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

James D. Westphal, Michael K. Bednar

Research output: Contribution to conferencePaper

Abstract

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.

Original languageEnglish (US)
DOIs
StatePublished - Jan 1 2006
Externally publishedYes
Event66th Annual Meeting of the Academy of Management, AOM 2006 - Atlanta, GA, United States
Duration: Aug 11 2006Aug 16 2006

Other

Other66th Annual Meeting of the Academy of Management, AOM 2006
CountryUnited States
CityAtlanta, GA
Period8/11/068/16/06

Keywords

  • Corporate Governance
  • Institutional Ownership
  • Interpersonal Influence

ASJC Scopus subject areas

  • Management Information Systems
  • Management of Technology and Innovation

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    Westphal, J. D., & Bednar, M. K. (2006). How top managers use interpersonal influence to neutralize the effects of institutional ownership. Paper presented at 66th Annual Meeting of the Academy of Management, AOM 2006, Atlanta, GA, United States. https://doi.org/10.5465/ambpp.2006.27175505