The Symbolic Management of Stockholders: Corporate Governance Reforms and Shareholder Reactions

By Westphal, James D.; Zajac, Edward J. | Administrative Science Quarterly, March 1998 | Go to article overview

The Symbolic Management of Stockholders: Corporate Governance Reforms and Shareholder Reactions


Westphal, James D., Zajac, Edward J., Administrative Science Quarterly


In recent years, scholarly and popular concern about corporate governance arrangements in large corporations has increased in intensity. Institutional investors and the popular business press have decried the apparent absence in many corporations of strong governance mechanisms that adequately promote managerial accountability to stockholders (e.g., Charan, 1993; Economist, 1994; Pozen, 1994). This concern has been reinforced by extensive academic research on the effectiveness of existing governance structures in protecting shareholders. Thus, while agency theory suggests that managerial incentives and boards of directors represent the primary mechanisms by which differences between managerial and shareholder interests are minimized (Jensen and Meckling, 1976; Fama and Jensen, 1983), a large body of empirical research suggests that neither mechanism is used sufficiently to represent shareholders. For example, research on executive compensation has led many observers to conclude that traditional management incentive practices are inadequate to reduce agency costs significantly (Finkelstein and Hambrick, 1988).(1) Large-scale empirical research on corporate boards suggests that boards have traditionally lacked the structural power needed to monitor effectively (e.g., Wade, O'Reilly, and Chandratat, 1990), and extensive qualitative evidence also indicates that boards have often been minimally involved in monitoring and controlling management decision making (e.g., Mace, 1971; Vance, 1968; Lorsch and MacIver, 1989).

This stream of research has bolstered claims by dissatisfied shareholders, and institutional investors in particular, that significant changes in governance structure are needed to enhance managerial accountability to shareholders. Several changes have gained currency as legitimate improvements in corporate governance, such as the adoption of new long-term incentive plans that align management compensation more closely with stock performance, or changes in board structure that increase the board's monitoring and control capacity. These changes are seen as increasing top management's attention to shareholders' interests and have been advocated by increasingly active investors, represented by groups such as the Council of Institutional Investors and the United Shareholders Association, both of which were founded in the 1980s (Kim and Ocasio, 1995). Advocates for such reforms have also pointed to the extensive empirical literature in financial economics that shows positive stock market reactions to the adoption of new governance mechanisms, such as long-term incentive plans.

Other behaviorally oriented studies, however, have emphasized that while there may be organization-wide benefits to such reforms, top managers would prefer to avoid or even resist them (Harrison, Torres, and Kukalis, 1988; Tosi and Gomez-Mejia, 1989; Hill and Phan, 1991). Both the economic and behavioral literatures on executive compensation suggest that, ceteris paribus, chief executive officers will prefer a pay package with a small pay-for-performance component (Zajac and Westphal, 1994). From a normative agency theory perspective, CEOs, as risk-averse agents, prefer less risk in their compensation contracts (Harris and Raviv, 1979), and incentives add uncertainty to a CEO's compensation (Beatty and Zajac, 1994). Research from the managerialist perspective (Williamson, 1964) suggests that CEOs prefer self-aggrandizing, growth-maximizing goals over profit-maximizing goals for their firms and would be reluctant to accept incentive plans tied closely to profit maximization or to give up decision-making autonomy vis-a-vis the board of directors.

While prior research has tended to emphasize the overtly political nature of top executive behavior, Westphal and Zajac (1994) and Zajac and Westphal (1995) have recently introduced a symbolic management perspective on corporate governance (see also Wade, Porac, and Pollock, 1997). They suggest that top managers can satisfy external demands for increased accountability to shareholders while avoiding unwanted compensation risk and loss of autonomy by adopting but not implementing governance structures that address shareholder interests and by bolstering such actions with socially legitimate language. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

The Symbolic Management of Stockholders: Corporate Governance Reforms and Shareholder Reactions
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.