Firm Risk , Corporate Governance and Firm Performance

Tosi and Gomez-Mejia, (1989) suggest that the challenge of corporate governance is to set up supervisory and incentive alignment mechanisms that alter the risk and effort orientation of agents to align them with the interests of principals. Therefore, the objective of this study is to determine the efficiency of monitoring and incentive contracts given certain characteristics of the firm. That is, the study sets out to determine whether risk firms with higher monitoring and levels of incentives are associated with higher firm performance. The results of this study of 282 firms demonstrate how the relationship between firm risk and performance is associated with the monitoring and incentive contracts used by these firms. In particular, the results of this study showed that the negative relationship between firm risk and firm performance is weakened by a higher proportion of non-executive directors on the board, higher levels of executive remuneration and the inclusion of shares in executives’ compensation contracts.