Shareholder Pressure Research Articles

E&P Notes (September 2018)

E&P Notes (September 2018)

CEO Ideology, Peer Influence, and Adoption of CSR Executive Position by Fortune 500 Firms

Prior research in upper echelons suggests that CEO values shape the decisions and outcomes of their firms. Our study extends this literature by considering how CEO values, conceptualized in terms of CEO political ideology (on the conservatism-liberalism spectrum), can influence other CEOs’ strategic decisions. Specifically, we integrate research on upper echelons with inter-organizational imitation to argue that ideological incongruence–i.e., the perceived incompatibility between a CEO’s values and the new practice they adopt– positively affects its subsequent adoption by other CEOs. In particular, we theorize that conservative-leaning CEOs’ decisions to adopt a CSR executive position (i.e., appoint a CSR specialist in the top management team) will be imitated at a higher rate by observing CEOs than those of liberal-leaning CEOs due to the increased perceptual salience and situational attributions associated with ideologically-incongruent actions. We further posit that these effects will be stronger when observing CEOs themselves lean conservative and when observing firms experience shareholder pressure to improve their CSR efforts. We test these ideas in a sample of Fortune 500 companies during 2001-2013 and find broad support for our hypotheses. Additionally, in supplementary experimental analyses, we find some evidence for our envisioned theoretical mechanisms.

Brokerage and Closure in Corporate Control: Shifting Sources of Power for a Fractured Corporate Board Network

Structural sources of power have shifted dramatically in corporate America. Recently, the fracturing of the corporate interlock network threatens corporate managers’ capacity to act as a unified group in support of their shared interests, potentially destroying managerialism and elevating shareholder power. Paradoxically, however, the fracturing of the corporate elite has not led to a widespread retreat of managerialism. Corporate managers have replaced their collective structural resources, embedded in their board interlock network, with organizational structural resources located within their firms. By adopting lone-insider board structures where the CEO is the only employee on the board of directors, CEOs establish brokerage positions within their focal firms, allowing them to preserve their autonomy even as the broader network withers. Firms nested in cohesive communities were the first to adopt lone-insider boards, supplementing and eventually replacing closure with brokerage as a structural resource. These alternative structural resources operated to preserve managerialism during different times. Network closure traditionally helped to preserve managerialism against shareholder pressure, but this effect disappeared as the network fragmented in the mid-2000s. In its absence, managers increasingly relied on organizational brokerage positions to maintain their autonomy. Consequently, managerialism remains surprisingly robust in the era of a fractured corporate board interlock network because top managers have become more focused on establishing positions of power within their own firms.

Bail-Ins Versus Bail-Outs: Using Contingent Capital to Mitigate Systemic Risk

Because the quickest, simplest way for a financial institution to increase its profitability is to increase its leverage, an enduring tension will exist between regulators and systemically significant financial institutions over the issues of risk and leverage. Many have suggested that the 2008 financial crisis was caused because financial institutions were induced to increase leverage because of flawed systems of executive compensation. Still, there is growing evidence that shareholders acquiesced in these compensation formulas to cause managers to accept higher risk and leverage. Shareholder pressure then is a factor that could induce the failure of a systemically significant financial institution. What then can be done to prevent future such failures? The Dodd-Frank Act invests heavily in preventive control and regulatory oversight, but this paper argues that the political economy of financial regulation ensures that there will be an eventual relaxation of regulatory oversight (“the regulatory sine curve”). Moreover, the Dodd-Frank Act significantly reduces the ability of financial regulators to effect a bail-out of a distressed financial institution and largely compels them to subject such an institution to a forced receivership and liquidation under the auspices of the FDIC. Believing that there is a superior and feasible alternative to forcing a strained, but not insolvent, financial institution into a liquidation, this paper recommends a system of “contingent capital” under which, at predefined points, a significant percentage of a major financial institution’s debt securities would convert into an equity security. However, unlike earlier proposals for contingent capital, the conversion would be to a senior, non-convertible preferred stock with cumulative dividends and voting rights. The intent of this provision is to create a class of voting shareholders who would be rationally risk averse and would resist common shareholder pressure for increased leverage and risk-taking, but who would obtain voting rights only at the late stage when the financial institution enters the “vicinity of insolvency.” This paper discusses (i) the possible design of such a security, (ii) the recent experience in Europe with issuances of similar securities, (iii) tax and other obstacles, (iv) the possibility of international convergence on a system of contingent capital, and (v) the existing authority of the Federal Reserve Board to implement such a requirement. It submits that contingent capital is an idea whose time is coming, but whose optimal design remains debatable.

CEO Wrongdoing: A Review of Pressure, Opportunity, and Rationalization

Wrongdoing, and specifically that which is committed by top executives, has attracted scholars for decades for a number of reasons. Among them, the consequences of wrongdoing are widespread for organizations and the people in and around them. Due to the vast array of consequences, there continues to be new questions and additional scholarly attempts to uncover why it occurs. In this review, we build upon previous efforts to synthesize the body of literature regarding the antecedents of CEO wrongdoing utilizing a framework that sheds light on the status of the literature and where unanswered questions remain. We apply the Fraud Triangle, a framework drawn from the accounting literature, to derive conclusions about what we know about the pressures faced by CEOs, the opportunities afforded to CEOs to commit wrongdoing, and contributing factors to a CEO’s ability to rationalize misbehavior. We organize the literature on these conceptual antecedents of CEO wrongdoing around internal (e.g., compensation structure and organizational culture) and external (e.g., shareholder pressure and social aspirations) forces. In doing so, we integrate findings from a variety of disciplines (i.e., accounting, finance, and sociology) but remain focused on management scholarship since the last review of organizational wrongdoing to provide an updated state of the literature. This review offers a clear framework and a common language; it highlights gaps in the literature and specific directions for future research with the ultimate goal of understanding why CEOs engage in wrongdoing.

Determinants and consequences of executive compensation-related shareholder activism and say-on-pay votes: A literature review and research agenda

This systematic literature review analyses the determinants and consequences of executive compensation-related shareholder activism and say-on-pay (SOP) votes. The review covers 71 empirical articles published between January 1995 and September 2017. The studies are reviewed within an empirical research framework that separates the reasons for shareholder activism and SOP voting dissent as input factor on the one hand and the consequences of shareholder pressure as output factor on the other. This procedure identifies the five most important groups of factors in the literature: the level and structure of executive compensation, firm characteristics, corporate governance mechanisms, shareholder structure and stakeholders. Of these, executive compensation and firm characteristics are the most frequently examined. Further examination reveals that the key assumptions of neoclassical principal agent theory for both managers and shareholders are not always consistent with recent empirical evidence. First, behavioral aspects (such as the perception of fairness) influence compensation activism and SOP votes. Second, non-financial interests significantly moderate shareholder activism. Insofar, we recommend integrating behavioral and non-financial aspects into the existing research. The implications are analyzed, and new directions for further research are discussed by proposing 19 different research questions.

Shedding Light on Stakeholder Power in a Regulated Market: A Study of Variation in Electric Utilities’ Climate Change Disclosures

Extant theory posits that corporations disclose environmental information to maintain economic and legitimacy resources. Frequently, studies find that corporations prioritize the maintenance of economic resources when formulating their disclosure strategies. These studies generally assume competitive markets. Many polluting industries, however, do not operate in competitive markets. Accordingly, current assumptions of competitiveness may obscure potential explanations of disclosure. To remedy this oversight, I investigate how utilities vary their climate disclosures in response to regulatory, movement, and shareholder pressures within more monopolistic and oligopolistic markets. By using a mixed-effects model, I find that embeddedness in regulatory processes and movement targeting correlate to an increase in substantive disclosures. Interestingly, within monopolistic electricity markets, shareholder pressures do not lead to variation in substantiveness. As markets become more competitive, I find that shareholders resume their position of power. I argue these findings demonstrate that competition influences corporations’ perceptions of stakeholder power–implicating disclosure strategy.

The Decline of Social Entrenchment: Social Network Cohesion and Board Responsiveness to Shareholder Activism

Shareholder activism through corporate governance proposals is a prominent avenue for investors to voice their concerns in corporate governance matters. However, shareholder proposals have an uneven effect on corporate governance. This paper contributes to research on shareholder activism by joining social movement approaches to activism with network theoretic approaches to corporate governance. The paper examines how firms’ position within cohesive sections of the board interlock network, termed “social entrenchment,” predicts (1) the likelihood of being targeted by activist investors and (2) firms’ responsiveness to proposal demands. First, a firm’s position in the board network serves as a salient network prism, attracting activists’ attention. This is especially true for activist investors who lack other backchannel avenues for engagement or seek to use public reputational penalties as part of their activism strategy. Second, the board network traditionally served as an important collective infrastructure among managerial elites helping them preserve autonomy and power. However, the network has become fractured in recent years, raising questions about its continued role in supporting elite cohesion. Results indicate that prior to the mid-2000s socially entrenched firms were less responsive to shareholder proposals. After the mid-2000s, socially entrenched firms were no less responsive. Findings suggest that the board interlock network may have traditionally helped protect corporate elites from external shareholder pressures but the network may have lost its capacity to help corporate leaders preserve their cohesion and autonomy.

Interaction between tolerance levels of people and adoption of green supply chain management practices: an empirical case study in the domestic appliances industry

To establish the scenario of adopting green supply chain management (GSCM) practices by navigating into the gateway of reality for sustainable environment. To understand the connection between tolerance level of people and adoption of GSCM practices and thereby investigating the perceptions of different pressure groups. The work relies on survey results taken in different pressure groups for domestic appliance industry. Survey questionnaire was developed, and responses were taken in the form of likert scale for 167 respondents. Survey results explain that adoption of GSCM practices is not much explained, and some sections of people are not able to tolerate the practices. Either they do not care for environment and do not know about GSCM. The paper discusses the lifestyle of people and its interaction with environmental remedy. This paper brings new insights on perceptions of regulatory, customer, shareholder and community pressure groups towards adoption of GSCM practices. Survey research method is limited to domestic appliances sector, and results may vary when tolerance level of people changes. Fluctuation in lifestyle of people to adapt to changes is a limitation in this paper. The paper brings out new insights on different categories of people. New findings are given on thoughts to deal with prejudices of people. Future research is suggested to find missing links to develop this body of literature.

Banking competition and misconduct: how dire economic conditions affect banking behavior

Increasingly, in the last decade, largely due to perceived greater shareholder pressures for more profitable performance, compensation maximization has taken center stage in some segments of the banking industry. Banks need to establish board governance committees with explicit responsibilities to monitor corporate ethics and culture. This paper aims to measure the correlation between dire economic conditions, competition, banking profitability, and misconduct. This is done by means of GDP comparisons to determine economic conditions, calculating z-scores to determine bank risk taking, and analysis of variance of return on assets, return on equity and z-scores, to determine profitability, and fines comparisons to determine misconduct. Analysis finds that dire economic conditions may lead to increased competition, increased competition may lead to increased risk taking, increased risk taking may have an impact on a bank’s financial performance, and decreased financial performance may lead to increase in misconduct. Keywords: banking competition, banking behavior, economic conditions. JEL Classification: C21, G01, G21, G32

Managerial response to constitutional constraints on shareholder power

Research summary: We examine whether top managers engage in misconduct, such as illegal insider trading, illegal stock option backdating, bribery, and financial manipulation, in response to the presence, or absence, of governance provisions that impose constitutional constraints on shareholder power. Within the agency framework, shareholders typically oppose governance provisions that limit their power because those provisions could undermine shareholder influence and increase agency costs. However, when shareholders support provisions that constrain their power, managers could respond positively by refraining from self‐interested behavior in the form of managerial misconduct. We find this to be especially true in industries where these governance provisions are particularly relevant to managers and in scenarios where CEOs do not also serve as board chair.Managerial summary: In recent years, shareholders have become central to organizations and the managers who run them. Shareholders and managers establish a rapport with one another, such that the behavior of one affects the behavior of the other. One of the most consequential decisions shareholders can make pertains to the reach of their influence: They can choose to impose strict governance over firms they own or they can allow for constitutional constraints that limit shareholder power. When they act in the mutual interest of managers by allowing such constraints, we find that managers respond in kind by refraining from bad behavior, such as illegal stock options backdating, insider trading, and financial manipulation. This is especially true in industries and scenarios in which shareholder pressure is most relevant to managers. Copyright © 2016 John Wiley & Sons, Ltd.

Marx after Minsky: Capital Surplus and the Current Crisis

Minsky’s theory of financial instability helps clarify how Marxist theory can explain the highly financialised capitalism of today, and the crisis which started in 2008. The advanced economies currently have high realised profits in the productive sector and lagging rates of investment. Shareholder pressures encourage corporate strategies which focus on stock-market ratings and M&A operations, less on productive investment. Tax evasion and the build-up of reserve cash piles by corporations have contributed to a global surplus of what Marx calledloanable capital. This surplus has been augmented by the increasing inequality of personal wealth ownership and, in the international economy by, large current-account surpluses. The results include: huge profits for the financial system; low interest rates; recurrent boom and bust in asset markets; the fuelling of huge increases in household and government debt; and the combination of instability and stagnation which results from an excess supply of loanable capital.

Firing on All Cylinders? CEO Retention and Performance: A Learning Approach

The decision a board makes to dismiss or retain their manager is the most important one it faces. This paper utilises real options analysis to develop a new learning-based model of this decision. The model presents new implications for optimised CEO survival and termination thresholds through time. Empirical evidence is found to indicate a CEO is more likely to be publicly fired after poor recent stock performance and privately fired when the manager's average accounting performance falls. This suggests that when a firm’s current stock performance is poor, the board is forced to act publicly due to shareholder pressure. When this pressure does not occur, there is indication that the board evaluates the manager's performance through time and makes rational retention decisions. This is consistent with the view that boards are sensitive to the threat (real or perceived) of shareholder outrage (when their job is threatened), and that boards may be trying to optimise long-run firm value, whereas powerful shareholders (such as blockholders) have short term incentives in stock returns. This may indicate that powerful shareholders do not have incentives that are aligned with small shareholders in maximising firm value.

Do‐no‐harm versus do‐good social responsibility: Attributional thinking and the liability of foreignness

Research summary: The efforts of multinational corporations to be socially responsible do not always engender positive evaluations from overseas stakeholders. Drawing on attribution theory, we argue that two heuristics guide stakeholders in evaluating firms' social performance: foreignness and the valence of firms' social responsibility. We provide evidence from a field study of secondary stakeholders and an experimental study involving 129 non‐governmental organizations. Consistent with attribution theory, the liability of foreignness is minimized when firms engage in “do‐good” social responsibility (focused on proactive engagement creating positive externalities) but is substantial when firms engage in “do‐no‐harm” social responsibility (focused on attenuating negative externalities). In online supporting information, Appendix S1, we demonstrate that these evaluations have consequences for whether stakeholders subsequently cooperate, or sow conflict, with firms.Managerial summary: There is no guarantee that efforts to be socially responsible will improve multinational corporations' relations with overseas stakeholders, such as customers, governments, and activists. In a field study and an experiment, we unpack when foreign firms suffer from harsh stakeholder evaluations. Foreign firms especially suffer from harsh evaluations when they conduct “do‐no‐harm” CSR rather than “do‐good” CSR. Stakeholders attribute the motive for foreign firms' do‐no‐harm CSR to managerial interests and shareholder pressures, perceiving a wedge between managers and owners (who may be unmotivated to reduce the negative impacts of their business activities) and local stakeholders (who bear the social costs). A practical implication is that foreign firms gain more from highlighting do‐good rather than do‐(no)‐harm CSR initiatives. Copyright © 2015 John Wiley & Sons, Ltd.

Green Banking in India: Way to Sustainable Growth

On planet earth, the rich biodiversity and the varied flora and fauna along with the changing climate, weather, natural resources, all the components are integral to sustainable development. Due to the turbulence in nature, many countries are promoting pathways for environmental development at par with economic growth and are Going Green. It is the need of the hour and Banks being the backbone of the economy and of prime importance can help in providing with the ideas and vision for financing portfolio projects that create a strong and successful low carbon economy. The objective of the study is to highlight the responsiveness of banks in India towards the environmental uproar and to understand the action plan towards adoption of green banking practices. In the study parameters based on awareness, implementation, gaps and drivers for green banking practices in India have been studied. The performance of regional rural banks has also been mapped to study the level of their participation in green banking. The research has been conducted using a structured questionnaire in addition to the secondary data obtained from published reports. The results show that only a very small subset of Indian banks have recognized the opportunity of green banking and are vigilant in dealing with environmental issues. Also on a global front, despite a number of initiatives taken and the potential opportunities arising, Indian banks have shown a tepid response. This is evident from the number of signatories in United Nations Environmental Program- Finance Initiative (UNEP-FI, 2014) where only two of them are Indian namely, Yes Bank Ltd and Infrastructure Finance and Leasing Corporation. The main deterrent for Indian banks probably is the risk of losing business to competition whereas the major drivers are shareholder pressure and improvement in brand equity and value addition. For making the topic of green banking more inclusive, clear RBI mandate, training and development, reduction of information asymmetry will play a pivotal role.

Shareholder short-termism in the UK: The kay review and the potential role of corporate law

This paper examines the notion of short-termism and assesses the potential impact of short-termist shareholder pressures on corporate governance in light of available empirical evidence on the effects of institutional shareholder ownership on corporate performance. Its main aim is to evaluate the adequacy of the recommendations included in the influential Kay Report and to assess the legal efficacy of the regulatory tools advocated by Kay. It is argued that although most of the Report’s recommendations are likely to alleviate the consequences of short-termism, the Report does not go far enough to ensure a definite change of culture and practice in equity markets. Therefore, further reforms are necessary in the area. In particular, it is expedient to robustly reform the structure of executive remuneration, facilitate a dialogue between companies and long-term investors, and reform shareholder voting rights to deter short-termist behavior and reward long-term investors

Corporate Governance and Double Liability: Toward a Bank Shareholder-Orientated Model

The financial crisis of 2007-09 was interpreted by many as evidence that incentives of managers were not optimally aligned with interests of shareholders. As a result, a plethora of proposals have been put forward seeking to increase shareholder engagement. However, this shareholder engagement strategy only makes sense if risk appetite of bank shareholders is not socially excessive. The conventional for corporate governance presumes that costs of failure are largely internalized by firm and so are taken into account when shareholders determine their risk appetite. In this paper I argue, when applied to banks, this view is mistaken. Banks do not internalize costs of failure, hence risk appetite of bank shareholders is socially excessive. I show that shareholder pressure on their management to accept greater risk can help explain excessive risk-taking of banks. My analysis indicates that recent corporate governance reforms that attempt to tighten alignment of managerial and shareholder interests cannot be expected to address problem I identify. To adequately understand what policies should be explored, we must first recognize that excessive risk-taking is also partly a product of conventional of governance. I therefore propose a modification to that model: a regime of double bank shareholder liability that is triggered by bank failure. I discuss how this has potential to reduce bank shareholders’ risk appetite, and, make less likely, excessive risk-taking. Welfare improvement occurs because of heightened risk awareness and enhanced risk-taking controls, decreasing likelihood of failure. I introduce term the bank shareholder-orientated model of governance to characterize this modified approach.

TOWARD A BANK SHAREHOLDER-ORIENTATED MODEL: USING DOUBLE LIABILITY TO MITIGATE EXCESSIVE RISK-TAKING

The conventional model for corporate governance depends on the rarely articulated assumption that the costs of failure are largely internalised by the firm and so are taken into account when shareholders determine their risk appetite. In this paper I argue that, when applied to banks, this view is mistaken. Banks do not internalise the costs of failure, hence the risk appetite of bank shareholders is socially excessive. I show that shareholder pressure on their management to accept greater risk can help explain the excessive risk-taking of banks. My analysis indicates that recent corporate governance reforms that attempt to tighten the alignment of managerial and shareholder interests cannot be expected to address the problem I identify. To adequately understand what policies should be explored, we must first recognise that excessive risk-taking is also partly a product of the conventional model. I therefore propose a modification to the conventional model: a regime of double liability that is triggered by bank failure. I analyse how this will reduce bank shareholders’ risk appetite and make excessive risk-taking less likely. Welfare improvement occurs because of heightened risk awareness and enhanced risk-taking controls, decreasing the likelihood of failure. Finally, examining a range of possible objections, I conclude that they do not provide a good basis for opposing a regime of double liability and the burden is now on proponents to justify the current limited liability regime for bank shareholders.

CSR Decreasing: How and So What? A Case Study in China Emerging Context

Previous researches in corporate social responsibility tend to focus on the meaning of and expectations for ¡°positive¡± CSR initiatives-a phenomenon when corporations increase their CSR initiatives by doing good, while ignored the meaning of and expectations for ¡°negative¡± CSR initiatives- a phenomenon when corporations decrease their CSR initiatives by stopping doing good.This paper explored the under mechanism of CSR decreasing behavior through a single longitude case studyby using a multilevel and longitudinal method. The results show that external factors such as industrial legitimacy demand, shareholder pressure, and corporate performance inefficiency have effects on the sensemaking of TMT¡¯s CSR perceptions and thus affect CSR initiatives. This study also indicates that the link between CSR and a firm¡¯s financial performance is contingent on stakeholders¡¯ perceptions of and subsequent reactions to CSR efforts.

Is Say on Pay Value-Enhancing?: A Cross-Country Analysis

There is a global movement to give shareholders a greater role in the corporate process. Say on Pay, which gives shareholders the right to vote on executive compensation is one of the tools of increased corporate democracy. Prior studies have been conducted to analyze Say on Pay on the U.K. and U.S., but this is the first study to analyze Say on Pay in a cross-country context. Analyses are conducted within a single country environment and within various groups (legislated vs. shareholder-initiated votes, binding vs. non-binding legislation, common law vs. civil law systems, and widely-held vs. concentrated ownership). I find that stocks of firms with positive abnormal CEO compensation and low CEO pay for performance react in a significant, positive manner. Significant positive abnormal returns are also earned by firms more likely to implement changes under shareholder pressure. For firms that receive shareholder-initiated Say on Pay proposals, I find that the stock price of these firms reacts negatively when the proposals are announced and when the proposal is passed. Overall, the findings suggest that the market views Say on Pay as value-enhancing for the companies with inefficient executive compensation and relatively poor corporate governance but value-destroying for other companies.