Managerial Discretion and the Practice of Corporate Governance
28 Pages Posted: 26 Mar 2012
Date Written: February 29, 2012
Abstract
On one hand, managers, and especially CEOs, are hired and paid to exercise their managerial discretion. On the other hand, within the agency theory approaches to corporate governance, managerial discretion is a source of moral hazard to be removed by incentives or monitoring. In this paper we draw on in-depth interviews with FTSE 100 CEOs and chairmen to enhance understanding of the corporate governance problematic by clearly distinguishing between different kinds of discretion, establishing the part each plays in corporate governance theory and practice and exploring the problems that arise from the difficulty of distinguishing in practice between them. We conclude that the different kinds of discretion that come into play as we move from a formal agency problem to the real-life problems of corporate governance both disrupt the logic and destroy the practical effectiveness of incentive and monitoring measures derived from the formal theory.
Keywords: accountability, executive pay, incentives, managerial discretion, motivation
Suggested Citation: Suggested Citation