Organizational discretion, board control, and shareholder wealth: A contingency perspective

Research Question/Issue: How does organizational context influence the impact of board control over managerial decisions on shareholder wealth?. Research Findings/Insights: We introduce a new theoretical concept—organizational discretion—to characterize the upper limit of managers' latitude of actions presented by their organizational context and propose that it moderates the impact of board control on shareholder wealth. Specifically, we first argue that strategic control by boards over managerial decisions reduces managers' latitude of actions and leads to trade-offs between the containment of managerial opportunism and the pursuit of strategic opportunities, which consequently influence the relationship between strategic control and shareholder wealth. We then suggest that the trade-offs incurred by strategic control over managerial decisions are more prominent in firms with high organizational discretion. Because of the trade-offs, we propose that boards are likely to decide whether to rely more on strategic control or financial control in internal corporate governance based on their firms' level of organizational discretion. Theoretical/Academic Implications: By introducing the concept of organizational discretion and highlighting the trade-offs caused by boards' strategic control over managerial decisions, we advance a contingency perspective to enhance the understanding about the impact of board control on shareholder wealth. It also bridges the strategic management and corporate governance research on managerial discretion that has largely evolved separately in the literature. Practitioner/Policy Implications: Boards should attend to the trade-offs between the containment of managerial opportunism and the pursuit of strategic opportunities when exercising strategic control over managerial decisions. Moreover, considering the trade-offs involved, boards should carefully design and implement internal corporate governance mechanisms based on their firms' level of organizational discretion.