Reaffirming the importance of managerial discretion in corporate governance: a comment on Andersen (2017)

• DOI: https://doi.org/10.1108/CG-05-2018-0172
• Pages: 240-254
• Date: 10 October 2018
• Published date: 10 October 2018
• Author: Moustafa Salman Haj Youssef,Da Teng
• Subject Matter: Corporate governance,Strategy

Reaff‌irming the importance of managerial

discretion in corporate governance:

a comment on Andersen (2017)

Moustafa Salman Haj Youssef and Da Teng

Abstract

Purpose –The purpose of this study is to refute the workof Andersen (2017) by suggesting a different

theoreticalview and to argue that the concept of managerialdiscretion is one of the core dimensions that

cannotbe discarded when studying corporate governance.

Design/methodology/approach –This paper uses theoretical frameworks from recent literature,

definitions and empirical studies on the concept of managerial discretion and corporate

governance.

Findings –Several studieshave empirically tested and measured the concept of managerialdiscretion,

some have provided validityand reliability of the concept and others have showed the direct impact of

discretionon firm performance.

Practical implications –Research on managerialdiscretion provides owners and board of directors a

clear advice on how much discretioncan be granted to top executives by taking into consideration the

differentdimensions of the external and internal environment.

Originality/value –This paper concludes that corporate governance research will not improve if it

abandonsthe concept of managerial discretion.

Keywords Corporate governance, Organizational performance, Managerial discretion,

Institutional antecedents

Paper type Viewpoint

Introduction

Corporate governance refers to the ways in which the suppliers of finance direct and

control their investment to receive a financial return (Shleifer and Vishny, 1997).

Corporate governance research is underpinned by agency theory (Jensen and

Meckling, 1976), which address the potential conflicts between shareholders or their

representatives, and the management team, mainly the upper echelons. Owners rely on

internal and external governance mechanisms to safeguard their return on investments

(Dalton et al., 2007). Internal mechanisms mainly compromise ownership

concentration, board of directors, and incentive payment; and external mechanisms

include a set of policies, customs, processes, laws and institutions to govern the

behaviour of corporations (Mostovicz et al., 2011). Managerial discretion stems for the

freedom in the decision-making of top executives, which mainly emerges from four

dimensions: individual, organisation, industry and institutional environment (Haj

Youssef and Christodoulou, 2018). As such, the interconnectedness of these two

concepts is inevitable as corporate governance mechanisms need to assess how much

leeway or discretion should be given to top management team, as it is a crucial factor in

determining firms’ outcomes.

Moustafa Salman Haj

Youssef is based at the

Department of

Management Studies,

Lebanese American

University School of

Business, Beirut,

Lebanon, and Coventry

University Business

School, Coventry, UK.

Da Teng is based at

Coventry University

Business School, Coventry,

UK.

Received 19 November 2017

Revised 7 May 2018

31 July 2018

Accepted 22 August 2018

PAGE 240 jCORPORATE GOVERNANCE jVOL. 19 NO. 2 2019, pp. 240-254, ©EmeraldPublishing Limited, ISSN 1472-0701 DOI 10.1108/CG-05-2018-0172