There is unequivocal consensus that the dominant theoretical perspective employed to investigate governance and governance issues in a host of disciplines (e.g., law, finance, and strategic management) is agency theory (Daily, Dalton & Rajagopolan, 2003; Dalton, Daily, Ellstrand & Johnson, 1998; Dalton & Dalton, 2011; Dalton, Daily, Certo & Roengpitya, 2003; Hillman & Dalziel, 2003; Jensen, 1998; Lynall, Golden & Hillman, 2003; Schulze, Lubatkin & Dino, 2003; Shleifer & Vishny, 1997; Young, Stedham & Beekun, 2000). The central premise of this theory is that managers, as agents, can engage in decision making and behaviors that may be inconsistent with maximizing shareholder wealth (Berle & Means, 1932; Fama & Jensen, 1983; Jensen & Meckling, 1976; Eisenhardt, 1989).
Agency theorists see the primary functioning of the board of directors as monitoring the actions of agents (i.e., managers) to protect the interests of principals (i.e., owners). Similarly, legal and financial scholars emphasize the fiduciary responsibilities of directors to ensure that managers are acting in the interests of shareholders (Bainbridge, 1993; Berle & Means, 1932; Mace, 1986). Thus, even though the monitoring function of the board of directors includes a number of specific activities (e.g., monitoring the CEO, monitoring strategy implementation, planning CEO succession, and evaluating and rewarding the CEO/top managers of the firm), the primary driver of each of these activities is the obligation to ensure that management operates in the interests of shareholders.
It is important to note that agency explanations have become so ingrained in governance research that alternative paradigms are too often ignored. Daily et al. referred to this barrier as empirical dogmatism, which they suggested has negatively impacted researchers' willingness to "embrace research that contradicts dominant governance models and theories (e.g., a preference for independent governance structures) or research that is critical of past research methodologies or findings" (2003: 379).
In essence, agency arguments have been institutionalized in reference to corporate governance. These have become the norms for viewing governance, and, as such, impact the organization of firms (e.g., the structure of the board) (D'Aunno et al., 2000). The agency arguments are embedded in how practitioners, institutional investors, and for the most part, academicians define what is good or sound corporate governance. In other words, there is remarkable consensus as to the best practices that need to reside in all firms if they are to maximize performance. Support for this idea was offered by Westphal and Zajac (1998) and Zajac and Westphal, who noted that "large investors appear to have co-opted normative agency theory to help legitimate their political agenda, thus contributing to and benefiting from the growth of agency theory as a dominant perspective on corporate control" (1995: 287-288).
A major area of academic study within the governance literature is the investigation as to what constitutes good governance. As a result of the institutionalization of agency arguments, the literature has reached considerable agreement that the proper internal mechanisms of a firm include effectively structured boards, executive and board compensation contracts that encourage a shareholder orientation, and concentrated ownership holdings that lead to active monitoring of executives (Chatterjee & Harrison, 2001; Daily et al., 2003). In essence, the social validity of these pressures and desired outcomes are largely unquestioned because they have been taken for granted. In other words, within the academic literature, popular press, and corporate practice, there is an extremely clear understanding as to what constitutes good governance. In fact, these conceptions are so ingrained in the minds of academicians, shareholder activists, large shareholders, and institutional shareholders that the validity of these conceptions goes unquestioned even in spite of contradictory evidence.
It is obvious that agency theory principles, as elaborated in the academic literature, have also dominated corporate practice (Daily et al., 2003; Shleifer & Vishny, 1997). Evidence of this can be found by considering the reforms sought by shareholder activists, thus lending insight into those governance practices that are perceived as both legitimate and effective in protecting shareholders' interests (Ryan & Schneider, 2002). According to Daily et al., shareholder activism is "designed to encourage executives and directors to adopt practices that insulate shareholders from managerial self-interest by providing incentives for executives to manage firms in shareholders' long-term interests" (2003: 373). It is argued in the literature that such activism acts as a trigger to destabilize managerial power and makes managers more responsive to the needs of institutional investors through increased monitoring by owners and boards of directors (David, Hitt & Gimeno, 2001). As noted by David et al., "through activism, managers are pressured to take actions to signal their commitment to owners" (2001: 146).
Specifically, this paper focuses the governance relationship frequently addressed in the domain of agency theory--the equity owned by the CEO. Equity owned by the CEO is often studied due to the belief that it may directly influence firm performance (Dalton, Hitt, Certo & Dalton, 2007). Furthermore, calls for greater equity ownership by the CEO in his/her firm when there is a belief that manager's interests have significantly diverged from those of the owners. This paper addresses a reoccurring situation where there is an institutionalized belief that managers (i.e., executives like CEOs) have neglected shareholder interests--corporate restructurings.
Corporate restructuring has been a significant area of interest in helping to understand the limits of firm growth, the implications of changes in the firm's business portfolio, as well as the effectiveness of changes in organizational and capital structures (Bergh, 2001; Bowman & Singh, 1993; Filatotchev & Toms, 2006; Johnson, 1996). Portfolio restructuring involves the process of divesting and acquiring businesses that entails a refocusing on the organization's core business(es), resulting in a change of the diversity of a firm's portfolio of businesses (Bowman, & Singh, 1993; Bowman, Singh, Useem & Bhadury, 1999).
A multitude of empirical and theoretical investigations into the antecedents of restructuring revealed that the premier explanation of asset restructuring is the agency explanation, which suggests that firms engage in restructuring as a direct response to less-than-desirable performance (Hoskisson & Hitt, 1994; Hoskisson, Johnson & Moesel, 1994; Johnson, 1996; Johnson et al, 1993). Additionally, it is posited that the suboptimal performance is driven by managerial inefficiencies arising from weak governance mechanisms. Due to its overwhelming acceptance by researchers, the agency explanation has made portfolio restructuring synonymous with weak or poor governance (Bethel & Liebeskind, 1993; Chatterjee, Harrison & Bergh, 2003; Markides & Singh, 1997). Research has not proven that governance is weak in the pre-restructuring period, yet this school of thought has become ingrained in the literature. From a post-restructuring perspective, a key question becomes, if governance is truly weak or a complete failure in the pre-restructuring period, then what changes does a firm make in the post-restructuring period? The basic implications of this question is that if firms do not correct such inefficiencies or shortcomings, then the process of portfolio restructuring may be followed by renewed expansion or continued inefficiencies in various governance mechanisms.
The Institutionalization of the Agency Explanation of Restructuring
The premier explanation as to why organizations engage in portfolio restructuring is in response to substandard organizational performance, which is driven by managerial inefficiencies that, in turn, resulted from weak governance. An organization divests assets with the intent of improving performance, whether it is their performance in relation to competitors, the overall industry, or a predetermined aspiration level. In fact, research has demonstrated that firms engaged in restructuring often are performing poorly prior to the initiation of restructuring activities (Bergh, 2001; Bowman et al., 1999; Hoskisson & Hitt, 1994; Hoskisson et al., 1994; Johnson, 1996; Markides & Singh, 1997; Smart & Hitt, 1994). For example, Jain (1985) found that performance began to suffer approximately a year prior to divestiture and resulted in negative excess stock return of 10.8% within the one year prior to the restructuring event.
More commonly known as the agency explanation of portfolio restructuring (Filatotchev, Buck & Zhukov, 2000; Hoskisson & Hitt, 1994; Markides & Singh, 1997), poor performance as an antecedent of portfolio restructuring has become the leading explanation in the literature to account for restructurings since the 1980s. This explanation suggests that performance needs to be improved as a result of past managerial inefficiencies, which arise as a result of agency costs. Arguments are made that the board of directors, ownership concentration, and managerial incentives were ineffective and resulted in the failure of internal governance systems (Bethel & Liebeskind, 1993; Chatterjee & Harrison, 2001; Hoskisson et al., 1994; Johnson, 1996).
Although never truly defined in the literature, weak governance is believed to be characterized by diffusion of shareholdings among outside owners, board passivity, and certain characteristics of managers and boards, such as minimal equity ownership by top managers and board members or an insufficient amount of outsiders sitting on the board (Bethel & Liebeskind...