Powerful Chief Executive Officers and Firm Performance: Integrating Agency and Stewardship Theory

• Author: Jianchun Miao,Hung‐Gay Fung,Anna Fung,Penghua Qiao
• Date: 01 November 2017
• Published date: 01 November 2017
• DOI: http://doi.org/10.1111/cwe.12223

©2017 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 100–119, Vol. 25, No. 6, 2017

100

Powerful Chief Executive Ocers and

Firm Performance: Integrating

Agency and Stewardship Theory

Penghua Qiao, Anna Fung, Jianchun Miao, Hung-Gay Fung*

Abstract

Do agency and stewardship behaviors coexist at rms, or does one dominate the other?

We use data from listed companies in China over the period 2007–2016 to show that

powerful chief executive officers (CEOs) simultaneously incur self-interested agency

costs while acting as stewards to benet the rm. In balancing the push-and-pull forces

of stewardship and agency behaviors, powerful CEOs in Chinese firms ultimately

improve short-term and long-term firm performance. Our results have important

implications for understanding how CEOs affect firms and how cultural factors can

motivate CEOs to work in the interest of the rm.

Key words: agency cost, performance, powerful chief executive ocer, stewardship

JEL codes: C12, D21, G34

I. Introduction

The importance of chief executive officers (CEOs) for firm performance has been

increasingly well-documented over time (Bromiley and Rau, 2016). Moreover, CEOs play

a bigger role in strategic decision-making when they have more power (Adams et al., 2005;

Haynes and Hillman, 2010) and can exert their will over others (Finkelstein, 1992).

Thus, understanding the role of powerful CEOs in firm performance is necessary to

develop better theories explaining the interplay between CEOs and rm behavior.

Two major economic theories explain CEO behaviors: stewardship theory and

*Penghua Qiao, School of Business and Economics, Kunming University of Science and Technology, China.

Email: oldbridge1221@126.com; Anna Fung, Department of Management and Organization, University of

Washington, USA. Email: annafung@uw.edu; Jianchun Miao (corresponding author), School of Economics

and Business Administration, Chongqing University, China. Email: miaojianchun@cqu.edu.cn; Hung-Gay

Fung, College of Business Administration, University of Missouri-St. Louis, USA. Email: fungh@umsl.edu.

The authors are grateful for the nancial support from the National Natural Science Foundation of China

(Grant Nos. 71702084 and 71372179), and through the research projects of the Humanity and Social Science

Youth foundation of the Ministry of Education of China (No. 17YJC630112).

©2017 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Powerful CEO and Firm Performance 101

agency theory. On one hand, stewardship theory assumes that CEOs identify with the

mission of their organization and are intrinsically motivated to pursue organizational

goals (Francoeur et al., 2017). CEOs with greater than typical power will better

advance the interests of the rm and its shareholders (e.g. Donaldson and Davis, 1991;

Davis et al., 1997; Boivie et al., 2011; Lange et al., 2015). On the other hand, agency

theory assumes that CEOs are self-interested and prefer a greater financial reward

over a smaller one in a materialistic, free-market world. According to agency theory,

a powerful CEO naturally engages in more self-interested behaviors that may hurt the

rm and stockholders (Jensen and Meckling, 1979; Fama and Jensen, 1983). The two

theories draw upon two completely dierent assumptions about the value judgments and

beliefs of CEOs (Kreiser et al., 2010). Power, in turn, amplies the innate nature of the

CEO’s attitudes;1 however, CEOs are usually subject to checks that prevent them from

freely pursuing one set of behaviors over the other. Thus, an analysis of the impact of

powerful CEOs on rm performance is interesting and important.

China, the largest emerging market in the world, is a market-oriented economy

(Sauvant, 2016) and oers an interesting test case of the two theories on two fronts. First,

for a thousand years, China has embraced traditional Confucius values. These values and

beliefs are intrinsically linked to the Chinese cultural background and social setting, and

ultimately shape individuals’ attitudes and behaviors (Kreiser et al., 2010). Chinese culture

emphasizes paternalism, collectivism and good social relations (Ahlstrom et al., 2010),

and contemporary Chinese CEOs have been educated in the socialist value of serving

the public (Wen et al., 2014). The long tradition of Confucianism, which advocates

sustainability and stewardship in making decisions (Wang et al., 2014), motivates

individuals to adopt behaviors that are pro-organizational and collectivist, rather than

self-serving and individualistic (Davis et al., 1997). The modern form of self-sacrice

for the public good inspired by the “Lei Feng spirit” has been widely publicized and

promoted in mainland China (Xinhua News Agency, 2002).

However, as the Chinese market has shifted towards focusing on personal gain and

financial rewards, CEOs likewise have tended to look after their self-interests more.

China has weak corporate governance, and legal institutions and nancial markets that

do not eectively monitor and constrain self-serving CEO behaviors (Lu et al., 2009).

Thus, powerful CEOs may freely engage in entrenchment and agency-cost behaviors in

China. Powerful CEOs are likely to incur agency costs, such as excessive perks (Bebchuk

et al., 2011; Fast et al., 2012), as having power can easily lead to its abuse.

1Former US president Barack Obama argues similarly that even the power of the Oval Oce in the USA only

amplies who you are (Columbus Dispatch, 2 November 2016), a statement consistent with and clarifying the

nature of power.