Ruth Aguilera

Corporate governance mainly aims to ensure that senior management acts in the interests of a firm's shareholders. CSR expands this scope to consider a firm's impact on stakeholders including creditors, employees, suppliers, customers and society as a whole.

Managerial entrenchment provisions (MEPs) are corporate governance conditions that consolidate a leader's position in a firm. Sometimes this can be a good thing, but sometimes it can decrease the value of the firm if a leader is self-seeking and pursues personal interests that do not align with those of other stakeholders.

The effectiveness of CSR policies, which can increase shareholder value and a company's long-term financial sustainability, can depend on the MEPs and whether they incentivise CEOs and managers to act in the firm's interests or their own. As such, there is the danger of CSR being championed and implemented as merely a symbolic gesture if senior management, corporate governance conditions and other external factors such as the macroeconomic setting are not aligned.

Managerial entrenchment provisions can decrease the value of a firm if a leader pursues personal interests

Esade's Ruth Aguilera, together with Kurt Desender, Josep A. Tribó (Universidad Carlos III de Madrid, Spain) and Jordi Surroca (Groningen), explored the effectiveness of governance bundles by focusing on the interplay between managerial entrenchment provisions and CSR activities.

They argue that when managerial entrenchment provisions and CSR are coherent, they reinforce each other to enhance firm value. Yet, as different national institutional systems possess distinctive governance rationales, the coherence between managerial entrenchment provisions and CSR is fundamentally different across countries, which in turn affects firms' ability to create value differently.

Coherence in context

The researchers looked at whether there was a difference between countries that operated in a more shareholder value-oriented setting and those that were stakeholder oriented. Their study considered the impact MEPs have on CSR policies being implemented either as a token effort or as a real effort to increase the firm’s value for shareholders in particular.

The team also sought to understand whether CSR was tokenistic (i.e., window dressing) or actually provided value to shareholders and the firm in countries considered to be more shareholder oriented, as opposed to those that are more protectionist towards stakeholders.

Social responsibility
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The study looked at a sample of 3,187 publicly listed corporations from 37 countries, classified as either liberal market economies (LMEs) or coordinated market economies (CMEs).

LMEs typically have "a stock market-based financial system, fluid labour markets, education and training systems offering general skills, a limited use of networks and alliances among firms, and a concentration of firms' decision-making power in top management."

CMEs are characterised by "a bank- or state-based financial system providing capital, strong internal labour markets based on employment protection, training systems that promote firm-specific skills, and an extensive use of networks and alliances among firms that favours the internalisation of the interests of three stakeholder groups – top management, shareholders, and workers."

Where MEPs and CSR work together best

Aguilera and her team found that in LMEs the adoption of entrenchment practices relaxes short-term market pressures, which in turn empowers managers to embrace a long-term perspective in decision-making. This includes engagement in mutually beneficial long-term relations with firm stakeholders through CSR.

The research suggests that this coherence between managerial entrenchment provisions and CSR is likely to generate positive firm value.

The adoption of entrenchment practices empowers managers to embrace a long-term perspective in decision-making

Conversely, the researchers found that in countries where corporate governance relies on non-market mechanisms, entrenchment practices disincentivised company leaders in firms where CSR policies were also pursued. These CSR initiatives were symbolic rather than substantive and served to fulfil the interests of managers at the expense of shareholders.

The results have implications for investors and regulators. Without the protection provided by MEPs, the market-based discipline of LMEs reduces the incentives for managers to invest in valuable long-term relationships with stakeholders.

According to Aguilera and her co-authors, this situation would result in managers having more incentives to spend company resources on symbolic CSR activities to avoid being disciplined by investors.

Managers protected by MEPs are more immune to the short-term pressure of external capital markets and can credibly fulfil contracts with stakeholders. In return, stakeholders are more willing to support spending on skills, R&D and other costly investments that can eventually increase shareholder value.

The researchers' recommendation for companies in LMEs is clear: do not hinder the adoption of MEPs as long as they are accompanied by real and substantive CSR activities.

They also suggest that managers' compensation should be designed to remunerate the generation of shareholder value together with the advances in CSR, in order to deter the risk of such CSR being part of a managerial entrenchment strategy.

Original research publication: Surroca J, Aguilera R, Desender K & Tribó JIs managerial entrenchment always bad and corporate social responsibility always good? A cross‐national examination of their combined influence on shareholder value, Strategic Management Journal (2020)

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