Governance Bundles, Firm Performance, and the Substitutability and Complementarity of Governance Mechanisms


*Lehigh University, College of Business and Economics, 621 Taylor Street, Bethlehem, PA 18015, USA. E-mail:


Manuscript Type: Conceptual

Research Question/Issue: This paper extends the theory of bundles of corporate governance mechanisms to address agency issues within the Anglo-Saxon system of corporate governance. The focus of our study is to detail the role of firm performance as a key determinant of how the governance mechanisms of monitoring and incentive alignment serve as complements or substitutes in addressing agency issues. Previous research has looked at these mechanisms in isolation from each other, with limited regard for the contingencies of firm performance and external monitoring. We propose that it is best to look at these mechanisms as a bundle of mechanisms to protect shareholder interests, and that firm performance is a key determinant of the composition of this bundle.

Research Findings/Insights: We introduce firm performance as a critical contingency that heightens shareholders' concerns over governance issues as they seek to retain control over adverse selection and moral hazard problems. We propose that when firms are performing poorly, outside monitoring by institutional investors can complement internal monitoring by boards of directors.

Theoretical/Academic Implications: We examine governance bundles under both agency and stewardship theoretical lenses to tie together previous empirical research and advance theory. In specifying the role of firm performance in determining the mix of mechanisms within the governance bundle, we reconcile prior disparate findings as to whether or not these governance mechanisms act in a complementary or substitutable fashion.

Practitioner/Policy Implications: The conceptualization of these governance mechanisms has practitioner merit in analyzing the challenges that board members face managing agency conflicts through the mix of governance mechanisms, given different levels of firm performance. Our research also shows that, under conditions of poor performance, shareholders can provide effective external monitoring that can improve the overall governance effectiveness of the firm.