The Bright Side of Shareholder Pressures: Trust Among Managers and Changes in Management Control Systems Design

Abstract

Shareholder activism increases demands on managerial processes to assuage concerns. We investigate how managers interactively use management control systems (MCS) to alleviate shareholder activism in the context of performance declines. We also identify a key factor that helps explain the variation in the level of interactive use: the broad-scope MCS design. In addition, an emerging question is the extent to which the diagnostic use of MCS plays a role in alleviating these shareholder pressures. We argue that this extent also depends on the analyst recommendations for the current year. Our hypotheses are empirically tested with survey, archival and hand-collected data from 168 firms. The results provide support for our predictions, suggesting that managers use an interactive lever to assuage shareholder activism in the context of performance declines. This effect is less pronounced for managers equipped with broad-scope information from their MCS. We further find that in a setting of favorable analyst recommendations, managers use a diagnostic instead of an interactive lever to cope with shareholder activism. Overall, the study’s results may help inform our understanding of how firms manage shareholder activism in the context of performance declines from a management control perspective.