How do entrenched managers handle stakeholders interests?

J. of Multi. Fin. Manag. 22 (2012) 263–277

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How do entrenched managers handle stakeholders interests? Huimin Chung, Jane Raung Lin, Ying Sui Yang ∗ Graduate Institute of Finance, National Chiao Tung University, Taiwan, ROC

a r t i c l e

i n f o

Article history: Received 12 October 2011 Accepted 6 October 2012 JEL classification: G34 M14 Keywords: Managerial entrenchment Corporate social responsibility Anti-takeover provisions Environmental stakeholder Financial performance

a b s t r a c t This study examines the impact of managerial entrenchment on non-shareholding stakeholders. We find that managers tend to focus different levels of attention on specific non-shareholding stakeholders relative to their level of entrenchment. When managers have greater protection, they tend to establish good relationships with certain stakeholders, particularly with regard to the natural environment. However, well-protected managers attempt to minimize any damage to workforce diversity and often increase the damage to the employees and the natural environment. Entrenched managers pay more attention to stakeholders who can have a positive influence on the short-term financial performance of the firm. However, negative social actions have insignificant effect on financial performance. Crown Copyright © 2012 Published by Elsevier B.V. All rights reserved.

1. Introduction In recent decades the literature has focused significant debate on stakeholder issues, with studies aimed primarily at the relation between the corporate management of stakeholders and financial performance and the ways in which corporate governance mechanisms affect the interests of stakeholders. However, the question of the influence of managerial entrenchment on different stakeholder interests has received much less attention in the extant literature. According to agency theory, managers may engage in behavior that provides them with personal benefits at the expense of shareholders;

∗ Corresponding author at: 1001 University Road, Hsinchu 300, Taiwan, ROC. Tel.: +886 3 5712121; fax: +886 3 5733260. E-mail addresses: [email protected] (H. Chung), [email protected] (J.R. Lin), [email protected] (Y.S. Yang). 1042-444X/$ – see front matter. Crown Copyright © 2012 Published by Elsevier B.V. All rights reserved. http://dx.doi.org/10.1016/j.mulfin.2012.10.002

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however, the impact on other, non-shareholding stakeholders is unclear. Separation of ownership and control leads to managers either pursue their own interests or seek a more appropriate balance of stakeholders’ interests in the firm (Poole et al., 2003). The role of managers is at the center of this debate, with the general assumption that managers have a moral obligation to the stakeholders in the firm and that they therefore act in an ethical way, using their control to satisfy the interests of stakeholders (Aragon-Correa et al., 2004). Surroca and Tribo (2008) argue that to gain stakeholders’ support, managers engage in a broad array of practices aimed at developing relationships with stakeholders. Such managers may collude with non-shareholding stakeholders to protect themselves from internal corporate governance mechanisms. Although such collusion may reduce the efficiency of the internal control mechanisms, it does not have the same effect on anti-takeover defenses. We therefore add to existing research by examining the impact of managerial attention to stakeholders in relation to the level of managerial entrenchment. Recently, Gompers et al. (2003), Cremers and Nair (2005), and Masulis et al. (2007) examine the market for corporate control. From the agency theory perspective, these studies show that managerial entrenchment has a negative effect on operating performance and firm value. Following Gompers et al., we use the governance index (G-index) to measure manager entrenchment to examine the relation between manager protection and stakeholders. Because prior literature inconsistently defines the concept of stakeholder, for example, Freeman (1984) defines stakeholders as “any group or individual, who can affect or is affected by the achievement of organization’s objectives.” Clarkson (1995) states, “Stakeholder are persons or groups that have, or claim, ownership, rights, or interests in a corporation and its activities, past, present, or future.” We follow social responsibility analytics methodology to include five major non-shareholding stakeholder groups: community, employees, environment, customers, and diversity. In our examination of the relation between managerial entrenchment and non-shareholding stakeholders, we explore corporate actions toward corporate social responsibility (CSR). CSR is defined as corporate investing decisions in which managers distribute the resources of firms toward stakeholders. Substantial empirical research exists on the relation between CSR and financial performance (Orlitzky et al., 2003). In addition, CSR may affect corporate reputation, which, in turn, may affect stock prices (Deckop et al., 2006). However, prior studies on investing in CSR provide inconsistent results. Hill and Jones (1992) argue that only managers “enter into a contractual relationship with all other stakeholders” and have “direct control over the decision-making apparatus of the firm.” In other words, the practices of CSR depend on the attitude of managers. Because CSR offers no obvious direct financial benefits to shareholders, agents are more likely than principals to invest in CSR because they have no direct residual claims on the income of the firm (Wang and Coffey, 1992). Furthermore, agents may also be motivated to pursue CSR activities based on self-interest, such as membership within the social elite, reputation, and distraction from mismanagement (Coffey and Wang, 1998). Recent research suggests that corporate governance can be linked to CSR (Ayuso and Argandona, 2007) through insider ownership, institutional ownership, and outside directors (Atkinson and Galaskiewicz, 1988; Coffey and Wang, 1998; Johnson and Greening, 1999; Wang and Coffey, 1992) as well as the changes in takeover regime and control (Kacperczyk, 2009; Walsh and Seward, 1990). The aggregate results are, however, inconclusive. Kacperczyk (2009) notes that the examination of governance mechanisms affecting the corporate focus on stakeholders is subject to limitations because the proxy variables for the governance mechanisms cannot adequately explain the relation between managerial power and ownership. Therefore, they cannot fully reflect the ways in which managerial control affects shareholders and stakeholders alike. Because the strengths and weaknesses (i.e., concerns) of social action have different constructs (Mattingly and Berman, 2006), further exploration is required. When managers exercise their enhanced discretionary power in the best interests of the organization and its stakeholders, this relation is likely to lead to enhanced performance. However, when managers use this discretion for self-serving purposes, the effects on the social standing and financial performance of the organization are likely to be negative (Cennamo et al., 2009). Although prior studies show that managers do not treat all kinds of stakeholders equally, we consider the individual strengths and concerns of stakeholders to fully reflect the corporate attention paid to them. Mattingly

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and Berman (2006) indicate that positive and negative social action should be separated, essentially because of their empirically and conceptually different compositions. In particular, they argue that a social strength is not simply the converse of a social concern, and vice versa. In sum, this study investigates the theoretical background of the manager–stakeholder relationship and its empirical effect on financial performance, including future financial performance as measured by return on assets (ROA). In addition, we examine how managerial entrenchment affects resource allocation to stakeholders (i.e., CSR) and the relation between the strengths and concerns of stakeholders. This study explores whether managers with more takeover protection tend to pay greater attention to stakeholders, and employs a simple proxy for the power between managers and shareholders. This paper seeks to investigate the relationships between managerial entrenchment and stakeholders and explore the effect of managerial entrenchment on financial performance. This study relies on basic specifications to contrast hypotheses by explaining CSR in terms of managerial entrenchment and explaining financial performance in terms of the interaction between managerial entrenchment and CSR. The remainder of this study is as follows. Section 2 reviews of the extant corporate governance literature on managerial behavior and its effects on stakeholder interests and develops the hypotheses. Section 3 describes the data and methodology. Section 4 provides the results of our analysis of the relation among managerial entrenchment, non-shareholding stakeholders, and financial performance. Finally, Section 5 concludes with some implications of the findings and recommendations for future research. 2. Theory development According to financial theory, the primary aim of all firms is to maximize firm value. Therefore, managers’ highest priority is maximizing shareholder wealth. However, stakeholder theory substantially broadens this perspective (Lougee and Wallace, 2008). Stakeholder theory maintains that management should evaluate corporate performance in terms of its ability to satisfy all important corporate constituencies. Managers have responsibilities toward each stakeholder group, all of which exist simultaneously (Greenley et al., 2005). Thus, instead of the traditional financial theory view of the firm as a shareholder value maximizer, the more recent stakeholder theory suggests that the firm as a stakeholder value maximizer best describes the relation between CSR and value maximization (Beltratti, 2005). Given the enormous differences in the goals among firms, corporate governance mechanisms take on diverse directions with different effects on managerial behavior, and yet the maximization of shareholder value is the most common major goal among most firms. In addition, inclusion of internal and external corporate governance mechanisms that control managerial behavior can only ensure accountability to shareholders (Walsh and Seward, 1990) but not to stakeholders. Prior studies suggest that firms with better governance mechanisms have higher firm value, higher profits, and higher sales growth (Gompers et al., 2003). Cremers and Nair (2005) further note that a portfolio consisting of long positions in firms with superior governance mechanisms and short positions in firms with inferior governance mechanisms generate annualized abnormal returns. However, Johnson and Greening (1999) indicate that both the hypercompetitive global marketplace and increasing pressure from stakeholders leave senior managers in a very difficult situation. Not only must they strive to ensure the survival of the firm, but they must also meet the demands of non-shareholding stakeholders. Posner and Schmidt (1984) suggest that most managers are similar in their stakeholder orientations and that management, as a whole, tends to rate shareholders relatively low while rating customers and themselves relatively high. Although corporate responsibility toward employees, consumers, and society is important, these concerns can be inconsistent with concerns relating to corporate governance based on agency theory (Benston, 1982). Hillman and Keim (2001) apply stakeholder theory to the analysis of strategic behavior and its association with corporate governance mechanisms. Arguing from a corporate governance perspective, Robertson (2008) suggests that one of the most important issues for a firm’s senior management team is the creation and maintenance of a positive moral environment. Mahoney and Thorn (2006) examine the relation between CSR and executive compensation (i.e., salaries, bonuses, and stock options) and report a positive relation for all types of compensation, with the exception of salaries. Johnson and

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Greening (1999) find a positive correlation between CSR and outside board membership. These studies clearly show that corporate goals and governance mechanisms drive managerial behavior. However, these governance mechanisms do not act as proxy variables between the power status of agents and shareholders (Kacperczyk, 2009). Accordingly, we include the takeover market in our investigation to determine the ways in which managers attend to the interests of stakeholders under the influence of the market. Kacperczyk (2009) examines the influence of managerial decision-making power on the stakeholder relationship and shows that, following the change in the Delaware takeover system, managers tended to pay greater attention to stakeholder interests. This finding suggests that Delawarebased firms obtained greater legal takeover protection from the decisions of the Delaware court (Subramanian, 2002). That is, takeover protections increase managerial control over the resources of the firm. Nevertheless, the Delaware takeover regime relates to a legal system of protective measures that cannot fully reflect managerial control. According to Gompers et al. (2003), many firms use defensive methods to avoid a hostile takeover by restricting shareholder rights. Gompers et al. construct a proxy variable, the governance index (G-index) that measures the balance of power between shareholders and managers. The index does not consider the influence on the validity of the provision or welfare but instead considers only the influence on the balance of power. Ultimately, managers have more decision-making power within firms with more anti-takeover protections to guard against any hostile threats. As a result, the ways in which managerial entrenchment can influence stakeholder profits in the absence of appropriate governance mechanisms is a critical factor in the empirical investigation of the relation between managers and stakeholders. To examine the relation between entrenched managers and stakeholder management, this study explores both the positive and the negative social actions of different stakeholders who are influenced by entrenched managers. Van der Lann et al. (2008) argue that corporations interact with different stakeholder groups differently. Thus, we consider the aggregated and disaggregated measure of the positive and negative aspects of different stakeholders to investigate whether managerial entrenchment can influence stakeholder profits without appropriate governance mechanisms. Accordingly, we develop the following hypotheses: H1a. Managerial entrenchment (i.e., high anti-takeover provisions [ATPs]) is associated with an increase in stakeholder strengths. H1b. Managerial entrenchment (i.e., high ATPs) is associated with a reduction in stakeholder concerns. The separation of management and ownership results in an agency problem, but it also provides managers with valuable opportunities to demonstrate greater responsibility toward other important corporate members (Wells, 2002). Poole et al. (2003) suggest the separation allows managers to balance stakeholder interests with their interests. According to stakeholder theory, managers are more inclined to attend to certain non-shareholding stakeholders who provide financial benefits (Godfrey, 2005). Waddock and Graves (1997), among others (e.g., Donaldson and Preston, 1995; Jones, 1995), show that CSR associates positively with future financial benefits. In addition, Orlitzky et al. (2003) argue that CSR is more highly correlated with accounting-based measures of financial performance than with market-based indicators. Accounting-based measures can capture a firm’s internal efficiency (Cochran and Wood, 1984). Orlitzky et al. suggest that these accounting returns reflect internal decision-making capabilities and managerial performance rather than external market responses. However, agency theory suggests that managers who satisfy the demands of stakeholders obtain resources at the expense of the firm’s financial benefits and therefore act in self-interest. We examine these theoretical relations by the following two hypotheses: H2a. Managerial entrenchment is associated with an increase in stakeholder strengths and therefore leads to higher financial performance. H2b. Managerial entrenchment is associated with an increase in stakeholder strengths and therefore leads to lower financial performance.

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3. Data and method 3.1. Data source and variable definitions The dependent variable is the stakeholder relationship. We measure this relationship using the Kinder, Lydenberg, and Domini (KLD) Research and Analytics database. KLD is a research organization that compiles social responsibility data on U.S. firms. Sharfman (1996) suggests that data from KLD pass several construct validity tests with the potential to become a widely accepted set of corporate social performance measures. The KLD data measure the stakeholder relationship using a rating system that separates the relationship into two factors of strengths and concerns. The indicators contain seven categories: community, corporate governance, diversity, employees, environment, human rights, and products. Each of these corresponds to one of six major stakeholder groups: community, employees, environment, customers, shareholders, and society (Lougee and Wallace, 2008). The strengths and concerns within each category indicate the positive and negative aspects of corporate activities related to the stakeholders. Each particular strength and concern is a binomial variable that equals 1 if it exists within a firm, and zero otherwise. Using data from 2003 to 2006, we focus on five KLD categories: community, diversity, employees, environment, and products. These categories reflect the level of corporate attention to primary (employees and products) and secondary (community, diversity, and environment) stakeholders that affect corporate survival (Clarkson, 1995; Kacperczyk, 2009), and often appear in prior research (Turban and Greening, 1997). The Appendix A provides the five KLD categories and their related information on strengths and concerns within each category. This study employs aggregated and disaggregated items to measure positive and negative behavior of firms toward stakeholders. The overall positive actions of stakeholders aggregate the sum of the strengths from the five selected categories, whereas the negative actions comprise the sum of the concerns. Following Mattingly and Berman’s (2006) argument that meaningful analysis should address positive and negative social actions separately, we use disaggregated measure of the positive and negative aspects of different stakeholders across the five categories to obtain more detailed information. The explanatory variable is Gompers et al.’s (2003) firm-specific anti-takeover measure, G-index, which is obtained from Investor Responsibility Research Center. The index consists of 24 ATPs. For each ATP adopted by a firm, the firm’s G-index increases by one point. As the number of ATPs increases, the index also increases. A higher (lower) index score indicates a higher (lower) level of managerial entrenchment. To determine the effects of entrenched managers on stakeholders and avoid the potential problem of endogeneity, we follow Core et al. (2006) and the G-index at year t − 1 for the study of year t in the regression model. Because the index is not available for each year, we use the ATPs in a missing year as the index for the preceding year. Firm-level governance mechanisms and the characteristics of CEOs also affect the entrenchment of managers. Therefore, we control duality, board size, board independence, and the demographic characteristics of CEOs (gender and age). Data are obtained from the Investor Responsibility Research Center and ExecuComp database for 2002–2005. Duality is a dummy variable that equals 1 when the chairman is also the CEO, and zero otherwise. Jensen (1993) argues that when the CEO is also the chairman, the board is ineffective and cannot perform its key functions, and the firm’s internal control systems fail. Fama and Jensen (1983) also argue that concentrating decision-making control in the hands of one individual reduces a board’s effectiveness in monitoring top management. Board size is the total number of directors and board independence is the proportion of independent directors on the board. Substantial previous literature addresses the monitoring role of the board especially in relation to the board’s efficiency. Prior studies indicate that smaller boards are more effective at monitoring (Coles et al., 2008) but that larger boards offer better advice to the CEO (Dalton et al., 1999). Hermalin and Weisbach (1988) point out that CEOs may choose outsiders who will provide expert advice and bring valuable experience to the board. Board independence is one of the most important governance variables in corporate finance: A higher proportion of independent directors on a board can improve the governance quality in a firm (Fama and Jensen, 1983) and enhance the firm’s

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reputation (Oxelheim and Randoy, 2003). In addition, Boone et al. (2007) find that board independence can negatively affect the manager’s influence. CEO Gender equals 1 if the CEO is a woman, and zero otherwise. Wang and Coffey (1992) show that the proportion of female board members is positively and significantly associated with firms’ charitable contributions. Prior studies also show that woman in the role of director affect the function of corporations (Kesner, 1988). CEO Age is also included as a control variable because prior studies suggest that CEOs with equal years of tenure but of different ages likely have different incentives, reputation, and career concerns (Bhagat and Bolton, 2008; Gibbons and Murphy, 1992). Firm characteristics may affect corporate actions toward stakeholders. Therefore, following Waddock and Graves (1997), we use firm size, financial performance, and leverage to control for corporate characteristics, which we obtain from COMPUSTAT for 2002–2005. Firm size is defined as the logarithm of net sales. Firm size is relevant and can affect the KLD rating (Johnson and Greening, 1999) because firms may be more vulnerable due to their greater visibility (Van der Lann et al., 2008). Firm performance is defined as return on assets (ROA), which is included based on that financial performance will affect the entrenched managers who pay more or less attention to stakeholders. Firm leverage is defined by the ratio between assets and debt. Because high leverage firms may not allocate resources toward other stakeholders, we include the debt to assets ratio as a control variable in our regression model. In the second regression model, ROA is a proxy for the future performance, which is included based on the notion that entrenched managers who pay more attention to stakeholders will affect a change in the financial performance, obtained from COMPUSTAT for the period from 2004 to 2008. Other variables in the same model are for the year of 2003–2006. To adjust for the industry effect, we use the SIC to calculate the industry average for the control variables and then subtract it from the control variables. If a firm has all variables, we include it into our model. The final number of available firms is 714 firms, and the total amount of data is 2856 observations. 3.2. Method Because the dependent variables are count data, our empirical analysis employs Poisson regressions to examine the relation between managerial entrenchment and stakeholders. The Poisson regressions are Stakeholders Strengthst = f (G-indext−1 , Dualityt−1 , Board Size, Board Independence, CEO gendert−1 , CEO aget−1 , Sizet−1 , Performancet−1 , Leveraget−1 )

(1)

Stakeholders Concernst = f (G-indext−1 , Dualityt−1 , Board Size, Board Independence, CEO gendert−1 , CEO aget−1 , Sizet−1 , Performancet−1 , Leveraget−1 ),

(2)

where the dependent variables are aggregated and disaggregated items of stakeholders. Following Cremers and Nair (2005), we consider the lagged one-period value of the explanatory variables. Aggregated stakeholders’ strengths (concerns) equal the sum of the strengths (concerns) in five categories. Disaggregated stakeholders strengths (concerns) are different stakeholders’ strengths (concerns). The main explanatory variable is the G-index, which measures the number of ATPs for the firms, while the control variables are duality, board size, board independence, demographic characteristics of CEOs (gender and age), size, performance (ROA), and leverage. We test several hypotheses. First, a negative (positive) coefficient of the G-index indicates that entrenched corporate managers pay less (more) attention to the strengths of stakeholders. Second, a positive (negative) coefficient of the G-index indicates an increase (reduction) in the stakeholder concerns among entrenched managers. Thus, we examine financial performance in

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Table 1 Descriptive statistics. Variables

Mean

Stakeholder strength Community strength Diversity strength Employee strength Environment strength Product strength Stakeholder concern Community concern Diversity concern Employee concern Environment concern Product concern G-index Duality Board Size Board Independence CEO Age CEO Gender (Female) Firm Size (Sales) Performance (ROA) Leverage (D/A)

1.86 0.25 0.94 0.40 0.19 0.08 1.68 0.13 0.26 0.55 0.38 0.37 9.59 0.82 9.95 0.71 55.37 0.01 7623.29 4.56 22.09

Std. dev 2.44 0.65 1.30 0.71 0.55 0.28 1.82 0.36 0.46 0.70 0.86 0.69 2.59 0.39 2.86 0.15 6.66 0.12 19,970.06 9.99 16.42

Min 0 0 0 0 0 0 0 0 0 0 0 0 2 0 4 0.13 35 0 21.99 −290.84 0

Max 19 5 7 5 4 2 13 3 2 4 5 4 16 1 30 0.94 79 1 32,8213 45.80 144.18

Notes: The sample consists of 2856 matched firms with available data on stakeholder relations and characteristics as well as the corporate governance indices (G-index).

relation to managerial entrenchment that pays more attention to stakeholders. We use the following models: ROAt+1 = f (Strengtht , G-indext , Strengtht × G-indext , Dualityt , Board Size, Board Independence, CEO gendert , CEO aget , Sizet , Leveraget )

(3a)

ROAt+1 = f (Concernst , G-indext , Concernst × G-indext , Dualityt , Board Size, Board Independence, CEO gendert , CEO aget , Sizet , Leveraget )

(3b)

ROAt+2 = f (Strengtht , G-indext , Strengtht × G-indext , Dualityt , Board Size, Board Independence, CEO gendert , CEO aget , Sizet , Leveraget )

(4a)

ROAt+2 = f (Concernst , G-indext , Concernst × G-indext , Dualityt , Board Size, Board Independence, CEO gendert , CEO aget , Sizet , Leveraget )

(4b)

where financial performance is ROA at time t + 1 and t + 2. In cases in which the entrenched managers have a stakeholder value system, the coefficient of the Strengtht × G-indext (Concernt × G-indext ) will be positive (negative). 4. Results Table 1 presents the means, standard deviations, minimums and maximums of all variables. Very little difference in the means is discernible between aggregated strengths and concerns (strengths = 1.86 vs. concerns = 1.68); however, significant differences exist in the standard deviations (strengths = 2.44 vs. concerns = 1.82). This finding indicates greater differentiation between the

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firms with regard to strengths and a greater divergence in the degree of care for stakeholders among sample firms. In contrast, far less variability occurs among sample firms with regard to stakeholder concerns. In each of the five items of strengths and concerns, we find greater variation in the means of the strengths than those of the concerns. Table 2 presents the correlation matrix of the variables. The results show significantly positive correlations between the strengths and concerns for stakeholders. The stakeholder strengths (concerns) equal to the sum of the disaggregated stakeholder strengths (concerns), with a significantly positive correlation between aggregated stakeholder strengths and disaggregated stakeholder strengths. The correlations for concerns are also positive. The diversity item in stakeholder concerns (Diversity concern) is significantly and negatively correlated with most of the disaggregated stakeholder strengths. Diversity concern indicates that the firm is involved in some major controversies related to affirmative action issues (e.g., no women serve on the firm’s board of directors or as senior managers, etc.). A large Diversity concern measure indicates that the firm pays less attention to other stakeholders. Ultimately, a large Diversity concern measure suggests that such firms may have serious diversity problems within the workplace and may be unable to maintain good relationships with their stakeholders. Table 2 also shows that the G-index, which indicates the level of managerial entrenchment, is positively correlated with the aggregated stakeholder strengths and concerns. This finding indicates that entrenched managers pay more attention to stakeholders but that the firm may act to the detriment of these stakeholders. Table 3 provides the Poisson regression results on stakeholder strengths and anti-takeover protections. The results show that greater managerial entrenchment (i.e., a higher G-index) has a negative and significant impact on aggregated stakeholder strengths. Table 3 also shows the disaggregated items on stakeholder strengths. The results indicate that entrenched managers pay more attention to stakeholders with related to the community, environment, and products; the coefficient of the Gindex is significantly positive for the environment but insignificant for both community and products. These results are consistent with Kacperczyk (2009), who argues that firms that pay more attention to the community and the environment obtain intangible benefits that are inherently difficult for shareholders to assess. These benefits may include promotion firm reputation (Atkinson and Galaskiewicz, 1988; McWilliams and Siegel, 2000; Van der Lann et al., 2008) and increased competitive advantage (Hillman and Keim, 2001; Turban and Greening, 1997). In contrast, negative G-index coefficients indicate entrenchment managers pay less attention to diversity and employees. This result may be due to the nature of the relationship between these stakeholders and managers. Diversity stakeholders can be classified as institutional stakeholders, and employees can be classified as technical stakeholders. Both exchange resources with the firm (Mattingly and Berman, 2006), and, therefore, entrenched managers pay less attention to them. Table 4 provides the Poisson regression results on stakeholder concerns and anti-takeover protections. The results indicate that managerial entrenchment has no real influence on the aggregated stakeholder concerns. However, further regression analysis shows that managerial entrenchment does have some influence on three of the stakeholder concerns. Specifically, the coefficients are significant and negative for diversity and significant and positive for employees and the environment. In other words, when managers have greater protection, they tend to reduce diversity concerns, albeit to the detriment of employee relations and the environment. Johnson and Greening (1999) combine the community, diversity, and employees items into a single dimension, people of corporate social performance, and find that this dimension is unrelated to senior management equity. Our results provide a more detailed explanation of the finding. Both Tables 3 and 4 show that board size and board independence are positively associated with most of the stakeholder strengths and concerns. Thus, firms interact positively with stakeholders when the board size is large or board independence is high. Dalton et al. (1999) argue that large boards offer better advice to CEOs and that such advice is more likely to come from outsiders on the board. Prior literature also generally assumes that outsiders enhance firms’ stakeholder orientation (Freeman, 1984) and that the board independence is positively related to CSR (Johnson and Greening, 1999). However, other studies question the superiority of outsiders (Wang and Coffey, 1992). For example, Ayuso and Argandona (2007) survey the literature and find that several studies show no relation between board independence and CSR activity. Tables 3 and 4 also provide uncertain evidence

Table 2 Correlation matrix. 1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

1. Stakeholer strength 2. Community strength 3. Diversity strength 4. Employee strength 5. Environment strength 6. Product strength 7. Stakeholder concern 8. Community concern 9. Diversity concern 10. Employee concern 11. Environment concern 12. Product concern 13. G-index 14. Duality 15. Board Size 16. Board Independence 17. CEO Age 18. CEO Gender (Female) 19. Firm Size 20. Performance 21. Leverage

1 0.70** 0.86** 0.63** 0.55** 0.41** 0.39** 0.30** −0.04** 0.23** 0.23** 0.38** 0.01 0.12** 0.29** 0.18** −0.02 0.11** 0.47** 0.06** 0.03

1 0.52** 0.27** 0.27** 0.14** 0.34** 0.27** 0.03 0.15** 0.16** 0.39** 0.02 0.10** 0.31** 0.11** 0.02 0.07** 0.45** 0.03 0.06**

1 0.33** 0.27** 0.23** 0.30** 0.25** −0.04** 0.19** 0.10** 0.36** −0.01 0.11** 0.26** 0.15** −0.04* 0.17** 0.40** 0.05** 0.04*

1 0.27** 0.27** 0.21** 0.18** −0.05* 0.11** 0.22** 0.11** −0.03 0.04* 0.12** 0.11** −0.02 −0.01 0.27** 0.07** −0.06**

1 0.25** 0.29** 0.14** −0.06** 0.18** 0.28** 0.19** 0.06** 0.07** 0.11** 0.13** 0.01 0.02 0.19** 0.04* 0.06**

1 0.10** 0.06** 0.02 0.13** 0.03 0.06** 0.02 0.03 0.07** 0.03 0.02 0.02 0.11** 0.02 −0.02

1 0.53** 0.30** 0.61** 0.73** 0.64** 0.05** 0.11** 0.25** 0.14** 0.06* −0.03 0.55** −0.03 0.20**

1 0.03 0.14** 0.36** 0.28** 0.03 0.08** 0.20** 0.08** 0.05** −0.01 0.37** 0.01 0.12**

1 0.07** −0.03 0.07** −0.14** −0.04** −0.10** −0.12** 0.03 −0.01 0.16** −0.05** −0.03

1 0.24** 0.18** 0.07** 0.06** 0.11** 0.12** −0.01 0.04* 0.26** −0.07** 0.10**

1 0.26** 0.09** 0.11** 0.18** 0.15** 0.05* −0.05* 0.35** −0.01 0.23**

1 0.03 0.08** 0.29** 0.11** 0.04* −0.05** 0.44** 0.01 0.11**

1 0.14** 0.18** 0.22** 0.03 −0.03 −0.10** 0.01 0.12**

1 0.16** 0.13** 0.24** −0.02 0.06** 0.05** 0.09**

1 0.08** 0.09** −0.07** 0.27** −0.01 0.18**

1 −0.05* 0.02 0.04* −0.04* 0.10**

1 −0.09** 0.03 0.02 0.04*

1 −0.02 0.03 −0.03

1 0.04* 0.05*

1 −0.16**

* **

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Variable

Significance at the 5% level. Significance at the 1% level.

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Table 3 Poisson regression results on stakeholder strengths and anti-takeover protections. Variables

Stakeholder

−0.0134* (0.0056) Duality 0.0728 (0.0444) Board Size 0.0266*** (0.0051) Board Independence 1.2058*** (0.1068) CEO Gender (Female) 1.0341*** (0.0814) CEO Age −0.0063** (0.0022) Firm Size 1.0230*** (0.0242) Performance 0.0014 (0.0016) Leverage −0.0052*** (0.0011) No. of Obs. 2856 R2 0.4352 G-index

Community

Diversity

Employee

Environment

Product

0.0156 (0.0155) 0.2076 (0.1452) 0.0953*** (0.0120) 1.4863*** (0.3056) 1.3913*** (0.2161) −0.0028 (0.0063) 1.4197*** (0.0641) −0.0018 (0.0041) −0.0061* (0.0029) 2856 0.3260

−0.0216** (0.0079) 0.1282* (0.0625) 0.0250*** (0.0071) 1.0258*** (0.1482) 1.2926*** (0.1008) −0.0102** (0.0031) 0.9973*** (0.0339) −0.0023 (0.0019) −0.0033* (0.0015) 2856 0.3737

−0.0369** (0.0122) −0.0658 (0.0882) 0.0057 (0.0116) 1.2521*** (0.2288) 0.0621 (0.2625) −0.0067 (0.0047) 0.8044*** (0.0536) 0.0121** (0.0040) −0.0106*** (0.0023) 2856 0.1257

0.0412* (0.0176) 0.1187 (0.1465) −0.0111 (0.0170) 2.3306*** (0.3558) 0.5201 (0.3104) 0.0020 (0.0778) 1.0899*** (0.0778) 0.0058 (0.0054) −0.0010 (0.0032) 2856 0.0945

0.0261 (0.0271) −0.1233 (0.1985) −0.0137 (0.0262) 0.3213 (0.4898) 0.7382 (0.4606) 0.0101 (0.0105) 1.0156*** (0.1201) 0.0070 (0.0084) −0.0118* (0.0053) 2856 0.0463

Notes: The dependent variables are different stakeholder strengths; the explanatory variable is the G-index. Figures in parentheses are standard errors. * Significance at the 5% level. ** Significance at the 1% level. *** Significance at the 0.1% level.

Table 4 Poisson regression results on stakeholder concerns and anti-takeover protections. Variable G-index

Stakeholder

0.0021 (0.0058) Duality 0.0980* (0.0448) Board Size 0.0234*** (0.0053) Board Independence 0.7442*** (0.1074) CEO Gender (Female) −0.1188 (0.1460) CEO Age 0.0059* (0.0023) Firm Size 0.6074*** (0.0257) Performance −0.0071*** (0.0009) Leverage 0.0007 (0.0011) No. of Obs. 2856 0.1921 R2

Community

Diversity

Employee

Environment

Product

−0.0202 (0.0181) 0.2886 (0.1900) 0.0798*** (0.0170) 1.1263** (0.4084) 0.2452 (0.5074) 0.0153 (0.0086) 0.8231*** (0.0894) −0.0067 (0.0038) −0.0074 (0.0041) 2856 0.0775

−0.0750*** (0.0150) −0.0315 (0.0970) −0.0643*** (0.0158) −0.9258*** (0.2413) −0.2575 (0.3577) 0.0103 (0.0055) 0.1333 (0.0708) −0.0076*** (0.0020) 0.0021 (0.0026) 2856 0.0385

0.0211* (0.0102) 0.0842 (0.0749) 0.0007 (0.0098) 0.7053*** (0.1858) 0.4908** (0.1806) −0.0020 (0.0040) 0.4345*** (0.0459) −0.0085*** (0.0014) 0.0025 (0.0018) 2856 0.0596

0.0392** (0.0124) 0.4584*** (0.1135) 0.0509*** (0.0106) 1.9718*** (0.2449) −2.4336* (1.0012) 0.0112* (0.0050) 0.5901*** (0.0537) −0.0066** (0.0024) 0.0024 (0.0023) 2856 0.0654

0.0110 (0.0126) −0.1023 (0.0998) 0.0536*** (0.0107) 1.0369*** (0.2412) −1.2230* (0.5797) 0.0058 (0.0051) 1.1148*** (0.0541) −0.0040 (0.0027) −0.0009 (0.0024) 2856 0.2347

Notes: The dependent variables are different stakeholder strengths; the explanatory variable is the G-index. Figures in parentheses are standard errors. * Significance at the 5% level. ** Significance at the 1% level. *** Significance at the 0.1% level.

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Table 5 Ordinary least squares regression results on stakeholder strengths (concerns), anti-takeover protections and performance. Variables

ROA(t + 1)

ROA(t + 2)

Strength

−0.2559 (0.1627)

−0.2821 (0.1863)

Concern G-index Strength × G-index

−0.0541 (0.0457) 0.0453** (0.0158)

−0.0783 (0.0600) 0.0484* (0.0200)

Concern × G-index Duality Board Size Board Independence CEO Gender (Female) CEO Age Firm Size Leverage No. of Obs. R2

0.2601 (0.3013) −0.2984*** (0.0469) −1.5177 (0.7936) −0.9379 (1.1546) 0.0366 (0.0196) 0.8824*** (0.0384) −0.0025*** (0.0005) 2740 0.1913

0.9023* (0.4059) −0.2527*** (0.0548) −1.2532 (0.9209) 0.2834 (1.3539) 0.0196 (0.0230) 0.7960*** (0.0494) −0.0029*** (0.0005) 2740 0.1102

ROA(t + 1)

ROA(t + 2)

−0.2879 (0.1679) −0.0221 (0.0491)

−0.2823 (0.2209) −0.0384 (0.0620)

0.0173 (0.0166) 0.3381 (0.2973) −0.2298*** (0.0396) −0.9271 (0.8011) −1.1317 (0.4597) 0.0350 (0.0197) 0.9064*** (0.0380) −0.0026*** (0.0005) 2740 0.1878

0.0156 (0.0225) 0.9826* (0.4072) −0.1823*** (0.0482) −0.6426 (0.9261) 0.7708 (1.3373) 0.0182 (0.0229) 0.8209*** (0.0493) −0.0029*** (0.0005) 2740 0.1075

Notes: The dependent variables are ROA(t + 1) and ROA(t + 2); the explanatory variable is the interaction between stakeholder strength (concern) and G-index. Figures in parentheses are standard errors. * Significance at the 5% level. ** Significance at the 1% level. *** Significance at the 0.1% level.

in regard to the relation of CEO Duality and CEO gender, to stakeholder strengths and concerns. The results suggest that firms with a dual CEO/chairman pay more attention to stakeholders. Wang and Coffey (1992) indicate that women directors tend to be more sensitive to CSR and more responsive to stakeholders. The coefficients of CEO age show that older CEOs are less responsive to stakeholders. In line with prior literature, Tables 3 and 4 show that Firm Size is significantly and positively related to aggregated and disaggregated stakeholder strengths and concerns. Stakeholders strengths increase with firm size as a result of the firm’s greater visibility; however, the influence of greater numbers of stakeholders also becomes unavoidable. Firms with better financial strength (a higher performance indicator) have more resources available to allocate to their stakeholders. The results indicate that performance has a positive correlation with most stakeholder strengths and a negative correlation with most stakeholder concerns. Tables 3 and 4 also indicate that firms with higher leverage have very little additional resources available to stakeholders. Therefore, the benefits and interests of stakeholders may suffer from capital shortage, leading, for example, to the exploitation of employees. Table 5 reports the estimation results of the regression model (3a), (3b), (4a), and (4b). The results show a positive and significant coefficient on the Strength × G-index for the financial performance regression. That is, when entrenched managers work to achieve a good relationship with the stakeholders, the firms are likely to experience a positive financial performance in the next period. However, the effect is not significant for the Concern × G-index. The results in Table 5 support the stakeholder model. That is, when entrenched managers pay more attention to stakeholders, their firms experience increased short-term financial performance.

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Kacperczyk (2009) points out that stronger takeover protection increases corporate attention to nonshareholding stakeholders and contributes to the long-term value of the firm. In addition, Short (2004) and Deckop et al. (2006) suggest that the negative financial effect of actions that result in concerns are not likely to be addressed immediately and are therefore unlikely to affect financial performance in the short term. This study focuses on accounting returns rather than stock price. The results therefore show that the positive effect on financial performance is short-term, unlike the effect on stock price, which is impacted by factors such as reputations, expectations of future returns, and risks. Accountingbased measures reflect managerial performance. Thus, as managers’ powers increase, the corporate resources available to stakeholders also increases, which then improves the firm’s financial performance.

5. Discussion and conclusions The findings show that increased managerial protections positively affect managers’ relationships with their secondary stakeholders but negatively affect their relationships with primary stakeholders. The regression using disaggregated stakeholder strengths and concerns used as the dependent variables confirms the findings. Because employees work in exchange for appropriate remuneration and because customers trade money for services or products, formal contracts protect both of them. Accordingly, entrenched managers tend to place less focus on these primary stakeholders. In contrast, entrenched managers desire to establish good relationships with secondary stakeholders, neither of which are protected by contracts with the firm (Kacperczyk, 2009; Van der Lann et al., 2008). Good relationships with secondary stakeholders help to improve the reputation of the firm and firm performance. The results show that entrenched managers pay less attention to the strengths of primary stakeholders. Our findings suggest that entrenched managers do not exploit all stakeholders. The results from the regression of disaggregated concerns show that managerial entrenchment influences diversity, employees, and environment but has no impact on community and customers. The results indicate that entrenched managers do not treat all types of stakeholders equally. The coefficients of employee and environment concerns are positive, while coefficient of diversity is negative. When managers have greater protection, they tend to cause greater harm to primary stakeholders, particularly employees. This negative effect on employees is likely related to formal contracts that include employee rights and firm obligations. Entrenched managers tend to pay less attention to diversity strengths and reduce diversity concerns. Because firms involved in any major controversy relating to diversity within the workplace tends to suffer from greater financial risk (Scholtens and Zhou, 2008) and therefore managers work to avoid or alleviate this risk. The results also suggest that managerial entrenchment leads to a decrease in employee strengths and an increase in employee concerns, although the employee contract may limit the motive. Nevertheless, prior empirical studies indicate that such increases in employee concerns would not necessarily result in any increase in financial risk or reduction in the firm’s financial performance (Scholtens and Zhou, 2008). According to the results of the disaggregated regressions, managers focus on secondary stakeholders (community, diversity, and environment) more than primary stakeholders (employees and customers). The findings also indicate that managerial entrenchment has a complex impact on the aggregated stakeholder strengths and concerns. That is, the negative effects of disaggregated stakeholders neutralize the positive effects. This outcome is an important gap within the literature, which may be worthy of further exploration in the future. In sum, the study provides evidence that when entrenched managers pay more attention to stakeholders, the firm experiences positive future financial performance. Kacperczyk (2009) suggests a similar conclusion. According to these findings, when entrenched managers pay more attention to stakeholders, the results include more effective use of resources and increasing accuracy in accounting performance.

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Acknowledgements The authors acknowledge the helpful comments provided by Robin Chou and Lee-Hsien Pan. Appendix A. Criteria

Strengths

Concerns

Community

Charitable giving Innovative giving Non-US charitable giving Support for housing Support for education Indigenous population relations Volunteer programs Other strengths CEO Promotion Board of Directors Work/life benefits Women and minorities Employment of the disabled Gay and lesbian policies Other strengths Union relations No-layoff policy Cash profit sharing Employee involvement Retirement benefit strengths Health and safety strengths Other strengths Beneficial products and services Pollution prevention Recycling Clean energy Communications Property, plant and equipment Other strengths Quality R&D/innovation Benefits to economically disadvantaged Other strengths

Investment controversies Negative economic impact Indigenous population relations Tax disputes Other concerns

Diversity

Employees

Environment

Product

Controversies Non-representation Other concerns

Union relations Workforce reduction Retirement benefit concerns Health and safety concerns Other concerns

Hazardous waste Regulatory problems Ozone-depleting chemicals Substantial emissions Agricultural chemicals Climate change Other concerns Product safety Marketing/contracting concerns Anti-trust Other concerns

Notes: The table provides a list of the rating criteria on the 2006 KLD data, showing the five KLD categories and the strengths and concerns associated with each category.

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