How top managers use interpersonal influence to neutralize the effects of institutional ownership

In this study we consider how top managers may use interpersonal influence behavior to diminish the impact of institutional investors on corporate governance and strategy. The rise of institutional ownership was widely expected to promote corporate governance reforms that serve the interests of shareholders. Yet, empirical research has generally shown that the level of institutional ownership has mixed, and often weak or insignificant effects on several organizational outcomes, including the adoption of board reforms, executive compensation, corporate diversification strategy, and firm performance. We offer a theoretical explanation for why institutional investors may not leverage their ownership power to force changes in governance and strategy. Specifically, we contend that high levels of institutional ownership may prompt top managers to engage in interpersonal influence behavior in the form of ingratiation and persuasion directed at institutional fund managers, deterring the latter from using their ownership power to coerce changes that could benefit shareholders. We suggest that extant theories of corporate governance have overestimated the organizational consequences of increased institutional ownership because they focus only on coercive power as a source of influence, without recognizing the potential for interpersonal influence processes to provide an alternative source of power in manager-shareholder relationships. We test our theory with a dataset that combines original survey data on CEO interpersonal influence behavior from a large sample of executives and institutional fund managers, together with archival data on institutional ownership, changes in board structure, CEO compensation and diversification strategy. Empirical analyses provide substantial support for our theoretical perspective.