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This paper examines the consequences of symbolic action in corporate governance. Specifically, we examine (1) whether the stock market reacts favorably to specific governance mechanisms that convey the alignment of CEO and shareholder interests, such as the adoption of long-term incentive plans (LTIPs), even if such plans are not actually implemented, (2) whether providing agencyrelated explanations for LTIPs affects the stock market response, and (3) whether the symbolic adoption of LTIPs deters other governance reforms that would reduce CEOs' control over their boards. Analysis of data from over 400 corporations over a ten-year period suggests that symbolic corporate actions can engender significant positive stockholder reactions and deter other, more substantive governance reforms, thus perpetuating power imbalances in organizations. We discuss implications for institutional and agency-based perspectives on organizations.
In recent years, scholarly and popular concern about corporate governance arrangements in large corporations has increased in intensity. Institutional investors and the popular business press have decried the apparent absence in many corporations of strong governance mechanisms that adequately promote managerial accountability to stockholders (e.g., Charan, 1993; Economist, 1994; Pozen, 1994). This concern has been reinforced by extensive academic research on the effectiveness of existing governance structures in protecting shareholders. Thus, while agency theory suggests that managerial incentives and boards of directors represent the primary mechanisms by which differences between managerial and shareholder interests are minimized (Jensen and Meckling, 1976; Fama and Jensen, 1983), a large body of empirical research suggests that neither mechanism is used sufficiently to represent shareholders. For example, research on executive compensation has led many observers to conclude that traditional management incentive practices are inadequate to reduce agency costs significantly (Finkelstein and Hambrick, 1988). Large-scale empirical research on corporate boards suggests that boards have traditionally lacked the structural power needed to monitor effectively (e.g., Wade, O'Reilly, and Chandratat, 1990), and extensive qualitative evidence also indicates that boards have often been minimally involved in monitoring and controlling management decision making (e.g., Mace, 1971; Vance, 1968; Lorsch and Maciver, 1989).
This stream of research has bolstered claims by dissatisfied shareholders, and institutional investors in particular, that significant changes in governance structure are needed to enhance managerial accountability to shareholders. Several changes have gained currency as legitimate improvements in corporate governance, such as the adoption...