Corporate social responsibility and stakeholder governance around the world

This paper examines the impact of stakeholder governance on corporate social responsibility (CSR) to determine whether CSR is employed as a mechanism to mitigate conflicts of interest between managers and diverse stakeholders, or used as managerial perquisites. To examine this relation properly, we not only employ an extensive sample of international firms, but also mitigate endogeneity by using various econometric methods. We find that stakeholder governance positively influences firms' CSR engagement with a greater magnitude than board governance after controlling for confounding factors. Stakeholders' influence in CSR engagement is more pronounced when investor protections and board governance are relatively weak.     

The Impact of Ambiguity on Managerial Investment and Cash Holdings

Standard finance theory suggests that managers invest in projects that, in expectation, produce returns that justify the use of capital. An underlying assumption is that managers have the information necessary to understand the distributional properties of the pay‐offs underlying the decision. This paper examines firm investment behavior when managers are likely to find it more challenging to develop expectations of pay‐offs, namely during periods of increased macroeconomic ambiguity. In particular, we examine how macroeconomic ambiguity – proxied by the variance premium (Drechsler, 2010 ) and the dispersion in forecasts of corporate profits from the Survey of Professional Forecasters (Anderson et al., 2009 ) – impacts managerial capital investment and cash holdings. Consistent with ambiguity theory, we find that macroeconomic ambiguity is negatively associated with capital investment and positively associated with cash holdings. These results are robust to alternative explanations related to risk, investor sentiment and economic conditions. Moreover, consistent with recent theoretical real options literature, we find that ambiguity reduces the value of investment opportunities, while risk increases the value of such opportunities. Overall, these findings provide initial empirical evidence on the economic distinction between ambiguity and risk with respect to managerial investment and cash holdings.     

Environmental social controls and capital investments: Australian evidence

Environmental social controls (ESCs) such as mandatory disclosure, regulations, subsidies, and stakeholder opinion are intended to improve firm environmental performance. This paper reports ESC importance to Australian financial managers in making capital investment decisions. A decision‐making experiment showed managers to be most responsive to stakeholder opinion (42 per cent), followed by subsidization (26 per cent) and regulatory cost (22 per cent). Mandatory disclosure has very little influence (10 per cent). ESC interaction effects are limited so coordination of ESC policy is not a primary concern. High degrees of managerial self‐insight suggest policy changes would be enhanced by close consultations with the managers involved.     

Corporate social responsibility and stakeholder governance around the world

In this paper, we examine the impact of stakeholder governance on corporate social responsibility (CSR) around the world to determine whether CSR is employed as a mechanism to mitigate conflicts of interest between managers and diverse stakeholders, or used as managerial perquisites. To examine this relation properly, we not only employ a large and extensive sample of international firms, but also control for endogeneity by using dynamic panel generalized method of moments (GMM), propensity score matching, and difference-in-difference approach. Our results suggest that stakeholder governance positively influences firms’ CSR engagement with a greater magnitude than board governance after controlling for endogeneity and other confounding factors of traditional corporate governance mechanisms, firm characteristics and national factors. Stakeholders’ influence in CSR engagement is more prevalent when investor protections and board governance are relatively weak.     

Public reactions to the 2013 Chinese H7N9 Influenza outbreak: perceptions of risk,stakeholders, and protective actions

This study used the Protective Action Decision model to guide a survey of 762 respondents in Anhui province, China during the 2013 Avian Influenza A (H7N9) outbreak. The data suggest that three types of psychological variables – risk perceptions, protective action perceptions, and stakeholder perceptions – influenced people’s behavioral expectations of adopting protective actions. In addition, the effects of demographic variables on behavioral expectations were quite variable, with some being unrelated to behavioral expectations, some being related but unmediated by the psychological variables, and others being either partially or completely mediated by the psychological variables. These results can help public health officials to communicate more effectively when encouraging people to protect themselves during an influenza emergency.     

Reasoning about safety management policy in everyday terms: a pilot study in citizen engagement for the UK railway industry

This paper reports on a pilot study in citizen engagement which formed part of a broader stakeholder engagement and consultation programme addressing safety decision‐making for UK rail industry activities. In addition to developing tools to support engagement initiatives, the study was concerned specifically with investigating everyday lay notions of what is a ‘reasonable’ basis for establishing safety. In view of the technical complexity of this issue, the exercise therefore presented an important methodological challenge: how to ‘translate’ specialised economic and legal issues in such a way that lay citizens were able to grasp, and reason about, these issues in an informed and considered way. The engagement exercise worked well in terms of its capacity to promote such a process of informed consideration, and in being ‘user friendly’ for participants. Despite the exercise involving a relatively small number of discussion group meetings, the quality and depth of the evidence collected allows some cautious provisional conclusions to be drawn regarding lay sensibilities concerning certain technical aspects of rail safety management.     

Making charity effectiveness transparent: Building a stakeholder‐focussed framework of reporting

Effectiveness in achieving mission is fundamental to evaluating charity performance, and is of central concern to stakeholders who fund, regulate and otherwise engage with such organisations. Exploring the meaning of transparency in the context of stakeholder engagement, and utilising previous research and authoritative sector discussion, this paper develops a novel framework of transparent, stakeholder‐focussed effectiveness reporting. It is contended that such reporting can assist the charity sector in discharging accountability, gaining legitimacy and in sharpening mission‐centred managerial decision making. Then applying this to UK charities’ publicly available communications, it highlights significant challenges and weaknesses in current effectiveness reporting.     

Demand for,and impediments to,the disclosure of information about climate change-related corporate governance practices

Based on a survey of climate change experts in different stakeholder groups and interviews with corporate climate change managers, this study provides insights into the gap between what information stakeholders expect, and what Australian corporations disclose. This paper focuses on annual reports and sustainability reports with specific reference to the disclosure of climate change-related corporate governance practices. The findings culminate in the refinement of a best practice index for the disclosure of climate change-related corporate governance practises. Interview results indicate that the low levels of disclosures made by Australian companies may be due to a number of factors. A lack of proactive stakeholder engagement and an apparent preoccupation with financial performance and advancing shareholders interest, coupled with a failure by managers to accept accountability, seems to go a long way to explaining low levels of disclosure.     

Serial Correlation in Management Earnings Forecast Errors

We examine whether management earnings forecast errors exhibit serial correlation and how analysts understand the serial correlation property of management forecast errors (MFEs). MFEs should not exhibit serial correlation if managers efficiently process information in prior forecast errors and truthfully convey their earnings expectations through management forecasts. However, for long‐horizon management forecasts of annual earnings, we find significantly positive serial correlation in MFEs, and sample self‐selection does not seem to drive this phenomenon. Further analyses suggest that managers’ unintentional information processing bias contributes to this positive serial correlation. Analysts anticipate the intertemporal persistence of MFEs but underestimate the persistence level when reacting to management forecasts. Our findings have implications for market participants who rely on management forecasts to form earnings expectations, and also shed light on the efficiency of managerial decision making.     

An Empirical Analysis of Financial and Non-financial Managers' Remuneration in Small and Medium-sized UK Enterprises

This paper examines empirically the influences on managerial remuneration in a sample of 97 UK small and medium-sized enterprises (SMEs). The empirical analysis, based on data obtained from interviews with middle (i.e. non-director level) managers and the published financial records of their employing firms lodged at Companies House, examines the relative explanatory power of a number of human capital, job/firm specific and external labour market variables. In addition, the sample was partitioned into two groups, one comprising 29 financial managers and the other comprising 68 non-financial managers. Separate wage equations were estimated for the two groups to determine whether the factors that influence remuneration differ between the two groups of managers. For the overall sample, the results indicate that the managers' ages, qualifications and previous careers and the size, growth, industry and location of their employing firms are able to explain a large proportion of the variance in remuneration. For the sub-sample analyses, firm profitability, (several aspects of) size, and the managers' career histories are of relatively greater importance in respect of financial managers' remuneration, whilst asset growth, industrial sector and location seem to be of more importance for the non-financial managers. These results are viewed as being broadly consistent with the expectations derived from the extant theoretical and empirical literatures on managerial remuneration.     

Managing earnings surprises in the US versus 12 other countries

We compare the distribution of earnings surprises in the US to those of 12 other countries. We expect US managers to be relatively more likely to manage earnings surprises due to differences in US corporate governance and legal environments versus those in other countries. An increasing emphasis on stock price performance in the US, as reflected by the rapid increase in stock and options compensation to US managers, and increases in litigation upon stock price drops, leads us to expect the tendency of US managers to manage earnings surprises versus those of non-US managers has increased in recent years. Our evidence is consistent with our expectations. We discuss the implications of our findings for public policies to address the earnings surprise game.     

Accounting rules? Stock buybacks and stock options: Additional evidence

This paper finds that CEO stock options influence the choice, amount, and timing of funds distributed as a buyback. These results favor a managerial opportunism motive for buybacks over other theories and support two key research expectations – that buybacks impose option-induced agency costs on outside shareholders, and that managers benefit from weak governance and unclear accounting in this choice. CEOs increase their insider selling following a buyback, which also supports a managerial opportunism perspective. Once we control for these agency factors, we find no evidence that buyback activity associates reliably with EPS accretion from the reduction in common shares. We conclude that the popular use of stock buybacks as a form of cash distribution derives significantly from a strong contemporaneous relation between buybacks and CEOs’ use of stock options as additional compensation.     

AN INTRODUCTION TO GAME THEORY AND BUSINESS STRATEGY

Sound managerial decision making often requires “putting yourself behind your rivals' desk.” Assuming rivals are rational and acting in their selfinterest, what decisions are they likely to make and how are they likely to respond to your actions? A complicating factor is that rivals' optimal choices typically will depend on their expectations of what you will do; their expectations in turn depend on their assessments of your expectations about them. This type of circularity or recursive thinking might appear to make the overall problem completely intractable. Yet, this situation is precisely where game theory is most useful. This article introduces the basic elements of game theory within the context of business strategy and shows how managers might use these tools in decision making. This analysis also provides managers with a richer understanding of competition within different market settings. For example, it provides insights into why there is fierce competition in some concentrated industries (such as commercial aircraft), but not in others. Although the authors focus primarily on interactions among rival firms in product markets, these concepts also are useful to managers when dealing with other parties, such as suppliers, employees, or gov‐ernment officials.     

Transdisciplinarity in the class room? Simulating the co-production of sustainability knowledge

Despite its many advantages, teaching transdisciplinary is a costly enterprise. Transferring diverse theoretical, methodological, and practical skills may require several teaching staff; developing meaningful stakeholder interaction is time-intensive; and managing the research process demands significant efforts in logistics and coordination. This article seeks to make two distinct contributions. Conceptually, it introduces a framework for distinguishing between soft, inclusive, reflexive, and hard transdisciplinarity, based on the notion that there are diminishing returns to all features of the practice. Empirically, it examines a classroom simulation – the Sustainable Development Indicator Exercise (SDIE) – as an example of soft transdisciplinarity. In the SDIE interdisciplinary student groups play the role of policy advisers. Building on a concrete transdisciplinary research project, they explore their understanding of sustainability, develop a multi-criteria decision making method for assessing sustainability criteria and indicators, elaborate and present their results, and reflect on their experience. All aspects of the exercise follow the logic of role playing: organizing group interaction, distributing responsibilities, interacting with their political principal, presenting their findings, and evaluating their progress. Experience from the simulation reveals insights into ways students address and express concerns with objectivity, transparency, deliberation, and balancing sustainability; it also points to ways for moving beyond soft transdisciplinarity.     

Firm's demand for insurance: An explorative approach

This paper addresses the question, what influences the insurance demand of companies and examines the influence of managerial risk aversion in this decision process. An explorative research approach based on qualitative data analysis is applied to explore the factors influencing the insurance related decision behavior in organizations. Using interviews and observations of firm's insurance managers, the results identify interdependencies between factors of insurance demand, such as ownership structure, managerial discretion, volatility of earning, size, services of the insurer, and business diversification which allows to propose a framework of contextual factors affecting company's insurance demand. Within this framework, the data imply managerial risk attitudes as decisive factor in the decision process about insurance demand in companies. This explorative study enriches the existing theories of firms’ insurance demand and addresses feedback from practice into theory.     

IPO market timing. The evidence of the disposition effect among corporate managers

Until now, IPO market timing has been mostly associated with a varying number of IPOs in certain periods of “hot” and “cold” issue markets. We would like to offer a different perspective. We focus on a speed of the IPO process, after the decision to go public was actually made. Our hypothesis is that in “hot market” managers will tend to minimize the time necessary to go public in order to take advantage of high valuations as quickly as possible. On the contrary, if the firm is not ready with the IPO on time and in the meantime the market falls during the going-public process, managers will tend to delay the IPO hoping that the good market conditions will come back soon. We argue that such a behavior might be attributed to the disposition effect among firms' managers.We find a statistically significant negative correlation between the market return and the speed of the IPO process. The absolute correlation coefficient is higher when the market return is calculated 90 days prior to the Approval Date of the prospectus than when it is calculated 90 days after the Approval Date. Hence, a vast part of the market influence on the speed of the offering process has its origin at the time when offering is formally not possible yet. External factors occurring after the Approval Date seem to be less important than the managerial decision influenced by observation of the market situation prior to the Approval Date.We also find that for firms débuting faster than the median of our sample, the average market return in the period between the IPO date and the median is positive. On the other hand, in the group of slower firms, the average market return in the period between the median and the IPO date is negative. There is an analogy between firms – débuting too fast in bullish market and too slow in bearish market, and investors – selling winning stocks too quickly and keeping falling stocks for too long in their portfolios. Both managers and investors seem to be biased by the S-shape utility function, as predicted by the prospect theory of Kahnemann and Tversky (1979).     

A case study demonstrates a democratic methodology for making risk-based decisions

Abstract

Risk is a subjective notion allowing the boundaries between the role of a risk practitioner and a decision-maker to become blurred. A belief that the public misunderstands risk and the need to control the risk assessment process are two barriers to effective engagement. A lack of engagement and the ability to enable citizens to decide their own future can contribute to the controversy we see in important public debates. In our study, we surveyed four stakeholder groups in the New Zealand to determine how they each rated the risks and benefits of a case study on the three biophysical impacts of the economy, environment and human health. Our survey methodology incorporated a continuous scale along three axes and this design enabled costs and benefits to be traded-off between individuals, giving them a representative voice. We used these results to investigate whether or not it would be feasible to use such an approach to make decisions. Our results indicate that public decision-making is possible, which in this case broadly reflected agreement between the public and the official decision. Such an approach holds promise for expanding the role of public engagement and input into the risk assessment process.     

Communication of risk assessment information to risk managers

This article describes the results of a two-phase study of risk communication between risk assessors and risk managers (including policy makers). The first phase consisted of telephone interviews with 30 air quality risk managers from all levels (18 from local, state, and regional offices, and 12 from national offices). The second phase involved a focus group with 11 senior EPA risk managers representing a broad range of EPA national offices and programmes. The two-hour focus group elicited responses from the risk managers to specific examples of videotaped risk information created by agency risk assessors. The risk managers indicated their interests in hearing both qualitative and quantitative information about risk and emphasized the importance of discussing other information about the decision context. Similar responses to the videotaped risk information were elicited from a class of students at the Harvard School of Public Health. This exploratory work suggests that to better inform risk managers, risk assessors must also appreciate and present the broader context of the decision, and they must convey how uncertainties and weaknesses in the assessment may influence stakeholder perceptions of risk and the effectiveness of different risk management options. Further research on how to communicate risk information to risk managers is recommended.     

Is there a dark side of competition? Product market competition and auditor-client contracting

This study establishes the informational value of a company's product market competition, derived from qualitative nonfinancial disclosures, in the audit contracting process. Greater product market competition could either serve as means of mitigating agency costs between managers and shareholders or heightening managerial rent-seeking activities and the incentive to distort disclosures. Consequently, greater competition could either increase or decrease audit engagement risk. We find that greater product market competition is associated with greater engagement risk. Auditors respond to the higher risk by assessing greater audit fees. Although auditors respond by charging higher fees and dedicating greater effort to these engagements, we nonetheless find that audit quality is negatively affected by greater competition. Our findings are consistent with the dark side hypothesis of product market competition. Overall, our study provides evidence that company-level competition effects convey valuable information to auditors.     

Investment decisions: The trade-off between economic and environmental objectives

While there are broader socio-political, psychological, and structural factors that influence investment decisions (see Harris et al., 2016), in line with the critical approach, this study provides an empirical insight into the notion that financialization, specifically the tendency to prioritise economic over environmental objectives, has a strong bearing on how managers view investment trade-off decisions in relation to sustainability issues. The study empirically investigates this notion by examining the investment trade–off preferences of Australian managers in relation to three decision attributes – economic outcomes (i.e. financial returns), environmental impact (i.e. carbon emissions) and stakeholder pressure to consider environmental issues. We use the discrete choice experimental method to quantify the trade-offs between the above mentioned three attributes. In addition, we also investigate the potential effect of three contingency factors on individual's preferences. Specifically, at the organisational level, we explore the effects of financial and environmental rewards and at the individual level, we explore the effect of environmental consciousness. In line with the financialization hypotheses our results indicate that managers prioritise financial returns over carbon emissions and stakeholder pressures with the preference for financial returns found to be positively associated with rewards for financial performance. However, in line with the pragmatic approach and despite the overall dominance of financial returns, there is evidence that manager's focus on financial returns can be influenced, with the preference for financial returns negatively associated with rewards for environmental performance and environmental consciousness. In addition, while stakeholder pressure was not found to be associated with any of the three contingency factors and, manager's emphasis on carbon emissions was not associated with financial rewards, manager's emphasis on carbon emissions was found to be positively associated with both rewards for environmental performance and environmental consciousness. Therefore, our findings suggest that corporate management have an important role to play, both in respect to the design of performance rewards systems and the recruitment of environmentally conscious managers, in order to promote the sustainability agenda.