Me or We: The Effects of CEO Organizational Identification on Agency Costs
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abstract
Two primary remedies for the agency problem (i.e., the CEO's opportunity to advance personal interests at the expense of the firm and its shareholders) have been emphasized in both research and practice: monitoring of the CEO by independent directors and the alignment of CEO and firm interests using financial incentives. Still, research evidence has not consistently shown these remedies to be effective. Noting that these traditional mechanisms aim to resolve the agency problem by extrinsically influencing the CEO's behavior, we seek to provide a broader understanding by considering how intrinsic drivers of behavior might mitigate agency costs. In particular, we draw on the literature on organizational identification to examine how a CEO whose identity is intertwined with the organizations will be motivated to avoid corporate actions that impose agency costs. We further consider how traditional control mechanisms, which represent agency costs in themselves, are made less effective when organizational identification is high, as they are rendered somewhat redundant. Using survey and archival data from 793 large U.S. firms, we find a negative effect of CEO organizational identification on agency costs-measured as a) CEO personal use of corporate aircraft, and b) unrelated firm diversification-and we find that organizational identification weakens the negative effects of incentive alignment and board independence on those outcomes. Our theory and supportive findings suggest how a CEO who makes little distinction between self-interest and organizational-interest will be likely to eschew actions that benefit the self over the organization, and less influenced by extrinsic control mechanisms.
