Managerial Discretion

Abstract

Managerial discretion is the latitude of action afforded to a manager. This literature, classically focused at the executive level, reconciles population ecology’s assertion that executives ultimately have little influence over firm-level outcomes and strategic choice theory’s assertion that executives make strategic decisions and thus have considerable influence over firm-level outcomes. Though generally viewed in the management literature as an opportunity for executives to positively affect performance and increase value, the literature in finance and economics argues that managerial discretion represents a cost to shareholders from potential opportunism or other self-serving behaviors. Within the management literature, scholars posit three categories (i.e., forces) that constrain or enable executives: (1) the task environment (i.e., industry-level factors), (2) the internal organization (i.e., firm-level factors), and (3) managerial characteristics (i.e., individual-level factors). Recently, a fourth category, national institutions (i.e., country-level factors), was added to the managerial discretion model. While the managerial discretion literature has typically focused on upper echelons, scholars are increasing their examination of mid-level managers’ discretion since many of the construct’s enabling and constraining factors are also relevant for managers who are subordinate to senior executives. The potential for issue selling and strategic planning activities by mid-level managers to influence executives’ perceived discretion is an example of phenomena studied by scholars attempting to improve our understanding of discretion afforded to mid-level managers.