Corporate governance and the new chief executive: How institutionalized power affects the agency contract

This research examines one explanation for why replacing the chief executive officer does not seem to improve firm performance despite its positive effect on financial markets: some new chief executive officers (CEOs) are able to negotiate favorable agency contracts, and therefore protect their positions, at the expense of performance that would benefit shareholders. In a longitudinal study of 150 publicly-traded firms in the United States, we found that the governance systems that align the CEO’s and owners’ interests, the mechanisms by which compliance with the agency contract is monitored, and the firm’s strategies and performance differed as a function of ownership concentration. In firms with dispersed ownership, new CEOs initiated changes favorable to them in the composition of the board of directors and in the level of and risk associated with their compensation. We also explore reasons for the differing patterns of institutionalized power resulting from the agency contract.