THE EFFECT OF HOME-COUNTRY
MANAGEMENT STYLES ON ENTRY
MODE DECISION:
A COMPARATIVE CASE STUDY OF LEHMAN
BROTHERS AND RABOBANK
University of Groningen
International Business and Management Faculty of Economics and Business
Nettelbosje 2 9747 AE Groningen The Netherlands
October, 2011
By
2
Abstract
This study explores the effect of management styles, as a home-country level antecedent, on the entry mode decisions of MNE’s. In particular it focuses on risk-taking behavior as a component of management styles with respect to a high-risk entry mode type, namely acquisitions. This is done by describing the role of nationality characteristics of management styles which could explain differences in managerial decision making. Therefore a comparative case study, of an organization with an Anglo-Saxon management style and one with a Rhineland management style, is designed. Based on this study it is argued that competition and payments structures, as nationality characteristics of management styles, positively influence the decision of organizations to opt for high risk acquisitions.
3
Preface
This thesis is the end result of my Master International Business and Management at the University of Groningen. For the last eight months of my Master’s, I researched the effect of home-country
management styles on the entry mode decision of multinationals. Writing this thesis was a bumpy ride, with ups and downs, but it gave me the opportunity to develop myself as an academic student, which will be of great experience for the rest of my career. I would like to thank a number of people for their support during my thesis.
First of all, I would like to thank my supervisor Miriam Wilhelm for here guidance and feedback during the process. In addition, you really helped me to create balance and consistency between the literature review and the case study, which was very helpful for me.
Second, since this study is the end of my study career, I would like to thank my family for their moral and financial support during my years on the University of Groningen.
Last but not least, I would like to thank my girlfriend. Her unconditional support, cooperation and patience during difficult times gave me the motivation to proceed with my thesis.
4
Table of Content
1. INTRODUCTION ... 5
2. THEORETICAL FRAMEWORK ... 8
2.1 Antecedents of entry mode ... 8
2.1.1 The role of management styles on market entry mode decisions ... 9
2.2 National differences of management style ... 11
2.2.1 Risk-taking behavior as a dimension of management style ... 12
2.2.2 The role of nationality characteristics on risk-taking behavior ... 15
3. METHODOLOGY ... 18 3.1 Research design ... 18 3.2 Data collection ... 19 3.3 Analysis... 21 4. CASE ANALYSIS ... 22 4.1 Case introduction ... 22
4.1.1 History of internationalization at Lehman Brothers ... 22
4.1.2 History of internationalization at Rabobank ... 24
4.2 Anglo-Saxon management style at Lehman Brothers ... 27
4.2.1 Type of acquisitions at Lehman Brothers ... 28
4.2.2 Nationality and risk-taking behavior at Lehman Brothers ... 29
4.3 Rhineland management style at Rabobank ... 32
4.3.1 Type of acquisitions at Rabobank ... 33
4.3.2 Nationality and risk-taking behavior at Rabobank ... 36
4.4 Comparative analysis ... 39
5. DISCUSSION ... 42
5.1 Working propositions and interpretation of the findings ... 42
5.2 Contributions... 45
6. CONCLUSION ... 46
7. LIMITATIONS AND RECOMMENDATIONS FOR FURTHER RESEARCH ... 48
5
1. INTRODUCTION
The choice of market entry modes has received considerable attention since the beginning of IB research. It has been considered as one of the most important strategic decisions in the internationalization process of organizations (e.g., Wind & Perlmutter, 1977; Anderson & Gatignon, 1986; Hill et al., 1990 and Brouthers & Hennart, 2007). Organizations can enter countries ranging from contractual modes such as direct exports or licensing, to equity modes such as joint ventures, alliances, Greenfield startups and acquisitions (Jagersma, 2005). All of these modes represent varying levels of degree of control, resource commitment, and investment risk to the MNE, which makes the entry mode choice a critical element in international expansion (Rodriguez et al., 2005). Prior work on the entry mode literature has taken two different paths. First, a considerable number of scholars emphasized certain post-entry, management and performance aspects of different entry modes, such as joint ventures, alliances, Greenfields and acquisitions (e.g., Cray 1984; Woodcock, Beamish, & Makino 1994; Yan 1999). Second, the main stream of research has studied the antecedents of entry mode decisions, where some studies date back to the beginning of the 1960s (Hymer, 1960) and scholarly interest have sustained ever since (e.g., Dunning 1977; Anderson & Gatignon, 1986; Kim & Hwang 1992; Herrmann & Datta 2002; Morschett et al., 2010). While many studies have focused on the host-country level antecedents, only limited attention has been paid to the home-country level antecedents (Morschett et al., 2010).
6 different risks. An understanding of how different management styles affect decision making with respect to risk is important to an organization’s operations, since it has implications for the successful development and implementation of certain internationalization strategies.
One problem which may explain why prior studies have not researched the effect of home country’s management style on entry mode decisions is that they overlooked the dimensions of management styles which may influence entry mode decisions. For instance, Khandwalla (1977) asserts that an organization’s management style comprises five dimensions, namely the management team’s attitude towards risk taking, participation in decision-making, optimization, coerciveness and flexibility (mechanistic or organic). As these dimensions might affect decision making in different ways and therefore it is deemed an important dimension with respect to entry mode decisions (Pablo et al., 1996). The reason why this research focuses on risk as a dimension of management styles is that risk is more directly linked with entry mode decisions as discussed above. According to March and Shapira, (1987, p. 1410) there is convincing evidence that perceived risk plays a more vital role in managers’ ultimate decisions than purely normative or otherwise objective risk assessments. Having such a theory would be of great practical relevance, since the forecast is that management styles will never fully converge (Hofstede, 1983) and more and more organizations expand the scope of their activities beyond national frontiers (Jagersma, 2005).
Therefore, the aim of this theory is to extent the existing management style theory by linking the risk dimension of management styles with actual entry mode decisions. The objective is to show causality between a particular management style and the risk taking behavior associated with entry mode decisions. This research will focus on the two most dominant management styles to date: the Anglo-Saxon and Rhineland style. The Anglo-Saxon model is embedded in the management styles of the US and the UK, while the Rhineland model is rooted in the German and Dutch management styles (Bakker et al., 2005).
Finally, this study contributes to the entry mode antecedent’s literature by being the first to focus on the Rhineland- and the Anglo-Saxon style’s actual risk-taking behavior concerning these decisions.
7 MNE’s. To the best of my knowledge this has not yet been done by previous studies. This leads to the following research question:
How does the risk-taking behavior of an Anglo-Saxon management style versus a Rhineland management style effect entry mode decisions of MNE’s?
In order to explore this question I conducted a comparative case study in the banking industry of the US and the Netherlands. The banking industry is traditionally one of the oldest industries on the market indices of these countries. Therefore, it can be argued that this industry is more likely to represent traditional management styles embedded in the national business systems than ‘’younger’’ industries such as high-technology industries. Moreover, the top management team of the organizations which will be investigated are raised either with the values of the Rhineland model or the Anglo-Saxon model. I will investigate this by a case study of an organization with an Anglo-Saxon management style and one of a Rhineland style. This research will focus on the top management team of both organizations, since strategic decisions are made by them. I believe that the findings contribute significantly to both theory and practice by providing scholars and practitioners with a better understanding of how management styles influence strategic choices in the international context.
8
2. THEORETICAL FRAMEWORK
This chapter continues by explaining the role of management styles on entry mode decision. Therefore it will particularly focus on nationality characteristics of management styles in order to explain differences in the risk-taking behavior of the Anglo-Saxon and Rhineland style.
2.1 Antecedents of entry mode
The choice for a particular entry mode has significant implications for organizational performance (Brouthers, 2002) as it determines whether an organization has to share control with a partner or has full control over the new subsidiary (Arregle et al., 2006). In addition, once established, the mode of entry is difficult to change, and has long-term consequences for the organization (Brouthers and Hennart, 2007).
Given its high relevance, many studies investigated the influence of antecedents on the entry mode selection. The antecedents that influence these entry mode decisions are often classified into host country-specific variables, home country-country-specific variables, company-country-specific variables, and venture-country-specific variables (e.g., Hill et al., 1990; Sarkar and Cavusgil, 1996; Malhotra et al., 2004 and Tsang, 2005).
The majority of entry mode literature focused on host country-specific variables. These studies particularly researched the effects of market attractiveness, uncertainty of the host-country, legal environment of the host-country and competitive situation (Morschett et al., 2010). For instance, Brouthers (2002) argues that organizations prefer to enter attractive markets by means of wholly-owned subsidiaries, such as acquisitions, because it is expected that this type of mode provide the greatest potential for long-term profit. Another antecedent which is researched often is the role of uncertainty in the host-country. Morschett et al. (2010) hypothesize that country risk is positively related to cooperative entry modes, such as alliances or joint ventures, rather than wholly owned subsidiaries. They argue that when uncertainty creates a situation where the value of an investment opportunity cannot be accurately predicted, firms should respond by keeping the initial investment low while obtaining an option for future investment and therefore choose for cooperative entry modes.
9 While these studies have made substantial contributions to our understanding of the entry mode behavior of firms, an important gap in the empirical literature is the issue of home country antecedents on entry mode choice. In fact, management styles play an important role in organizations since corporate strategies and decisions are influenced by the top management team’s (TMT) unique management style (Hambrick and Mason, 1984). As a result the entry mode choice is considered as one of the most important strategic decisions in the internationalization process of organizations since it has several long-term consequences for the firm.
In addition, the general opinion seems to be that dissimilarities in management styles among countries will persist (Calori and de Woot, 1994). It can further be assumed that due to these differences in nationality management styles have different orientations towards risk. It is, therefore, not uncommon to find some policies and procedures which are found to be reckless and ‘risky’ to one country’s organization appear to another as normal and justifiable (Koen, 2005). Therefore one may expect that TMT’s with different management styles have different risk taking behaviors when it comes to entry mode choices, since these are associated with different risks. An understanding of how different management styles affect decision making with respect to risk is important to an organizations operations, since it has implications for the successful development and implementation of strategies such as entry mode decisions.
2.1.1 The role of management styles on market entry mode decisions
When organizations decide to enter a new market they have to consider how the firm can best enter a specific market and take into account the risk and environmental factors that are associated with different entry mode strategies (Deresky, 2000). So far, prior research regarding antecedents focused primarily on joint ventures, acquisitions and Greenfield investments. This classification is widely used by other researchers in the area of entry mode strategy (e.g. Ahmed et al., 2002; Brouthers, 1995; Buckley and Casson, 1981).
10 organization’s literature as comprising a number of factors. One of these factors is the management team’s risk taking behavior (Khandwalla, 1977). Management styles are unique to organizations and may differ considerably across countries (Koen, 2005). Therefore it is likely to find differences in risk taking behavior between management styles that influence acquisition decisions.
Beehr and Gupta (1987) define management styles as the prevailing managerial philosophies of the organization. The term refers to the overarching beliefs and values that guide the organizations design and functions. In line with this, Bakker et al. (2005) define a management style as a set of related principles and practices guiding the management of functions such as strategy, production, finance and personnel in an organization.
Scholars subsumed under the non-convergence school emphasize the embeddedness of management styles in their institutional context. In the field of management, the institutional approach is exemplified by the ‘business systems’ approach (Whitley, 1992) and, more recently, the analysis of ‘varieties of capitalism’ (Hall & Soskice, 2001).
11 firms typically engage in more strategic interaction with trade unions, suppliers of finance, and other actors (Hall and Soskice, 2001).
The philosophy and pressures from the two models of capitalism influence executives in the way they lead organizations. Depending on the beliefs and priorities, executives will lead organizations in fundamentally different ways. This influence arises to a great extent because the institutional contexts in which organizations operate are characterized by nationality differences that influence decision makers. Therefore it is essential to take a closer look on national differences that shape the management styles.
2.2 National differences of management styles
Over time important and persisting differences have been identified among developed countries, mainly between the USA and Europe (Guest, 1990). Two forms of capitalism are identified by several researchers which each influence management styles of organizations. One form of capitalism, referred to as the Anglo-Saxon capitalism, stems from the USA and focuses on short-term maximization of shareholder value. This is often classified as ‘neoliberalism’ or liberal market economies as explained above (Avery, 2005). The Anglo-Saxon model is found in several English-speaking countries, Australia, Canada and the UK. This model is characterized by:
• A system that imposes relatively short-term horizons on organizations, but at the same time allows high risk taking.
• A system that imposes strong competition requirements and therefore limits possible cooperation between organizations.
• A company law which is based on a unitary board system (Koen, 2005).
The second form of capitalism is called the Rhineland capitalism. Other terms which are often used interchangeably are stakeholder capitalism or coordinated market economies. This approach is based on the principle of long-term sustainability of the organization and its relation with several interest groups, including employees, suppliers and customers, and the community’s organizations are located in. Cooperation and consensus are important terms in the Rhineland model. Besides the interest of these constituencies are to be balanced against each other in management decision-making (Aoki, 1999). The Rhineland model is typically found in European countries, like Austria, Germany, The Netherlands and Switzerland. This model is characterized by:
• A system that allows long-term financing of organizations.
• A system that enables cooperation to take place between organizations.
12 As experience shows, it is often very difficult for executives from an Anglo-Saxon model to understand the specifics in the decision-making process in the Rhineland model and vice versa (Perlitz and Seger, 2004). The characteristics described above are important to explain differences between the two models. Although long-term v/s short term orientation, cooperation v/s competition and the board structure received considerable attention in the academic literature (Bakker, 2005), the aspect of risk taking behavior is rather limited described. However, according to several scholars risk taking behavior is an important dimension of management styles (e.g., Khandwalla, 1977 and Albaum and Herche, 1999). Moreover, differences in risk-taking behavior can be explained by differences in nationality (Cummings et al., 1971). Therefore the next section will elaborate on the aspect of risk-taking behavior of management styles.
2.2.1 Risk-taking behavior as a dimension of management style
As part of their business lives, managers are involved in risky decisions that have important, long-lasting and far-reaching outcomes. Risky decisions which are made by managers have broad consequences that not only affect themselves, but also the survival of the organization. According to Simon (1960) decision making is the heart of management and risk assessment is the essence of decision making. Therefore it is important to observe the risk taking behavior of different management styles.
As explained previously, Khandwalla (1977) composed a five dimensional framework in order to conceptualize management styles. An important dimension of this framework is risk. In his book, Khandwalla (1977) differentiates between risk taking and risk aversion. He states, that the extent to which management is willing to accept risk affects the choice of decision rules used for choosing among alternatives. Some individuals are risk takers, while others are more risk averse; some are cautious and some are daring; some believe in organic growth while others prefer constant change. Similarly, some organizations – which are assemblages of individuals- demonstrate a risk taking orientation while others show a more cautiously, conservative approach. For instance, a risk taking manager would say ‘’no risk no gain’’, while a risk averse manager would rather hold the boat.
13 The article of Bakker et al. (2005) is another framework which distinguishes several dimensions of management styles. Risk is one of the dimensions which is used to differentiate between management styles. However, their study is different in that they focus on two contrasting management styles with respect to risk. Bakker et al. (2005) argue that Anglo-Saxon management styles are more risk taking while Rhineland style managers are more risk averse.
Based on the information above it seems that the role of risk is an important determinant of management styles. Therefore it is essential to highlight the role of risk in in the existing literature, particular in its relation with decision making since it can be argued that differences in management styles affect executive’s decision making. Before the existing literature will be reviewed a description about the definition of risk will be given.
According to MacCrimmon and Wehrung (1986) risk can be described as a situation where the magnitude and chance of exposure to an outcome make a person worse off than some reference status quo. In line with these arguments, March and Shapira (1987) argue that risk is seen as associated with negative consequences, such as loss. Consistent with the focus on negative outcomes, risk can be defined as the non-zero probability that one or more undesirable outcomes will occur; stated differently, there is some likelihood of a loss (Keil et al., 2000). According to Barki et al., (1993) risk is generally seen as a composition of two components: (1) the probability that a loss will occur, and (2) the significance or magnitude associated with the possible loss. The former component means that an event is considered risky if its outcome is uncertain, but that it may result in a loss. As this probability increases, the risk level increases. The latter component means that the more significant the potential loss, the greater the implied risk. As a consequence, risk generally can be regarded as the combination of the probability of an undesirable event occurring and the magnitude of the loss that is associated with the event (Mellers and Chang, 1994). These two factors have often been used together to define and describe risk (e.g. Sjoberg, 1980; Haimes, 1991).
14 how risks are assessed and what risks are seen as acceptable. Therefore, one can define risk propensity as the tendency of a manager to be risk averse or risk-taking.
There has been relatively little attention to the willingness of people to take risk, however, it is generally proposed that people differ in their willingness to take risks (Fishburn, 1977; MacCrimmon and Wehrung, 1990; Fu, 1993). Besides, risk propensity of decision makers is equally important. Particular since it has been identified as an important determinant of organizational decision making (Bromily and Curley, 1992). There are only a few exceptions that deal with managerial risk propensity (e.g. March and Shapira, 1987, Slovic, 1972, Taylor and Dunnette, 1974 and MacCrimmon and Wehrung, 1986).
Although managerial perception and propensity affect decision making in an organization, there is some evidence indicating that they are related with each other. While prior research has examined the effects of risk perception on decision making (Keyes, 1985; Bromily and Curley, 1992) and the relationship between risk propensity on decision making (Fishburn, 1977 MacCrimmon and Wehrung, 1990) there is a study of Sitkin and Weingart (1995) which examined both constructs in relationship with decision making. These authors found that risk propensity is inversely related to risk perception. This indicates that in order to evaluate risk orientation of managers one has to examine both risk perceptions and risk propensities of managers.
The objective of this study is to focus on risk-taking behavior of management styles, which is the link between perception and action. Although risk received considerable attention in the academic literature, it is argued by Shapira (1995) the relation between decision theoretic conceptions of risk and conceptions of risk held by managers is relatively murky (Shapira, 1995). It has been argued that empirical investigations of decision making in organizations have not generally focused directly on the conceptions of risk and risk taking held by managers (March, 1981). In addition, Vlek and Stallen (1980) argue that empirical investigations of risk in decision making have not generally focused on managerial behavior.
15 important in comprehending how risk behavior varies among managers, some questions remain unanswered. Therefore, the next sections will further explore to what extent other characteristics influence managerial risk-taking behavior. These sections will particular look at the underlying mechanisms of risk orientation, nationality, which has received only limited attention. Yet, efforts have been made to associate risk preference with dimensions of nationality (Bass and Burger, 1979).
2.2.2 The role of nationality characteristics on risk-taking behavior
Managerial risk-taking behavior varies across managers and across context. Therefore it is relevant to research the role of nationalistic characteristics in order to detect differences in their behavior. To date there are few comparative management studies that found some national (country-specific) differences in risk-taking behavior using attitudinal measures (e.g., Cummings et al., 1971; Hopkins et al., 1977; Laughhunn, Payne and Crum, 1980). For instance, the study of Cummings et al. (1971) compared the beliefs of managers from five regional clusters (Greece, Spain, Central Europe, Scandinavia and the USA) on four basic attitudes (risk, self-determination, conciliation and trust). With respect to risk attitude, Cummings et al. (1971) found that American managers exhibited the highest tendency towards risk-taking while the central European executives were the most risk-averse. Similarly, Bass and Burger (1979) reported that risk preferences are higher for U.S. managers than for managers from a number of different countries, such as Germany.
There are several nationalistic characteristics that may explain the differences in risk-taking behavior between managers from the Anglo-Saxon model and the Rhineland model. First, based on the literature of Koen (2005) the Anglo-Saxon model is characterized by a system that fosters competition between actors. The study of Dick (2006) found a positive relation between competition and risk-taking behavior. This study focused on the banking sector and found that under competitive pressures banks tend to foster risk-taking behavior. His study did not distinguish between banks from the Anglo-Saxon countries and Rhineland countries, however based on the literature of Koen (2005) it can be argued that organizations from the Rhineland style foster cooperation instead of competition. Therefore one would expect to see a lower level of risk-taking behavior by managers from a Rhineland model.
16 article of Das en Teng (1997) offers an interesting analysis regarding the relationship between time horizon and risk. They emphasize that highly, risky opportunistic managers are characterized by a stronger short-term thinking. Thus, a manager that is engaged in short-term decisions is more likely to exhibit stronger risk-taking behavior.
Such national tendencies in risk-taking behavior can further be accelerated through certain HRM practices that are common in a specific country. In particular, incentive schemes such as performance-related pay systems may further stimulate risk-taking behavior and short-term orientation. For instance, US based organizations have different pay systems than non-Anglo-Saxon firms. Anglo-Saxon based organizations rely much more on performance-related pay systems, while this is much lower in Rhineland countries, such as Germany and the Netherlands (Bakker et al., 2005). The introduction of performance-related reward systems in the US was stimulated by the decentralized nature of industrial relations, the short-term orientation of organizations and the need to quickly realize a significant return on investment (Koen, 2005). Performance-related pay implies a stimulus of competition between employees to achieve the best performance. This type of reward system is difficult to implement in the Netherlands since it underlying consumptions are in conflict with the Dutch business culture, where a consensus orientation prevails (Heijltjes et al., 1996).
Performance-related pay received considerable attention in the academic literature, particular in relation with risk (e.g., Coffee, 1988 and Mehran, 1995). According to these authors managers are motivated to improve personal wealth and when that wealth is strongly linked to the wealth of firm owners, executives will exhibit risk preferences similar to those of principals by selecting riskier strategic options. On the other hand, when executive compensation is isolated from firm performance, no incentives exist to accept risk. As a result executives will likely exhibit risk averse behavior when choosing among strategic options (Hill et al., 1988; Hill & Snell, 1989). This indicates that in order to assess risk behavior of managers with respect to nationality characteristics, one should look at the type of payment. Studies of executive payment focus particularly on equity payment (e.g., Low, 2009). It is suggested that equity-based compensation aligns the fortune or interest of executives to that of the shareholders of the organization (Jensen and Meckling, 1976). Therefore, executive stock options can encourage managerial risk-taking behavior as increase in stock return volatility increase the value of the executive stock options (Haugen and Senbet, 1981; Smith and Stulz, 1985).
18
3. METHODOLOGY
3.1 Research design
The objective of this research is to link the theory on management styles with research in antecedents of entry mode choices. In particular it focuses on the underlying mechanism of managerial risk orientation as a determinant of management styles. This research is of qualitative nature since theory building is the goal of the study. Qualitative research attempts to increase the understanding of why things are the way they are in the social world, and why people act in the way they do (Hancock 1998; Milliken 2001). The aim of qualitative research is to gather as exhaustive material as possible in order to bring out inconsistencies and contradictions (Alasuutari, 2004).
When theory building is the aim of a research, case studies are often employed since this is one of the best bridges from rich qualitative evidence to mainstream deductive research (Eisenhardt and Graebner, 2007). According to Yin (2003, p. 13) a case study is ‘’an empirical inquiry that investigates a contemporary phenomenon in depth and within its real-life, especially when the boundaries between phenomenon and context are not clearly evident’’ Case studies are rich, empirical descriptions of particular instances of a phenomenon that are typically based on a variety of data sources (Yin, 1984). Moreover, since it is a theory building approach, building theory from cases is likely to produce theory that is accurate, interesting and testable (Eisenhardt and Graebner, 2007). Besides, case studies are commonly used in the management literature, in particular when studying organizations and organizational behavior (Yin 1984).
For this research a comparative case study has been chosen. This comparative case study consists of two cases: Lehman Brothers from the U.S. and Rabobank from the Netherlands. The cases of this research are selected purposefully. According to Patton (1990, p. 169) the logic and power of purposeful sampling lies in the selection of information-rich cases from which issues of central importance to the purpose of the study can be learned. The objective of this multiple-case study is two find contrasting results, which will increase the confidence in the robustness of the theory.
19 Although Lehman Brothers and Rabobank are expected to differ in their management styles, they are comparable in several ways. First, both organizations are selected since they are active in the banking industry in order to control for industry effects. Moreover, since the banking industry is one of the oldest industries in the world it can be argued that the management styles of both organizations are shaped by the national business systems of both countries. Secondly, both organizations are quite large (as measured by total income) and both have native CEO’s who lived a large part of their life in their country of origin. This indicates that they are raised in the business cultures of their own country. In addition, from the six members of Rabobank’s executive board, five were born and raised in the Netherlands. Only one was an outsider, who was born in Brazil, but moved to the Netherlands right after his graduation and started to work for Rabobank (www.rabobank.com). On the other hand, all of Lehman Brothers executives have the U.S. nationality (www.investing.businessweek.com).
The objective of this study is to examine the influence of management styles on the acquisition decisions. To date, the academic literature has no general conceptualization for acquisition risks. In order to differentiate between high risk and low risk acquisitions, this study will look at several characteristics that can differentiate between the types of risk for each acquisition. Therefore it will use existing literature that focused on several characteristics of acquisitions that are related with risks. For instance, some authors differentiate between the risk of domestic and cross-border acquisitions (Mantecon, 2008 and Zaheer, 1995). Others look at the payment structure of acquisitions (financed by cash, stock or debt), or the target country of the acquired company (emerging or developed) (Palepu and Healy, 2008 and Bekaert, Harvey and Lundblad, 2003). A few authors investigated risk with respect to full or partial acquisitions (Duarte and Garcia-Canal, 2004 and Reuer, Shenkar and Ragozzino 2004). Finally acquisition experience is described in previous literature with respect to experience (Haleblian, J. and Finkelstein, S., 1999).
3.2 Data collection
There are several ways to collect data. The two main types are primary and secondary data. This thesis relied on secondary data. The sources used for this research are given below.
Table 1: Secondary data sources
Data source Type of data
Business Source Premier, Lexis Nexis, Google Scholar and Google
20 (Source: Author’s construction)
Although it would have been desirable to do interviews with the executives of both Rabobank and Lehman Brothers in order to reveal managers’ risk perception and orientation regarding their market entry mode decisions, it did not prove to be feasible to conduct interviews with these executives. Thus, this research will rely on existing interviews with the top management level of both organizations, in particularly it focuses on the CEO of both organizations as the unit of analysis. Therefore, a broad range
Existing interviews Rabobank and Lehman Brothers: www.volkskrant.nl, www.mt.nl, www.refdag.nl, www.depers.nl,
www.euromoney.com, and other.
Rabobank website Annual reports, articles, press releases etc.
Books Peterson, P. 2009. ‘’The Education of an
American Dreamer: How a Son of Greek Immigrants Learned His Way from a Nebraska Diner to Washington, Wall Street, and Beyond.’’
In this book, Peter G. Peterson describes a part about his career at and the tumultuous days of Lehman Brothers. Furthermore it deals with the creation of The Blackstone Group, one of the main competitors of Lehman Brothers. McDonald, L.G. 2009. ‘’A colossal failure of
common sense: The Inside Story of the Collapse of Lehman Brothers.’’
21 of existing interviews is used in order to subtract information about the risk behaviors and characteristics of these CEO’s.
3.3 Analysis
22
4. CASE ANALYSIS
4.1 Case introduction
The next sections will continue discussing the findings from the empirical research on the case studies. By applying the literature to the case study this research tries to give new insights on the role of management styles in high or low risk acquisition decision. This is achieved, by specifically investigating the role of managerial risk taking behavior of Lehman Brothers and Rabobank executives and comparing these behaviors with their acquisition choices. The executives of Lehman Brothers and Rabobank are the subject of investigation since they are considered as a reflection of the management styles of both organizations.
4.1.1 History of internationalization at Lehman Brothers
Lehman Brothers was one of the main global financial service organizations in the USA until declaring bankruptcy in September 2008. The organization participated in businesses such as investment banking, private banking, private equity, research and trading. Lehman Brothers headquarters was established in New York. The history of Lehman Brothers traces back to a German immigrant. Henry Lehman opened a small general store in Montgomery in 1844. It was until 1850 when Henry and his brothers, Emanuel and Mayer, founded Lehman Brothers. The company started as a cotton trading company and remained in this business until the late 19th century. From 1887, the first signs of the banking organization became visible when the organization underwrote its first public offering (Harvard Business School, 2011).
The organization became more involved in financial advisory, which provided the foundation for developing the underwriting business in the early 1900s. Since that time Lehman Brothers was involved in the financing of new organizations in emerging industries, such as the motion picture industry, the communication industry and the computer and electronic industry. It was in the 1960s and 1970s when Lehman Brothers began to expand internationally, opening offices in Europe and Asia (Harvard Business School, 2011).
23 Lehman Brothers strategy was based on a strategy of acquiring rather than relying on organic growth, particularly in the years before the organizations bankruptcy. In an interview with Anthony Currie, Fuld stated the he wanted the organization to achieve much more by increasing their revenues from $12 billion to around $20 billion. However, he argued: ‘’these gains will not come from incremental increase, but rather from an expansion in acquisitions’’ (Curry, 2005).
In 2004 the organization was able to acquire Neuberger Berman, after several painful years of sitting on the sidelines. The Neuberger acquisition was the realization of Lehman Brothers diversification strategy by acquiring other companies, which Lehman Brothers had been espousing since the mid-1990s. Until the end of the fiscal year of 2005 this strategy worked out quite well and the financial records reflected sound management. Then the greed of Lehman’s CEO resulted in several acquisitions that were not in the best interest of the organization and its shareholders, but rather in the interest of Fuld. Fuld’s greed led to an approach of maximizing his total compensation (Dagher, 2008).
Table 2 Acquisitions by Lehman Brothers between 2000 and 2008
Year Number of acquisitions
2000 3 2001 2 2002 7 2003 4 2004 6 2005 3 2006 9 2007 10 2008 2
(Source: Author’s construction, based on www.alacrastore.com)
24 Another reason which can explain the high number of acquisitions from in 2006 and 2007 is the increased competition in the real estate business. The competition in this business segment came from a number of US investment banks. Moreover, there was the success of the Blackstone Group that also heavily invested in this segment (McDonald, 2009, p. 229). This organization is specialized in private equity and at that time owned and run by two old Lehman men: Pete Peterson and Stephen Schwarzman. The success of the Blackstone Group caused Lehman Brothers to invest heavily in this business segment by being involved in many acquisitions.
4.1.2 History of internationalization at Rabobank
Rabobank is Dutch cooperative bank with a long history. The roots of the organization lie in the agriculture. Rabobank is a result of the merger of two separate companies, the Coöperatieve Centrale Raiffeisen-Bank in Utrecht and the Coöperatieve Centrale Boerenleenbank in Eindhoven, in 1972. Both separate companies were founded by rural folk who had little access to the capital market and decided to help one another. In 1980 the organization decided to formally adopt the name that it had been using for a long time, Rabobank Nederland. The name comes from the combination of the first two letters of the original organizations. Amsterdam became the legal domicile of the organization (Rabobank, 1).
The idea of the cooperative bank came from Friedrich Wilhelm Raiffeisen. His idea was to collect the savings from the rural population so as to be able to fulfill the local need for credit. The fundamental principles of the co-operatives were: self-help, self-responsibility and self-management. From the first day of operation the concept of the organization proved to be successful. The local member banks knew their customers personally since they were operating at the heart of the community. They had the capability to select creditworthy farmers and keep a close eye on their loans in contrast to town-based banks. As a result, the organization was able to provide their customers with loans with better terms and conditions (Rabobank, 1).
25 2002 the Board of Directors was abolished and the Executive Board was responsible for managing the banking activities. Moreover, the Executive Board was now responsible for serving the interest of the local member banks. Furthermore, the independent Supervisory Board was strengthened in order to control the Executive Board for proper management practices (Rabobank, 1).
A little decade before the change in the governance model of Rabobank, the bank formally established Rabobank International. Yet, international activities of the bank have been part of the organization for a long time. The signs for an international offset of the organization started already in the 1970s, when Rabobank’s business customers began to express a growing demand for services abroad. Rabobank opened offices in Europe, North America, Asia and South America. Moreover, the organization entered into strategic alliances with partner banks in Europe and purchased existing foreign banks, which enabled Rabobank to take it expertise in the field of agricultural sector and consumer banking to promising foreign markets. Apart from the success of Rabobank’s internationalization strategy, the organization believed that the advantages of international expansion are often smaller than argued (Groeneveld and Wagemakers, 2004). As a result its strategy is rather pragmatic and practical and in accordance with Rabobank’s cooperative nature and history. The internationalization strategy of the organization is based on three pillars:
1. Alliances with other European (cooperative) banks.
Rabobank’s strategy within Europe is based on forming alliances with other European banks with an identical concept. Rabobank’s objective is to be a prominent with a European dimension.
2. Enter foreign markets virtually.
The success of internet banking in the Netherlands has inspired Rabobank to export this concept across the border. In 2002 it entered the Belgian market with Rabobank.be. The objective of this concept is to focus on simple products, such as savings and a limited number of investment funds for private households. The difference with other Belgian banks is that this concept offers simple and transparent products with sharp prices.
3. Niche markets
26
Table 3 Acquisitions by Rabobank between 2000 and 2008 Year Number of acquisitions
2000 0 2001 0 2002 2 2003 2 2004 0 2005 0 2006 6 2007 2 2008 0
(Source: author’s construction based on zephyr database)
Rabobank was involved in several acquisitions in the past. These acquisitions were mainly driven by the ambition to become an all finance institution. Another reason for the organization to proceed with the acquisitions of other firms is to strengthen the position on market segments that fall outside the scope of the Rabobank brand, such as the acquisitions of online broker Alex in 2003 (Groeneveld and Wagemakers, 2004). When Rabobank entered the international market 25 years ago, their main focus was to serve large farms and the agribusiness companies. More recently, Rabobank changed it strategy to offer services not only to large companies, but also to smaller agricultural clients internationally and individuals in nonmetropolitan areas of selected countries. The strategy, which is also names ‘’country banking’’ extends Rabobank’s expertise in retail banking to the international market. This strategy has already proven successful in several countries, including Australia, New Zealand and Ireland. Besides, the organization is focusing on the US market, where it acquired several organizations the last decade (Novack and Henderson, 2004).
27
4.2 Anglo-Saxon management style at Lehman Brothers
Whether an organization can be attributed to an Anglo-Saxon or a Rhineland model depends on several characteristics as described by Koen (2005). In order to determine the management style of Lehman Brothers a closer look at these characteristics is needed.
From Lehman Brothers spin-off from American Express in 1994, the organizational changed dramatically. The most remarkable change was its move from the traditional fixed-income business into new businesses such as investment banking (Greenfield, 2010). One of the consequences of the move to investment banking was the fierce competition of other banks in the same segment. Although Lehman Brothers business culture was characterized as highly competitive (Greenfield, 2010), the move to investment banking caused the organization to emphasize this characteristic even more.
By 2001, Lehman Brothers was growing and began to attract a different caliber of senior hires, particularly in the investment banking division. These bankers can be characterized as businesspeople with an ‘’eat what you kill’’ mentality (Greenfield, 2010, p. 33). These seniors where hired by Fuld, because he received the instruction of the Board to take more risk and grasp the market opportunities that appeared. As a result, the business culture which was already based on a transaction oriented system, diverted attention from a long-term strategy. Therefore, the emphasis was placed even more on making short-term results.
Another characteristic which shows that Lehman Brothers leans more towards the Anglo-Saxon management style is because the organizations structure is based on a unitary board. According to Perlitz and Seger (2004) the Anglo-Saxon model is characterized by a unitary board and can therefore be distinguished from the Rhineland model. This is in line with the theory of Koen (2005). In addition, there was no independent board leadership structure at Lehman Brothers since Fuld served as Chairman of the Board and Chief Executive Officer of the organization (www.investing.businessweek.com).
28
4.2.1 Type of acquisitions at Lehman Brothers
Lehman Brothers internationalization strategy was based on diversifying rapidly, rather than relying on organic growth as discussed above. Therefore it needed to diversify, both nationally and internationally. According to Fuld this would be achieved by increasing the number of acquisitions (Curry, 2005). Although acquisitions can be an effective growth vehicle, they are inherently risky, as they are associated with significant uncertainty and a high potential for financial loss (Ravenscraft and Scherer, 1987). Therefore we need to take a closer look at the organizations purchased by Lehman Brothers. Table 4 gives an overview of some companies acquired by Lehman Brothers which will be analyzed in more detail.
Table 4 Worldwide acquisitions of Lehman Brothers
Target Country Deal value Financing method
Full or partial acquisition
Grange Securities Ltd
Australia $95 million n/a Full
Brics Securities Ltd.
India $55 million n/a Full
The Crossroad Groups
United States n/a n/a Full
GLG Partners United kingdom $1.5 billion n/a Full
Neuberger Berman Inc.
United States $2.63 billion Cash/equity Full Archstone-Smith
Trust
United States $22.2 billion Debt (75%)/cash Full (Source: Author’s construction)
29 Second, although Lehman Brothers diversified internationally, most of its acquisitions took place in the United States, particularly the acquisitions that amounted more than a billion dollars. There was one exception, the acquisition of GLG Partners. However, GLG Partners is a UK based organization. There are many similarities between the US and the UK, since both are Anglo-Saxon countries. Therefore, this acquisition can be considered as relatively less risky compared to acquisitions in non- Anglo-Saxon countries.
Third, almost all of the organizations purchased by Lehman Brothers were full acquisitions. Lehman Brothers was involved in several minority stakes in order to diversify, however these stakes amounted less than 50% and most of them even did not exceed the 10% (www.alacrastore.com). The research context of this thesis is based on acquisitions that involve 50% or more ownership, since this is not the case with Lehman Brothers minority stakes they are not considered for further investigation.
Fourth, the acquisitions pursued by Lehman Brothers are financed by means of cash, equity and debt. Equity and cash financing are relatively safe, since they both avoid a leverage-burden of debt (Palepu and Healy, 2008). Debt financing, however, is associated with more risk since it can increase incidence of bankruptcy and create limitation on future growth opportunities (Martin, 1996). The purchase of Archstone-Smith Trust was an example of an acquisition financed by considerable debt. There are indications that Lehman Brothers financed more of their acquisition with debt. For instance, when analyzing the growth of Lehman Brothers, approximately 67.3% of that growth is in long term investments, which were mostly completed through acquisitions. Remarkable, however, is that in the same period the total liabilities increased by approximately 70% (Dagher, 2008). However, only limited data was available regarding the method of payment for Lehman Brothers acquisitions.
Finally, Lehman Brothers diversification strategy was not based on developing countries. Although, they acquired Brics Securities Ltd. from India, most of the acquisitions took place in developed countries. A possible explanation for this is that Lehman Brothers particularly concentrated on investment banking, which offered only limited opportunities in less developed countries compared to developed countries (The Economist, 2010).
4.2.2 Nationality and risk-taking behavior at Lehman Brothers
30 First, it is important to focus on Fuld’s nationality and to what extent this nationality may influence his attitude towards risk. Fuld, who was born and raised in the U.S. by a Jewish family, started his career at Lehman Brothers during his Master of Business Administration when he worked as an intern at Lehman Brothers. Immediately after receiving his MBA Fuld started as a full time employee at Lehman Brothers. He joined the organization in 1969 as a commercial-paper trader. In the early 1980s, at the age of 37, Fuld became supervisor of both the fixed-income and the equity division. More than a decade later he became CEO of the organization after it was spun off by American Express. Interesting is that Fuld never left the organization since his arrival in 1969.
Based on the information above there are strong indications that Fuld is raised with the values and cultures of the American nationality. Competition is one of the characteristics of the Anglo-Saxon business system (Bachmann and van Witteloostuijn, 2009), which also played a major role in Fuld’s career at Lehman Brothers. Fuld’s competitive behavior was primarily based on the success of the Blackstone Group. The Blackstone Group was owned and run by two old Lehman Brothers men: Pete Peterson and Stephen Schwarzman. According to McDonald (2009) there were probably no other men in all of New York whom Fuld would rather see fail. Therefore, Fuld’s competitive drive to success and his objective to outperform these men led to incredible risk taking behavior of Fuld and his second men, Mark Walsh, which was given full responsibility for the firm’s global real estate group. Walsh was characterized as a natural risk taker and Fuld liked that a lot. He particularly liked that Walsh went for high-risk, high-return bridge debt and equity financing for large acquisitions. (McDonald, 2009, p.227 and 229).
Another important characteristic of the Anglo-American business system is the payment structure. The US business system is known for its variable pay systems. According to Bebchuck, Cohen and Spamann (2010), Lehman Brothers payment system was also based on variable pay. They found that on top of their cash salaries, executives received considerable amounts of performance-based cash bonuses. These bonuses were provided on the basis of Lehman Brothers high earnings and stock price increases during those years, with the exception of 2008 when the organization filed for bankruptcy.
31 This culture of excessive bonus distribution grew during the years, particular during the period of Richard S. Fuld.
Based on the book of Lawrence McDonald (2009, p.233) there are arguments that the incentive structure at Lehman Brothers triggered executives and particularly Fuld to take more risks. According to McDonald (2009) and Sam Dagher (Dagher, 2008), Lehman Brothers variable pay system, gave Fuld and other executives the opportunity to maximize their total compensation, which led to more excessive risk taking behavior. Although Fuld received considerable bonuses during his period as an executive, the most important question is whether these bonuses led to decisions that created excessive risk taking behavior. Based on the study of Bebchuk et al. (2010) it can be argued that there is no direct evidence that Lehman Brothers incentive system led to excessive risk-taking by their executives. They argue that even though executives had incentives to take excessive risks, their decisions might have been driven by a failure to recognize risks and thus might have not been affected by those incentives. However, give the structure of executives’ payoffs, the possibility that risk taking decisions were influenced by incentives should not be dismissed but rather taken seriously.
Table 5: Cash bonuses CEO Lehman Brothers
(Source: Author’s construction based on Bebchuck et al., 2010)
Table 5 gives an overview of the bonus distribution at Lehman Brothers for the period 2000 -2008. This is the bonus received by Fuld and it is ranked in cash and equity remuneration. The table shows that differences between cash and equity bonuses are large. The large number in equity bonuses provides
Year Cash bonus Equity bonus
32 evidence for the impact of equity-based compensation on managerial risk-behavior at Lehman Brothers, which is in line with the study of Haugen and Senbet (1981) and Smith and Stulz (1985) who argue that stock options can encourage managerial risk-taking behavior since the interest of shareholders and executives are aligned. Therefore, there are strong indications that Lehman Brothers pay system, which was based on performance-related pay, gave executives the opportunity to take considerable risks in order to enhance their compensation.
Although Lehman Brothers asserts in its annual report of 2007 that it had a culture of risk management at every level of the firm there are strong indications that this might be different. For instance, during the same period the leverage ratio of the organization rose from 26.2 to 1 in 2006 to 30.7 to 1 in the troubled markets in 2007. The figures indicate that Lehman Brothers risk management, which also effected its acquisition decisions, was different than it showed to outsiders in its annual report.
Thus, based on the information above it can be concluded that the payment system and competitive behavior of Lehman Brothers played a significant role in the risk-taking behaviors of its executive. Particularly the incentives received by means of equity may result in more risk taking-behavior by the executive of the organization. This is partially supported by the increase in leverage ratio which indicates that the organization takes considerable risks.
4.3 Rhineland management style at Rabobank
There are many similarities between the cooperative structure of Rabobank and the Rhineland model. For instance, Rabobank’s organization is characterized by a socially oriented business culture aimed at long-term sustainability. Moreover it has a democratic consultative structure, a prudent risk management and a sustainable remuneration policy (Rabobank, 2008), which are all characteristics of the Rhineland model.
33 Based on the information above it seems that many characteristics of Rabobank’s cooperative structure are identical to the Rhineland model. Therefore it can be concluded that Rabobank’s management style pursues the Rhineland model.
4.3.1 Type of acquisitions at Rabobank
Information subtracted from annual reports, databases and interviews show that Rabobank pursued an internationalization strategy which is mainly based on acquisitions. Although they are involved in alliances, joint ventures and Greenfield investments across the world, acquisitions are used as the dominant entry mode strategy.
Rabobank’s internationalization strategy focuses on maintaining and building their leadership position on the food and agricultural sector internationally. The strategy had begun to spawn a string of acquisitions and international business expansions from the 1990s onwards after years of careful preparation and validation (Ederer et al., 2005). Rabobank’s internationalization strategy started in Australia, where they acquired a small bank in the state of Western Australia. The Primary Industry Bank of Australia (PIBA), as it was named, was purchased for $66 million dollar. The investment amounted to about 0,2% of Rabobank’s capital base at that time. Therefore, it can be considered as a relatively small acquisition (Ederer et al., 2005).
Table 6 Worldwide acquisitions of Rabobank
Target Country Deal value Financing
method Full or partial acquisition Primary Industry Bank of Australia (PIBA)
Australia $66 million n/a full
Valley Independent Bank (VIB)
United States $210.5 million Cash Full
Land Lease Agribusiness (LLA)
United States $45 million Cash Full
Ag Services of America (ASA)
United States $47 million Cash Full
Central Coast Bancorp (CCB)
United States $371 million Cash Full
Friesch-Groningse Hypotheekbank
34 (FGH bank)
ACC Bank Ireland $ 147 million n/a Full
Bank Gospodarki Zywnosciowej SA (BGZ)
Poland n/a n/a Partial (59,35%)
Kyivsky Mizhnarodny Bank (KMB)
Ukraine n/a n/a Partial (65%)
(Source: Author’s construction)
A little decade later Rabobank moved its strategy to the US market in order to repeat the Australian success there. The US market was comparable to the Australian since they both had a sizeable segment of large, profitable and sophisticated agricultural organizations that matched Rabobank’s borrower profile (Ederer et al., 2005). After looking around and searching extensively, Rabobank acquired several organizations that fit in their profile. In 2002 they acquired the Valley Independent Bank (VIB) for a total cash purchase price of $210 million. This was a 100% acquisition and involved considerable more money than their first acquisition of PIBA. A year later they made a second acquisition with the purchase of Land Lease Agribusiness (LLA). This involved a total cash price of $45 million. LLA had a good network of loan origination for equity loans, thus adding a unit capable of providing long-term financing to US activities. The purchase of LLA was also based on a 100% acquisition. In January 2004, a third acquisition followed, when Rabobank purchased Agricultural Services of America (ASA) for a total cash price of $47 million. ASA was a specialist in the US market regarding crop financing and was acquired in order to extend Rabobank’s share in the US market.
35 The case of Poland and Ukraine was different. Rabobank found two interesting organizations which would fit seamlessly in their concept. In Poland they acquired Bank Gospodarki Zywnosciowej SA (BGZ) and in Ukraine the Kyivsky Mizhnarodny Bank (KMB). However, these were partial acquisitions. They acquired for BGZ for 59,35%, while KMB was acquired for 65%. Unfortunately there was no information regarding the deal value and the method of finance.
In the meantime, Rabobank also acquired some European companies. One of them was the ACC Bank from Ireland, which was purchased for $147 million. ACC did not entirely fit into Rabobank’s strategy, but the organization believed that Ireland offered a good marketplace where they could own a full-fledged banking presence (Ederer et al., 2005).
When analyzing the type of acquisitions at Rabobank there are some interesting results. First, almost all the acquisitions of Rabobank are financed by means of cash. Cash financing is a relatively safe manner to finance an acquisition since it avoids a leveraged-burden of debt and leads to preservation of the capital structure (Palepu and Healy, 2008). Thus, it seems that Rabobank’s management pursues an acquisition strategy which is based on financing acquisitions by means of cash in order to reduce inherent risks.
Second, most of its acquisitions involve organizations from developed organizations. Although Rabobank is expanding its boundaries to less developed countries such as Brazil and China, they have not yet found interesting takeover objects. This also indicates that their acquisitions strategy is based on taking small, well-considered steps in order to reduce any hasty decisions which may lead to additional risks.
36
4.3.2 Nationality and risk-taking behavior at Rabobank
A explained by prior scholars, nationality is an important determinant of managerial risk behavior (e.g., Cummings et al., 1971; Hopkins et al., 1977). Therefore it is important to look at nationality characteristics that can explain Rabobank’s risk-taking behavior. As a result, this paragraph will analyze the CEO’s background and Rabobank’s payment structure.
Heemskerk grew up in the Dutch city Noordwijkerhout, a Roman Catholic enclave in the province of South-Holland. Although Heemskerk turned out to be a capable banker, there were no indications that he would end up in the financial world. In his younger years, Heemskerk decided to become a Jesuit. Therefore he moved to Germany, where he studied theology and philosophy in Frankfurt and Tübingen. In his final year he moved to France, where he completed his theology study and decided to study economics (Reformatorisch Dagblad, 2011).
Heemskerk started his career at the AMRO bank in 1969 where he worked for 21 years. He left the organization when it merged with ABN and moved to van Lanschot Bankiers in 1990. After a successful career of eleven years, in where he brought the company to the stock market, Heemskerk left van Lanschot. In 2002 he became CEO at Rabobank. At the moment of his arrival there was much chaos in the top of the organization, but under his leadership the rest was quickly recovered.
In 2007, the year that Heemskerk was to retire, the financial crisis broke out and he answered the call to stay longer and help Rabobank to survive these difficult times. As a banker, Heemskerk found it important to aspire for sustainability and community involvement. Therefore, he saw the provision of microfinance to small workers in order to build their own business in underdeveloped countries, as a way to combine the core function of the organization with the support to charities. According to Heemskerk: "There are many ways to stimulate developing countries. You can invest in education or a better constitution. But by investing in the banking sector of a country you are able to give people the opportunity to start a life for themselves without affecting the culture’’ (Reformatorisch Dagblad, 2011). Eventually Heemskerk resigned in 2009 when he was succeeded by Piet Moerland.
37 welfare state, cooperation as coordinating device and long-term relationships. These countries may be viewed as consensus economies (Delsen and de Jong, 1998). An important characteristic is that managers from these countries are seen as relatively risk-averse (Cummings et al., 1971).
Another similarity between Germany and the Netherlands is their board structure and payment structures. As explained before, payment structure is a nationality characteristic which can explain differences in risk-taking behavior of executives. Therefore we need to take a closer look at the payment structure of Rabobank.
Table 7: Cash bonuses Executive Board Rabobank
(Source: author’s construction, based on Rabobank, 2000 – 2010)
A prerequisite for Rabobank is to maintain the cooperative identity of retail banking activities in the Netherlands and abroad. This includes, among other things, carrying out a prudent bonus policy. Although incentives do play a role in the remuneration of Rabobank’s executives, there are no indications that the organization makes uses of an excessive bonus culture. For instance, in an interview with de Pers, Sander Pruijs (CEO of the business bank of Rabobank) argues: ‘’ Extreme high bonuses do not fit with the idea of the cooperative bank. Employees of Rabobank receive a pristine fixed salary and in case of excellent performance bonus of around 15% on top of their fixed salary’’ (Wiersma, 2010).
Based on interviews with Bert Heemskerk and his successor Piet Moerland one can argue that the payment structure does not play an important role in the risk orientations of these CEO’s. In an interview with Dominique Haijtema en Jan-Hein Strop (2001), Bert Heemskerk discusses the incentives approved by the Supervisory Board of organizations. ‘’ I do not see why these boards members, which approved these idiot incentives, have not lost their job’’ (Haijtema and Strop, 2001). Also after the resignation of
Year Cash bonus
38 Bert Heemskerk as CEO, the same bonus philosophy remained in the organization. Heemskerk’s successor, Piet Moerland even described the culture of Rabobank as down to earth. ‘’Within the Rabobank culture, vainglorious behavior and personal gain are not recognized.’’ (Zweers, 2011).
In another interview with the Volkskrant it can be concluded that Heemskerk associate incentives with risk taking and particular at the TMT. In this interview he gives an example of what could happen at Rabobank. He states: ‘if the president- commissioner would offer me a two million bonus only if I ensure that profits would rise by 15 percent next year, then I have no idea how to achieve this. The knowledge that I would earn an extra 2 million would almost certainly lead to situations in where risk plays a more crucial role’ (Klok, 2009).
An overview of the bonus distribution is given in table 7. There are no figures regarding the exact bonus of Rabobank’s executives, since Rabobank is a cooperative association and therefore, unlike listed public limited liability companies, that have anonymous shareholders, it is under no obligation to publish the remuneration of the individual members of its Executive Board (Rabobank, 2000-2010). However, the annual reports of the organization provide sufficient information about the total cash bonuses of the six members of the Executive Board. Based on the figures of table 7, it seems that the bonus of the CEO of Rabobank is relatively low, since these amounts have to be distributed by the rest of the Executive Board. Rabobank does not award variable compensation in the form of option and/or share packages to members of either the Executive Board or senior management (Rabobank, 2008). According to the Supervisory Board of Rabobank, which formulates and monitors the remuneration policy, the structure within the Rabobank has never been such that it might encourage irresponsible risks taking behavior (Rabobank, 2000-2010)
