The Role of Technical Expertise in Firm Governance Structure: Evidence from Chief Financial Officer Contractual Incentives
Strategic Management Journal, Forthcoming
27 Pages Posted: 11 Feb 2005 Last revised: 5 May 2010
Date Written: April 30, 2008
We provide evidence that the presence of technical expertise in a firm’s governance structure allows the firm to reduce reliance on contractual incentives to control the potential agency problem. Specifically, we find that firms with a board finance committee, or a Chief Executive Officer (CEO) who has a financial background, tend to use lower levels of incentive-based compensation for their Chief Financial Officers (CFOs). Our findings suggest financial experts provide stronger oversight and/or direction with regard to the firm’s financial policies and strategies, thereby allowing firms to reduce reliance on incentive compensation. Our study provides insight into the role of technical expertise and board committees in firm governance, and into the benefits of common functional expertise within top management teams.
Keywords: Corporate Governance, Chief Financial Officer, Compensation, Monitoring, Financial Expertise, Equity Incentives, Finance Committee
JEL Classification: M41, J33, G34
Suggested Citation: Suggested Citation