TO WHAT EXTENT IS CHANGE COMMUNICATED BY
CEOS EFFECTIVE FOR CORPORATE REPUTATION
IN TIMES OF CRISIS?
Master Thesis, MSC Human Resource Management University of Groningen, Faculty of Economics and Business
TO WHAT EXTENT IS CHANGE COMMUNICATED BY
CEOS EFFECTIVE FOR CORPORATE REPUTATION
IN TIMES OF CRISIS?
ABSTRACT
The 2008 financial crisis had a great effect on companies, and their reputation. In this study it is researched what effect the crisis had on CEO communication, focusing on change and how this affects corporate reputation. The age of the CEO is used as a moderator in this relationship, because previous research found that the risk-taking behavior and innovativeness of CEOs is influenced by age. Now it is researched whether this also entails that they differ in communicating change. The aim of this study is to see whether CEO change communication moderates the relationship between the financial crisis and corporate reputation and to find out whether CEO age has an influence on the change communication after the crisis. 154 Fortune 500 companies were used in this study, using their annual reports and most admirable ranking. Results show that there indeed is a significant lower corporate reputation after the crisis. However, the results show no significant role for CEO communication, nor for the moderating role of CEO age. Nevertheless, the results still show useful insights, it was found that after the crisis, there was less change communication. The results differ per industry, indicating that industries cope with change and crisis differently.
TABLE OF CONTENTS
Abstract……….2
Table of Contents……….3
Introduction………..4
Theoretical Background.……….8
Financial Crisis 2008 and Corporate Reputation……….8
Financial Crisis 2008 and CEO Communication………10
CEO Communication and Corporate Reputation………..11
Influence of Age on relationship Financial Crisis 2008 and CEO Communication………..12 Methodology………...15 Data collection………15 Variables……….15 Data analysis………...17 Results……….18
Discussion and Conclusion...……….23
References…...………27
INTRODUCTION
The reputation of organizations is essential for the survival of firms and can be regarded as a strategic asset (Ferguson, Deephouse & Ferguson, 2000). When an organization has a good corporate reputation, it means that the organization has approval and acceptance from its stakeholders (Watson, 2007). When corporate reputation is used as a strategic advantage, it can lead to the firm becoming more competitive, which enhances the bargaining power of the firm as well (Watson, 2007). The CEO of the company has a great influence on this reputation, because this person controls the policy decisions made by the organization and is the spokesperson of the firm (He, Cordeiro & Shaw, 2015).
As this study focuses on the relationships between the 2008 financial crisis, CEO change communication and corporate reputation, it is expected that change is communicated more after the crisis, however, this might not hold for every CEO. Results from previous studies show that older CEOs do not like to take risks, while younger CEOs are more eager to take risks and are more innovative (Vroom & Pahl, 1971). It might be possible that these indications of change behavior differ regarding the age of the CEO, meaning that there is a difference to which extent change is communicated by younger and older CEOs (Minola, Criaco & Cassio, 2014; Vroom & Pahl, 1971). Past research has been done on how CEO tenure could possibly influence the relationship of crisis with change communication (Musteen, Barker & Baeten, 2010). However, this study will add to the literature by investigating whether there is a difference in change communication depending upon the age of CEOs at times of economic crisis and what influence this has on the reputation of the firm, after the financial crisis of 2008. It is found that the age of a CEO has implications concerning the amount of acquisitions (Yim, 2013), which is related to innovation and change, therefore it would be interesting to see whether older and younger CEOs are communicating change to a different extent (Shull & Hanweck, 2002).
communication is researched together with corporate reputation, where CEO communication will be the mediator. Since the 2008 financial crisis has led to a need for change, it is expected that when this change is communicated to stakeholders, that this has a positive influence on the reputation of the firm (Craig & Brennan, 2012; Peni, 2014; Hui & Matsunaga, 2015). Lastly, the age of the CEO is also considered in this study. It is investigated whether there is a difference in the way CEOs communicate change, based on their age. It is found that older people are more risk adverse, whilst younger CEOs have more groundbreaking ideas, therefore it is expected that the younger a CEO is, the more change will be communicated after the 2008 financial crisis (Vroom & Pahl, 1971; Graham, Harvey & Puri, 2010). A graphical display of the variables used in this study can be found in Figure 1. The research question of this study will be as follows:
Is the effect of the financial crisis of 2008 on corporate reputation mediated by whether the CEO is communicating change in formal documents and is this communication style after the crisis influenced by CEO age?
In summary, this study will add to the literature that it shows whether the 2008 financial crisis has an effect on corporate reputation, whether the 2008 financial crisis has an affect on the amount of change words a CEO communicates, whether communicating change after the 2008 financial crisis has a positive effect on corporate reputation and whether the age of the CEO moderates the relationship between the 2008 financial crisis and CEO change communication. After conducting this research it will be clear whether CEO age has an influence on the communication of change. Practically, the benefit of this study is that it shows whether it is effective to communicate change after the financial crisis of 2008 and the role the age of a CEO plays here.
THEORETICAL BACKGROUND The Financial Crisis of 2008 and Corporate Reputation
A crisis can be defined as: “a major unpredictable event that has potentially negative results” (Barton, 1993, p. 2). As Claessens and Kose (2013) point out, a financial crisis can be seen as a multidimensional event that does not have one single indicator, however it is found that changes in credit and asset prices, balance sheet problems and difficulties with financial mediation are common indicators of a financial crisis. This means that the origin of a financial crisis differs per crisis as each crisis has different
causes to start (Lönnberg, Ögren & Rafferty, 2011). In this study, the focus will be on the financial crisis of 2008, since this crisis was the largest economic disruption since the Great Depression from the 1930s (Adebambo, Brockman & Yan, 2015; Zhao, Jiang & Li, 2015). The consequences of this financial crisis were immense; banks were bought out by governments, financial institutions went bankrupt, stockprices decreased enormously, while unemployment numbers increased (Adebambo et al, 2015). Therefore, this recent financial crisis affected many organizations globally (Grieve & Provost, 2012).
good corporate reputation improves customer trust towards the company (Keh & Xie, 2009). All of the benefits discussed above contribute to building a competitive advantage for the firm (Melo & Garrido-Morgado, 2012).
An effect of the 2008 financial crisis was a strong decrease in stock prices, this has led to lower revenues for organizations and a reduction of their net value (Raithel, Wilczynski, Schloderer & Schwaiger, 2010). The consequence of this was, that some organizations had to lay off personnel, in order to lower costs to ensure survival (Athey, 2009; Sorensen & Robinson, 2009). This dismissal of employees has a negative effect on the reputation of the firm (Barnett & Hoffman-Ross, 2008). This is caused due to the decreasing motivation of the remainders in the firm, since their collegues have been fired and therefore the commitment of the employees staying with the firm reduces and their trust in the firm decreases (Wayhen & Werner, 2000; Brockner, Grover, Reed, De Witt & O’Malley, 1987). According to Flanaghan and O’Shaughnessy (2005) all of the above led to a lower customer perception of the firm and therefore decreases its reputation after a financial crisis. For example, when a firm had a good reputation in the beginning, but had to lay off personnel as a consequence of the financial crisis of 2008, this had a negative impact on the social considerations within the firm its strategy (Fombrun, 1996). As an effect, this reduced the morale and the motivation of the employees, but it also negatively impacted the way outsiders view this firm, lowering the corporate reputation of the company (Fombrun, 1996). This is in accordance with the expectancy violations theory (Sohn & Lariscy, 2015). This theory shows that when negative aspects of the organizations are known, for example a big lay off or lower stock value, that shareholders are influenced by this disconfirming information that they have received (Sohn & Lariscy, 2015). Companies are perceived as a social actor, and therefore shareholders hold the company accountable for its actions, which in the end will reduce their corporate reputation, when actions are negative to expactations (Sohn & Lariscy, 2015). The following hypothesis is based on the theory provided above:
The Financial Crisis of 2008 and CEO Communication
As was discussed above, the financial crisis of 2008 had far-reaching consequences for organizations worldwide, with decreasing stock prices, rising unemployment and lower net worths of the organizations (Adebambo et al., 2015; Zhao et al., 2015). As this particular crisis had great implications for the organizations affected, there was a need for change (Paulet, Parnaudeau & Relano, 2015; Gendron & Smith-Lacroix, 2015). Companies were forced into making changes in order to ensure the firm its survival and in order to be financially viable, by cutting costs, which corresponds with the prospect theory described above (Athey, 2009; Sorensen & Robinson, 2009; Kahneman & Tversky, 1979). As Gersick and Hackman (1990) point out, changes in the organization are present due to extraordinary events, like for example a financial crisis. Since the organization could gain from making changes after the beginning of the 2008 financial crisis in order to survive, and there was a need to do so, CEOs would communicate this back to their stakeholders, to give them the impression that the firm was going to change certain policies (Gendron & Smith-Lacroix, 2015; Van Halderen, Bhatt, Berens, Brown & Van Riel, 2014). These changes that were communicated by the CEO in the annual reports, had to be implemented for real, in order to survive (Athey, 2009; Sorensen & Robinson, 2009). This means that in periods of economical declines, change is preferred (Schulz, 2008; Gersick & Hackman, 1990). As prospect theory describes, change is preferred in this situation because it could lead to more gains for the organization (Kahneman & Tversky, 1979). In order to have full disclosure, a CEO can choose to communicate these proposed changes in their organizational policy in times of a financial crisis that are necessary to ensure survival of the firm to its stakeholders (Hui & Matsunaga, 2015). The explanation leads to the second hypothesis being formulated as follows:
H2: After the 2008 financial crisis, CEOs have communicated in a more change-oriented way in the annual reports, compared to the year before the financial crisis CEO Communication and Corporate Reputation
would have positive outcomes (Paulet et al., 2015). Especially if these changes ensure that companies can survive this economic crisis, stakeholders will support it (Paulet et al., 2015). This is a reason why CEOs would communicate more towards change in their annual reports, because by making changes to ensure that the organization is able to keep its resources and operations, the customer perception of the company, its reputation, will strengthen (Shivinski & Dabrowski, 2016; Paulet et al., 2015). Unpopular decisions had to be made in times of crisis and now companies should try to regain trust of stakeholders by making some changes within the organization (Athey, 2009; Sorensen & Robinson, 2009). By acting in a way that stakeholders prefer, in this case that means implicating change that makes sure that the organization will remain viable, the firm can repair the trust as they are perceived to be willing to make an effort and take responsibility for results from the past (Keh & Xie, 2015; Fombrun, 1996). This will have positive effects on the corporate reputation (Keh & Xie, 2015). Therefore the third hypothesis can be stated as follows:
H3: When a CEO is communicating more towards change after the 2008 financial crisis, this will have a positive effect on the reputation of the firm after the crisis. The Moderating role of Age on the Relationship between the Financial Crisis of 2008 and CEO Communication
CEO could facilitate this since they are new and inexperienced, which could lead to groundbreaking innovations necessary to overcome the financial crisis and feel comfortable in this changing environment (Buchholtz et al., 2003; Henderson et al., 2006; Chwon, 1960; Hambrick & Mason, 1984; Oshagbemi, 2004). Because of this inexperience and lack of knowledge, younger CEOs do not follow the established paths and have innovative new ideas, they change the status quo and will also communicate this in the section they write in the annual reports (Chown, 1960; Hambrick & Mason, 1984). Which means that younger CEOs will communicate more towards change than older CEOs do in the annual reports of their companies. Therefore the fourth hypothesis of this study is as follows:
METHODOLOGY Data collection
To test the hypotheses in this study, the sections in the annual reports that are written by the CEOs of 154 Fortune 500 Companies (n = 154) were studied. Two annual reports of each company are used, 2007 and 2008. The annual reports of 2008 are published in early 2009, and therefore, it is used to measure the amount of change words after the 2008 financial crisis. The annual report of 2007 is published in early 2008, meaning before the financial crisis began. 97% of the CEOs in this study is male, while only 3% is female. The average age of the CEOs involved in this study is 57 years old (M = 56.98, SD = 6.41). The sections written by the CEO comes in different formats, a letter, a statement or an interview. 178 annual reports had a letter written by the CEO, 115 used a statement, and only 15 annual reports had incorporated an interview with the CEO. While most of these sections were written by the CEO only (83.1%), 16.2 percent used two writers, and in only two annual reports 3 people wrote the CEO section.
Variables
were used. The annual report of 2007 is published in early 2008, which is before the start of the 2008 financial crisis. The annual report of 2008 is published in early 2009, after the beginning of the financial crisis.
Financial crisis The 2008 financial crisis can be regarded as an event, it happened at a point in time and it is known that it affected firms worldwide as was described in the previous section (Adebambo et al., 2015). Therefore, this variable will have two categories; before and after the financial crisis.
Corporate reputation is measured using the ranking of most admirable companies by Fortune of 2010, one year after the beginning of the financial crisis, and the most admirable companies ranking of 2007 (Fombrun & Shenley, 1990). The ranking of 2010 is published in the beginning of 2010 and the ranking of 2007 is published in the beginning of 2007. This means that they contain primarily information from the previous year. Using the rankings of 2007 and 2010, time is provided to see the effects of the annual reports a company has written and what effect it had on the reputation of the organization. This ranking shows the most admired companies perceived by customers. Being an admired company means that the company has a good reputation (Fombrun & Shenley, 1990). By using the scores of companies on the Fortune’s most admirable list, it can be tested what impact the amount of change words and the 2008 financial crisis had on the corporate reputation. Their score in 2010 will be compared to their score in 2007, a year prior to the crisis, to investigate the relative difference and the effect of the 2008 financial crisis.
Age: The age of the CEOs investigated in this study will simply be determined by looking at their date of birth, and as a consequence, establish what age they were at the end of 2008.
difference. Also, there will be controlled for the nationality of the CEO. This is measured with the value of Hofstede’s dimension uncertainty avoidance for each nationality (Hofstede, 1984). The CEOs involved in this study come from all over the world and have different cultures. As each culture has its own features, there might be a difference in the way they communicate, which will be controlled for in this study (Hofstede, 1984). Lastly, there will be controlled for the industry the company is in. The 2008 financial crisis affected one industry more than the other, and that is why there might by cross-industry differences where should be controlled for (Moore & Mirzaei, 2016).
Data analysis
To analyze the executive summaries in the annual reports, the text analysis program LIWC is used. These pieces of text are analyzed on how much they focus on change, measured in a ratio with the total amount of words.
RESULTS
Below, Table 1 can be seen which describes the mean, standard deviation and correlations between variables. Both the variable communication and reputation have a value of before and after the crisis, this way the variable crisis is represented in the table below. Furthermore the only control variable that can be found in this table is CEO nationality. The control variables CEO gender and Company industry will be researched, although they are not visible in this table, due to the categorical nature of these variables. The indications of this table will be researched more thoroughly when the hypotheses are tested.
The first hypothesis, The 2008 financial crisis has led to lower corporate reputations for companies, was tested by using a repeated measures Anova. The reputation ranking of companies in the Fortune 500 (n = 154) were measured before (2007) and after (2010) the 2008 financial crisis. The results of the Anova showed a significant difference of the measure reputation before and after the 2008 financial crisis as can be seen in the table below. It can be concluded that the reputation in 2010 (M = 5.84, SD = 0.82) is indeed significantly lower than the reputation in 2007 (M = 6.10, SD = 0.82). Therefore, the first hypothesis is accepted. However, as can be concluded by testing the control variables, it shows that this effect on reputation differs per industry. This was especially the case in the engineering, delivery and the banking industry. TABLE 2: Dependent variable: reputation
Model 1 Model 2 Wilks’ Lambda F p Wilks’ Lambda F p Crisis 0.93 11.78 0.00** 0.07 0.99 0.91 0.34 0.00 CEO nationality 1.00 0.32 0.57 0.00 CEO gender 0.99 1.08 0.30 0.00 Company industry 0.61 3.52 0.00** 0.39 ** p < 0.01
the amount of change words significantly differs in 2007 (M = 2.54, SD = 0.06) from the amount of change words in 2008 (M = 2.15, SD = 0.06). It shows that more change-related words were used in the annual report from 2007 than in 2008, however, it was hypothesized in the opposite direction. Consequently, the second hypothesis will be rejected. As can be seen in the table below, this relationship also differs per industry; especially the entertainment industry and megabanks communicated less change after the 2008 financial crisis.
TABLE 3: Dependent variable: CEO communication
Model 1 Model 2 Wilks’ Lambda F p Wilks’ Lambda F p Crisis 0.82 34.84 0.00** 0.19 0.97 3.88 0.05* 0.03 CEO nationality 1.00 0.03 0.86 0.00 CEO gender 0.98 0.42 0.52 0.00 Company industry 0.77 1.70 0.04* 0.23 ** p < 0.01 * p < 0.1
regressed with the change in corporate reputation (2010-2007). As can be concluded from the table below, there is no significant relationship between the change in CEO communication and the change in corporate reputation. This implicates that the relationship between the 2008 financial crisis and corporate reputation is not mediated by CEO change communication. Therefore, the third hypothesis can be rejected. TABLE 4: Dependent variable: change in corporate reputation
Model 1 Model 2 B t p B t p Communication 0.17 0.189 0.85 0.03 0.32 0.75 CEO nationality -0.00 -0.19 0.85 CEO gender -0.41 -0.90 0.37 Company industry
There is controlled for company industry, however, this did not lead to significant outcomes. Due to its extensiveness is not shown in the table above.
DISCUSSION AND CONCLUSION
Summarizing the results in the previous section, it can be concluded that the 2008 financial crisis has led to organizations having a lower corporate reputation. As a result, the first hypothesis was accepted. It was also found that there is a significant relationship between the 2008 financial crisis and the communication of change. It was expected that a CEO would communicate more change words after the 2008 financial crisis, however the opposite direction was found; CEOs communicate less change after the 2008 financial crisis, rejecting the second hypothesis. The third hypothesis, which tested the mediating role of change communication on the relationship between the 2008 financial crisis and corporate reputation was rejected as well. It was found that the crisis had a significant influence on the use of change words, although this was in a different direction. However, no significant relationship was found between change communication and corporate reputation. Lastly, the fourth hypothesis tested the moderating effect of CEO age on the relationship between the 2008 financial crisis and CEO change communication. This moderating effect was not found, meaning that age does not significantly influence the relationship between the crisis and the use of change words. The fourth hypothesis was rejected.
The first hypothesis, which believed that the 2008 financial crisis has had a negative impact on corporate reputation, was accepted. As explained in the theory section, this is because of the unpopular changes companies had to make, to survive this crisis (Barnett & Hoffman-Ross, 2008).
Bozzolan & Michelon, 2015). This corresponds more with the threat-rigidity theory, than the proposed prospect theory, because the organization is unable to change (Staw et al., 1981). Another explanation might be that although organizations wanted to implemented changes, that they did not have the financial resources to do so. The financial crisis 2008 has led organizations to cut costs, in order to survive (Raithel, et al., 2010). Companies had to deal with lower revenues en lower net values, therefore it is possible that they could not finance the changes an organization wanted to implement (Raithel et al., 2010). This is also in lign with the threat-rigidity theory, as the organization is unable to change (Staw et al., 1981). These are both possible explanations to why there were less change-related words in the annual reports after the crisis. It is possible that both approaches have a combined effect on this.
The third hypothesis is rejected as well. The relationship between the 2008 financial crisis and change communication was already tested significant in the opposite direction in hypothesis two. The explanations stated above apply here as well. The other part of the third hypothesis tested whether more change words were used after the 2008 financial crisis and whether this would have positive effect on the corporate reputation This test was not significant either. This could be because of corporate reputation being a broad variable. It is influenced by a lot of things. Not only is corporate reputation influenced by CEO communication, it is for example also influenced by the extent to which an organization considers social corporate responsibility (Alon & Vidovic, 2015), other forms of communication, like for example online, social media communication by the company (Floreddu, Cabiddu & Evaristo, 2014), trust and consumer loyalty (Walsh, Mitchell, Jackson & Beatty, 2009), and financial performance (Gopalan, Nanda & Yerramilli, 2011).
Based on the conducted research, it is now possible to answer the research question: Is the effect of the financial crisis of 2008 on corporate reputation mediated by whether the CEO is communicating change in formal documents and is this communication style after the crisis influenced by CEO age? To conclude, there indeed is a significant difference between the reputation of companies in 2007 and 2008. However, this relationship is not mediated by the extent to which CEOs communicate change in the annual reports. Also the extent to which change is communicated by CEOs after the crisis is not affected by the age of the CEO.
The practical implications of these study is that these results show that organizations should be aware of their corporate reputation after a financial crisis. However, it can be concluded from the study that they cannot maintain a good reputation by communicating change only. It is also found that the age of a CEO does not influence the amount of change words that is communicated after the financial crisis.
A limitation of this study could be the years that were used to measure reputation and change communication. Reputation and change communication were both measured in 2007, the year before the crisis. However, for change communication the annual report of 2008 was used, while for reputation the ranking of Fortune’s most admirable companies of 2010 was used. Perhaps it is the case, that it takes longer for companies to focus on change and to rebuild their reputation. If this were to be the case, it would be better to measure change communication and corporate reputation after the crisis later in time. Another limitation of this study could be that reputation was measured using the Fortune’s most admirable ranking. This limited the study to only using Fortune 500 companies. A companies reputation could also be measured in a different way. For example, a questionnaire to test how certain companies are perceived by the external environment. This could also increase the scope and make the outcomes more generalizable, because the study would not be limited to Fortune 500 companies.
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APPENDIX A ‘Change’ Dictionary
Transformation Intervenion Change Vision
Adding Added Growing Grown
Advancing Advanced Introduction Introduce
Build Forward Milestones Birth
Built Building Forwarding Milestone Changes Coaches Improvement Improved Changing Envision Visioning Envisioned Develop Developed Developing Progression Development Progress Advancement Intend Enhanced Enhancement Enhancements Enhancing Enthusiasm Eager Revolution Growth Facilitate Facilitated Facilitating Coach Facilitation Coaching Improve Stimulate Founding Training Nurturing Trained Improving Stimulation Stimulated Stimulating Innovation Transform Transformed Transforming Intention Innovate Innovating Innovated Intervening Intervene Intervened Changed
Introduced New Newly Enahnce
Light Add Grow Foundation
Nurtured Idealistic Idyllic Promoting Promoted Promote Enthussiastic Revolutionize
Train Nurture Ideal Promotion
