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Running Head: Managerial discretion across countries

Project #2: Literature Review

Managerial discretion across countries

Universidad of Arizona

English Composition 108

Professor Spencer Boyd Turrentine

Word count: 1502 (without references)

November 2021
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Project #2: Literature Review: Managerial discretion across countries
Project #2: Literature Review:

Managerial discretion across countries

Introduction

Executives have a high level of autonomy and authority, which is often applied

without accepting external influences. This concept, known as managerial discretion,

can be viewed in either a positive or negative light. On the one hand, it is a positive

characteristic that contributes to company growth and performance. In contrast, others

view this as a direct influence on the agency theory, which states that managers take

advantage of their positions to make decisions that benefit them rather than investors or

the company (Pazzaglia, 2010).

The theory of managerial discretion was provided for the first time more than thirty

years ago. This concept refers to the influence top executives have on the behavior of

their companies (Hambrick and Finkelstein, 1987). They claim discretion exists in the

sense that there is a lack of constraints and considerable ambiguity concerning means

and ends. Managerial discretion can present many drawbacks in an organization, since

the power that an executive has can be used by them for unethical behavior (Pazzaglia,

2010). This brings the possibility of whether certain countries have a lower level of

managerial discretion to avoid unethical behavior in their companies. Following this, the

research question appears: Does the importance and application of managerial

discretion vary significantly between countries?

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Project #2: Literature Review: Managerial discretion across countries
Managerial discretion is divided into three categories (Crossland & Hambrick, 2011;

Finkelstein & Peteraf, 2007), individual, organization, and environment. About this last

one, the environment factor is interpreted primarily through the lens of industry

characteristics; however, recently, researchers have begun to consider the possibility

that national-level factors could have a significant impact on executive discretion as well

(Crossland & Hambrick, 2011).

In this paper, the relevance of managerial discretion between countries is analyzed

with research articles that address these country-specific issues, and follows the

following criteria:

1) Managerial discretion across countries based on released data

2) Previous studies on cross-national level discretion

3) Managerial Discretion impact on different countries

1. Managerial discretion across countries based on released data

Many researchers perceive managerial discretion as opportunistic behavior and as a

latitude that deserves to be criticized. Others take a more neutral position. For example,

Craig Crossland (2009) correlates country-level discretion scores with multiple data on

chief executive officer's effects on firm performance in his article. The author talks about

the research rather than his position or opinion about the topic. He further emphasizes

his interest in knowing whether his hypothesis regarding the relationship between

managerial discretion in countries is correct or not. It is common for fewer writers to take

a positive approach to this topic, but there is a large spectrum of viewpoints. This can

be evidenced by looking for its meaning in diverse books or articles on the subject;
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Project #2: Literature Review: Managerial discretion across countries
completely different denotations can be found. It could also depend on the author's

background and country. For example, Chen et al. (2015) connote their research in a

more biased way than Crossland, exposing the unfavorable effects of having a

company with a high degree of managerial discretion.

Other articles, meanwhile, differ not in whether it is good or bad, but in its effects.

Although many authors have shown in their studies that CEOs in industries with high

levels of discretion have a significant effect on company growth, Haj et al. (2019) state

that Fitza (2014) shows that the actual impact of CEO performance on companies is not

related to marginal discretion. Haj et al. affirm that the difference in these results is

reflected in the distinct methodology they used.

2. Previous studies on cross-national level discretion

In 2007, one of the first Craig Crossland studies on the field, affirmed that

managerial discretion investigations tend to focus on industry and firm-level factors, but

not many on the systematic influence of country-level determinants. Nowadays, several

renowned researchers in the field, including Crossland and Hambrick (2011), have

stated in their works that managerial discretion varies greatly between countries (Wang,

DeGhetto, Ellen & Lamont, 2019).

A past research article by Craig Crossland (2009) aimed to examine whether social

norms affected managerial discretion in each country. The results showed that CEOs

have a high degree of discretion in countries where the norms promote autonomy and
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Project #2: Literature Review: Managerial discretion across countries
unpredictability. However, these results do not clarify whether the opposite is true in

countries where these concepts are not valued. This analysis examined five distinct

hypotheses about variations in managerial discretion level with a methodology based on

analyzing firms from 15 different countries. His research is well elaborated, but lacks a

coherent approach. The countries chosen for the study are all developed countries in

the northern hemisphere, such as the United Kingdom or the United States. The

analysis would have been much richer and more diverse if it had considered Latin

America, Africa, or West Asia (or just developing countries).

A new Crossland study, updated and produced in cooperation with Hambrick (2011),

states that institutions can severely restrict the managerial discretion of executives in

some countries, such as Japan and South Korea, while in others, such as the U.S. and

U.K., institutions provide greater managerial discretion. They affirm that there is a

difference between countries in their approach to this topic. Their criteria for evaluating

managerial discretion in different countries vary according to strategic management and

executive compensation. In addition, in many countries, following a norm is essential, so

a high degree of managerial discretion can be perceived as too reckless, especially if

the executive is using unconventional methods or not considering stakeholders'

demands and expectations. Furthermore, in many countries CEOs are paid much more

than others (Crossland and Hambrick, 2011). According to studies, this is one of the

incentives most related to the levels of managerial discretion. The higher the executive

pay in that country, the higher the level of authority and managerial short-termism

(Chen, Cheng, Lo & Wang, 2015; Crossland & Hambrick, 2011).

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Project #2: Literature Review: Managerial discretion across countries

3. Managerial Discretion impact on different countries

Crossland and Hambrick (2007) found that executives in the United States

presented a stronger impression on company performance than in Japan and Germany,

attributing the differences to diverse cultural values, ownership outlines, and

governmental systems. However, the study presents some weaknesses. It is important

to note that the paper stated that managerial discretion has the greatest impact on CEO

effects on organizational outcomes, but did not provide any measures or evidence

directly supporting this conclusion. The article analyzed only three countries, so its

findings had limited validity. Because of this, the researchers' study did not provide solid

evidence of how managerial discretion in national institutions is related to managers'

performance.

Rabl et al. (2014), like the other authors mentioned, examine the perspective of the

role of managers in different countries. Differently, the paper focuses on the connection

between managerial discretion and the effectiveness of high-performance work systems

across the globe. The findings suggest that, in cultures where social norms are not rigid,

also called loose cultures, high-performance work systems efficiency is not directly

associated with national culture. Furthermore, a surprising finding is that national

culture-based logic is empirically supported in countries that have low managerial

discretion, as indicated by the existence of a tight or strict national culture. By dividing

the countries into loose and tight, there is a better understanding of how managerial
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Project #2: Literature Review: Managerial discretion across countries
discretion relates to social norms between countries, and thus understand why in some

places it has greater weight than in others.

Conclusion

Managerial discretion is a discussed topic with different points of view. The

importance of contextual differences in management theory is especially relevant in light

of today's global economy. Previously, research focused on the effects of managerial

discretion in industries; however, recent results have suggested that national-level

factors may also have a great significance.

Managerial discretion is seen by many researchers as an opportunistic practice,

while others are more neutral and refer more to the research rather than stating an

opinion about whether it is correct or not. Moreover, other writers tend to emphasize its

effects. While many studies have shown that CEOs in industries with high discretionary

levels are significant contributors to company growth, others disagree, claiming that the

real impact of the chief executive officer's performance is not related to managerial

discretion (Haj, Youssef, Hussein & Christodoulou, 2019). Furthermore, many authors

agree to examine the variation in perception and implementation of this concept

between nations. The difference is the criteria used: some relate it to high-performance

work systems, others with tight or loose cultures, the payment, or others. Nevertheless,

the generally accepted statement is that managerial discretion differs in importance and

application between countries depending on the social norms of each society.

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Project #2: Literature Review: Managerial discretion across countries
The author who has contributed the most information on the topic has been

Crossland, with stronger arguments. In addition, the investigations of this author have

been cited by the other sources used. Pazzaglia (2010) and Haj et al (2019) present an

opposite stance, but the evidences conferred are not strongly supported. In conclusion,

this literature review shows that managerial discretion has different perspectives

between authors and around the world, and differs in relevance between countries.
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Project #2: Literature Review: Managerial discretion across countries
References

1) Chen, X., Cheng, Q., Lo, A. K., & Wang, X. (2015). CEO Contractual Protection

and Managerial Short-Termism. The Accounting Review, 90(5), 1871–1906.

https://www.jstor.org/stable/26550596

2) Crossland, C. (2007). National Institutions and Managerial Discretion: A

Taxonomy of 24 Countries. Annual Meeting Proceedings (Academy of
Management), 8(1), 1–6. https://doi.org/10.5465/AMBPP.2007.26523622

3) Crossland, C. (2009). Why Do Ceos Matter More In Some Countries Than

Others? Managerial Discretion At The National Level. Annual Meeting
Proceedings (Academy of Management), 8(1), 1–6.
https://doi.org/10.5465/AMBPP.2009.44243482

4) Crossland, C., & Hambrick, D. C. (2011). Differences in managerial discretion

across countries: how nation-level institutions affect the degree to which ceos
matter. Strategic Management Journal, 32(8), 797–819.
https://doi.org/10.1002/smj.913

5) Finkelstein, S., & Peteraf, M. A. (2007). Managerial activities: a missing link in

managerial discretion theory. Strategic Organization, 5(3), 237–248.

http://www.jstor.org/stable/23727514

6) Haj Youssef, M. S., Hussein, H. M., & Christodoulou, I. (2019). Competitiveness

and managerial discretion: an empirical investigation at the national-
level. Competitiveness Review, 29(2), 181–203. https://doi.org/10.1108/CR-01-
2017-0011
7) Pazzaglia, F. (2010). Are Alternative Organizational Forms the Solution to Limit

Excessive Managerial Discretion? Journal of Business Ethics, 93(4), 623–639.

http://www.jstor.org/stable/40605369

8) Rabl, T., Jayasinghe, M., Gerhart, B., & Kühlmann, T. M. (2014). A Meta-
Analysis of Country Differences in the High-Performance Work System-Business
Performance Relationship: The Roles of National Culture and Managerial
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Project #2: Literature Review: Managerial discretion across countries
Discretion. Journal of Applied Psychology, 99(6), 1011–1041.
https://doi.org/10.1037/a0037712

9) Wang, G., DeGhetto, K., Ellen, B. P., & Lamont, B. T. (2019). Board Antecedents
of CEO Duality and the Moderating Role of Country‐level Managerial Discretion:
A Meta‐analytic Investigation. Journal of Management Studies, 56(1), 172–202.
https://doi.org/10.1111/joms.12408