The primary objective of this paper is to investigate the direct and the mediated relationship amongst corporate governance (CG) and financial performance, agency conflicts (AC) and chief executive officer (CEO) power. This study explicitly models the AC and CEO power using a system of structural equation modelling (SEM).
Drawing on a sample of UK non-financial Financial Times Stock Exchange (FTSE) 100 companies listed between 1999 and 2014, we employ recursive and non-recursive modelling approaches, alongside instrumental variables and bootstrapping techniques, to empirically investigate the direct and indirect relationships between CG and financial performance through two pathways: (1) CEO power and (2) AC.
The results provide strong evidence that the relationship between CG and financial performance is mediated by the level of AC. In particular, a high level of AC should match with robust CG mechanisms in order to mitigate the negative effect of AC on financial performance. The mediated effect of the CEO power is less pronounced. Furthermore, we found that CG positively and significantly affects the financial performance, giving rise to the stream of empirical evidence that found a positive link. The findings remain consistent under different methodologies and after addressing endogeneity.
Our sample includes only FTSE 100 companies, as it was not possible to collect data on CEO power and AC for companies outside the FTSE 100.
This study calls for more in-depth disclosure on CG, which will account explicitly for AC and CEO power given their potential negative effect on shareholders' value.
This study represents the first empirical investigation of the direct and the quantification mediated relationships among CG, AC, CEO power and collective impact on financial performance.
