The system isn’t entirely broken
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by S. Trevis Certo |
The study of organizational leaders represents an important area of research. In the context of strategy research, we typically define leaders as top executives. Another important group of leaders, though, is the board of directors. Researchers examining these leaders examine one central question: How do firms' top leaders matter?
In this context, perhaps the most fundamental outcome that we examine is firm performance. In addition, though, researchers also examine the relationships between leaders and firm strategies such as - among others - diversification, merger and acquisition activity and innovation.
Most of my research involves top executives and boards of directors. I recently published a paper in the Academy of Management Journal, for example, with some colleagues at Kansas State and Indiana University that examined the extent to which executives and boards suffer losses when their firms restate their earnings. According to our results, both executives and directors of firms with earnings restatements are much more likely to lose their jobs as compared to their counterparts in firms that do not restate their earnings.
We believe that this provides some evidence that our corporate governance system may not be totally broken.
In another paper that was recently accepted at the Journal of Business Ethics, I worked with Richard H. Lester (a Mays clinical associate professor) and two colleagues at Indiana University to examine the influence of merger and acquisition activity on director compensation packages. Generally speaking, we know that on average acquiring firms tend to perform poorly. In other words, most mergers and acquisitions don't result in positive performance.
Nonetheless, we found that directors receive - on average - higher levels of compensation after their firms complete merger or acquisition activity. This is a surprising result. If mergers and acquisitions don’t typically result in higher levels of performance, then why do directors receive higher compensation after these deals?
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