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The role of technical expertise in firm governance structure: evidence from chief financial officer contractual incentives
Author(s) -
Gore Angela K.,
Matsunaga Steve,
Eric Yeung P.
Publication year - 2011
Publication title -
strategic management journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 11.035
H-Index - 286
eISSN - 1097-0266
pISSN - 0143-2095
DOI - 10.1002/smj.907
Subject(s) - corporate governance , incentive , chief executive officer , officer , business , finance , accounting , principal–agent problem , executive compensation , compensation (psychology) , control (management) , agency (philosophy) , agency cost , economics , management , shareholder , microeconomics , psychoanalysis , law , psychology , philosophy , epistemology , political science
We provide evidence that the presence of technical expertise in firm governance structure reduces reliance on contractual incentives to control the potential agency problem for executives whose responsibilities require specialized knowledge. Specifically, we find that firms with financial expertise in the form of a board finance committee, or a chief executive officer with a financial background, tend to use lower levels of incentive‐based compensation for their chief financial officers. Our findings suggest financial experts provide stronger oversight and/or direction with regard to firm financial policies and strategies, thereby allowing firms to reduce reliance on incentive compensation. Our study provides insight into the role of technical expertise and board committees in firm governance, and into the benefits of common functional expertise within top management teams. Copyright © 2010 John Wiley & Sons, Ltd.