Institutional change in real-time: The development of employee stock options for German venture capital

This paper seeks to analyze how and why divergent institutional changes occurred in a government agency. While there is evidence of research on the concept of collective action and involvement in the literature on institutional entrepreneurship, the focus has been at the macro and field levels, with scarce attention being given to the topic at the micro and organizational levels. This study addresses this gap in the literature, drawing on the institutional entrepreneurship process model of Battilana, Leca, and Boxenbaum (The Academy of Management Annals), in combination with literature on collective action. The methodology involved a longitudinal case study, in which data were collected through extensive interviews and documentation analysis. Based on findings showing that the divergence change process could not be achieved without the support of organizational collective involvement, a refined version of the Battilana et al. entrepreneurial model is proposed. Doi: 10.28991/ESJ-2023-07-02-017 Full Text: PDF

We contribute to the literature on institutional and organizational change by integrating two related areas of study: the theory and methods of analysis informed by the research on institutional logics and historical-event sequencing. Institutional logics provide the theory to understand how the content of culture influences organizational change; historical-event sequencing reveals the underlying patterns of cultural transformation. We apply this dual perspective to the cases of institutional stability and change in organizational governance in three industries: accounting, architecture, and higher-education publishing. Research on governance has focused on changes in organizational design between markets, hierarchies, and networks. Missing from this research is an understanding of how institutions at the wider societal level motivate organizations to adopt one of these governance forms over another. We examine how the governance of firms in these industries has been influenced by the institutional logics of the professions, the market, the state, and the corporation by focusing on three mechanisms – institutional entrepreneurs, structural overlap, and historical-event sequencing. Overall, our findings reveal how accounting was influenced by state regulation producing a punctuated equilibrium model, architecture by professional duality producing a cyclical model, and publishing by market rationalization producing an evolutionary model of institutional change in organizational governance.

Purpose– Mass retail in France, as an organizational field, experienced an institutional change when the Dutreil Law was promulgated on August 2, 2005. This new text is the result of a long process through which different groups of opposing logics faced one another. Michel-Edouard Leclerc actively took part in the debate launched about the Galland Law reform. His institutional activism has contributed to this change and he can be qualified, on that account, as an institutional entrepreneur. Anchored in neo-institutional theory, this article contributes to understanding the part played by the institutional entrepreneur in the process of institutional change. Design/methodology/approachDesign/methodology/approach– The authors analyze Michel-Edouard Leclerc's discourse on his weblog to characterize the rhetorical strategies he adopts to legitimize change. The analysis is based on the works of the pragmatics of communication and on a detailed semantic analysis of reference fields (TropesFindings– This contribution has enabled the author to stress the part of the institutional entrepreneur in the transformation of an organizational field. The rhetorical strategies implemented here contribute to modifying institutional logic. From a theoretical point of view, this contribution links the neo-institutional approach with entrepreneurship by proposing to define the institutional entrepreneur as an actor pursuing political opportunities.Originality/value– One important advantage of this work is that the authors have offered a methodological framework for studying the discourse of institutional entrepreneurs. The paper proposes empirical operationalization of rhetorical strategies. This contributes to improving the validity of the research because the identification of rhetorical strategies is no longer exclusively related to the researcher's subjective interpretation. The work also has practical implications for the actors: how can their discourse play a part in the institutionalization process?

Purpose– The aim of this paper is to propose an action-interaction-process framework to extend research on institutional entrepreneurship. The framework examines an actor's characteristics, interactions in an institutional context, and the process by which entrepreneurial action is accomplished.Design/methodology/approach– Via a sociohistorical archival method of narrative analysis, the action-interaction-process framework is applied to an exemplary case of institutional entrepreneurship – the case of James Meredith and the integrationist movement at the University of Mississippi in the 1960 s.Findings– The findings show that institutional entrepreneurs who maintain little power and influence over the institutional field must form strategic alliances to mobilize constituents and capitalize on the convergence of resources in the social setting.Practical implications– Through the process of collective action, institutional entrepreneurs can overcome resistance to change and displace inequitable institutional policies, while establishing new practices and norms.Originality/value– This research provides a stronger approach to examining institutional entrepreneurship and institutional entrepreneurs, the interaction between the institutional entrepreneur and the social context in which the individual operates, and the process by which inequitable institutionalized norms are reformed through collective action. This approach is useful to researchers examining institutional entrepreneurship or any area in which power disparity plays an important role.

Purpose – The purpose of this paper is to examine the role of institutional entrepreneurship in opportunity formation and opportunity exploitation in developing emerging strategic new industries. Design/methodology/approach – The paper reviews the focal literature focussing on institutional entrepreneurs’ role in opportunity formation with special attention to opportunities for institutional entrepreneurs in emerging economy. A multi-method approach consisting of historical case studies and event sequencing is applied to track the historical development of the solar energy industry in two case contexts and to investigate the role of institutional entrepreneurs in this process. Findings – Investigation of two cases illustrates that different types of institutional entrepreneur, as represented by individual entrepreneurs and local government, in the context of massive institutional change – such as the Grand Western Development Program and the Thousand Talents Program in China – have varied effects on triggering and inducing institutional change and innovation to explore and exploit opportunities in emerging new industries. Practical implications – The significance of local context for the nature and scope of institutional entrepreneurship in emerging economy is worthy of further research. The top-down process of institutional innovation dominated by local government might cause myopic outcome and distortion of market opportunities. Indigenous individual entrepreneurs with well-accumulated political capital and strong perceived responsibility could be the main actors to introduce incremental institutional change by combining bottom-up and top-down processes and promoting sustained new industry development through creating and seizing institutional opportunities and market opportunities. Originality/value – This paper illustrates the close relationship between institutional environment and opportunity formation in emerging economies, contributes to the understanding of contextualizing institutional entrepreneurs in different regional contexts and discloses the problems involved in local government acting as an institutional entrepreneur.

The paper reviews the current discussion on institutional change and institutional entrepreneurship. Specifically, it focuses on institutional change agents, by which we mean individuals whose actions can be shown to have contributed to formal or informal institutional change, to the benefit of the wider economy or society as well as to themselves. It aims to explore their antecedents and behaviours, and the contingent factors contributing to institutional change, both intentionally and unintentionally. We find that the concept of institutional entrepreneurship does not provide an adequate conceptual underpinning for incorporating human agency into institutionalised theory. We therefore argue that a focus on institutional change agents may be more productive. Whilst institutional theory recognises the impact of institutions on entrepreneurs and individuals, this paper draws attention to the role of human agency for institutional change. Institutional change can happen intentionally and as an unintended by-product of entrepreneurial or organisational 'path-dependent' behaviour. The implication of this is that it is not only intentional behaviour which contributes to institutional change, but rather any entrepreneurial behaviour which implicitly or explicitly questions existing institutions. Thus, the paper adds to the current debate on institutional entrepreneurship.

The Evolution of Property Rights: A Study of the American West

Europe continues to lag behind the USA in venture capital (VC) activity and in the creation of successful startups, and has recently been surpassed by China. This is despite the fact that many European countries have deep financial markets, strong legal institutions, and high R&D spending. We point to the tax treatment of employee stock options as an explanation for the stronger growth of the US VC sector. As a response to high uncertainty and transaction costs, VC financiers have developed a model in which founders and key recruitments are compensated with stock options under complex contracts. Low tax rates on employee stock options further raise the relative returns of working and investing in innovative entrepreneurial firms, and shift financial capital and talent to that sector. We measure the effective tax on stock options in VC-backed entrepreneurial firms in a number of developed economies. Countries with lower stock option taxation have higher VC activity and more high-growth expectation entrepreneurial activity. Based on these associations and the theoretical and empirical literature, we argue that more lenient taxation of gains on employee stock options can be a strategy for European countries to catch up in entrepreneurial finance. This tax policy would narrowly target entrepreneurial startups without requiring broad tax cuts. The favorable tax treatment of stock options allows the state to promote firms that rely on entrepreneurial finance and make use of these types of contracts without lowering taxes for other sectors of the economy.

The rapid institutional changes taking place today, including the emergence and global spread of new institutions bring to the fore the question of how new institutions develop. From the 1990s onwards, a new technical term has begun to spread in the literature: institutional entrepreneurship, reflecting the revaluation of people’s activity in institutional change. The aim of the paper is to answer the questions regarding this kind of entrepreneurship. How does institutional entrepreneurship emerge, how can we interpret and define this phenomenon? What kind of driving forces are behind it? How does it work in the real economy? The novelty of the paper is in addressing institutional entrepreneurship as the result of a special ability and activity of actors to combine different, already known elements for building up new institutions. The study introduces the characteristics of institutional entrepreneurship, using the example of the sharing economy, by contrasting sharing as an alternative to conventional market solutions. The paper also demonstrates how the institutional entrepreneurship of sharing changes its socio-economic environment, from mobilization of unused resources through perception of ownership to the increase of the growth potential of the economy.

Institutional Theory and Institutional Change: Introduction to the Special Research Forum

Stock options issued to employees has become a significant component of total compensation in many firms. Although option pricing technology has evolved remarkably over the years, valuing employee stock options (ESOs) still presents numerous challenges, and there is no model that is generally accepted in practice. Simply treating ESOs as if they were plain vanilla (American) stock options fails to take proper account of a number of their particular features. Along with vesting rules and the uncertainty they entail, these features include the fact that the equity of existing stockholders will be diluted when the ESOs are exercised. In that sense they resemble warrants rather than traded option contracts. Also, the fact that ESOs are issued on a regular basis means there are typically a number of outstanding ESOs with differing maturities and strike prices, which introduces interaction among them in valuation and in optimal exercise strategy. In this article, Dennis and Rendleman present a lattice technique to value ESOs that takes account of the effects of dilution and optimal exercise for a firm that has a diverse set of ESOs outstanding. Their approach increases computational efficiency substantially over the standard solution technique for a lattice model, but realistic problems still can become intractable as the number of time steps and options grows. Fortunately, the results indicate that in most cases, the effect of dilution and interaction among exercise decisions is present but relatively small.

Japan's economic success has been attributed largely to the nature of its national institutions, such as relational banking, lifetime employment, and relational contracting in intermediate product markets. These institutions were tightly linked to govern the Japanese economy, but more diverse patterns of organizing have become evident since the 1990s. For instance, in financial markets, venture capital funds and IPOs (initial public offerings) have appeared alongside relational banking to finance start-ups. In labour markets, non-standard forms of employment have come to be a significant alternative to the lifetime employment norm. It is clear that the Japanese business system is becoming more diverse within. But when, why and how has such organizational diversity come about in Japan? And is such diversity a sign of a gradual breakdown of the system, or has it become the very characteristic of the Japanese system? If it is the former, what is the process by which we should expect the emergence of a new system? If the latter, how much diversity can be sustained within a system? This paper addresses these questions with respect to specific empirical cases at the national and corporate levels. The paper begins by developing a framework linking institutional change and organizational diversity in Section 1. This section advances a model of institutional change in a specific direction, namely from CME (coordinated market economy) to LME (liberal market economy), and identifies organizational diversity as a feature of such change as well as of the new emergent system. It is argued that organizational diversity may increase with institutional change due to three logically separable factors. First, diversity increases in a move from CME to LME because LME, with less sunk cost in building coordination and collaboration, accommodates greater diversity within the system. Second, diversity increases also because the process of institutional change may afford different timing for individual actors to defect from the old institutions, dictating the extent to which 'layering' may persist. Third, organizational diversity is introduced due to different settlements that result from local contests between management and labour. Section 2 examines the timing and the extent of diversity in financial and labour markets at the economy-wide level. It identifies the late 1990s as the time when organizational diversity began to take off in the Japanese economy. In financial markets, venture capital in Japan experienced 'conversion' - shifting its goals and functions from being part of the Japanese institution of relational banking towards being more part of an equity-based finance system. New stock exchanges were created, but are layered and not directly threatening existing institutions of relational banking and stock exchanges for established public corporations. Nevertheless, the layering of the new stock exchanges and legal changes triggered a slow process of conversion in venture capital. In labour markets, Shunto is portrayed as a case of 'conversion', with its function changing from coordinated pay bargaining to a mechanism forlegitimizing pay restraint and dispersion. At the same time, contingent work was identified as a case of 'layering' onto the norm of lifetime employment. Although the Japanese economy had always had a dual labour market, legal changes and practices that fuelled the use of agency labour and on-site contracting in manufacturing threatens the norm of lifetime employment more fundamentally than in earlier periods. Nevertheless, unlike in financial markets, in which layering triggered conversion, layering and conversion in labour markets have been much more drawn out and interactive throughout the 1990s. Section 3 turns to varied responses to institutional pressures at the company level in two contrasting settings. The aim here is to compare and contrast the ways in which Softbank and NTT used the holding company structure to bring about organizational diversity. These cases highlight another reason for organizational diversity by focusing our attention on how company-level action impacts on national institutional change. The introduction of the pure holding company form faced experimentation, and is being adopted in different ways by various companies to satisfy their own ends. In particular, Softbank not only created a new institution in the form of Nasdaq Japan, but also adopted the pure holding company structure to overcome the absence of a realistic 'exit option' for venture capitalists. NTT also adopted the holding company structure but for a different reason, namely as a political compromise, and greater diversity in its internal labour markets, subverting the norm of lifetime employment, has been slowly introduced despite union resistance. In summary, this paper addresses the conference sub-theme of how different kinds of national institutions complement or conflict with each other, giving insight into various actors' strategies and their capacity to influence institutional change.

The author critiques the existing literature on institutional change and points out that most of the work on institutional change and entrepreneurship is set in commercial fields where the guiding motive is competition and maximization of profits as against co-operation and sharing of resources that is at the core of institutional change in social arena. Issues such as injustice, inequity, and absence of fair play are significant concerns, which could spur the emergence of change agents, or social entrepreneurs, or champions to initiate action for change in a typical social arena such as an Indian rural community. Forwarding this argument and drawing from literature on social change, social entrepreneurship, and social movement, Patnaik extends the profiles of institutional change suggested by Dorado and posits an alternative profile of ‘social institutional change’ by addressing existing power asymmetries through the process of convening. The chapter defines institutional convening, the relationship between institutional convening and power, the role of institutional champion as an extension of DiMaggio’s ‘institutional entrepreneur’

Emerging economies are characterized by fundamental and comprehensive institutional transformations as their economies begin to mature. How venture capitalist functions in environments that differ so fundamentally from those of the mature markets where venture capital was initially developed has only begun to be addressed. This article builds a framework to further the understanding of venture capital practice in emerging markets. Specific attention is focused on the impact of networks in the model, in particular, how networks and other informal institutions can act to supplement or replace formal institutions when they are weak. The article goes on to examine what the implications are for venture capital and the role of informal institutions in emerging economies as formal institutions become more established. The research and resulting model is grounded in 65 semistructured interviews with venture capitalists in emerging economies around East Asia. This article contributes to the literature by drawing attention to the impact of networks and changing institutional environments on venture capital during different phases of an economic transition process in emerging economies. The findings have implications for understanding institutional impact on venture capital activity as well as entrepreneurs and entrepreneurial ventures that seek venture capital financing in emerging economies.

When institutional change outruns the change agent: The contested terrain of entrepreneurial microfinance for those in poverty