A new study by a Pennsylvania State University professor finds that the most effective corporate governance occurs when multiple mechanisms are in place.  Penn State’s Smeal College of Business faculty member Vilmos Misangyi and a colleague from the Sinagpore Management University conducted the research, and their work found that the effectiveness of governance requires both the presence of both CEO incentive alignment and monitoring. 

The article based on the research “Substitutes or Complements? A Configurational Examination of Corporate Governance Mechanisms” will be published in the Academy of Management Journal.

According to the research, the two main components of governance mechanisms include incentive alignment and monitoring. While alignment mechanisms spur executives to act in the best interest of shareholders, through CEO stock ownership and compensation contingent upon company performance.



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Their findings are dissimilar to conventional wisdom, which usually finds that “governance mechanisms tend to substitute for one another,” i.e., as long as incentives are present, monitoring need not be.

“The effectiveness of the governance bundle requires the presence of both CEO incentive alignment and monitoring mechanisms,” the researchers found. In fact, they continue, “All six of the different configurations [of governance mechanisms] leading to high profits … include at least one of the CEO alignment mechanisms and at least one each of the internal and external monitoring mechanisms.”

The research also found two key implications pertain to board independence and CEO duality. While an independent board, one which is composed of members that doesn’t tires to the firm, tends to be beneficial, this monitoring mechanism is not effective by itself. Also, the researchers found that while many governance reformers hold CEO duality – when the CEO is also the chairperson of the board – can be detrimental, it can lead to both lead to high and low profits depending on the rest of the governance.

The study concludes that future study and implementation of corporate governance should take into account the full configuration of governance mechanisms as they work together rather than attempting to evaluate effectiveness of those mechanisms individually.


“To truly understand governance effectiveness, we must stop thinking about the mechanisms in isolation, giving up a search for the end all mechanism(s), and instead direct attention to how the various governance mechanisms effectively combine with each other for the particular outcomes desired,” the researchers wrote.