Governance structure, product-market strategy and performance: A longitudinal study of the banking industry during deregulation

This research explores the relationships between corporate governance structure and product-market strategy, how the degree of 'fit' between governance structure and strategy affects performance, and the ways deregulation affects both governance structure and its relationship with strategy. These relationships are examined within the context of the banking industry from 1981-1992.;The study argues that both agency costs and the benefits reaped through effective monitoring of management are affected by product-market strategy. As a result, to the extent that governance structure is a function of these agency issues, a relationship should be observed between governance structure and strategy. That is, a 'fit' is expected to develop between a firm's governance structure and its strategy. Moreover, it is expected that this fit has effects on performance. It is also hypothesized that because regulation affects the agency relationship (Demsetz and Lehn, 1985), deregulation should be associated with changes in governance structure. More specifically, it is expected that deregulation should effect governance structures characterized by a closer alignment between the interests of owners and managers.;The study reveals several important findings. Utilizing a sample of ninety-five commercial banks, the study found significant relationships between governance structure and strategy. It was found that product-market strategies characterized by high (low) monitoring costs were associated with governance structures which more tightly (loosely) aligned the interests of owners and managers. It was also found that profound changes in governance structure occurred during the 1980's, which, for the most part, brought about closer alignments between owners and managers. In addition, utilizing hierarchical regression analysis, the degree of 'fit' between governance structure and strategy was found to be significantly related to financial performance, where the performance measures included both accounting-based and market-based measures, as well as measures of risk.;The study's findings have important implications for strategic management theory and research. By discovering a significant linkage between governance structure-strategy 'fit' and firm performance, the study demonstrates that earlier conceptualizations of the relationships between governance structure, strategies and performance are incomplete. In addition, the findings suggest that use of a control group is essential when exploring changes in governance structure over time. Important implications for bank boards of directors and regulators are also evident, as the results show that governance structures may play an important role in bank financial performance.;The theoretical foundation of the study rests upon the work of Berle and Means (1932) and agency theorists such as Jensen and Meckling (1976), Fama and Jensen (1983) and Williamson (1983). It also builds upon the empirical work of Hill and Snell (1988, 1989), Oswald and Jahera (1991), and Rajagapolan and Finkelstein (1992).