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Transcript of CONTESTED INSTITUTIONAL CHANGE: … · Web viewEarly research in institutional theory focused on...
INSTITUTIONAL LOGICS, PERFORMANCE FEEDBACK, AND THE
ADOPTION OF CORPORATE GOVERNANCE PRACTICES
TIMOTHY J. ROWLEYUniversity of Toronto105 St. George StreetToronto ON M5S 3E6
ANDREW V. SHIPILOVINSEAD
Boulevard de Constance77305 Fontainebleau France
Tel: 33 1 60 72 44 24E-Mail: [email protected]
HENRICH R. GREVEINSEAD
1 Ayer Rajah Ave.138676 Singapore
ABSTRACT
Institutional entrepreneurs often advocate new goals for organizations, yet little is known
about how organizations respond to these goals—especially when the institutional logic
underlying the goals is contested. We combine insights from institutional logics and performance
feedback theory to develop a model that addresses how organizations react to such contested
goals and to the accepted goal of profitability. We show that Canadian firms adopted practices
consistent with the logic of board reform as a function of gaps between their profitability
aspirations and their position on a corporate governance score devised by institutional
entrepreneurs.
1
Early research in institutional theory focused on the taken-for-granted
nature of institutional environments in which organizations uniformly react to
normative, mimetic and coercive pressures (DiMaggio and Powell 1983). However,
adoption of new institutions is often less uniform and more contentious than this
early account described (Greenwood et al. 2011; Haveman and Rao 1997;
Thornton and Ocasio 1999). Current theory suggests that institutional
environments are complex and contain multiple, contested institutional logics,
defined as “the socially constructed, historical patterns of material practices,
assumptions, values, beliefs, and rules by which individuals produce and reproduce
their material subsistence, organize time and space, and provide meaning to their
social reality” (Thornton and Ocasio, 1999: 804). There has been much work on
how new institutional logics replace old ones (Thornton et al. 2012), and attention
is now turning to how organizations respond to the complexity of multiple
contested logics. With the co-existence of competing logics organizations must
decide whether and to what degree to adopt practices associated with each logic.
Accordingly, Greenwood et al. (2011) developed a framework of “filters”—
organizational attributes that affect whether or not organizations accept or resist a
particular logic.
Consistent with this shift toward the organization, we examine why firms
differ in their responses to contested logics especially as they are faced with
contested goals associated with these logics. Such goals are created by
institutional entrepreneurs who pioneer scoring mechanisms demonstrating the
extent to which organizations adopt practices consistent with the logic that the
entrepreneurs are trying to spread. Examples include standardized scores to
evaluate schools’ performance (Herman and Golan 1993), environmental or quality
2
certifications for companies (Guler et al. 2002), and ease of doing business scores
for governments (La Porta et al. 1999). Institutional entrepreneurs make these
scores public and rally support for the need of attaining higher scores, expecting
organizations to treat such attainment as a performance goal. This way, the
entrepreneurs apply pressure on organizations to adopt the logic underlying these
scores. Yet, when the institutional logics are contested, so are these goals. The
introduction of contested goals can lead to unintended consequences—while they
prompt some organizations to affirm their identity as the proponents of the logic
underlying the scores and adopt corresponding practices, the goals can also push
the other organizations to affirm the identity of the opponents of this logic, thus
they would resist its practices. Moreover, whether or not organizations will even
pay attention to contested goals will depend on their profitability, which affects the
propensity to take risks related to repairing a profitability shortfall or safeguarding
superior profitability.
This combination of ideas results in a theoretical model with two elements
predicting how organizations respond to contested logics. The first uses the
concept of identity from the institutional logics perspective. It suggests that the
organization’s ability to achieve a contested goal relative to other organizations
affects the degree to which it adopts this goal as part of its identity. This will have
an impact on the organization’s subsequent adoption of practices associated with
this goal. The second element invokes performance feedback theory that examines
how organizations make changes when responding to deviations between their
actual performance and aspiration levels. We argue that decision makers use
performance feedback based on profitability as a filter affecting their responses to
contested goals. When their profitability is below aspirations, firms that are also
3
below a contested goal are more likely to reject that goal and associated practices
even though this could attract repercussions from institutional entrepreneurs
supporting the logic of a contested goal. In contrast, when their profitability is
above aspirations, firms that also exceed a contested goal can more easily justify
greater commitment to its logic and are thus more likely to adopt its practices.
This model is significant because it expands the institutional logic and
performance feedback theories. It enriches institutional logics theory by focusing
on profitability-based performance feedback as a novel and distinct filter affecting
logic adoption. It contributes to performance feedback theory which has focused
on commonly agreed upon metrics such as profitability or market share, but has
overlooked how new contested goals emerge in the organizations’ environment
(Gavetti et al. 2012). We show that when it comes to adopting institutional
practices, the affirmation of firms’ identities through their position on contested
scores makes them resist any kind of changes, especially when their profitability
deviates from aspirations. Furthermore, whether a firm considers adoption of a
particular contested practice to be a risky change depends on the firm’s identity.
This comes in contrast with the predictions of traditional performance feedback
theory which assumes that adoption of a particular practice is a risky behavior for
all firms and they will be likely to adopt more new practices when their
performance is below aspirations, while they will adopt less when their
performance is above aspirations. Our theory describes nuanced organizational-
level processes that predict some firms’ persistent rejection of practices associated
with new institutional logics, and thus explains the persistent heterogeneity
observed in some institutional environments.
4
Our study context is the spread, from 2001 to 2010, of corporate governance
practices aimed at reforming the boards of large Canadian organizations. During
this period, board reform was the new institutional logic of governance, and its
intention was to motivate directors and their boards to better represent external
shareholder interests. To facilitate the diffusion of this logic, institutional
entrepreneurs created a publicly available governance ranking based on the firms’
adoption of practices consistent with board reform. Firms could respond to this
ranking either by adopting its practices or choosing not to adopt.
The next section provides an overview of the emergence of the board reform
logic in Canada that is based on our interviews with key experts. We also reviewed
more than two thousand articles in the Canadian business press (e.g., National
Post, The Globe and Mail) that described this logic as well as the extant
institutional logic of management control. This research helped explain the
emergence of governance ranking as a performance score over which there was
much disagreement among the proponents of these two logics. This overview is
followed by development of a model of how organizational identity and
performance feedback interact to determine organizational responses to
institutional logic contestation.
CORPORATE GOVERNANCE LOGICS IN CANADA
The board of directors oversees the actions of management on behalf of
public corporation shareholders. The logic of board reform is a socially constructed
pattern of practices, assumptions, and rules according to which companies’ boards
become more independent of management (Westphal and Zajac 1998). This logic
stems from the work of theorists who maintained that reducing board dependence
on management was necessary to improve firms’ ability to maximize shareholder
5
value (Beatty and Zajac 1994; Berle and Means 1932; Crystal 1984; Fama and
Jensen 1983). Yet because the prevailing view for many preceding decades was
that governance and profitability were not strongly linked, the balance of control in
most economic systems tipped toward managers rather than boards. Proponents of
management control argued that, whereas management had developed the specific
skills needed to understand key issues and achieve performance goals, board
members committed much less time to the organization. Hence, according to this
logic, management control, rather than more board oversight, would increase
shareholder value (Shipilov et al. 2010).
By the turn of the 21th century, there was a growing discontent with the
logic of management control. Corporate scandals in 2002 finally triggered concrete
action, and stakeholders mobilized to lessen managerial control in Canada. In
2002, the CEO of one of Canada’s largest institutional investor firms summarized
this dissatisfaction in telling us that “the pendulum has swung too far and it is time
to balance managerial power with better boards.” The charge was led by the
Ontario Teachers’ Pension Plan (OTPP), a large institutional investor; the Canadian
Coalition for Good Governance (CCGG), a newly formed investors’ trade
association; and The Globe and Mail, Canada’s principal business newspaper.
These organizations commissioned ongoing research that scored corporations’
board practices and compared them with “best practices” standards. The Globe
and Mail published these governance scores for all Canadian corporations listed on
the S&P-TSX index, and the OTPP used them to seek improvements in low-scoring
firms. One OTPP executive explained the rationale for publicly comparing board
practices as follows: “Sunlight is a great disinfectant and so is shame…. These
governance scores tell us which boardrooms we should be knocking on…High
6
scores give us confidence that the board has some influence and have our best
interest at heart.” ” In the language of institutional theory, these three
stakeholders were institutional entrepreneurs that sought change by destabilizing
the status quo.
The governance scoring and ranking was conducted by the Clarkson Centre
for Board Effectiveness at the University of Toronto and was underwritten by the
institutional entrepreneurs identified above. Beginning in 2002 (for the 2001 fiscal
year), the Clarkson Centre examined proxy statements and public documents
annually in order to score the governance practices of each corporation in the
Toronto Stock Exchange index. The results were used to calculate the Board
Shareholder Confidence Index (BSCI), and the BSCI scores were sent to each
corporation (and other relevant stakeholders) and published on the Clarkson
Centre website. Each year The Globe and Mail published “Board Games”—a
feature that included all the governance scores and extensive commentary, so
board practices and comparisons became public knowledge.
However, many corporate executives and board chairs resisted the change.
Early on, most of the organizations in opposition to the board reform took the
passive form by simply not adopting the board reform practices. When confronted
by the media on this issue, they invoked their opposition to reforms and their
adherence to the management control logic. One CEO told us, “My board is a
necessary evil. The public markets require us to have a board but it is not much
more than a cost and distraction.” Another CEO reflected: “Managers manage and
boards drink tea [so] more oversight will not make Canadian companies better
[financially]. Giving more power to boards is counterproductive.” Some directors
held similar views: “Management has all the information and invests all of
7
themselves into the company. How can a board oversee these people if they are
the experts?” Many board members likewise took issue with outside influence, and
the chair of a Canadian bank argued that “the right board practices must fit with
the particulars of each board and should be chosen by people in the boardroom …
not by critics.”
The strongest opposition to board reforms came from closely-held and
family-controlled firms, which insisted that—despite being publicly traded—they
were a different form of organization requiring different governance principles and
practices (Shipilov et al. 2010). A small minority of firms with substantial family-
ownership stakes raised tension and engaged in more active political contestation;
in fact, the Clarkson Centre was threatened with lawsuits. In addition, The CCGG’s
Managing Director interviewed in 2008 indicated that “many corporations see us
as no more than [a] nuisance and maybe worse. They think we will give up soon
and things will [return to the] … old ways.” There were also efforts made to attack
the credibility of the scores and of the stakeholders promoting them. One
corporation’s CEO sent a menacing e-mail to the faculty member leading the
Clarkson Centre: “if this witch hunt is not stopped [then your] career will be in
jeopardy.”
Institutional theory suggests that the companies could have mitigated
external pressures by ceremonial adoption of board reform practices (Meyer and
Rowan 1977). Yet, adoption of such practices had real costs as well as had
consequences for the balance of power between the board and the management.
First, adoptions distracted managers’ and board members’ time and attention from
the other areas as well as affected political climate in the organizations. For
example, increased director independence required firing some directors and
8
hiring the new ones; separating the CEO and Chair positions required convincing
the CEO that another board member would be the Chair as well as overcoming
political opposition inside the board to individual candidacies. Similarly, achieving
committees’ independence required changing their compositions and often lead to
changing managers’ compensation systems. All of these tasks took time and had a
strong potential to increase tensions within the board, as well as between the
boards and the management. Second, initial adoption of some board reform
practices signified adoption of their underlying logic and willingness to be judged
by its goals. Finally, initial adoption of some board reform practices gave
independent directors more say into how the company should be run, thus these
directors pushed for even more adoptions regardless of the costs involved.
Many advocates of the board reform argued that the costs of adopting these
practices were justified, because they helped companies’ performance. Yet, many
advocates of the management controlled boards argued that adopting board
reform practices would have a negative impact on the firms’ performance and will
not justify the costs. Thus, there was no consensus on the existence of the causal
relationship between firms’ financial performance and their adoption of the board
reform practices.
The board reform logic comprises the broad groups of structural, evaluation,
and equity-related practices. Structural practices include splitting the positions of
CEO and Chairman of the Board as well as achieving independence of the board of
directors and of its audit and compensation committees. Evaluation practices
include the development of formal mechanisms for evaluating directors and the
board as a whole. Equity-related practices include using company shares to
compensate directors; eliminating dual share structures, the repricing of options,
9
and excessive dilution of shares; and aligning managers’ compensation with the
firm’s performance on the stock market. Figures 1a and 1b plot the rate at which
these practices were adopted during 2001–2010 by the companies making up the
Toronto Stock Exchange index.
--- Insert Figures 1a and 1b about here ---
Institutional investors used the governance ratings to induce low-scoring
corporations to adopt new board reform practices. Such adoptions increased, but
there was evidence suggesting that corporations below the average governance
scores continued to resist board reform. One board chair expressed their common
sentiment: “Not only are the practices unrelated to anything we are willing to do
but even if we want to make some changes we could never win. We would have to
blow up our current board. Impossible.” The CEO of a family-controlled firm had a
similar view: “Running a company means producing good returns for shareholders,
not engaging in a check-the-box exercise. This system [governance scoring] is out
to get us.” However, corporations that scored high in the ranking system
responded differently. As the CCGG Managing Director commented with regard to
his meetings with boards in 2009, “the best [governance-scoring] boards are the
most willing to listen to our suggestions and are more likely to adopt new
practices.” Indeed, our tabulations of adoptions of board reform practices show
that the firms above the average governance rating were more likely to adopt than
firms below the average governance rating, with an average difference of 8.36
percent across all governance practices. A similar pattern was seen for return on
assets (ROA), though there the gap was 5.51 percent between firms whose ROA
was above and below the average. These gaps are large considering that the
overall rate of adoption for all practices was 19.9 percent.
10
By the end of our study, despite the pressures from the proponents of the
board reform logic, many firms still either passively resisted board reform
practices by not adopting them or engaged in active resistance by publicly
speaking out against the board reform. This suggests that there was no uniform
view on the appropriate separation of powers between the management and the
board, thus the logics of “board reform” and “management control” remained
contested. In other words, despite strong pressures from the institutional
entrepreneurs over ten years, Canadian companies did not exhibit isomorphism
with respect to adopting the board reform practices. Such persistent heterogeneity
in the adoption cannot be explained by theory of taken-for-granted institutions
(Meyer and Rowan 1977) or replacement of institutional logics (Thornton and
Ocasio 1999). The theory of organizational filters may do so if we can find the
correct filters, i.e. attributes that affect organizational decisions to adopt or to
resist adoption of board reform.
PERFORMANCE FEEDBACK ON CONTESTED AND PROFITABILITY GOALS
There is a growing recognition among institutional scholars that
organizations differ in their responses to external pressures, especially when
institutional environments contain different contested institutional logics over a
long period of time. Greenwood et al. (2011) developed a framework for explaining
heterogeneity of organizational responses based on the recognition that an
organization’s adoption of different practices from contested logics can be affected
by “filters”: attributes that affect how organizations perceive institutional
complexity and construct a repertoire of accepted responses. We pursue this line
11
of reasoning by examining the effects of organizational identity, as proposed by
Greenwood et al. (2011), and we add financial performance as our own proposed
filter.
An organization’s responses to institutional logics are influenced by its
identity—defined as its claims of membership in socially prescribed categories—
because the identity restricts some options while enabling others (Meyer and
Hollerer 2010). Consistently with the identity argument, Shipilov et al. (2010)
showed that, when contested practices spread in multiple waves, an organizations’
adoption of previously diffused practices solidifies its identity as an adopter of their
underlying logic; this leads to a path-dependent effect that renders the
organization more likely to adopt additional practices from the same logic.
A logic is accepted when there is a general consensus in the institutional
field about the merit of values, assumptions and beliefs underlying the logic’s
practices for achieving some organizational or field level outcomes. A logic is
contested when such consensus is lacking and the field contains multiple logics
each of which is supported by a number of actors. Alternative goals are embedded
at the core of the alternative institutional logics, making goal conflict central to
institutional logics theory. Thornton (2002) documents how the shift from editorial
to market logic led publishers to shift from goals based on prestige and sales
growth towards a focus on short term profits. Mohr and Lee (2000) examined how
the shifts from an individualist logic based on race to a corporate logic in
universities lead to a shift from affirmative action to outreach goals. These and
other studies examined a variety of tactics used by institutional entrepreneurs to
facilitate the diffusion of their institutions—appeals to different types of rationality
(Townley 2002), using identity discourses (Mohr and Lee 2000) or affecting hiring,
12
promotion decisions and authority structures (Thornton 2002), yet they overlooked
a distinct tactic of quantifying the goal attainment through introducing scoring
systems on goals consistent with the entrepreneurs’ institutional logic. This tactic
involves creating a rating or a certification mechanism that shows how well or
poorly organizations adhere to the diffusing institutional practices, such as ISO
certifications for companies (Guler et al. 2002). If a given institutional logic has
strong supporters in the institutional field, then such scores can be used to
congratulate the companies that achieved a high score for their compliance and to
criticize the companies that achieved low scores.
The expectation of institutional entrepreneurs, who champion such scores, is
that their attainment becomes a goal in itself and the desire to achieve this goal
along with the public pressures to do so will make all companies equally likely to
adopt their logic. What is not known, however, is how companies react to scores
especially if they do not adopt their underlying logic. Even though institutional
entrepreneurs expect all companies to adopt logic consistent practices to increase
their score and to avoid public shaming, surprisingly the non-adopters of the
underlying logic might reject these practices even more because their low standing
on the contested goal forces them to affirm their identity as adherents to the
alternative logic and its goals. Thus, despite the best intentions of the institutional
entrepreneurs, the creation of such scores might hinder the diffusion of practices
they champion, yet the existing research on institutions doesn’t examine how and
why this might happen.
To examine this, we start with the observation that when a particular logic is
contested, the performance scores and goals associated with this logic are
contested as well. “Board reform” was a contested logic in Canada because there
13
was no agreement among directors and managers on whether adopting its
practices would improve firm performance. The creation of a governance score
(Board Shareholder Confidence Index) by the institutional entrepreneurs was an
attempt to impose performance goals associated with the board reform logic.
Because board reform was contested, the BSCI performance score and the goal of
attaining higher BSCI scores was also contested by the proponents and the
opponents of this reform.
When an identity becomes positively verified, a social actor’s commitment to
the identity increases (Burke and Stets, 1999). Managers seek organizational
membership in institutionalized social categories that allow the organization to be
viewed in positive terms, causing organizations to generally respond to external
pressures in ways that preserve or create positive identities (Dutton et al. 2010;
Sauder and Espeland 2009). Thus, the desire for a positive identity affects an
organization’s response to institutional pressure and, in particular, to the adoption
of new practices. For example, organizational identities in the oil and gas industry
affect whether firms perceive environmentally friendly protocols as a threat or
rather as an opportunity (Sharma 2000).
Contested scores affect an organization’s propensity to adopt practices
advocated by the scores’ creators through their impact on the organization’s
identity. To understand how this happens, we borrow the terminology of
“aspiration level” from performance feedback theory. The aspiration level is
defined as the borderline between perceived success and failure of on a particular
goal dimension (Cyert and March, 1963; Schneider, 1992). Although it is usually
applied to goals accepted by the focal actor, such as the decision makers inside the
firm, it can also refer to a goal imposed by external actors (Locke et al. 1988), such
14
as institutional entrepreneurs. Comparison of an organization’s performance to its
reference group defines whether or not it performs below or above aspirations.
When institutional logics are contested, so will be the corresponding
aspiration levels. As a contested score gains visibility in the institutional field, the
discrepancy between an organization’s actual performance and the performance of
the others on this score will affect the organization’s propensity to adopt or reject
practices that the score is designed to promote. This will occur irrespective of
whether the organization actually agrees that the average performance of the
others on this score is actually worth aspiring to.
Organizations that are high adopters of the logic-consistent practices are
above aspiration levels on the scores associated with this logic and are singled out
for praise by the logic’s supporters. Low adopters are below aspiration levels and
thus are targeted for criticism even though these organizations may not actually
aspire to achieving high scores on the contested goals. Thus the average BSCI
score across the Canadian economy formed contested aspiration levels for all
companies in the country.
The further an organization’s contested score is below aspiration levels, the
more likely it will reject that score and its logic. Adopting just a few board reform
practices as a symbolic gesture is a dangerous strategy for such organization.
While doing so would have suggested that the organization accepts the board
reform logic, it would still be performing below aspirations on the governance
score and would risk acquiring a negative identity (i.e. an organization paying only
a lip service to board reform) despite the efforts that its managers made to
relinquish their authority. Therefore, managers and board members of an
organization performing low on the governance score are more likely to pursue the
15
positive identity of a managerial control firm, rather than a negative identity of a
board reform firm that fails to fully implement board reform practices. Executives
in such organizations will not be receptive to external challenges to their authority
over the corporate policy (Brehm and Brehm 1981; Westphal 1998; Wright et al.
1992). Such managers will defend the status quo by denying the need to give more
power to the boards, justify their existing management control practices or
question the motives of the institutional entrepreneurs who seek to impose board
reform (Ashforth and Gibbs 1990). Because adoption of the board reform practices
represents a threat to a firm that identifies itself as the proponent of the
management controlled boards logic, the behavior consistent with maintaining a
positive identity of a managerial control firm becomes to hold its position on the
governance score and reject corresponding practices. Thus, even though decision-
makers in a firm don’t buy into the need to reach an aspiration level on the
contested goal imposed by the institutional entrepreneurs, the difference between
the firm’s performance on the contested goal and that aspiration level publicized
by the score will still be consequential for their rejection of contested practices.
Conversely, organizations performing above contested aspirations (i.e. if
their BSCI score is above the national average) gain public affirmation of the
positive identity of the adopters of the board reform logic. Following identity
theory, decision makers in such organizations will seek out opportunities to
enhance this positive identity further, which can be done by adopting even more
practices consistent with the board reform logic. Doing so would entail a relatively
low cost, as these executives already overcame their natural reluctance to
relinquish control and shift structural power to the board (Westphal 1998). Thus,
the higher the performance of an organization on the board reform score relative
16
to the aspiration level, the more likely the organization is to adopt other board
reform practices. These arguments lead to the following hypotheses:
H1: An organization is less likely to adopt a contested institutional practice if its
performance based on the contested goals is below that of its aspiration level.
H2: An organization is more likely to adopt a contested institutional practice if its
performance based on the contested goals is above that of its aspiration level.
One assumption behind research on performance feedback is that
performance and associated aspiration levels represent commonly agreed upon
and uncontested goals for companies and individual executives (March and
Shapira 1987). Financial performance and financial aspirations, frequently
operationalized as profitability, are a key component of research on performance
feedback in organizations precisely because of the profitability’s commonly-agreed
upon nature. That is, organizational success is widely defined as the ability to
reach or exceed profitability goals, while the inability to do so is considered a
failure.
Performance feedback theory also suggests is that performance below
aspirations causes search for alternative actions and risk taking in the form of new
practices’ adoption. For example, reduction of firms’ market share below their
aspiration levels in the contexts where market share is a close correlate of
profitability caused format changes for radio stations (Greve, 1998) or change of
syndicate partners for investment banks (Baum et al, 2006). Lower return on
assets relative to aspiration levels caused organizations to engage more in
innovations (Greve 2003a), make investments (Greve 2003b), change strategic
positioning (Park 2007), engage in acquisitions (Iyer and Miller 2008), and take
risks more broadly (Miller and Chen 2004). That such effects have been found over
17
a wide range of outcomes testifies to the power of profitability in shaping
managerial action. This is because profitability ensures organizational survival,
increases managerial compensation, and is a broad indicator of operational
sustainability.
Although profitability is a frequent predictor of change in such business
actions as innovation, investment, acquisitions, and strategic positioning, research
on institutional theory has not demonstrated an effect of profitability on the
diffusion of institutional practices. This fact may simply reflect an empirical
omission, but there is also reason to believe that investigation of a direct effect
between profitability performance feedback and adoption of institutional practices
would yield no findings. Managers who seek to improve profitability seldom adopt
practices that have weak or no performance consequences. Managers will focus
instead on actions that they see as more consequential in response to gaps
between their profitability and aspiration levels. Institutional goals can be
important in their own right when an institution is so well established that its goals
are binding on all organizations in the institutional field. Yet this is not the case for
goals associated with contested institutional logics. Contested institutions yield
more choice to organizations than in environments dominated by a single
institutional logic. On average, such goals will be lower in the goal hierarchy than
profitability precisely because there is no consensus on whether their attainment
contributes to organizational survival, and operational sustainability.
Thus, we should expect different reactions to contested logics and goals
depending on the organization’s financial performance: The effect of profitability
performance feedback on the adoption of such practices will be indirect and
localized within the extreme cases of adopters of different logics. When an
18
organization simultaneously performs below contested aspirations and below
profitability aspirations, its attention will be on profitability rather than the
contested logic. Because fixing profitability problems will be much higher on its
managers’ agenda than improving the standing on the contested goals (i.e. goals of
board reform), they will make changes in the areas that are more directly related
to profitability. Building a positive identity associated with a contested logic that is
not directly linked to financial performance is of a secondary concern for
organizations performing below profitability aspiration levels. Managers in such
firms can exploit this uncertain link to justify resistance against adoption of
contested practices, because they can argue that adoption will distract managers’
and boards’ attention from fixing profitability shortfalls, when these practices are
in fact unrelated to profitability. Thus, we propose:
H3: An organization is less likely to adopt a contested institutional practice if its
performance based on the contested goals is below aspiration levels and its
profitability is also below aspirations.
Performance feedback research also suggests that when performance based
on profitability is above aspirations, the risk taking is reduced because decision
makers avoid making changes that could disrupt superior performance. This is why
Greve (2003: 91-92, 100-101) finds that firms with higher ROA than their
aspirations reduced R&D investment and innovations. Similar findings of lower
rates of change and new practice adoption when profitability is high are common
in the performance feedback literature (Iyer and Miller 2008; Miller and Chen
2004).
Even though performing above profitability aspirations reduces the
propensity for risk taking in general, organizations that also perform above
19
contested aspirations will find the adoption of associated practices to be a highly
appropriate risk reduction behavior given their positive identity as adopters of the
board reform logic. Thus, managers in such organizations will switch their
attention from making risky changes in innovation, R&D, acquisition or partnering
strategies to adopting more board reform practices. This will help them attain the
new levels in the contested goal without risk because their organizations already
agree with the underlying logic.
Furthermore, because the rhetoric advocating the contested practices
typically involves some claims of effects on profitability, managers who have
adopted the board reform logic will add its goals and practices to their profitability
enhancing heuristics. Even if the contested practices in fact are unrelated to
profitability, such managers may nonetheless perceive that the firm experiences
increased profitability after practices’ adoption. This is because profitability has a
high unexplained component (McGahan and Porter 2002), and managers who
believe in the value of specific changes typically try to attribute profitability
improvements to their actions while attributing profitability drops to
environmental conditions(Meindl and Ehrlich 1987). This sets the stage for
superstitious learning in the firms that both adopt contested institutional logic and
experience profitability performance above aspirations supporting their belief that
the adopted institutional practices were in fact beneficial (Denrell 2003; Levitt and
March 1988). Thus, they subsequently adopt more of them. These arguments result
in the following hypothesis:
H4: An organization is more likely to adopt a contested institutional practice if its
performance based on the contested goals is above aspirations and its profitability
is also above aspirations.
20
We have suggested that the adoption of practices stemming from a
contested institutional logic is influenced not only by performance relative to the
goals consistent with that logic but also by profitability relative to its aspiration
level. According to performance feedback theory, we can subdivide performance
feedback into social and historical aspirations. Social aspirations are formed when
organizations compare their performance against peer groups while historical
aspirations are formed when organizations compare their performance against its
own past performance. Falling behind relative to either type of comparison based
on financial goals has been shown to affect an organization’s willingness to change
(Argote and Greve 2007; Greve 1998, 2003c). Moreover, there are contextual
differences in the relative weight placed on social versus historical aspiration
levels and in the choice of peer groups, depending, for example, on the
organization’s network position (Shipilov et al. 2011). While this research
examined how firms set uncontested profitability aspirations, it is mute on how
firms set their contested aspirations. Understanding the formation of contested
aspirations is important because they are a key building block in a model
explaining heterogeneity in firms’ responses to contested practices.
Contested goals are imposed by outside actors, and hence firms’ decision
makers will pay more attention to social than to historical aspirations.
Comparisons with peers yield an external performance benchmark for contested
goals, but historical comparisons in such a context are difficult. Organizations do
not have a long track record on attaining contested goals, which are relatively
new, so the required level of performance leading to acceptance (or rejection) of
an institutional logic is unclear from historical comparisons of an organization’s
own past performance. For profitability goals, in contrast, both social and
21
historical aspirations are well-defined. Firms have records of their own profitability
going back a long time, and the profitability of peers is also an unambiguous
criterion for immediate social comparisons. In other words, firms can clearly
establish how well they must perform in order to exceed their past profitability and
that of their peers. These considerations lead to our final hypothesis.
H5: An organization will pay attention to its social aspirations when responding to
performance feedback based on a contested goal and will pay attention to both
historical and social aspirations when responding to profitability performance
feedback.
DATA AND METHODOLOGY
Sample and Data Collection
We obtained access to the Clarkson Centre’s Board Shareholder Confidence
Index for 2001–2010 and to the data on Canadian companies’ adoption of
governance practices for the same period. Information on the adoption of practices
was collected by the Clarkson Centre from the companies’ annual proxy
statements. We also conducted interviews between 2001 and 2012 to capture the
evolution of key stakeholders’ sentiments about the BSCI.
The sample of companies covered by the BSCI consisted of those included in
the Toronto Stock Exchange (TSX) index, which comprised about 200 Canadian
companies in each year. The proxy statements contain information about board
membership, board practices, and the ownership structure of all companies in our
sample; this allowed us to construct annually updated networks of interlocking
directorates. Collecting data on these networks was necessary to rule out
alternative explanations for the mimetic drivers of diffusing practices. For each
22
TSX member company, we collected data on director attributes, and organization
characteristics (e.g., size and industry of operations) and performance from such
publicly available sources as Compustat, Thomson One Banker, and Bloomberg
Professional Service.
Our qualitative fieldwork suggested that the time frame chosen for the
analysis (i.e., 2001–2010) was justified for several reasons. First, our key
contribution to the literature is examining how institutional logics and feedback
based on different performance goals affect the spread of contested practices. The
study’s time frame begins when the BSCI was created and started disseminating
information about company performance with respect to the board reform. By the
end of the study period, board reform was well established—so much so that the
key institutional entrepreneurs (the CCGG, the OTPP, and The Globe and Mail)
started re-allocating funding to other initiatives.
Dependent Variable
Our dependent variable is companies’ adoption of governance practices in
line with the logic of board reform; these are the same practices used by the
Clarkson Centre to construct the BSCI. As described in the methodology section
below, the analysis is set up so that each practice is tracked separately, but the
adoptions are pooled in the analysis. There are 11 practices in total concerning the
structure, evaluation process, and equity.
The first set comprised four structural practices. (1) Board independence.
Relationships with management increase the risk that a director will place the
interests of executives before those of shareholders. The BSCI considered the
corporate board to be independent (i.e., dominated by outsiders without
connections to the firm’s management) when at least two thirds of its directors
23
were independent. To identify dependencies between directors and management,
BSCI applied stringent measures. Specifically, it followed the CCGG guidelines in
considering board members to be not independent under any of the following
conditions: when (a) they were now employees of the organization or were so at
any time during the previous three years; (b) they were executives of organizations
“affiliated” with the focal organization; (c) their organizations currently provided
legal, auditing, or consulting services to the focal organization or did so within the
last three years; or (d) they had a kinship relation to the focal organization’s CEO
or Chairman of the Board. (2) and (3) Independence of audit and compensation
committees. The BSCI coded the audit and compensation committees (individually)
as independent if all committee members were independent directors. (4) Board
chair and CEO split. When the CEO and board chair positions are not separate, it is
more difficult for the board to operate independently of management influence.
The BSCI considered the organization to qualify on this criterion if the CEO and
chair positions were occupied by different individuals—unless they had a kinship
relation.
The second set of practices involved performance evaluations. (5) Director
evaluation involved peer-to-peer assessment of each director’s performance,
usually on an annual basis. (6) Board evaluation was also based on directors’
assessments and focused on the quality of board meetings, of board information
packages, of the chair’s leadership, and of specific board processes.
The third set consisted of five equity-related practices. (7) Director stock
ownership captured the alignment of interests between directors and the company,
a primary goal of board reform that could be achieved by increasing the portion of
directors’ compensation paid via company shares. The BSCI coded the company as
24
having adopted this practice if the average value of share ownership by the
company’s directors exceeded 4 times their annual retainer. (8) Dual share
structure. The rationale for this criterion is that board effectiveness increases
when shareholders can influence its decisions by voting—influence that is
diminished when only some shares qualify as “voting” shares. A company was
viewed by the BSCI as not having a dual share structure, and thus as enabling the
influence of common shareholders, when more than 50% of its equity controlled
more than 50% of the votes. (9) Share dilution occurs when options granted to
executives and directors make up a significant proportion of the outstanding
shares, thus diluting returns that would otherwise go to the shareholders and so
running counter to board reform logic. A company was scored as exhibiting share
dilution unless options granted to directors and managers (resp., CEO’s)
constituted no more than 10% (resp., 5%) of the company’s outstanding shares.
(10) Option repricing. When a company’s share performance has suffered, the cost
of exercising directors’ stock options can be greater than the cost of purchasing
stock at market value. In this case a company may decide to lower the exercise
price in order to align it with the market value of the stock, and such repricing is
seen as relieving directors of their responsibility for the company’s performance. A
company was considered not to exhibit option repricing if it had not lowered the
exercise price within the preceding three years. (11) Alignment between CEO
compensation and share price. Setting CEO compensation is a responsibility of the
directors, and it should reflect (as dictated by board reform logic) the company’s
actual performance. A company was coded for proper alignment if CEO
compensation did not increase by more than 25% following a year during which
the firm’s share price decreased by more than 25%.
25
Finally, we emphasize that the actual practices and the specific numeric
weights used to determine their absence or presence (e.g., the ratio of share
ownership to annual retainer that determines director stock ownership) were
based on the governance guidelines stipulated by the Toronto Stock Exchange and
the Canadian Coalition for Good Governance and thus directly reflect the demands
of these institutional entrepreneurs.
Each practice defined by the BSCI yielded a binary indicator variable,
labeled Board reform practice, which was set to 1 if the focal company employed a
given practice in a particular year (and set to 0 otherwise). We pooled our data by
“stacking” the matrices of single-practice diffusion regressions into one large
matrix (Shipan and Volden 2006; Wei et al. 1989). An organization at risk for
adopting a particular practice will generate an observation for that practice. With
respect to board evaluation, for example, our dependent variable Board reform
practice is set to 1 if the organization was observed to adopt board evaluation in
year t (and to 0 otherwise). Once an organization has adopted a practice, it can no
longer generate an observation for that practice. Our data structure therefore
consists of organization-year observations only for the companies at risk for
adopting new governance practices (because they do not yet employ them).
Independent Variables
Our key performance measures were the firms’ ROA and BSCI score; the
former measure was obtained from Compustat and the latter from the Clarkson
Centre. The BSCI score ranges between 0 and 100 points. The Clarkson Centre
researchers used 100 points as the initial value for each company and then
subtracted points for each reform practice that the company failed to adopt.
26
We used the following formula to construct historical aspiration levels for ROA
and BSCI:
Historical aspirationst = (1 − a)(Historical aspirationst – 1) + (a)(Performancet – 1).
(1)
Here Performancet – 1 is the ROA (or BSCI, as applies) at time t − 1, and a is a
number (between 0 and 1) that represents the weight given to the immediate prior
performance as compared with the weight given to more distant performances. If
the historical aspiration level is weighted more toward recent performance, then it
will adjust quickly to short-term performance variations; if it is weighted more
toward past performance, then short-term performance variations have little
impact.
We computed social aspirations for each firm as the average ROA and BSCI
for all firms in the TSX index but excluding the focal firm. Firms are more likely to
react to the performance of similar others and so we weighted each firm’s
performance by 1/[1 + w], where w was set to 0 if the two firms were in the same
industry and to 1 otherwise (Greve 2008).
Because firms may use historical and social aspirations simultaneously
(Cyert and March 1963), we aggregated them based on the following formula for
aspiration level AL:
ALt = G(Social aspirationst) + (1 − G)(Historical aspirationst), (2)
where G is the weight given to social aspirations. When G = 0, the firm’s
aspirations are solely historical; when G = 1, its aspirations are entirely social. So
if a firm’s aspiration level is based equally on social and historical aspirations,
G = 0.5.
27
To determine how firms react when their performance is above or below
aspiration levels, we computed separate AL values based on ROA and BSCI and
then subtracted them from the actual ROA and BSCI. To enable comparison of the
slopes above and below the aspiration level, we split each relative performance
variable for both performance metrics into two variables. ROA below AL equals
zero for observations where relative performance based on ROA is greater than
zero and equals the relative performance otherwise; ROA above AL equals zero for
observations where relative performance based on ROA is less than zero and
equals the relative performance otherwise. Analogous definitions hold for the
variables BSCI below AL and BSCI above AL.
We control for a range of additional factors that may affect an organization’s
adoption of contested practices. For each year, we computed the number of
practices compatible with board reform logic that an organization had already
adopted, thus creating the Own practice variable. An organization might also adopt
practices simply because it shares directors with prior adopters. We constructed
affiliation matrices in which each Xij entry denotes the number of directors in
common between organizations i and j. A matrix of this type was constructed for
each year in our observation window. We then computed Interlock practice as a
count of the number of contested practices adopted by the firm’s interlocking
partners.
Network centrality is often associated with early adoption of innovations and
with other important performance outcomes (Shipilov and Li 2008). To capture an
organization’s position in the network of interlocking relationships, we used a
measure of normalized eigenvector centrality (Bonacich 1987).
28
To control for the stock market performance of companies, we computed
Market/book value as a separate control variable. We chose this measure over the
alternatives because market-based performance measures are typically the most
salient from the perspective of shareholders. Canadian companies with shares
listed in the United States may be more receptive to new governance practices
because US rules on governance were tougher, especially after passage in 2002 of
the Sarbanes–Oxley Act. We therefore controlled for US exposure via an indicator
variable, US stock crosslisting, which was set to 1 only if the focal organization
was cross-listed on the New York Stock Exchange or Nasdaq.
A company with an extremely low BSCI score will likely attract considerable
attention from external stakeholders, especially those that favor board reform. To
capture this dynamic we use another indicator variable, Extremely low BSCI,
which was set to 1 only if the company’s BSCI score failed to exceed 25 (i.e., a
score that would put the company at the very bottom of BSCI tables).
Governance in banks and other financial institutions is a hot spot, too, given
the importance of the financial sector to the overall health of the economy. We
therefore included the indicator variable Financial sector, which was set to 1 if the
focal company operated in that sector (and to 0 otherwise). Directors’ oversight of
large organizations also attracts attention from external stakeholders because of
the disproportionate effects that governance failures would have in organizations
of that size. Hence our models include the natural log of net sales (Ln net sales) for
each company in the sample. Our interviews and content analysis of the business
press suggested that stock ownership by members of the CCGG influenced board
decisions to adopt the second wave of contested practices. To capture this
phenomenon, the indicator variable CCGG ownership is set to 1 if CCGG members
29
held ownership stakes in the firm (and to 0 otherwise).
We employed an indicator variable for the focal practice of each observation
and thereby accounted for differences in the base rate of diffusion (some practices
spread more rapidly because they are easier to adopt or are viewed as providing
greater benefits). For identification, we omit one practice from the set of indicator
variables. Finally, all of our models include year fixed effects to control for the
effect of time on the diffusion rates. The independent variables are lagged by one
year.
Estimation
We estimated a panel logit model using either the population average or
random effects (via the “xtlogit” command in STATA) along with Huber–White
robust standard errors clustered by organization (Shipan and Volden 2006); the
logit approach is appropriate because our dependent variable is binary. We
predicted adoption of governance practices at time t + 1 as a function of the firm’s
BSCI score (and of other independent and control variables) at time t. The data we
used cover no more than eight time periods per organization,1 which means that
the fixed-effects estimator of the logit model is biased (Lancaster 2000).
Simulations have revealed that the population-average estimator outperforms the
fixed-effects estimator for short time panels in logit models (Greene 2004). The
disadvantage of using the population-average estimator is that, unlike a random-
effects estimator, it does not yield a likelihood ratio—which is needed to compute
the BIC statistic when testing Hypothesis 5. Therefore, we first built our regression
models using a population-average estimator and then replicated our results with a
1 The data for 2001–2010 amount to ten time periods. One time period is lost because we lagged independent variables to avoid simultaneity bias, and another time period is lost because we initialized historical aspirations (i.e., firms’ historical aspirations for 2001 were undefined).
30
random-effects estimator. Another advantage of using population-average and
random-effects (rather than fixed-effects) estimators is that they do not require the
omission of observations for firms that did not adopt a given practice throughout
the entire observation period. In other words, we are particularly interested in
understanding what factors cause firms to persist in their decisions not to adopt
board reform practices, and using a fixed-effects estimator would have forced us to
exclude persistent non-adopters.
ANALYSIS AND RESULTS
Table 1 reports descriptive statistics and correlations between variables. All
the correlations are within a range that indicates the absence of multicollinearity.
Because our regression models contain interactions, we computed the variance
inflation factor (VIF) for each model; all the models’ maximum VIF statistics were
well below the cutoff level of 10.
--- Insert Table 1 about here ---
We built hierarchically nested models to test Hypotheses 1–4, and the
results are reported in Table 2. We used the population-average estimator in the
first four models. Model 1 is a baseline; in addition, Model 2 includes ROA above
and below aspiration levels, Model 3 includes BSCI above and below aspiration
levels, and Model 4 includes interactions between ROA and BSCI above and below
aspirations. Model 5 replicates Model 4 but uses instead a random-effects
estimator. Given equation (2), in each model we assumed that firms—when
adopting or resisting governance practices—react solely to social aspirations for
BSCI (GBSCI = 1) but react equally to social and historical aspirations for ROA
(GROA = 0.5).
31
The results are qualitatively similar across the models, so we interpret the
full Model 5. According to Hypothesis 1, a firm whose BSCI score is below its
aspiration level is less likely than other firms to adopt contested practices. Because
BSCI below AL takes negative values only, a positive and significant coefficient for
this variable provides support for H1 (p<0.05). Conversely, Hypothesis 2 indicates
that a firm is more likely to adopt such practices if its BSCI score is above
aspiration levels. Because BSCI above AL takes only positive values, a positive
coefficient for this variable supports H2 (p<0.05).
In Hypothesis 3 we argued that underperformance of profitability
aspirations and contested performance below the peer group makes firms less
likely to adopt contested practices. To test this hypothesis, we evaluated the
interaction between BSCI below AL and ROA below AL; a negative coefficient for
this interaction supports our hypothesis (p<0.05). According to Hypothesis 4,
performance above the firm’s own profitability aspirations and above its peer
group’s performance on contested criteria renders the focal firm more likely to
adopt contested practices. To test this hypothesis, we interacted BSCI above AL
with ROA above AL; here our hypothesis is supported by a positive coefficient for
the interaction (p<0.1).
--- Insert Table 2 about here ---
Figure 2 illuminates how interactions between aspiration levels for both
goals affect the likelihood of adoption; it plots the predicted probability of adopting
a new practice, where the probability at the graph’s origin is set equal to the
average adoption probability for the data set. Thus, the reported probabilities
cover a realistic range of variation. The curve without interactions (small square
symbols) shows an appreciable increase in adoption of contested practices across
32
the entire range of BSCI scores. The curve for ROA and BSCI scores above
aspirations (large square symbols) shows significant increases in the propensity of
firms above peer adoption levels of BSCI to adopt governance practices. The curve
with ROA below aspirations and governance scores below aspirations (no symbols)
shows that this condition significantly decreases the propensity to adopt
governance practices.
--- Insert Figure 2 about here ---
Finally, in Hypothesis 5 we argued that the attention companies pay to
historical versus social aspirations is a function of the type of performance
feedback to which they are responding. Hypotheses concerning different aspiration
levels are tested by comparing the fit of two models: one in which social and
historical aspirations are equally weighted when setting the overall aspiration level
versus one in which aspiration levels are adjusted to reflect theoretical criteria.
This approach is similar to that adopted in the learning literature for identifying
“depreciation factors” for past experience (Baum and Ingram 1998), and it has
been implemented in other studies examining heterogeneity in aspiration levels
(Greve 2002; Shipilov et al. 2011). Comparing the fit of nonnested models is
traditionally based on the Bayesian information criterion (BIC) (Raftery 1996).
Table 3 summarizes the tests for Hypothesis 5. As reported in the table, we
varied the weight G given to social (versus historical) aspirations for both BSCI
and ROA to see how well the results fit the data as compared with the case where
GROA and GBSCI are both equal to 0.5. The top value in each table cell is the Wald
statistic for Model 4 (computed using a population-average estimator), and the
bottom value reports the BIC for Model 5 (computed using a random-effects
estimator). We allowed G to vary from 0 to 1 in increments of 0.1, so this analysis
33
amounted to running 121 regressions for each model. These regressions helped us
identify which weights of the social and historical aspiration levels produce the
best-fitting model.
--- Insert Table 3 about here ---
Wald statistics approximately follow a chi-square distribution, with
differences greater than 3.84 lending support to the best-fitting model at p < 0.05
(higher chi-square values indicate a better fit). Yet because the test is nonnested
for these models, the difference in Wald statistics should be viewed as merely
indicative. Between-model BIC differences exceeding 6 indicate strong support for
the model with a smaller BIC, where “strong support” is roughly equivalent to an
0.05 significance level in non-Bayesian inference (Raftery 1996). For the reference
model, in which GROA = GBSCI = 0.5, the BIC is 3384 and the Wald statistic is 229.
There is strong support for our chosen model, in which GROA = 0.5 and GBSCI = 1.0,
since its BIC is 3369 (and since 3384 − 3369 > 6); here the Wald statistic is 235,
which also supports our choice. Models for which GROA ranges between 0.3 and 0.5
and GBSCI ranges between 0.9 and 1.0 provide a still better fit, although not
significantly better than when GROA = 0.5 and GBSCI = 1.0. In sum, we find support
for Hypothesis 5 (p<0.05), which states that firms—when deciding whether or not
to adopt contested governance practices—refer only to social aspirations for the
governance score and to a mix of social and historical aspirations for financial
performance.
Some results concerning our control variables are of particular interest.
First of all, firms whose interlock partners had adopted board reform practices
were themselves, as expected, more likely to follow suit (i.e., the coefficient for
Interlock practice is positive and significant). This finding is consistent with prior
34
research on mimetic diffusion of practices through networks (Davis and Greve
1997).
Second, though our models include indicator variables reflecting the
intrinsic appeal of each practice across the population, these variables do not
capture variation in the extent to which practices appeal to individual firms; that
purpose is served by the Own practice variable. The negative and significant
coefficient for this variable confirms the existence of a “high-hanging fruits”
mechanism: once a firm has adopted some of the BSCI governance practices, there
remain fewer such practices for them to adopt. Because these leftovers are
evidently practices that the focal firm’s managers and board members had already
decided were relatively unappealing, that firm will naturally be more reluctant to
adopt them than the ones initially adopted.
Third, the coefficient for Centrality is negative and significant. This is
because a firm with a high centrality in the network occupies a core position within
the field and so is shielded from the pressure of alternative institutions; this makes
it less likely to adopt a new and contested logic. In contrast, it is peripheral
organizations whose adoptions drive acceptance of such institutional logics
because they are less wedded to the status quo (Leblebici et al. 1991).
Supplementary Analyses
The analysis reported in Table 2 is conducted by pooling all three groups of
practices—structural, evaluation, and equity-related—into a single dependent
variable. To check whether firms’ adoption (in response to aspiration–performance
gaps) differed by practice group, we performed a separate analysis of each one’s
diffusion. The results were substantially weaker in each of the three analyses due
to the loss of statistical power needed for modeling diffusion dynamics, suggesting
35
that our empirical strategy of analyzing the practices’ joint diffusion was more
appropriate.
We also checked for whether firms with low BSCI scores also had poor
financial performance. If such an effect exists and can be easily observed by
managers, then the implication is that adherence to board reform logic is
objectively associated with superior financial performance. To check for the
presence of this effect, we computed a correlation between ROA and BSCI on the
full sample of firm-year-practice observations. This dataset doesn’t drop firm year
practice observations after the firms adopted a particular governance practice (as
we have done in the main analysis), because we would like to capture whether
firms improved ROA even after the adoption of specific practices. The correlation
was extremely low (r = -0.001) and not significant. Similarly, a correlation
between the number of board reform practices adopted by firms (variable Own
Practice) and ROA was also low (r=0.001) and not significant.
DISCUSSION AND CONCLUSIONS
We have sought to extend the work on firm responses to competing
institutional logics by specifying and testing a model that combines the theory on
organizational identity (Greenwood et al. 2011) with performance feedback (Greve,
2003). A key element of our theory is the idea that institutional entrepreneurs aim
to impose goals on organizations in order to gain acceptance of the institution they
are trying to popularize and to spread its associated practices. Institutional
entrepreneurs make salient firms’ positions with respect to other firms on such
goals, affecting the firms’ identities and consequently the adoption of contested
practices. However, because organizations are addressing contested logics and
goals, we should expect variation in responses across firms.
36
We make two specific arguments related to explaining such behavioral
patterns. First, firms scoring relatively low on goals associated with a contested
logic are unlikely to accept that logic because doing so would create a negative
identity for them. Instead, publication of contested scores pushes these firms to
affirm a positive identity of the proponents of the alternative logic and they
become less likely to adopt the practices spearheaded by these entrepreneurs. In
contrast, firms scoring relatively high on such goals are pushed to affirm their
identity as adopters of the score’s logic, thus they are more likely to adopt more of
its practices. This mechanism helps explain the continued divergence in practices
seen in complex institutional fields (e.g., Greenwood et al., 2011). Second, we also
invoke performance feedback theory to predict that firms with low profitability and
low scores on the contested goal are likely to have a further reduction of the
adoption likelihood. This is because they will address profitability shortfalls with
other behaviors (such as investment in R&D, increased innovation or the like) and
because they do not consider adoption of contested practices to be a profitability
enhancing strategy given their identity. In contrast, in profitable firms with high
adoption levels of contested goals, managers posit causal links between the two
and hence further increase their levels of adoption, especially since such actions
represent a low risk strategy given their chosen identity.
Our evidence offers support across the board. The rate of adopting board
reform practices increases when firms’ corporate governance score relative to
peers is high and decreases when the governance score relative to peers is low. In
addition, we find that (i) profitability below aspirations reduces adoption rates for
firms whose governance score is below that of their peers and (ii) profitability
above aspirations increases adoption rates for firms whose governance score is
37
above peer levels. In other words, higher profitability gives organizations the
latitude to pursue goals related to board reform, and this effect is strongest in the
organizations that indicate prior acceptance of board reform as a logic. In turn,
lower profitability provides firms that adopt the management control logic an
excuse to avoid adoption of the board reform practices. Finally, organizations set
their aspiration levels differently for contested corporate governance goals than
for uncontested profitability goals. With respect to profitability, firms use both the
performance of their peers and their own past performance as a reference; with
respect to governance, they refer only to the performance of their peers.
These findings are an important extension of work on the diffusion of
institutions. It has been shown by others that organizations mimetically adopt new
practices of uncertain value, thereby spreading institutional structures and norms
(Davis and Greve 1997; DiMaggio and Powell 1983; Galaskiewicz and Burt 1991).
We demonstrate the existence of a more strategic form of diffusion that has not
been previously documented: the imposition of goals by institutional entrepreneurs
leads a firm to adopt (or not) depending on its own performance with respect to
these goals irrespective of other firms’ actions. Thus the firms are not acting
through imitation of other firms in their networks or more broadly in the
interorganizational field, but rather they are choosing a position relative to a field-
level scoring mechanism. This is a new finding, yet it is consistent with the more
political view of institutions that has been promoted by the theory of institutional
logics—in particular, its recent turn toward logics that do not rapidly displace
others but instead remain in contestation over a period of time (Greenwood et al.
2011). Thus, both the firm’s network position and its own characteristics matter
38
for important organization-level outcomes (Shipilov 2009), such as the adoption of
diffusing practices.
Our findings also contribute to performance feedback theory in several
ways. First, the finding that profitability below aspirations led to less adoption of
institutional practices by the proponents of the management controlled board logic
supports the shifting of goals from lower level goals to profitability that so far has
seen little empirical testing (Greve, 2008). Second, the contrast in findings
between the goal imposed by institutional entrepreneurs and the usual findings on
goals such as profitability or market share strongly suggest that contested goals
have effects that contrast with accepted goals like profitability, and likewise that
adoption of institutions has causes that are distinct from those of changes in
business practices like R&D investment, innovation, and acquisition strategy.
Performance feedback based on profitability doesn’t have a direct effect on the
adoption of contested practices, rather it acts as the moderating mechanism
affecting attention to institutional actions or business actions for firms that
perform above or below contested goals. Additionally, the organization’s identity
affects its considerations of appropriate search behaviors in response to
performance feedback. That is, an organization which has an identity of a
supporter for the board reform logic views adoption of new board reform practices
as a low risk behavior to be followed when its financial performance is above
aspirations; while an organization with an identity of the management control firm
views the non- adoption of a board reform practice as a low risk behavior, in which
it will engage even if its financial performance is below aspirations. Thus,
examining performance feedback based on profitability in isolation from the
performance feedback based on contested goals that forces the firm to affirm its
39
identity by taking sides with a particular logic will give an incomplete picture of
the diffusion of institutional practices.
The underlying logic of our theoretical model is that managers’ action is
driven by their comparisons of current performance with aspiration levels, but the
mechanisms driving action in Hypotheses 1 and 2 are different from the
mechanisms driving action in Hypotheses 3 and 4. In the first two hypotheses, the
action is driven by an organization’s identity, which becomes affirmed and
publicized through its performance on a contested goal. Because it is the pressure
towards the positive confirmation of a firm’s identity in the environment of
contested goals and not the risk taking in the environment of commonly accepted
goals that drives action in the first two hypotheses, we expect and find different
results from what could have been predicted by a model linking a firm’s
profitability performance feedback to its adoption of R&D activities. Such
traditional performance feedback model would have predicted that firms
performing below aspirations will always adopt new practices, as they search for
solutions to improve their performance, while firms performing above aspirations
will always reject new practices as they don’t want to make changes that
jeopardize their performance. Instead, we find that firms performing below
contested aspirations resist adoption, while firms performing above contested
aspirations are more likely to adopt.
In the second two hypotheses, the action is driven by the relative propensity
of the organization to take risks and to make inferences on whether profitability is
affected by the adoption of contested practices which, in turn, are simultaneously
driven by contested and profitability performance feedbacks. Developing such a
model is a new theoretical contribution, as the current institutional logics theory
40
doesn’t examine aspiration levels and the consequences of comparing performance
to aspirations on contested goals for identity adoption. Similarly, the current
rendering of the performance feedback theory assumes that all goals are accepted
by the managers, as profitability goals are, and overlooks contested goals. Thus,
the effects in our theoretical model extend both institutional and performance
feedback theories.
More broadly, the move in organizational research from institutions leading
to isomorphism (DiMaggio and Powell 1983) to institutions being replaced by new
institutions (Thornton and Ocasio 1999) or remaining in contention (Hoffman 1999)
might be a result of researchers gaining the necessarily conceptual tools for seeing
institutional environments as complex and contentious, and organizations as
choosing how much to adapt to each of the potentially conflicting logics
(Greenwood et al. 2011). For organizational decision making, firm level theories
such as performance feedback provide concepts and processes with strong
explanatory power that can augment the explanations at the level of the
organizational field that have been common so far. These behavioral explanations
nicely complement the more political perspective of institutional adoption that is
exemplified by research on institutional logics (Thornton et al., 2012). The most
obvious avenues for extending this research include identifying firm identities via
the organizational characteristics (e.g. ownership structures) that empower a
firm’s proponents of governance reform as well as examining how firms’ adoption
decisions differ as a function of such characteristics.
There are many other possible extensions as well. Although our investigation
has focused on organizations deciding between two different institutional logics,
our understanding could benefit from research on how organizations react to, and
41
choose among, multiple contending logics. Questions also remain about just how
entrepreneurs advance (and render prominent) their own goals. What
characteristics of institutional entrepreneurs, and of the new logics and goals they
promote, are most strongly associated with having an effect on the aspiration
levels of organizations? Developing theory and conducting empirical research
along these lines may well benefit from cross-fertilization with the field of social
movements (King and Soule 2007); after all, institutional entrepreneurs can use
similar tactics—and benefit from similar situations—as grass-roots social
movements (Rao 1998). In sum, there are many potentially fruitful areas that are
ripe for extending the work in this paper on contested logics and organizational
responses to new and evolving institutions.
Our study does have some limitations, which stem primarily from the
institutional context from which it derives. It is a classical dilemma of institutional
research that sensitivity to a specific context is needed to inform the investigation,
even as it leads to limited generalizibility. For example, we have provided clear
evidence regarding the effects of governance performance vis-à-vis a contested
institutional logic (board reform) but we have not established the extent to which
institutional entrepreneurs are able to induce such effects in other contexts. This is
an important area for future research. Also, our paper addresses an institutional
context in which multiple specific practices are viewed as being consistent with a
new environment. Analogous phenomena have been observed elsewhere—as in the
multiple practices that constitute due process in the workplace (Edelman 1990)—
but it is not a universal feature of institutionalization. Future research may benefit
from comparing multi- with single-practice institutions as well as from a focus on
between-practice relations such as those explored in this paper.
42
We produce a simplified view of an organization as a unitary entity that
either adopts or doesn’t adopt the contested logic. Clearly, organizations have a
considerable degree of internal heterogeneity, which we cannot observe in our
dataset. Some groups inside organizations might favor the adoption of the
contested logic while the other groups might resist the adoption. Groups who have
power in the organization might use different tactics to impose its views, for
example, using their power for keeping the discussion of the contested logic off the
organizational agendas or using their power to defeat the motions in support of the
logic. Different environmental conditions might give one group more power over
the other, and this could affect whether an organization as a whole accepts or
rejects the specific logic (Thornton and Ocasio 1999). Future research could
account for this internal heterogeneity and examine how the distribution of power
inside organization among different interest groups interacts with performance
feedback in its impact on the logic adoption decisions.
In conclusion, our aim has been to inform and advance research in
institutional theory by drawing attention to performance goals as a distinct filter
affecting organizations’ responses to contested institutions. We also hope to have
advanced the performance feedback theory by tracking the emergence of
contested goals and the organizational reactions to these goals. Our results
emphasize that institutions spread not only through inertial and mimetic
processes, as portrayed in previous studies, but also via a feedback cycle between
the contested goals and organizational responses to them that affect, in turn, their
further adoption. Such findings broaden our understanding by showing that firms
respond more strategically to institutional pressures than has been recognized
before. Finally, we hope that the ideas and results presented in this paper become
43
part of a solid foundation for a more complete understanding of the mechanisms
that underlie institutionalization and of the relative importance of various
performance goals that shape the this process.
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47
Table 1: Descriptive Statistics
VariableMean S.D. 1 2 3 4 5 6 7 8 9 10 11 12 13
1Board reform practice 0.199
0.399 1
2 Financial sector 0.1510.35
9
-0.03
9 1
3Extremely low BSCI 0.050
0.219
-0.06
30.02
6 1
4US stock crosslisting 0.342
0.474
0.079
-0.05
0
-0.15
0 1
5 CCGG ownership 0.4470.49
70.07
4
-0.05
00.10
70.12
3 1
6Market/book value 0.363
20.795
0.020
0.020
0.005
0.051
-0.04
9 1
7 Ln net sales 7.0702.06
80.00
70.14
10.03
30.02
30.02
5
-0.03
2 1
8 Centrality 4.07514.7
47
-0.08
70.50
90.04
6
-0.17
3
-0.00
60.01
30.29
9 1
9 Interlock practice 43.74
337.8
850.07
90.14
0
-0.00
50.08
30.07
00.03
50.54
20.19
6 1
10 Own practice 7.504
1.714
0.077
-0.03
8
-0.43
40.15
0
-0.16
60.03
00.01
3
-0.16
10.18
3 1
11 ROA below AL
-1.182
3.279
0.020
0.054
0.051
0.031
0.086
-0.02
70.22
90.05
80.14
9
-0.09
0 1
12 ROA above AL 1.380
2.782
0.023
-0.16
9
-0.05
4
-0.01
70.00
40.04
1
-0.06
5
-0.10
7
-0.09
20.03
80.17
9 1
48
13
BSCI × ROA below AL
-12.91
615.1
240.10
4
-0.15
6
-0.57
50.20
7
-0.02
0
-0.01
8
-0.14
1
-0.24
3
-0.00
70.70
0
-0.09
10.07
3 1
14
BSCI × ROA above AL 3.459
6.247
0.097
-0.06
9
-0.12
80.12
20.06
90.02
4
-0.04
2
-0.12
70.11
70.58
3
-0.03
2
-0.01
30.47
3
Note: N = 3,506
49
Table 2: Logit Models of Governance Practices Adoption
Model 1 Model 2 Model 3 Model 4 Model 5Financial sector
0.167 0.159 0.219 0.229 0.252
(0.180) (0.181) (0.183) (0.182) (0.219)Extremely low BSCI
−0.655*(0.303)
−0.651*(0.303)
−0.496(0.330)
−0.575+
(0.331)−0.692+
(0.377)US stock crosslisting
0.160(0.118)
0.158(0.118)
0.140(0.119)
0.127(0.118)
0.202(0.140)
CCGG ownership
0.100(0.273)
0.097(0.273)
0.104(0.277)
0.087(0.276)
0.173(0.301)
Market/book value
0.005(0.004)
0.005(0.004)
0.005(0.004)
0.005(0.004)
0.005(0.004)
Ln net sales 0.027 0.020 0.028 0.025 0.037(0.032) (0.032) (0.032) (0.032) (0.037)
Centrality −0.032*** −0.032*** −0.030*** −0.032*** −0.036***(0.008) (0.008) (0.008) (0.008) (0.008)
Interlock practice
0.007***(0.002)
0.007***(0.002)
0.008***(0.002)
0.008***(0.002)
0.009***(0.002)
Own practice −0.051 −0.048 −0.225*** −0.215*** −0.289***(0.035) (0.035) (0.058) (0.058) (0.070)
ROA below AL
0.018 0.019 −0.005 −0.006
(0.017) (0.017) (0.019) (0.021)ROA above AL
0.000 0.001 −0.021 −0.028
(0.017) (0.017) (0.021) (0.024)BSCI below AL
0.016** 0.012+ 0.015*
(0.006) (0.006) (0.007)BSCI above AL
0.030** 0.022* 0.025*
(0.010) (0.011) (0.012)BSCI × ROA −0.005* −0.005* below AL (0.002) (0.003)BSCI × ROA 0.004+ 0.005+
above AL (0.002) (0.003)Constant −1.906*** −1.862*** −0.740 −0.785+ −0.542
(0.346) (0.350) (0.462) (0.461) (0.525)Observations 3,506 3,506 3,506 3,506 3,506Degrees of freedom
26 28 30 32 32
Note: All models contain fixed effects of individual years and individual practices.+p < 0.1; *p < 0.05; **p < 0.01; ***p < 0.001, two tailed tests
50
Weight for BSCI Social Aspirations (GBSCI)
Weight for ROASocial
Aspirations
(GROA)
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.00.0 224
3388 2243388
2243388
2253388
2263387
2283385
2293383
2313380
2333377
2333374
2343372
0.1 2243388
2243388
2253388
2253388
2263387
2283385
2293382
2313379
2333376
2343373
2343371
0.2 2243388
2253388
2253388
2253388
2273387
2293384
2303381
2323378
2343375
2353372
2353370
0.3 2243388
2253387
2253388
2263387
2273386
2293383
2313380
2333377
2353373
2363371
2363369
0.4 2243387
2253387
2253387
2263387
2273386
2293383
2313380
2343377
2353373
2363370
2363368
0.5 2243387
2253387
2243387
2253388
2273386
2293384
2313380
2333377
2343374
2353370
2353369
0.6 2243387
2253387
2253387
2253388
2263387
2283384
2303381
2323378
2333375
2343372
2343370
0.7 2243387
2253387
2243387
2253388
2263387
2273385
2293382
2313379
2323376
2343373
2343371
0.8 2243387
2243387
2243387
2253388
2263387
2273385
2293382
2313379
2323376
2333373
2333371
0.9 2243387
2243387
2243387
2253388
2263387
2273385
2293382
2313379
2323376
2333373
2333371
1.0 2243387
2243387
2243387
2253388
2263387
2283385
2293382
2313379
2323376
2333373
2343371
Table 3: Effects of Varying the Weights Assigned to Social Aspirations for BSCI and ROA
Notes: The top value in each cell is the Wald statistic; the bottom value is the BIC statistic. We vary the weight G given to social (versus historical) aspirations for both BSCI and ROA performance. G=1 means that a firm pays attention only to social aspirations, G=0 means that a firm pays attention only to historic aspirations, G=0.5 means that a firm pays attention both to social and historic aspirations. We track how changes in GROA and GBSCI improve model fit as compared to the baseline where GROA =GBSCI =0.5. Higher Wald statistics with differences greater than 3.84 support the best-fitting model at p < 0.05. Between-model BIC differences exceeding 6 indicate strong support for the model with a smaller BIC (equivalent to p < 0.05). For the reference model, in which GROA = GBSCI = 0.5, the BIC is 3384 and the Wald statistic is 229. There is strong support for the model in which firms pay equal attention to social and historic aspirations based on profitability (GROA = 0.5) but they pay no attention to historic
51
aspirations based on governance score GBSCI = 1.0. This model’s BIC statistic is 3369 and the Wald statistic is 235.
52
53
54
Figure 2: Predicted probability of