Shareholders and Stakeholders Around the World: The Role of Values, Culture, and Law in Directors’ Decisions

Amir Licht is Professor of Law at the Interdisciplinary Center Herzliya and Renée B. Adams is Professor of Finance at the University of Oxford’s Saïd Business School. This post is based on their recent paper.

Controversies over the right way to handle shareholder and stakeholder relations have never been deeper despite decades of debate. In recent work, Nobel laureate Oliver Hart discusses whether, and should, “the board of directors of a public company [has] a legal duty to maximize shareholder value?” In mid-2016, The Wall Street Journal ran a story on a growing trend among leading U.S. chief executive officers (CEOs) to flex their corporate muscles for social causes such as gay and transgender rights. Only a year earlier, however, the Chief Justice of the Delaware Supreme Court, Leo Strine, Jr., sternly warned against “the dangers of denial”:

Despite attempts to muddy the doctrinal waters, a clear-eyed look at the law of corporations in Delaware reveals that, within the limits of their discretion, directors must make stockholder welfare their sole end, and that other interests may be taken into consideration only as a means of promoting stockholder welfare.

With four out of the six major companies mentioned in the Journal being Delaware corporations, one may wonder what their top managers were thinking when they decided to take such bold moves, arguably in breach of applicable law. In this study, we set out to examine the hotly-debated issue of the relative importance of formal (legal) versus informal (cultural) institutions and of personal values for strategy formation and corporate governance. We hypothesize and show that values and culture play an important role in corporate leader’s decision-making and that the law does not trump them.

We present a multi-level theoretical account of the way in which directors exercise discretion over the shareholder-stakeholder dilemma. We argue that in favoring one constituency over another in particular circumstances, directors are guided by both personal and social institutional factors, where such institutions comprise both informal and formal ones. In this view, a director’s strategic choice is anchored firstly in her personal values; it may be affected by her cultural heritage; and it could also be sensitive to applicable law. The more compatible her values and social institutional environment are with an entrepreneurial conception of equity investment, the more likely she is to side with shareholders. Legal doctrine about the objective of the corporation, as it was forcefully portrayed by Chief Justice Strine with regard to Delaware, might not be definitive or even dominant. Laws pertaining to other stakeholders (e.g., creditor rights) could be influential, and legal rules on the whole may or may not be dominated by culture and social norms.

To test our hypotheses we implement a survey-based quasi-experimental approach. In order to get closer to discovering “what were they thinking”, we canvass directors in more than 50 countries with a survey instrument that uses seminal court cases to elicit these directors’ shareholderism level. We measure value preferences at the individual level using an advanced psychometric instrument based on Shalom Schwartz’s theory of personal values. We draw on new institutional economics, institutional theory, and cross-cultural psychology to derive measures of formal and informal institutional factors which may be exerting their effect on managerial discretion.

We first show that corporate leaders hold a principled, ideology-like stance towards shareholders and stakeholders, called shareholderism, that associates positively with a personal value profile expressing self-enhancement and entrepreneurship (power, achievement, self-direction) and negatively with universalism. Using country fixed effects, we confirm that Adams, Licht and Sagiv’s (2011) results for Sweden are robust to changes in the institutional environment. Our results thus confirm the universality of the shareholderism concept and its relation to personal values. They also provide a much-needed replication of empirical findings in this era of “replication crisis”.

At the institutional level, we find that a common law legal origin is unrelated to shareholderism. Among particular legal regulations, creditor protection correlates negatively with directors’ shareholderism, as one would expect, whereas legal shareholder- and employee protection are unrelated to it. These results speak to an open debate about the role of law and culture in corporate governance, placing it in a more general framework, and suggest that in contrast to legal origin, culture matters with regard to firm stakeholders. We observe negative links between shareholderism and cultural embeddedness, harmony, and (more weakly) with egalitarianism. These cultural orientations discourage exploitation and dynamic development, promote self-restraint, and endorse a view of all persons as moral equals, respectively. The general social structure in cultures that de-emphasize these orientations thus may be more conducive to shareholderist strategic choices.

Recent years have witnessed a surge of research on the relations between personal attributes of corporate leaders, predominantly CEOs, and strategic outcomes. Much of this literature has dealt primarily with demographic and otherwise observable attributes of CEOs and members of top management teams. According to Donald Hambrick, this approach is appropriate “given the great difficulty obtaining conventional psychometric data on top executives (especially those who head major firms),” even though such use “leaves us at a loss as to the real psychological and social processes that are driving executive behavior, which is the well-known ‘black box problem’.” Management scholars thus have analyzed the prominence of CEOs’ photographs in annual reports and company press releases. To assess CEOs’ risk attitudes and overconfidence, financial economists have used indirect indicators such as possessing private pilot licenses as well as physical attributes such as height and facial structure. Other scholars use available information such as CEOs’ political contribution data to gauge their ideological convictions.

Notwithstanding the senior level of the participants in this study, a decent number of corporate leaders completed an advanced psychometric instrument on values in addition to the corporate governance module, thus allowing us to peek into the proverbial black box. Based on this framework, we are able to test hypotheses of universal validity—that is, relating to directors regardless of country of origin, law, and culture—which prior work could not. This study thus advances a universal approach to conceptualizing and operationalizing CSR. It deals with the substance of individual discretion with regard to a key strategic challenges and demonstrate how personal attributes and a diverse set of institutional factors—both cultural and legal—may affect such decisions.

The complete paper is available for download here.

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