Res 341

2009

Research Briefs

103

their executives a relatively smaller compensation package. Dey suggests that there is a trade-off between executive compensation and well-structured corporate governance. Overall, the most efficient governance structures are found in corporations with more agency conflicts. In terms of the impact on financial performance, it has previously been suggested that good corporate governance characteristics do not affect a firm’s financial performance. But previous studies have not discovered any relationship between the number of outside directors and a firm’s financial results. In contrast, Dey found a significant relationship between corporate governance mechanisms and a firm’s financial performance, depending on the number of agency conflicts present. Put simply, corporations with more agency conflicts benefit financially from incorporating effective governance mechanisms while corporations with few agency conflicts do not. Dey found that a strong audit committee was the only corporate governance feature that affects a firm’s financial performance regardless of the number of agency conflicts. This study provides important evidence that corporate governance mechanisms vary across firms due to the number of corporate agency conflicts. Dey’s results strongly suggest that political solutions for corporate governance may be harmful because they will undermine the instinctive tendency of firms to efficiently address the agency conflicts they face. Although these results suggest that firms will naturally address emerging agency conflicts, they do raise some questions. The most important unanswered question is whether the presence of well-structured corporate governance mechanisms is enough to ensure their effectiveness. Given the recent corporate governance failures, doubt clearly exists about how well these corporate governance mechanisms are working. Indeed, one wonders whether shareholders and managers sometimes create a facade of good...