Substitutes or Complements? A Configurational Examination of Corporate Governance Mechanisms

We conduct an exploratory qualitative comparative case analysis of the S&P 1500 firms with the aim of elaborating theory on how corporate governance mechanisms work together effectively. To do so, we integrate extant theory and research to specify the bundle of mechanisms that operate to mitigate the agency problem among publicly traded corporations and review what previous research has said about how these mechanisms combine. We then use the fuzzy-set approach to qualitative comparitive analysis (QCA) to explore the combinations of governance mechanisms that exist among the S&P 1500 firms that achieve high (and not-high) profitability. Our findings suggest that high profits result when CEO incentive alignment and monitoring mechanisms work together as complements rather than as substitutes. Furthermore, they show that high profits are obtained when both internal and external monitoring mechanisms are present. At the same time, however, monitoring mechanisms evidently combine in complex ways such that there may be simultaneity of substitution and complementarity among and across the various monitoring and control mechanisms. Our findings clearly suggest that the effectiveness of board independence and CEO non-duality—governance mechanisms widely believed to singularly resolve the agency problem—depends on how each combine with the other mechanisms in the governance bundle.