Shareholder orientation affecting short-termism : the empirical setting

Bachelor Thesis

Shareholder orientation affecting

short-termism: the empirical setting

Martin van Nistelrooij 10248390

15-07-2015 2014/2015

Statement of originality

This document is written by Martin van Nistelrooij who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

Table of contents

Abstract

Corporate governance is frequently mentioned in the ongoing debate about the issue of short-termism. This paper explores the relationship between corporate governance and short-term orientation within organizations. By addressing corporate governance within the framework of the agency theory, this study proposes that short-term orientation is positively influenced by a

shareholder orientation. Further this study tests the assumption that there is a shift towards a

stakeholder orientation. A longitudinal study is conducted and content analyses are performed on 55 CEO statements included in the annual reports of five leading organizations within the Netherlands to measure short-term orientation and shareholder orientation. The study covers the 2004 to 2014 time frame. There is no support found for either of the hypotheses. These findings can indicate the insignificance of corporate governance structures regarding short-term orientation. Furthermore these findings may point to the indifference of managers to consciously pursue a specific corporate governance structure.

1. Introduction

From the third quarter of 2014 on, there has been a significant drop in the oil price. The price of $115.71 a barrel on the 19th of June 2014 declined within three months to $82.60 on October 16 2014, which was almost the lowest price in four years (http://www.bloomberg.com/energy). As this price is a product of supply and demand, it is also partly determined by expectations. With demand low due to weak economic activity, the supply side has also experienced turbulence due to the recent developments in Iraq, Libya and even more recently Ukraine and Iran. These developments were accompanied by adjusted expectations of the European and Chinese economy. This immediate disruption put severe stress on organizations within the oil and gas industry which had to face serious short-term issues (Baumeister & Kilian, 2014). Among these companies was Royal Dutch Shell. Royal Dutch Shell is known for its strict scenario-planning. This strategy involves a focus on the short-term, without losing sight of the long-run (Peterson et al., 2003). Yet even this scenario-planning could not prevent the stock price to drop 20 percent from $31.00 on 2 September 2014 to $24.73 on December 16 2014

increase the price of stock and serve shareholders (http://www.theguardian.com/business/2015/jan/ 29/shell-cuts-spending-oil-price-slide). On the other hand provided the low oil-price environment opportunities for Shell. Analysts state that due to this turbulence Shell was able to take over former competitor British Gas in 2015

(http://www.theguardian.com/business/2015/apr/08/shell-bg-group-47bn-takeover-oil-industry).

The example stated above illustrates an environment where corporate governance and short-term decision-making are mutually related. Corporate governance receives many attention within recent literature, especially within the context of a phenomenon called ‘short-termism’ (Lazonick & O’Sullivan, 2000; Jackson & Petraki, 2011). This phenomenon is argued to be the result of a

systematic focus on the short-term within organizations (Jackson & Petraki, 2011). The corporate governance structure known as the ‘shareholder orientation’ is often criticized and mentioned as a possible driver of short-termism (Bezemer, 2010; Lazonick & O’Sullivan, 2000; Jackson & Petraki, 2011). As Bezemer (2010) found empirical evidence of a negative relationship between shareholder orientation and firm performance, this study will empirically address the relationship between a shareholder orientation and short-termism.

In the following section is corporate governance explained in more detail according to existing literature. Here, two main models of corporate governance are reviewed and how they relate to the agency theory is highlighted. Their differences will be explained and theory about their hypothetical link with short-termism will be discussed. The next section will decompose this link into several related constructs. In this section the elements of each construct will be explained and described within the context of their interaction. Two hypotheses will be proposed based on theory and rhetoric. Then the methodology within this study will be discusses in detail. After that, the results will be mentioned and are interpreted in detail. As well the implications as the limitations will be explicitly mentioned. Afterwards, a conclusion will be provided.

2. Theoretical framework

Since the existence of the limited liability form of corporation there has been corporate governance (Bhasa, 2004). Corporate governance refers to “the structure of rights and responsibilities among the parties with a stake in the firm” (Aoki, 2000). Nowadays, two different orientations towards corporate governance are commonly acknowledged: a shareholder orientation and a stakeholder orientation (Bhasa, 2004). The shareholder orientation has developed from the Anglo-Saxon model

of governance and focuses on the maximization of shareholder value (Bhasa, 2004; Bezemer, 2010). On the other hand, as a product of the Nippon-Germano or Continental model (Bhasa, 2004), the stakeholder orientation “conceptualizes organizations as communities of interest whose

stakeholders should be served” (Bhasa, 2004; Bezemer, 2010). Organizations within liberal markets as the United States and the United Kingdom are often shareholder orientated, whereas a

stakeholder orientation towards corporate governance is more conventional within coordinated market economies as Europe and Japan (Bezemer, 2010).

Variations in the adaptation of corporate governance is argued to be due to cultural, legal or historical differences among nations (Bhasa, 2004). However, the agency theory view prevails within many studies concerning comparative corporate governance (Aguilera & Jackson, 2003). The agency theory is concerned with resolving problems that arise with the separation of ownership and control and originated in the 1970s (Aguilera & Jackson, 2003; Berle & Means, 1932; Lazonick & O’Sullivan, 2000). In this period, major U.S. manufacturing companies struggled with problems of excessive centralization and innovative competition. Agency theorists argued that is was essential to provide managers with an overarching financial goal. Without this goal managers could divert corporate resources to serve their personal interests rather than those of the owners and negatively influence performance (Barton, 2011). Therefore, the agency theory was introduced as an approach to corporate governance. The agency theory was based on the believe that “shareholders are the principals and managers their agents” (Lazonick & O’Sullivan, 2000). The alignment of incentives among managers and shareholders was fundamental to the agency theory. By functioning as a market for corporate control it was a mechanism to discipline managers of poor performing

companies. According to the agency theory the new indicator of performance became the return on corporate stock and the managerial doctrine evolved into ‘shareholder value maximization’. This shareholder orientation continued to spread among U.S. firms and nowadays many U.S. firms are based on this principle (Lazonick & O’Sullivan, 2000; Bezemer, 2010).

With the shareholder orientation as a response to the agency problem, stakeholder orientation emerged as a response to shareholder orientation (O’Sullivan, 2000). Bhasa (2004) defines shareholder orientation as a monistic approach, since it only believes in creating value to the shareholder. However, as the shareholder orientation has the objective of creating shareholder value, it does not aim to neglect the importance of other stakeholders. The idea behind a shareholder orientation is that performing towards an objective of creating shareholder value enhances the welfare of all stakeholders involved in the organization. However, stakeholder theorists argue that this value is generated at the expense of other stakeholders (Kacperczyk, 2009). In contrast to this,

Bhasa (2004) defines stakeholder orientation as an pluralistic approach to corporate governance as it assumes that decisions within the firm do not only address shareholders but all stakeholders within an organization. Therefore, Bhasa (2004) argues that “stakeholder theory is a modern evolution keeping in needs with the current day business dynamics”. However, both models are widely adopted globally and according to Aguilera and Jackson (2003) both models of corporate governance have different characteristics that lead to the variation of corporate governance among developed capitalist economies.

First, they state that both models approach the agency problem differently. The continental corporate governance system, where most organizations pursue a stakeholder orientation, is

characterized by blockholders (large shareholders) such as bank and families (Aguilera & Jackson, 2003; Gelter, 2009). Since their stake in companies is of significant size, blockholders can “bear the cost of monitoring managers” (Edmans, 2013). They can exert governance in two possible ways; through ‘voice’ and through ‘exit’. Voice is exerting governance through direct intervention. Cases of exerting voice are direct proposals of strategy changes or voting against directors. On the other hand, exit is a form of indirect intervention. Exit means that blockholders can sell their shares and abandon the organisation if managers destroy value. As a consequence the stock price will fall and managers will be punished indirectly. Therefore, managers are persuaded to maximize value (Edmans, 2013). In short, a shareholder orientation addresses the agency problem mainly by dispersed ownership. Governance is exerted through market mechanisms, mostly by creating a market for corporate control (Gelter, 2009). In addition to this Gelter (2009) states that “Continental European corporate governance systems, which are characterized by strong shareholder influence due to concentrated ownership, have pro-stakeholder institutions in their corporate governance systems”.

With both corporate governance models addressing the agency problem, there are many opposing opinions within existing literature regarding comparative corporate governance within the framework of the agency theory. These opinions mainly concern the shareholder orientation.

Proponents of shareholder orientation point to the decade-long boom of the U.S. economy from the 1990s to the late 2000s and the growth of the information-technology sector in Silicon Valley (Lazonick & O’Sullivan, 2000). However, Lazonick and O’Sullivan (2000) argue that a better understanding of the evolution and impact of the shareholder orientation indicates that this approach can be a threat to companies and even whole economies (Lazonick & O’Sullivan, 2000).

Lazonick and O’Sullivan (2000) are not the only researchers who express their concerns about the shareholder orientation. Many other studies suggest a negative impact of this approach to

corporate governance, often stated within the context of “short-termism” (Jackson & Petraki, 2011; Lazonick & O’Sullivan, 2000). Short-termism is characterized by Laverty (1996) as “representing decisions and outcomes that pursue a course of action that is best for the short term but suboptimal over the long run”. Miles (1993) stated that “in the Anglo-Saxon economies the interaction of financial markets with managerial decision making results in a suboptimal level of long-term investment”. Narayanan (1985) even as Jackson and Petraki (2011) link short-termism to way the agency problem is approached within the shareholder orientation. As this relationship is quite complex, they mention that shareholders can not observe the managers choice of project by controlling managers through a market for corporate control. Therefore they tend to monitor management through short-term results. In this way, managers yielding high short-term profits are perceived to be highly capable relative to managers who pursue long-term performance and do not yield immediate profits. This way it becomes attractive for managers to pursue short-term results. Within the shareholder orientation, this lack of sufficient monitoring can not be compensated by the control of other stakeholders, as is argued to be the case within the the stakeholder orientation (Jackson & Petraki, 2011; Bhasa, 2004). While this interaction among shareholders and managers above is basically explained, the interaction among managers and shareholders in a shareholder orientation is suggested to be central to the problem of short-termism, though much more complex (Jackson & Petraki, 2011).

In 2010, Bezemer published a study concerning the contextual development of shareholder orientation within the Netherlands from 1992 to 2006 within an empirical setting. Bezemer (2010) found a negative relationship between shareholder orientation and performance. However, this study applied a dichotomous approach to corporate governance, conceptualizing organizations as either stakeholder oriented or shareholder oriented. Yet several studies have suggested that this orientation may be more subtle and firms may also adopt more ‘hybrid models’ of corporate governance (Ponssard et al, 2005; Vitols, 2004; Yoshikawa et al., 2007; Yoshikawa & Rasheed, 2009). This study can be interpreted as a continuation on the study of Bezemer (2010) as the time frame used for this study is from 2004 to 2014, extending the time frame used by Bezemer (2010). Further it addresses the level of shareholder orientation as a ratio variable, taking the possibility of hybrid models of corporate governance into consideration. Despite many studies addressing the impact of a shareholder orientation on short-termism, not much empirical research has been performed within this subject. Yet, according to Lazonick and O’Sullivan (2000) corporate governance can have a significant impact on organizations or even whole economies. This study

attempts to partly fill this gap in literature. Therefore, this study tries to answer the following research question:

What effect does shareholder orientation have on short-termism?

3. Conceptual model

3.1. Short-termism

There are many different definitions of short-termism used in literature. However, most literature agrees on the elementary concept of short-termism - “by emphasizing the short-term, individuals or organizations either sacrifice or forgo potentially greater long-term value” (Jackson & Petraki, 2011). The long-term performance of a firm consists of an accumulation of results achieved in the short-term. Often the survival of a firm depends on these short-term results. However, “the course of action that maximizes results in the short-run is frequently not identical to the course of action that maximizes the performance in the long-run” (Laverty, 1996). This is also referred to as the problem of intertemporal choice (Laverty, 1996). The concept of intertemporal choice lies at the heart of short-termism. Within intertemporal choice “the timing of costs and benefits from a decision are spread out over time” (Loewenstein & Thaler, 1989). Because of this diffusion of consequences over time, evaluation of those consequences may be problematic. However, people tend to abstract this evaluation by approach. A commonly used approach to intertemporal choice is the normative approach of ‘discounted utility’, first introduced by Fisher in 1930 (Laverty, 1996). This rational approach identifies intertemporal choice as an optimization problem (Jackson & Petraki, 2011). This means that this approach assumes that there is an optimal trade-off between the long-run and the short-term (Laverty, 1996). Within this approach discount rates function as an instrument to evaluate future returns. With these discount rates future returns are corrected for devaluation and uncertainty that is caused by time (Laverty, 1996).

An alternative framework for studying intertemporal choice is to identify it as ecological rationality (Jackson & Petraki, 2011). Jackson and Petraki (2011) state that “this approach focuses attention on the organizational-level psychological factors that influence how the time horizons and preferences of individuals are created and reinforced within particular settings”. Within this

framework, diversity exists among different authors in the devotion of short-termism to the actors responsible (Jackson & Petraki, 2011). Whereas Narayanan (1985) assigns short-termism to

managers, others state that shareholders may have short-term preferences (Dickerson et al., 1995). However, more recent approaches within the framework of ecological rationality do not make this distinction but focus on the social mechanisms of actors to address intertemporal choice (Jackson & Petraki, 2011).

3.2. Incentives to stakeholders

The agency theory, prevailing within comparative corporate governance, concerns two main

stakeholders within organizations: managers and shareholders. So in order to understand the agency theory in its full context of short-termism it is crucial to understand the interests and backgrounds of these stakeholders.

3.2.1. Managers

Managers are among the most important stakeholders within organizations. This importance is underlined by the fact that they exercise control over the organization. Ultimately, they take decisions concerning the direction of the firm; in the short-term as well as over the long-run (Jackson & Petraki, 2011). According to Porter (1991), it is most ideal if managers act in order to pursue value over the long run. However in previous studies, managers have been accused of having short time horizons and neglecting the importance of the long-run (Narayanan, 1985).

DesJardine and Bansal (2015) state that “some individuals focus on the distant past and others focus on the distant future, whereas others think only a few days away”. However, this is an

oversimplified argumentation and the issue concerning management taking myopic decisions is not this unambiguous. Various studies have shown possible reasons for managers to act myopic

(Jackson & Petraki, 2011). However, it is vital to state that of these reasons, unconscious drivers of managers pursuing a short-term orientation are irrelevant to this study as they can not be examined in the context of the agency theory. Therefore these drivers will not be illustrated.

Probably the most evident arguments for myopic behaviour is derived from the economic perspective on myopia. Within this perspective the assumption is made that managers are receptive to monetary incentives which induces short-term orientation by managers (Jackson & Petraki, 2011). Over the years, monetary incentives became more vital to managers due to economic developments. This started in the 1950s, when many U.S. top managers began receiving stock options as payments. This was due to changes in tax regulations, which made this type of payment attractive. This development made it lucrative for top management to inflate the market value of the stock of their company (Lazonick & O’Sullivan, 2000). On top, managers’ compensations mostly

correlated with their firms’ stock prices, which made inflation of them even more profitable (Matsunaga & Park, 2001). Because the stock market grew during the 1960s and 1970s, stock options accounted for a large proportion within the total pay check of top management. Over the years, this type of compensation became more common and stock-based rewards became regular mechanism for compensation. In the post-World War II decades, when economic times were good, this inflation of stock prices caused prosperity. Profits gained due to this were reinvested in the organization and all stakeholders involved would benefit. When times got worse however, by rising competition and segmentation of organizations, these gains became too small to reinvest in the company, and were used solely as compensation to managers. Organizations were at the other side of the pay check and were downsized to survive (Lazonick & O’Sullivan, 2000). So the high stock prices managers aimed for became a driver of a short-term orientation by managers. By focusing on short-term results and downsizing firms to increase and maintain these results managers were able to line their own pockets. Until today, top management is still paid by equity-based incentive schemes, with myopia as a consequence (Jackson & Petraki, 2011).

In addition to this managers have the ability to increase their earnings as they have substantial influence over their own salaries. By yielding short-term profits and simultaneously underinvesting in long-term tangible assets to boost stock prices they are able to maximize their monetary incentives (Laverty, 1996; Jackson & Petraki, 2011). Besides this direct effect on earnings, boosting current profits also improves the perception about their ability by shareholders since shareholders are not able to observe the choice of project due to dispersed ownership. This rise in reputation also appears to be a driver of short-term orientation by managers and may also increase the managers wages (Narayanan, 1985).

3.2.2. Shareholders

Nowadays, shareholders have a lot of power within companies. Yet this has not always been the case. In the 1970s, developments in the American financial sector promoted the growth of equity-based institutional investing. The focus on supporting long-term investments altered to generating capital gains by trading in corporate and government securities. This was caused by regulatory changes by the SEC and technology changes which made it possible for firms to handle much higher volumes of trade than before. Furthermore, the inflation caused by the oil-crisis in the 1970s generated problems for U.S. financial institutions in managing their financial assets. The response of the U.S. Congress was the ERISA; enacted in 1974. In practice, the implementation of this law made it possible for pension funds and life insurance companies to invest substantial proportions of

their portfolios in risky securities, such as ‘junk bonds’ (Lazonick & O’Sullivan, 2000). Junk bonds were bonds that were considered to be below the investment grade, which meant they had a high risk of default but also a high interest rate as compensation. In the late 1970s it became possible to issue new junk bonds, which made it relatively easy to acquire capital. Because of this, external factors were ideal for institutional investors to participate in hostile takeovers. With the junk bond as their most important weapon, pension funds, mutual funds, and hedge funds created a powerful market for corporal control. As a result, shareholders became more powerful within organizations in the form of institutional investors (Lazonick & O’Sullivan, 2000).

In similarity with managers, several studies have shown that institutional investors are also blameworthy of pursuing short-term results (Chaganti & Damanpour, 1991; Hansen & Hill, 1991; Kochhar & David, 1996; Samuel, 2000). Jackson and Petraki (2011) analyze short-term orientation by institutional investors within a framework of two determining factors; the orientation of the investor and the investment incentives.

Concerning investor orientation investors can either be short-term oriented or oriented towards the long-run. These orientations differ among shareholders, which results in different investment strategies. Often an important factor for determining investor orientation is the level of engagement of the investor with the firm (Jackson & Petraki, 2011). Distinction can me made between acting as an owner or as an actual trader of stock (Hendry et al., 2006). Traders of stock usually have a low level of engagement with the firm and pursue quick and high returns and therefore are often more short-term orientated. Investors that are more engaged in the firm try to exercise voice and are willing to share responsibilities. This engagement usually reflects a more long-term orientation in investments (Black, 1992). Another aspect related to the orientation of the investor is the organisational capacity to evaluate and monitor firms. Traders of stock may lack firm-specific information and as a result find it hard to evaluate the performance of the firm. Therefore, they may prefer monitoring performance through current earnings, which is an easier and more accessible method (Jackson & Petraki, 2011). So in this situation, institutional investors require short-term results as this is their benchmark of firm performance.

Second, investment incentives may arise because of issues caused by the delegation of investment decisions within institutions. Since the investment decision is separated from the preference of the initial investor by this delegation, it can cause conflicts between the principal and the personal incentives of institutional agents (Jackson & Petraki, 2011). Hansen and Hill (1991) state that “institutional fund managers are under considerable pressure from their superiors to perform” and that is why institutional myopic behaviour arises. Since the performance of the fund

managers is frequently evaluated, they can not afford to be long-run orientated (Chaganti & Damanpour, 1991). In other words, the internal governance structure of institutional investors causes a conflict of interests among the different members within the organization and thereby creates short-term orientation.

3.3. Short-termism as a consequence of shareholder orientation

Both managers and investors have specific incentives to having short time horizons. Jackson and Petraki (2011) state that “short-termism is caused by a self-reinforcing and dynamic calibration (shortening) of time horizons produced through the interaction between shareholders and managers, amplified by several roles player by gatekeepers in mediating these relationships”. They continue: “short-termism therefore should be regarded as a social process, in which a certain behaviour is reinforced by the reaction of others” (Jackson & Petraki, 2011). So with this emphasis on

interaction as an important aspect of short-termism, the agency theory requires closer inspection. The classical agency conflict arises when shareholders pursue long-term strategies, but managers act myopically. However, within the shareholder orientation it is argued that the lack of correctly monitoring ability can not be resolved. Therefore, investors may respond by pursuing strategies that do not require them to trust management. This is achieved by demanding higher short-term

dividend payments, which is exactly what happened in the 1980s (Jackson & Petraki, 2011; Lazonick & O’Sullivan, 2000). So actually investors choose to intentionally pursue short-term strategies, partly because the lack of trust in top management. Conclusively, the shareholder

orientation started as a response to the agency problem and was intended as solution to the possible short time horizons of managers. But actually the issue is the adjustment of shareholders to this phenomenon, which in some scenarios does not even exist.

Moreover, Jackson and Petraki (2011) state that if one set of actors has limited power, these situations may lead to isolated cases of myopia. However, with the establishment of the shareholder value orientation approach, the institutional investor has considerably more power over managers (Lazonick & O’Sullivan, 2000). As managers are expected to act in the favours of their

shareholders, which are short-term oriented, managers tend to adjust to their strategies because of this pressure (Chaganti & Damanpour, 1991). When the scenario occurs that both shareholders and managers are short-term oriented, a systematic and self-reinforcing patters of short-termism arises. Jackson and Petraki (2011) namely mention that short-termism “reflects the complex interaction between the incentives and orientations of different stakeholders”. As this occurs, managers try to inflate stock prices by cutting down investment in long-term assets. If this becomes a systematic

feature of an organization, it is referred to as short-termism (Jackson & Petraki, 2011). That is why it is hypothesized that:

Hypothesis 1: Short-term orientation increases with shareholder value orientation.

3.4. The revival of the stakeholder orientation

In recent literature there has been much emphasis on the diffusion of shareholder orientation

towards coordinated economies such as France (Morin, 2000), Germany (Fiss & Zajac, 2004; 2006; Tuschke & Sanders, 2003), and Japan (Jackson, 2003; Yoshikawa, et al., 2007; Yoshikawa &

McGuire, 2008). However, Bezemer (2010) states that over the last years the Anglo-Saxon model of shareholder orientation has been progressively criticized. In addition to that, other studies argue that the ‘conventional’ view of shareholder orientation is challenged by the stakeholder theory (Freeman et al., 2007, 2010; Ulrich, 2008). A temporal decline of the diffusion of a shareholder orientation has already been instigated within the Netherlands due to the internet burst and various corporate governance scandals, according to Bezemer (2010). Bezemer (2010) continues that the backlash of the financial crisis could be of more significant impact. Other research shares this view of the potential rise of the stakeholder theory within the context of the financial crisis. Brown (2010) states that a stakeholder orientation emerges as a response to Wall Street companies held responsible for privatizing gains and externalising losses to innocent stakeholders. Therefore, the second hypothesis of this study is as follows:

Hypothesis 2: Corporate governance is shifting towards a stakeholder orientation.

4. Method

4.1 Study design

The emphasis of this study is on examining a situation or problem by explaining the relationship between variables. Moreover it tries to show a trend within a variable over time. That is why the overall design of this study is explanatory (Saunders et al., 2012). The research strategy in this study is that of archival research. This means secondary archival data is used to conduct the study. Archival data is especially useful to answer research questions that change over time, which is the case in this study (Saunders et al, 2012). The accessibility of this type of data was also an important

motive to select this research strategy. Furthermore, archival data are free of mitigate biases, do not depend on response rates and are often quite reliable (DesJardine & Bansal, 2015). This data however, was collected for a different purpose than what it was used for in this study. This means that these records may not contain the precise information needed to answer the research question and data may be missing (Saunders et al., 2012). Nonetheless, the fact that this data it is a product of the day-to-day activities of organizations makes it useful data to this research (Saunders et al, 2012).

In order to quantify the qualitative data from these data sources content analyses were executed. More specifically, linguistic analyses were used because that type of analysis can quantify the underlying meaning and content of written texts (DesJardine & Bansal, 2015). However, it is impossible to interpret the content within its full meaning, which is a limitation of this analysis. Besides these linguistic analyses, the numbers within the financial statements included in the annual reports were used to gather data concerning the control variables.

4.2. Sample and time frame

The sampled firms in this study included Royal Dutch Shell, Philips, Unilever, AkzoNobel and DSM. These firms were sampled with respect to a combination of two requirements in order to generate a valid sample. The focus of this study is on the entire Dutch economy, so the sampled firms had to best represent this population. The following requirements were met in order to achieve the best possible sample.

The first requirement stated that the firms not only had to be registered in the Netherlands, but also originated in Netherlands. Absence of this requirement could create a sample which generated biased data. This is due to the fact that the shareholder orientation is suggested to originally have started within liberal markets. So any possible previous influence of these markets on the sampled firms can have an impact on the data. By satisfying this requirement these possible influences are attempted to be minimized. Secondly, the firms had to be leading firms within the Netherlands in order to represent the Dutch economy. To define wether firms account as leading firms, firm size was selected to be the dominant factor. Firms that were available for sampling were selected based on size according to Forbes Global 2000 (http://www.forbes.com/global2000/list/ #country:Netherlands). Ultimately all five selected organizations satisfied both requirements.

The time frame used for this study is the 2004 to 2014 research period, which is chosen because of several reasons. First, this eleven year time frame was the largest time frame possible to conduct the study in regarding the availability of the data. For the sampled firms, no historical data

before 2004 was easily accessible. Second, this timespan is considered wide enough to conduct an analysis of trends or permanent changes within the constructs. Since previous studies suggest that a stakeholder orientation is a rising phenomenon within the Netherlands, multi-year data is needed to include these assumptions in this study (Bezemer, 2010). Finally, multi-year data made it possible to isolate the independent variables (DesJardine & Bansal, 2015).

4.3. Data sources

Secondary data in the from of archival data sources provided the data necessary for conducting this research. These data sources were annual reports of the sampled firms. Annual reports are still used as major corporate instruments by Dutch organisations to communicate with their shareholders (Bezemer, 2010). An important requirement was that all the annual reports were written in English in order to provide consistency of the analyzing process. The annual reports were downloaded from the website of ‘jaarverslag.com’ (http://www.jaarverslag.com) or from the official websites of the sampled companies.

The annual reports included statements written by the CEO, the chairman of supervisory, or by both. However, only the statements written by the executive managers were conducted for this study. The distinction between the statements written by chairmen and CEOs could be due to the differences in board structures among organizations. AkzoNobel, DSM and Philips have two-tier board structures, whereas Unilever and Royal Dutch Shell function by a one-tier board system. For the organizations that have two-tier board systems, statements from the chairmen of the executive board of directors, in practical terms the CEOs, were used as data sources. This was done because the CEO is assumed to have the best overview of the daily operations of the organization, whereas the chairman of the supervisory board solely has a monitoring function. To be consistent, statements from the CEOs were used when organizations had a one-tier board structure as well. This meant that the statements of chairmen of the board of supervisory were neglected.

The analyzed textual data in these statements covered all possible text written, except for salutations. So titles and subtitles were included as well within the content analyses. The reason for this is that these data provide valuable information about what facts the CEO wants to emphasize. Exceptions were also made for citations of the writers, because these were consistently double mentioned, as well as in the text as separately in between the lines. Financial statements within these annual reports were used to acquire the data supporting the control variables. This financial data was measured according to its notations within the corresponding annual statements. This

means that the numbers were valued according to the currency rate used within the fiscal statements of the specific years.

4.4. Construct measurements

4.4.1. Short-term orientation

The measurement of the short-term orientation of a firm was based on the method of a similar research performed by DesJardine and Bansal (2015). In this study, linguistic analysis of textual archival data was performed in order to measure organizational time horizons. Short time horizons are considered to be a valid variable to operationalize the short-term orientation of a firm, since short time horizons are likely to lead to corporate short-termism (DesJardine & Bansal, 2015). In addition, DesJardine and Bansal (2015) state that firms are more likely to have a short time horizon if the managers within a firm have short time horizons. So in this study managerial time horizons are considered to reflect the short-term orientation of a firm, despite the fact that this may be harsh assumption.

To execute the linguistic analysis performed by DesJardine and Bansal (2015) they compiled and validated a dictionary of words that reflected the time horizon of managers. The dictionary consisted of words that reflected short time horizons and words that reflected long time horizons. Thereafter, the ratio for organisational time horizon for each transcript was computed by the following formula. A higher ratio indicates a longer time horizon.

Time horizon = # of long time horizon words / (# of short time horizon words + # of long time horizon words)

This exact dictionary as well was the associated formula for computing time horizon used by DesJardine and Bansal (2015) are copied and used in this study in order to analyze the data. The exact word list is stated in the Appendix.

4.4.2. Shareholder value orientation

To measure shareholder value orientation within a firm, again linguistic analyses of the statements within the annual reports are performed. Bezemer (2010) states that “language inside these reports regarding shareholder value is an important reflection of managerial predispositions towards this ‘normative governance paradigm’ (Fiss & Zajac, 2004; Pye, 2002) and of the way in which a firm

publicly presents itself to the capital markets”. However, in contrast to operationalizing short-term orientation, there was no existing dictionary that reflected shareholder value orientation used in previous studies. So in order to operationalize shareholder value orientation, a new dictionary of words reflecting this phenomenon was created. With the method of creating a dictionary used by DesJardine & Bansal (2015) as a major reference, the following three steps were undertaken to obtain a valid word list. The final word list used to measure shareholder orientation is presented in the Appendix.

Step 1. Compiling a comprehensive dictionary of keywords

In order to generate a comprehensive dictionary of keywords, various corporate documents were collected. These included the already gathered annual reports but also sustainability reports and company website releases were collected. After analysis of these documents, a comprehensive list of words was generated consisting of words which either reflected a shareholder value orientation or a stakeholder orientation. Only the words that appeared unanimously in one of the two categories remained in the dictionary, the others were dropped.

Step 2. Validating keywords into context

The software package NVivo was used to asses the frequency of occurrences of each keyword in the statements. Secondly, these appearances were analyzed in their context. Each word was manually checked within its context in order to determine its validity. All words counted were ought to be valid.

Step 3. Computing shareholder value orientation

Shareholder value orientation was computed with the following ratio for each statement. A higher ratio indicated a higher shareholder value orientation.

Shareholder value orientation = 1 - ( # of stockholder value orientation words / (# of shareholder value orientation words + # of stockholder value orientation words))

4.5 Control variables

Possible confounding effects are controlled for through the addition of control variables in the analyses. These control variables are variables that are expected to have an impact on the effect of

the independent variables on the dependent variables. To avoid this, these variables need to be kept constant (Saunders et al., 2012).

With respect to short-term orientation and shareholder value orientation several firm-level control variables were included. Firm size is added as a control variable. Hereby, is taken into account that the size of a firm can provide stability which makes it more comfortable for those firms to focus on the long-term (Groot, 1998). To correct for firm size a natural logarithm of the yearly total sales of each firm was included. In the same context is corrected for firm performance. The better firms perform, the less sensitive they might be to short-term pressures caused by corporate governance (DesJardine & Bansal, 2015) or the less firms tend to “espouse a shareholder value orientation to restore their public reputation” (Bezemer, 2010). Including of a covariate for return on assets resolved this (Bezemer, 2010). Third, there may be a possible confounding effect of the industries the organizations operate in. SIC codes were collected of each of the sampled firms. According to these SIC codes there was no overlap of industries within the sample. Therefore, there was not controlled for industry within this study.

4.6 Analysis

The data consisted of five firms which were observed over eleven years. Given this sample and the research goal, a fixed-effects panel regression model seemed appropriate to test the first hypothesis. The reason for this is that the data is collected of various firms over multiple points in time.

Therefore, all cases are not totally independent. Within a fixed-effects panel data regression is assumed that the organizations are different, but the difference in organizations is probably related to the explanatory variable. The panel data was balanced as all measures were conducted within the same years among the organizations and no measures were missing. In order to test the first

hypotheses, a time lag had been created in the data to test for causality, as it is impossible to identify the direction of a possible effect with a regular correlation. This is referred to as Granger causality. Specifically, the following regression was estimated:

Time horizon = β0 + β1𝗑 Shareholder orientation + 𝐹1 + ɛ

were β0 is the constant and β1 is the model coefficient of the regression. 𝐹1 is the vector of control

In order to test the second hypothesis, descriptives in the form of a table and graph are provided. Next a linear regression is conducted as there was no need to control for fixed or random effects. Specifically, the following regression was estimated:

Time horizon = β0 + β1𝗑 Time+ ɛ

were β0 is the constant and β1 is the model coefficient of the regression and ɛ is the error term.

5. Results

This section will provide the results of the tests regarding both hypotheses. First the descriptives and correlations are provided, after that the models regarding the hypotheses will be discussed.

Table 1 provides summary statistics and correlations for each of the four variables. On average 47 percent of all words relation to organisational time horizon indicated a long time horizon (Time horizon = 0.469). Of the total words regarding either a shareholder orientation or a

stakeholder orientation were 17 percent shareholder orientation related. The standard deviation is 19 percent (SD=0.186) and the standard deviation for time horizon is 16 percent (SD=0.156). In the Appendix tables including the descriptives of firms separately are presented (Table 2 - Table 6).

The Pearson correlation coefficient over all firms between shareholder orientation and time horizon is 0.265 and significant (p<0.05). Within the firms this correlation is signification within Shell (Table 5) and AkzoNobel (Table 2), and respectively 0.778 (p<0.01) and -0.582 (p<0.05). Over all firms, revenues and shareholder orientation have a significant Pearson correlation coefficient of 0.350 (p<0.01). Remarkable is that only within Philips (Table 4) and AkzoNobel (Table 2) correlations between revenues and ROA were significant, respectively 0.663 (p<0.05) and -0.911 (p<0.01).

Results from model 1 are presented in Table 7. Hypothesis 1 was not supported (Model 1: β = 0.093, p>0.05), so according to the results there can not be assumed that a shareholder orientation has an effect on short-term orientation. This is also indicated by the low value of R2_.

Descriptives according to the second hypothesis are presented in Table 8. The means of shareholder orientation over time are presented in a graph as well (Graph 1). According to the formula

computing shareholder orientation, results about stakeholder orientation can be interpreted by the opposite of the results of stakeholder orientation, as they are assumed to be mutually exclusive. So a rise in shareholder orientation can interpreted as a decline in stakeholder orientation. The

descriptives point out that there are no assumptions to accept hypothesis 2. Results from the linear regression (model 2) are presented in Table 9. These results indicate that hypothesis 2 is not

supported either (Model 2: β = 0.000, p>0.05). So according to the results it can not be assumed that there is a shift towards a stakeholder orientation. Again this is confirmed by the low value for R2_.

6. Discussion

6.1. Implications

Since no significant effect was found of shareholder orientation on short-term orientation, it seems that a shareholder orientation does not lead to short-termism, as was proposed. However, this assumption needs to be carefully interpreted, since there could be many possible explanations for the lack of support of this hypothesis.

A possible assumption for not finding the effect of shareholder orientation on short-termism concerns concentrated ownership as a characteristic of the stakeholder orientation. Concentrated ownership is argued to increase the amount of influence within an organization (Aguilera & Jackson, 2003; Bhasa, 2004). This influence is assumed to be exercised by voice, where

shareholders actively engage within firm decision making (Jackson & Petraki, 2011; Black, 1992). However, this study concerns the interaction among shareholders and managers as the main reason for short-termism. As shareholders who exert voice are assumed to pursue long-term profits, the situation of shareholders exerting voice and aiming for short-term profits is not unthinkable. This implicates that, when measuring shareholder orientation as the opposite of stakeholder orientation, a shareholder orientation does not inevitably has to lead to short-termism.

Moreover, Bhasa (2004) states that within the stakeholder orientation, the attention of managers is diversified towards different stakeholders and therefore the focus on shareholders diminishes. A possible consequence of this may be that a stakeholder orientation does not fully address the agency problem between managers and shareholders. As Bhasa (2004) states that

organizations with a stakeholder orientation often have concentrated ownership, the agency problem within a stakeholder orientation is assumed to be settled by concentrated ownership. However, it is a harsh assumption that in every situation a stakeholder orientation is accompanied by concentrated ownership and therefore settles the agency problem. Firms pursuing a stakeholder orientation could as well be controlled by a market for corporate control. Therefore, it is at least considerable that corporate governance does not have direct effect on short-term orientation.

The lack of support for the second hypothesis can be interpreted in various ways. First, the level of orientation towards either a shareholder orientation or a stakeholder orientation could be greatly diversified among organizations. As there are many different views regarding the diffusion of various corporate governance models globally, it is assumable that many organizations have adapted various corporate governance structures. Another implication of the lack of results supporting the second hypothesis could be the indifference of managers towards corporate

governance. As they do not actively pursue either a shareholder orientation or a stakeholder orientation a trend can never be concluded.

6.2. Limitations

Besides analyzing results to existing literature, there also might be methodical problems within the research that may cause these results. One of these possible problems that requires examination is the measurement of specific variables within this study. On forehand was known that measuring both time horizons and level of shareholder orientation could be problematic, as both variables are complex constructs. There is no direct method of conceptualizing both variables, as they can only be approached by close approximation. In the case of managerial time horizon, this study

approaches this construct by measuring expressions of CEOs within annual statements. Jackson and Petraki (2011) however, mention high stock market turnover or low job tenure as indicators of managerial time horizons (Jackson & Petraki, 2011). This may indicate that managerial time horizon can only be approached, instead of directly assessed, by various measures, but the validity of the measure depends mainly on the theory supporting it. The same accounts for shareholder orientation, which can also be conceptualized by approximation. The method used by Bezemer (2010), where two independent raters code annual reports, can be considered as a more precise approximation to capturing shareholder orientation.

When discussing possible methodical issues, the used data sources may also have a significant effect on the results. In this study, the way time horizon is measured is by quantifying qualified information through counting words used in annual statements. The possibility however of CEOs being highly short-term oriented but not expressing this within annual statements is at least considerable. However, the opposite effect can also be true. The reasoning behind this is that the statement within the annual report is mainly addressed to the shareholder. Ironically this illustrates the theory which is used to support this study as the problem of short-termism is supported by the theory stating that shareholders may lack the ability to accurately valuate the performance of managers. Therefore, shareholders may monitor management through short-term results. As a reaction to this, managers pursue short-term profits in order to boost their perceived ability (Jackson & Petraki, 2011). If this theory is sustains, it is assumable that CEOs will purposely provide an excessive number of references to short-term gains within their annual statements.

Furthermore, Saunders et al. (2012) argue that archival data is a valid representation of day-to-day operations. Logically these day-day-to-day operations extrapolate in yearly operations. However, in this specific case, the statement of the CEOs may be written in maybe less than a week, probably

at the end of the fiscal year. Therefore, it is assumable that a measurement at one point in time is not a valid representation for the activities within a whole year. In addition to that, within this study the assumption is made that CEOs represent managers as a stakeholder in an organization. This is a plausible assumption since the CEO is on top of the hierarchal ladder and therefore oversees most of the managerial decision making. However, CEOs are not able to oversee all daily operations and are probably only slightly attached to managers responsible for this. The plausibility of the CEO representing all managers is slightly extreme. Basing managerial time horizon on several managers within the executive board would be more appropriate.

Another methodical problem within the measurement of variables may be the small sample. Data is conducted of five organisations over eleven years. This created a total data set of 55 cases. Within the fixed-effects regression this data was even reduced to 50 cases, and analyzed within five categories of ten cases. However, in order to generate significant results a sufficient sample size is preferred.

7. Conclusion

This study tried to answer the research question: What effect does shareholder orientation have on short-termism?. The answer on the research question based on the results of this study would be that there are no effects of shareholder orientation on short-term orientation. This study attempted to fill an empirical research gap by associating corporate governance to short-termism within the framework of the agency theory. The main focus of this study was on the interaction of the managers and shareholders, which was argued to positively influence short-termism within a shareholder orientation. However results supporting this hypothesis were not found within this study. Secondly, the study aimed to answer the question if there was a shift towards a stakeholder orientation, as suggested in previous literature (Bezemer, 2010; Brown, 2010). No support for this hypothesis was found either.

Contributions for future research could include that the findings in this study indicate that corporate governance can be addressed differently nowadays. As the results in this study may suggest managers being indifferent to common corporate governance models of stakeholder and shareholder orientations. This could be further investigated in future research. An important note has to be made about the method used in this study as it could have several limitations which could indicate the results found. The relatively small sample size and the probably biased method of

measuring constructs could have been of major importance on the findings of this study. It is suggested that future research uses qualitative data as it might be a more reliable way of measuring managerial time horizons and corporate governance. However, hopefully the empirical setting within this study might be of inspiration for short-term future research regarding corporate governance in relation to short-termism, as many questions about these subjects are still unanswered.

References

Aguilera, R. V., & Jackson, G. (2003). The cross-national diversity of corporate governance: Dimensions and determinants. Academy of management Review, 28(3), 447-465.

Aoki, M. (2000). Information, Corporate Governance and Institutional Diversity: Competitiveness in Japan, the USA, and the Transitional Economies. Oxford University Press, Inc..

Barton, D. (2011). Capitalism for the long term. Harvard Business Review, 89(3), 84-91.

Baumeister, C., & Kilian, L. (2015). Understanding the Decline in the Price of Oil since June 2014.

Berle, A. A., & Gardiner, C. (1968). Means. 1932. The modern corporation and private property, 204-5.

Bezemer, P. J. (2010). Diffusion of corporate governance beliefs: board independence and the emergence of a shareholder value orientation in the Netherlands (No. EPS-2010-192-STR). Erasmus Research Institute of Management (ERIM).

Bhasa, M. (2004). Global corporate governance: debates and challenges. Corporate Governance: The international journal of business in society, 4(2), 5-17.

Black, B. S. (1992). Agents watching agents: The promise of institutional investor voice. UCLA Law Review, 39, 811-893.

Brown, M. T. (2010). Civilizing the economy: A new economics of provision. Cambridge Univers

Chaganti, R., & Damanpour, F. (1991). Institutional ownership, capital structure, and firm performance. Strategic Management Journal, 12(7), 479-491.

DesJardine, M. R., & Bansal, P. (2014). Under pressure: How financial analysts and investors contribute to short-termism. Presented at the Academy of Management Conference 2014, Philadelphia.

Dickerson, A. P., Gibson, H. D., & Tsakalotos, E. (1995). Short-termism and Underinvestment: The Influence of Financial Systems. The Manchester School, 63(4), 351-367.

Edmans, A. (2013). Blockholders and corporate governance (No. w19573). National Bureau of Economic Research.

Fiss, P. C., & Zajac, E. J. (2004). The diffusion of ideas over contested terrain: The (non) adoption of a shareholder value orientation among German firms. Administrative Science Quarterly, 49(4), 501-534.

Fiss, P. C., & Zajac, E. J. (2006). The symbolic management of strategic change: Sensegiving via framing and decoupling. Academy of Management Journal, 49(6), 1173-1193.

Freeman, R. E., Harrison, J. S., & Wicks, A. C. (2007). Managing for stakeholders: Survival, reputation, and success. Yale University Press.

Freeman, R. E., Harrison, J. S., Wicks, A. C., Parmar, B. L., & De Colle, S. (2010). Stakeholder theory: The state of the art. Cambridge University Press.

Gelter, M. (2009). The dark side of shareholder influence: managerial autonomy and stakeholder orientation in comparative corporate governance. Harvard International Law Journal, 50(1).

Groot, T. L. (1998). Determinants of shareholders' short-term pressures: empirical evidence from Dutch companies. The European Journal of Finance, 4(3), 212-232.

Hansen, G. S. & Hill, C. W. 1991. Are institutional investors myopic? A time-series study of four technology-driven industries. Strategic Management Journal, 12(1), 1-16.

Hendry, J., Sanderson, P., Barker, R., & Roberts, J. (2006). Owners or traders? Conceptualizations of institutional investors and their relationship with corporate managers. Human Relations, 59(8), 1101-1132.

Jackson, G. (2003). Corporate governance in Germany and Japan: Liberalization pressures and responses during the 1990s. In Yamamura, K. Streeck, W. Eds, The end of diversity?

Jackson, G., & Petraki, A. (2011). Understanding short-termism: The role of corporate governance. Stockholm: Glasshouse Forum.

Kacperczyk, A. (2009). With greater power comes greater responsibility? Takeover protection and corporate attention to stakeholders.

Kochhar, R., & David, P. (1996). Institutional investors and firm innovation: A test of competing hypotheses. Strategic Management Journal, 17(1), 73-84.

Laverty, K. J. (1996). Economic "short-termism": The debate, the unresolved issues, and the implications for management practice and research. Academy of Management Review, 21(3), 825-860.

Lazonick, W., & O'sullivan, M. (2000). Maximizing shareholder value: a new ideology for corporate governance. Economy and society, 29(1), 13-35.

Loewenstein, G., & Thaler, R. H. (1989). Anomalies: intertemporal choice. The journal of economic perspectives, 181-193.

Matsunaga, S. R., & Park, C. W. (2001). The effect of missing a quarterly earnings benchmark on the CEO's annual bonus. The Accounting Review, 76(3), 313-332.

Miles, D. (1993). Testing for short termism in the UK stock market. The Economic Journal, 1379-1396.

Morin, F. (2000). A transformation in the French model of shareholding and management. Economy and Society, 29(1), 36-53.

Narayanan, M. P. (1985). Managerial Incentives for Short-term Results. The Journal of Finance, 40(5), 1469-1484.

Peterson, G. D., Cumming, G. S., & Carpenter, S. R. (2003). Scenario planning: a tool for conservation in an uncertain world. Conservation biology, 17(2), 358-366.

Ponssard, J. P., Plihon, D., & Zarlowski, P. (2005). Towards a convergence of the shareholder and stakeholder models. Corporate ownership and control, 2(3), 11-18.

Porter, M. E. (1991). Capital disadvantage: America's failing capital investment system. Harvard business review, 70(5), 65-82.

Pye, A. (2002). The changing power of ‘explanations’: Directors, academics and their sensemaking from 1989 to 2000. Journal of Management Studies, 39(7), 907-925.

Samuel, C. (2000). Does shareholder myopia lead to managerial myopia? A first look. Applied Financial Economics, 10(5), 493-505.

Saunders, M., Lewis, L., Thornhill, A. (2012). Research methods for business students. Harlow, England: Pearson Education Limited.

Tuschke, A. and Sanders, W.M.G. (2003). Antecedents and consequences of corporate governance reform: The case of Germany, Strategic Management Journal, 24, 631-649.

Ulrich, P. (2008). Integrative economic ethics: Foundations of a civilized market economy. Cambridge University Press.

Vitols, S. (2004). Negotiated shareholder value: the German variant of an Anglo-American practice. Competition and Change, 8(4), 357-374.

Yoshikawa, T., & McGuire, J. (2008). Change and continuity in Japanese corporate governance. Asia Pacific Journal of Management, 25(1), 5-24.

Yoshikawa, T., & Rasheed, A. A. (2009). Convergence of corporate governance: Critical review and future directions. Corporate Governance: An International Review, 17(3), 388-404.

Yoshikawa, T., Tsui-Auch, L. S., & McGuire, J. (2007). Corporate governance reform as institutional innovation: The case of Japan. Organization Science, 18(6), 973-988.

Words regarding shareholder orientation shareholder shareholders stockholder stockholders investor investors

Words regarding stakeholder orientation

stakeholder government stakeholders governments employee employees staff staff member staff members trade union trade unions works council works councils supplier suppliers producer producers customer customers consumer consumers client clients humanity community communities society societies environment environmental environmentally social socially sustainable sustainability