INSTITUTIONAL LOGICS, PERFORMANCE FEEDBACK, AND THE
ADOPTION OF CORPORATE GOVERNANCE PRACTICES
TIMOTHY J. ROWLEY
University of Toronto
105 St. George Street
Toronto ON M5S 3E6
rowley@rotman.utoronto.ca
ANDREW V. SHIPILOV
INSEAD
Boulevard de Constance
77305 Fontainebleau France
Tel: 33 1 60 72 44 24
E-Mail: shipilov@insead.edu
HENRICH R. GREVE
INSEAD
1 Ayer Rajah Ave.
138676 Singapore
henrich.greve@insead.edu
ABSTRACT
Institutional entrepreneurs often advocate new goals for organizations, yet little is known
about how organizations respond to these goals—especially when the institutional logic
underlying the goals is contested. We combine insights from institutional logics and performance
feedback theory to develop a model that addresses how organizations react to such contested
goals and to the accepted goal of profitability. We show that Canadian firms adopted practices
consistent with the logic of board reform as a function of gaps between their profitability
aspirations and their position on a corporate governance score devised by institutional
entrepreneurs.
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Early research in institutional theory focused on the taken-for-granted nature of institutional
environments in which organizations uniformly react to normative, mimetic and coercive pressures
(DiMaggio and Powell 1983). However, adoption of new institutions is often less uniform and more
contentious than this early account described (Greenwood et al. 2011; Haveman and Rao 1997; Thornton and
Ocasio 1999). Current theory suggests that institutional environments are complex and contain multiple,
contested institutional logics, defined as “the socially constructed, historical patterns of material practices,
assumptions, values, beliefs, and rules by which individuals produce and reproduce their material subsistence,
organize time and space, and provide meaning to their social reality” (Thornton and Ocasio, 1999: 804).
There has been much work on how new institutional logics replace old ones (Thornton et al. 2012), and
attention is now turning to how organizations respond to the complexity of multiple contested logics. With
the co-existence of competing logics organizations must decide whether and to what degree to adopt
practices associated with each logic. Accordingly, Greenwood et al. (2011) developed a framework of
“filters”—organizational attributes that affect whether or not organizations accept or resist a particular logic.
Consistent with this shift toward the organization, we examine why firms differ in their responses to
contested logics especially as they are faced with contested goals associated with these logics. Such goals are
created by institutional entrepreneurs who pioneer scoring mechanisms demonstrating the extent to which
organizations adopt practices consistent with the logic that the entrepreneurs are trying to spread. Examples
include standardized scores to evaluate schools’ performance (Herman and Golan 1993), environmental or
quality certifications for companies (Guler et al. 2002), and ease of doing business scores for governments (La
Porta et al. 1999). Institutional entrepreneurs make these scores public and rally support for the need of
attaining higher scores, expecting organizations to treat such attainment as a performance goal. This way, the
entrepreneurs apply pressure on organizations to adopt the logic underlying these scores. Yet, when the
institutional logics are contested, so are these goals. The introduction of contested goals can lead to
unintended consequences—while they prompt some organizations to affirm their identity as the proponents
of the logic underlying the scores and adopt corresponding practices, the goals can also push the other
organizations to affirm the identity of the opponents of this logic, thus they would resist its practices.
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Moreover, whether or not organizations will even pay attention to contested goals will depend on their
profitability, which affects the propensity to take risks related to repairing a profitability shortfall or
safeguarding superior profitability.
This combination of ideas results in a theoretical model with two elements predicting how
organizations respond to contested logics. The first uses the concept of identity from the institutional logics
perspective. It suggests that the organization’s ability to achieve a contested goal relative to other
organizations affects the degree to which it adopts this goal as part of its identity. This will have an impact on
the organization’s subsequent adoption of practices associated with this goal. The second element invokes
performance feedback theory that examines how organizations make changes when responding to deviations
between their actual performance and aspiration levels. We argue that decision makers use performance
feedback based on profitability as a filter affecting their responses to contested goals. When their profitability
is below aspirations, firms that are also below a contested goal are more likely to reject that goal and
associated practices even though this could attract repercussions from institutional entrepreneurs supporting
the logic of a contested goal. In contrast, when their profitability is above aspirations, firms that also exceed a
contested goal can more easily justify greater commitment to its logic and are thus more likely to adopt its
practices.
This model is significant because it expands the institutional logic and performance feedback theories.
It enriches institutional logics theory by focusing on profitability-based performance feedback as a novel and
distinct filter affecting logic adoption. It contributes to performance feedback theory which has focused on
commonly agreed upon metrics such as profitability or market share, but has overlooked how new contested
goals emerge in the organizations’ environment (Gavetti et al. 2012). We show that when it comes to
adopting institutional practices, the affirmation of firms’ identities through their position on contested scores
makes them resist any kind of changes, especially when their profitability deviates from aspirations.
Furthermore, whether a firm considers adoption of a particular contested practice to be a risky change
depends on the firm’s identity. This comes in contrast with the predictions of traditional performance
feedback theory which assumes that adoption of a particular practice is a risky behavior for all firms and they
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will be likely to adopt more new practices when their performance is below aspirations, while they will adopt
less when their performance is above aspirations. Our theory describes nuanced organizational-level
processes that predict some firms’ persistent rejection of practices associated with new institutional logics,
and thus explains the persistent heterogeneity observed in some institutional environments.
Our study context is the spread, from 2001 to 2010, of corporate governance practices aimed at
reforming the boards of large Canadian organizations. During this period, board reform was the new
institutional logic of governance, and its intention was to motivate directors and their boards to better
represent external shareholder interests. To facilitate the diffusion of this logic, institutional entrepreneurs
created a publicly available governance ranking based on the firms’ adoption of practices consistent with
board reform. Firms could respond to this ranking either by adopting its practices or choosing not to adopt.
The next section provides an overview of the emergence of the board reform logic in Canada that is
based on our interviews with key experts. We also reviewed more than two thousand articles in the Canadian
business press (e.g., National Post, The Globe and Mail) that described this logic as well as the extant institutional
logic of management control. This research helped explain the emergence of governance ranking as a
performance score over which there was much disagreement among the proponents of these two logics. This
overview is followed by development of a model of how organizational identity and performance feedback
interact to determine organizational responses to institutional logic contestation.
CORPORATE GOVERNANCE LOGICS IN CANADA
The board of directors oversees the actions of management on behalf of public corporation
shareholders. The logic of board reform is a socially constructed pattern of practices, assumptions, and rules
according to which companies’ boards become more independent of management (Westphal and Zajac
1998). This logic stems from the work of theorists who maintained that reducing board dependence on
management was necessary to improve firms’ ability to maximize shareholder value (Beatty and Zajac 1994;
Berle and Means 1932; Crystal 1984; Fama and Jensen 1983). Yet because the prevailing view for many
preceding decades was that governance and profitability were not strongly linked, the balance of control in
most economic systems tipped toward managers rather than boards. Proponents of management control argued
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that, whereas management had developed the specific skills needed to understand key issues and achieve
performance goals, board members committed much less time to the organization. Hence, according to this
logic, management control, rather than more board oversight, would increase shareholder value (Shipilov et
al. 2010).
By the turn of the 21th century, there was a growing discontent with the logic of management control.
Corporate scandals in 2002 finally triggered concrete action, and stakeholders mobilized to lessen managerial
control in Canada. In 2002, the CEO of one of Canada’s largest institutional investor firms summarized this
dissatisfaction in telling us that “the pendulum has swung too far and it is time to balance managerial power
with better boards.” The charge was led by the Ontario Teachers’ Pension Plan (OTPP), a large institutional
investor; the Canadian Coalition for Good Governance (CCGG), a newly formed investors’ trade association;
and The Globe and Mail, Canada’s principal business newspaper. These organizations commissioned ongoing
research that scored corporations’ board practices and compared them with “best practices” standards. The
Globe and Mail published these governance scores for all Canadian corporations listed on the S&P-TSX index,
and the OTPP used them to seek improvements in low-scoring firms. One OTPP executive explained the
rationale for publicly comparing board practices as follows: “Sunlight is a great disinfectant and so is
shame…. These governance scores tell us which boardrooms we should be knocking on…High scores give
us confidence that the board has some influence and have our best interest at heart.” ” In the language of
institutional theory, these three stakeholders were institutional entrepreneurs that sought change by destabilizing
the status quo.
The governance scoring and ranking was conducted by the Clarkson Centre for Board Effectiveness
at the University of Toronto and was underwritten by the institutional entrepreneurs identified above.
Beginning in 2002 (for the 2001 fiscal year), the Clarkson Centre examined proxy statements and public
documents annually in order to score the governance practices of each corporation in the Toronto Stock
Exchange index. The results were used to calculate the Board Shareholder Confidence Index (BSCI), and the
BSCI scores were sent to each corporation (and other relevant stakeholders) and published on the Clarkson
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Centre website. Each year The Globe and Mail published “Board Games”—a feature that included all the
governance scores and extensive commentary, so board practices and comparisons became public knowledge.
However, many corporate executives and board chairs resisted the change. Early on, most of the
organizations in opposition to the board reform took the passive form by simply not adopting the board
reform practices. When confronted by the media on this issue, they invoked their opposition to reforms and
their adherence to the management control logic. One CEO told us, “My board is a necessary evil. The
public markets require us to have a board but it is not much more than a cost and distraction.” Another CEO
reflected: “Managers manage and boards drink tea [so] more oversight will not make Canadian companies
better [financially]. Giving more power to boards is counterproductive.” Some directors held similar views:
“Management has all the information and invests all of themselves into the company. How can a board
oversee these people if they are the experts?” Many board members likewise took issue with outside
influence, and the chair of a Canadian bank argued that “the right board practices must fit with the particulars
of each board and should be chosen by people in the boardroom … not by critics.”
The strongest opposition to board reforms came from closely-held and family-controlled firms,
which insisted that—despite being publicly traded—they were a different form of organization requiring
different governance principles and practices (Shipilov et al. 2010). A small minority of firms with substantial
family-ownership stakes raised tension and engaged in more active political contestation; in fact, the Clarkson
Centre was threatened with lawsuits. In addition, The CCGG’s Managing Director interviewed in 2008
indicated that “many corporations see us as no more than [a] nuisance and maybe worse. They think we will
give up soon and things will [return to the] … old ways.” There were also efforts made to attack the
credibility of the scores and of the stakeholders promoting them. One corporation’s CEO sent a menacing email to the faculty member leading the Clarkson Centre: “if this witch hunt is not stopped [then your] career
will be in jeopardy.”
Institutional theory suggests that the companies could have mitigated external pressures by
ceremonial adoption of board reform practices (Meyer and Rowan 1977). Yet, adoption of such practices had
real costs as well as had consequences for the balance of power between the board and the management.
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First, adoptions distracted managers’ and board members’ time and attention from the other areas as well as
affected political climate in the organizations. For example, increased director independence required firing
some directors and hiring the new ones; separating the CEO and Chair positions required convincing the
CEO that another board member would be the Chair as well as overcoming political opposition inside the
board to individual candidacies. Similarly, achieving committees’ independence required changing their
compositions and often lead to changing managers’ compensation systems. All of these tasks took time and
had a strong potential to increase tensions within the board, as well as between the boards and the
management. Second, initial adoption of some board reform practices signified adoption of their underlying
logic and willingness to be judged by its goals. Finally, initial adoption of some board reform practices gave
independent directors more say into how the company should be run, thus these directors pushed for even
more adoptions regardless of the costs involved.
Many advocates of the board reform argued that the costs of adopting these practices were justified,
because they helped companies’ performance. Yet, many advocates of the management controlled boards
argued that adopting board reform practices would have a negative impact on the firms’ performance and will
not justify the costs. Thus, there was no consensus on the existence of the causal relationship between firms’
financial performance and their adoption of the board reform practices.
The board reform logic comprises the broad groups of structural, evaluation, and equity-related
practices. Structural practices include splitting the positions of CEO and Chairman of the Board as well as
achieving independence of the board of directors and of its audit and compensation committees. Evaluation
practices include the development of formal mechanisms for evaluating directors and the board as a whole.
Equity-related practices include using company shares to compensate directors; eliminating dual share
structures, the repricing of options, and excessive dilution of shares; and aligning managers’ compensation
with the firm’s performance on the stock market. Figures 1a and 1b plot the rate at which these practices
were adopted during 2001–2010 by the companies making up the Toronto Stock Exchange index.
--- Insert Figures 1a and 1b about here ---
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Institutional investors used the governance ratings to induce low-scoring corporations to adopt new
board reform practices. Such adoptions increased, but there was evidence suggesting that corporations below
the average governance scores continued to resist board reform. One board chair expressed their common
sentiment: “Not only are the practices unrelated to anything we are willing to do but even if we want to make
some changes we could never win. We would have to blow up our current board. Impossible.” The CEO of a
family-controlled firm had a similar view: “Running a company means producing good returns for
shareholders, not engaging in a check-the-box exercise. This system [governance scoring] is out to get us.”
However, corporations that scored high in the ranking system responded differently. As the CCGG
Managing Director commented with regard to his meetings with boards in 2009, “the best [governancescoring] boards are the most willing to listen to our suggestions and are more likely to adopt new practices.”
Indeed, our tabulations of adoptions of board reform practices show that the firms above the average
governance rating were more likely to adopt than firms below the average governance rating, with an average
difference of 8.36 percent across all governance practices. A similar pattern was seen for return on assets
(ROA), though there the gap was 5.51 percent between firms whose ROA was above and below the average.
These gaps are large considering that the overall rate of adoption for all practices was 19.9 percent.
By the end of our study, despite the pressures from the proponents of the board reform logic, many
firms still either passively resisted board reform practices by not adopting them or engaged in active
resistance by publicly speaking out against the board reform. This suggests that there was no uniform view on
the appropriate separation of powers between the management and the board, thus the logics of “board
reform” and “management control” remained contested. In other words, despite strong pressures from the
institutional entrepreneurs over ten years, Canadian companies did not exhibit isomorphism with respect to
adopting the board reform practices. Such persistent heterogeneity in the adoption cannot be explained by
theory of taken-for-granted institutions (Meyer and Rowan 1977) or replacement of institutional logics
(Thornton and Ocasio 1999). The theory of organizational filters may do so if we can find the correct filters,
i.e. attributes that affect organizational decisions to adopt or to resist adoption of board reform.
8
PERFORMANCE FEEDBACK ON CONTESTED AND PROFITABILITY GOALS
There is a growing recognition among institutional scholars that organizations differ in their
responses to external pressures, especially when institutional environments contain different contested
institutional logics over a long period of time. Greenwood et al. (2011) developed a framework for explaining
heterogeneity of organizational responses based on the recognition that an organization’s adoption of
different practices from contested logics can be affected by “filters”: attributes that affect how organizations
perceive institutional complexity and construct a repertoire of accepted responses. We pursue this line of
reasoning by examining the effects of organizational identity, as proposed by Greenwood et al. (2011), and we
add financial performance as our own proposed filter.
An organization’s responses to institutional logics are influenced by its identity—defined as its claims
of membership in socially prescribed categories—because the identity restricts some options while enabling
others (Meyer and Hollerer 2010). Consistently with the identity argument, Shipilov et al. (2010) showed that,
when contested practices spread in multiple waves, an organizations’ adoption of previously diffused practices
solidifies its identity as an adopter of their underlying logic; this leads to a path-dependent effect that renders
the organization more likely to adopt additional practices from the same logic.
A logic is accepted when there is a general consensus in the institutional field about the merit of
values, assumptions and beliefs underlying the logic’s practices for achieving some organizational or field level
outcomes. A logic is contested when such consensus is lacking and the field contains multiple logics each of
which is supported by a number of actors. Alternative goals are embedded at the core of the alternative
institutional logics, making goal conflict central to institutional logics theory. Thornton (2002) documents
how the shift from editorial to market logic led publishers to shift from goals based on prestige and sales
growth towards a focus on short term profits. Mohr and Lee (2000) examined how the shifts from an
individualist logic based on race to a corporate logic in universities lead to a shift from affirmative action to
outreach goals. These and other studies examined a variety of tactics used by institutional entrepreneurs to
facilitate the diffusion of their institutions—appeals to different types of rationality (Townley 2002), using
identity discourses (Mohr and Lee 2000) or affecting hiring, promotion decisions and authority structures
9
(Thornton 2002), yet they overlooked a distinct tactic of quantifying the goal attainment through introducing
scoring systems on goals consistent with the entrepreneurs’ institutional logic. This tactic involves creating a
rating or a certification mechanism that shows how well or poorly organizations adhere to the diffusing
institutional practices, such as ISO certifications for companies (Guler et al. 2002). If a given institutional
logic has strong supporters in the institutional field, then such scores can be used to congratulate the
companies that achieved a high score for their compliance and to criticize the companies that achieved low
scores.
The expectation of institutional entrepreneurs, who champion such scores, is that their attainment
becomes a goal in itself and the desire to achieve this goal along with the public pressures to do so will make
all companies equally likely to adopt their logic. What is not known, however, is how companies react to
scores especially if they do not adopt their underlying logic. Even though institutional entrepreneurs expect all
companies to adopt logic consistent practices to increase their score and to avoid public shaming, surprisingly
the non-adopters of the underlying logic might reject these practices even more because their low standing on
the contested goal forces them to affirm their identity as adherents to the alternative logic and its goals. Thus,
despite the best intentions of the institutional entrepreneurs, the creation of such scores might hinder the
diffusion of practices they champion, yet the existing research on institutions doesn’t examine how and why
this might happen.
To examine this, we start with the observation that when a particular logic is contested, the
performance scores and goals associated with this logic are contested as well. “Board reform” was a contested logic in
Canada because there was no agreement among directors and managers on whether adopting its practices
would improve firm performance. The creation of a governance score (Board Shareholder Confidence Index)
by the institutional entrepreneurs was an attempt to impose performance goals associated with the board
reform logic. Because board reform was contested, the BSCI performance score and the goal of attaining
higher BSCI scores was also contested by the proponents and the opponents of this reform.
When an identity becomes positively verified, a social actor’s commitment to the identity increases
(Burke and Stets, 1999). Managers seek organizational membership in institutionalized social categories that
10
allow the organization to be viewed in positive terms, causing organizations to generally respond to external
pressures in ways that preserve or create positive identities (Dutton et al. 2010; Sauder and Espeland 2009).
Thus, the desire for a positive identity affects an organization’s response to institutional pressure and, in
particular, to the adoption of new practices. For example, organizational identities in the oil and gas industry
affect whether firms perceive environmentally friendly protocols as a threat or rather as an opportunity
(Sharma 2000).
Contested scores affect an organization’s propensity to adopt practices advocated by the scores’
creators through their impact on the organization’s identity. To understand how this happens, we borrow the
terminology of “aspiration level” from performance feedback theory. The aspiration level is defined as the
borderline between perceived success and failure of on a particular goal dimension (Cyert and March, 1963;
Schneider, 1992). Although it is usually applied to goals accepted by the focal actor, such as the decision
makers inside the firm, it can also refer to a goal imposed by external actors (Locke et al. 1988), such as
institutional entrepreneurs. Comparison of an organization’s performance to its reference group defines
whether or not it performs below or above aspirations.
When institutional logics are contested, so will be the corresponding aspiration levels. As a contested
score gains visibility in the institutional field, the discrepancy between an organization’s actual performance
and the performance of the others on this score will affect the organization’s propensity to adopt or reject
practices that the score is designed to promote. This will occur irrespective of whether the organization
actually agrees that the average performance of the others on this score is actually worth aspiring to.
Organizations that are high adopters of the logic-consistent practices are above aspiration levels on
the scores associated with this logic and are singled out for praise by the logic’s supporters. Low adopters are
below aspiration levels and thus are targeted for criticism even though these organizations may not actually
aspire to achieving high scores on the contested goals. Thus the average BSCI score across the Canadian
economy formed contested aspiration levels for all companies in the country.
The further an organization’s contested score is below aspiration levels, the more likely it will reject
that score and its logic. Adopting just a few board reform practices as a symbolic gesture is a dangerous
11
strategy for such organization. While doing so would have suggested that the organization accepts the board
reform logic, it would still be performing below aspirations on the governance score and would risk acquiring
a negative identity (i.e. an organization paying only a lip service to board reform) despite the efforts that its
managers made to relinquish their authority. Therefore, managers and board members of an organization
performing low on the governance score are more likely to pursue the positive identity of a managerial
control firm, rather than a negative identity of a board reform firm that fails to fully implement board reform
practices. Executives in such organizations will not be receptive to external challenges to their authority over
the corporate policy (Brehm and Brehm 1981; Westphal 1998; Wright et al. 1992). Such managers will defend
the status quo by denying the need to give more power to the boards, justify their existing management
control practices or question the motives of the institutional entrepreneurs who seek to impose board reform
(Ashforth and Gibbs 1990). Because adoption of the board reform practices represents a threat to a firm that
identifies itself as the proponent of the management controlled boards logic, the behavior consistent with
maintaining a positive identity of a managerial control firm becomes to hold its position on the governance
score and reject corresponding practices. Thus, even though decision-makers in a firm don’t buy into the
need to reach an aspiration level on the contested goal imposed by the institutional entrepreneurs, the
difference between the firm’s performance on the contested goal and that aspiration level publicized by the
score will still be consequential for their rejection of contested practices.
Conversely, organizations performing above contested aspirations (i.e. if their BSCI score is above
the national average) gain public affirmation of the positive identity of the adopters of the board reform logic.
Following identity theory, decision makers in such organizations will seek out opportunities to enhance this
positive identity further, which can be done by adopting even more practices consistent with the board
reform logic. Doing so would entail a relatively low cost, as these executives already overcame their natural
reluctance to relinquish control and shift structural power to the board (Westphal 1998). Thus, the higher the
performance of an organization on the board reform score relative to the aspiration level, the more likely the
organization is to adopt other board reform practices. These arguments lead to the following hypotheses:
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H1: An organization is less likely to adopt a contested institutional practice if its performance based on the contested goals is
below that of its aspiration level.
H2: An organization is more likely to adopt a contested institutional practice if its performance based on the contested goals is
above that of its aspiration level.
One assumption behind research on performance feedback is that performance and associated
aspiration levels represent commonly agreed upon and uncontested goals for companies and individual
executives (March and Shapira 1987). Financial performance and financial aspirations, frequently
operationalized as profitability, are a key component of research on performance feedback in organizations
precisely because of the profitability’s commonly-agreed upon nature. That is, organizational success is widely
defined as the ability to reach or exceed profitability goals, while the inability to do so is considered a failure.
Performance feedback theory also suggests is that performance below aspirations causes search for
alternative actions and risk taking in the form of new practices’ adoption. For example, reduction of firms’
market share below their aspiration levels in the contexts where market share is a close correlate of
profitability caused format changes for radio stations (Greve, 1998) or change of syndicate partners for
investment banks (Baum et al, 2006). Lower return on assets relative to aspiration levels caused organizations
to engage more in innovations (Greve 2003a), make investments (Greve 2003b), change strategic positioning
(Park 2007), engage in acquisitions (Iyer and Miller 2008), and take risks more broadly (Miller and Chen
2004). That such effects have been found over a wide range of outcomes testifies to the power of profitability
in shaping managerial action. This is because profitability ensures organizational survival, increases managerial
compensation, and is a broad indicator of operational sustainability.
Although profitability is a frequent predictor of change in such business actions as innovation,
investment, acquisitions, and strategic positioning, research on institutional theory has not demonstrated an
effect of profitability on the diffusion of institutional practices. This fact may simply reflect an empirical
omission, but there is also reason to believe that investigation of a direct effect between profitability
performance feedback and adoption of institutional practices would yield no findings. Managers who seek to
improve profitability seldom adopt practices that have weak or no performance consequences. Managers will
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focus instead on actions that they see as more consequential in response to gaps between their profitability
and aspiration levels. Institutional goals can be important in their own right when an institution is so well
established that its goals are binding on all organizations in the institutional field. Yet this is not the case for
goals associated with contested institutional logics. Contested institutions yield more choice to organizations
than in environments dominated by a single institutional logic. On average, such goals will be lower in the
goal hierarchy than profitability precisely because there is no consensus on whether their attainment
contributes to organizational survival, and operational sustainability.
Thus, we should expect different reactions to contested logics and goals depending on the
organization’s financial performance: The effect of profitability performance feedback on the adoption of
such practices will be indirect and localized within the extreme cases of adopters of different logics. When an
organization simultaneously performs below contested aspirations and below profitability aspirations, its
attention will be on profitability rather than the contested logic. Because fixing profitability problems will be
much higher on its managers’ agenda than improving the standing on the contested goals (i.e. goals of board
reform), they will make changes in the areas that are more directly related to profitability. Building a positive
identity associated with a contested logic that is not directly linked to financial performance is of a secondary
concern for organizations performing below profitability aspiration levels. Managers in such firms can
exploit this uncertain link to justify resistance against adoption of contested practices, because they can argue
that adoption will distract managers’ and boards’ attention from fixing profitability shortfalls, when these
practices are in fact unrelated to profitability. Thus, we propose:
H3: An organization is less likely to adopt a contested institutional practice if its performance based on the contested goals is
below aspiration levels and its profitability is also below aspirations.
Performance feedback research also suggests that when performance based on profitability is above
aspirations, the risk taking is reduced because decision makers avoid making changes that could disrupt
superior performance. This is why Greve (2003: 91-92, 100-101) finds that firms with higher ROA than their
aspirations reduced R&D investment and innovations. Similar findings of lower rates of change and new
practice adoption when profitability is high are common in the performance feedback literature (Iyer and
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Miller 2008; Miller and Chen 2004).
Even though performing above profitability aspirations reduces the propensity for risk taking in
general, organizations that also perform above contested aspirations will find the adoption of associated
practices to be a highly appropriate risk reduction behavior given their positive identity as adopters of the
board reform logic. Thus, managers in such organizations will switch their attention from making risky
changes in innovation, R&D, acquisition or partnering strategies to adopting more board reform practices.
This will help them attain the new levels in the contested goal without risk because their organizations already
agree with the underlying logic.
Furthermore, because the rhetoric advocating the contested practices typically involves some claims
of effects on profitability, managers who have adopted the board reform logic will add its goals and practices
to their profitability enhancing heuristics. Even if the contested practices in fact are unrelated to profitability,
such managers may nonetheless perceive that the firm experiences increased profitability after practices’
adoption. This is because profitability has a high unexplained component (McGahan and Porter 2002), and
managers who believe in the value of specific changes typically try to attribute profitability improvements to
their actions while attributing profitability drops to environmental conditions(Meindl and Ehrlich 1987). This
sets the stage for superstitious learning in the firms that both adopt contested institutional logic and
experience profitability performance above aspirations supporting their belief that the adopted institutional
practices were in fact beneficial (Denrell 2003; Levitt and March 1988). Thus, they subsequently adopt more
of them. These arguments result in the following hypothesis:
H4: An organization is more likely to adopt a contested institutional practice if its performance based on the contested goals is
above aspirations and its profitability is also above aspirations.
We have suggested that the adoption of practices stemming from a contested institutional logic is
influenced not only by performance relative to the goals consistent with that logic but also by profitability
relative to its aspiration level. According to performance feedback theory, we can subdivide performance
feedback into social and historical aspirations. Social aspirations are formed when organizations compare
their performance against peer groups while historical aspirations are formed when organizations compare
15
their performance against its own past performance. Falling behind relative to either type of comparison
based on financial goals has been shown to affect an organization’s willingness to change (Argote and Greve
2007; Greve 1998, 2003c). Moreover, there are contextual differences in the relative weight placed on social
versus historical aspiration levels and in the choice of peer groups, depending, for example, on the
organization’s network position (Shipilov et al. 2011). While this research examined how firms set
uncontested profitability aspirations, it is mute on how firms set their contested aspirations. Understanding
the formation of contested aspirations is important because they are a key building block in a model
explaining heterogeneity in firms’ responses to contested practices.
Contested goals are imposed by outside actors, and hence firms’ decision makers will pay more
attention to social than to historical aspirations. Comparisons with peers yield an external performance
benchmark for contested goals, but historical comparisons in such a context are difficult. Organizations do
not have a long track record on attaining contested goals, which are relatively new, so the required level of
performance leading to acceptance (or rejection) of an institutional logic is unclear from historical
comparisons of an organization’s own past performance. For profitability goals, in contrast, both social and
historical aspirations are well-defined. Firms have records of their own profitability going back a long time,
and the profitability of peers is also an unambiguous criterion for immediate social comparisons. In other
words, firms can clearly establish how well they must perform in order to exceed their past profitability and
that of their peers. These considerations lead to our final hypothesis.
H5: An organization will pay attention to its social aspirations when responding to performance feedback based on a contested
goal and will pay attention to both historical and social aspirations when responding to profitability performance feedback.
DATA AND METHODOLOGY
Sample and Data Collection
We obtained access to the Clarkson Centre’s Board Shareholder Confidence Index for 2001–2010 and
to the data on Canadian companies’ adoption of governance practices for the same period. Information on
the adoption of practices was collected by the Clarkson Centre from the companies’ annual proxy statements.
16
We also conducted interviews between 2001 and 2012 to capture the evolution of key stakeholders’
sentiments about the BSCI.
The sample of companies covered by the BSCI consisted of those included in the Toronto Stock
Exchange (TSX) index, which comprised about 200 Canadian companies in each year. The proxy statements
contain information about board membership, board practices, and the ownership structure of all companies
in our sample; this allowed us to construct annually updated networks of interlocking directorates. Collecting
data on these networks was necessary to rule out alternative explanations for the mimetic drivers of diffusing
practices. For each TSX member company, we collected data on director attributes, and organization
characteristics (e.g., size and industry of operations) and performance from such publicly available sources as
Compustat, Thomson One Banker, and Bloomberg Professional Service.
Our qualitative fieldwork suggested that the time frame chosen for the analysis (i.e., 2001–2010) was
justified for several reasons. First, our key contribution to the literature is examining how institutional logics
and feedback based on different performance goals affect the spread of contested practices. The study’s time
frame begins when the BSCI was created and started disseminating information about company performance
with respect to the board reform. By the end of the study period, board reform was well established—so
much so that the key institutional entrepreneurs (the CCGG, the OTPP, and The Globe and Mail) started reallocating funding to other initiatives.
Dependent Variable
Our dependent variable is companies’ adoption of governance practices in line with the logic of board
reform; these are the same practices used by the Clarkson Centre to construct the BSCI. As described in the
methodology section below, the analysis is set up so that each practice is tracked separately, but the adoptions
are pooled in the analysis. There are 11 practices in total concerning the structure, evaluation process, and
equity.
The first set comprised four structural practices. (1) Board independence. Relationships with management
increase the risk that a director will place the interests of executives before those of shareholders. The BSCI
considered the corporate board to be independent (i.e., dominated by outsiders without connections to the
17
firm’s management) when at least two thirds of its directors were independent. To identify dependencies
between directors and management, BSCI applied stringent measures. Specifically, it followed the CCGG
guidelines in considering board members to be not independent under any of the following conditions: when
(a) they were now employees of the organization or were so at any time during the previous three years; (b)
they were executives of organizations “affiliated” with the focal organization; (c) their organizations currently
provided legal, auditing, or consulting services to the focal organization or did so within the last three years;
or (d) they had a kinship relation to the focal organization’s CEO or Chairman of the Board. (2) and (3)
Independence of audit and compensation committees. The BSCI coded the audit and compensation committees
(individually) as independent if all committee members were independent directors. (4) Board chair and CEO
split. When the CEO and board chair positions are not separate, it is more difficult for the board to operate
independently of management influence. The BSCI considered the organization to qualify on this criterion if
the CEO and chair positions were occupied by different individuals—unless they had a kinship relation.
The second set of practices involved performance evaluations. (5) Director evaluation involved peer-topeer assessment of each director’s performance, usually on an annual basis. (6) Board evaluation was also based
on directors’ assessments and focused on the quality of board meetings, of board information packages, of
the chair’s leadership, and of specific board processes.
The third set consisted of five equity-related practices. (7) Director stock ownership captured the
alignment of interests between directors and the company, a primary goal of board reform that could be
achieved by increasing the portion of directors’ compensation paid via company shares. The BSCI coded the
company as having adopted this practice if the average value of share ownership by the company’s directors
exceeded 4 times their annual retainer. (8) Dual share structure. The rationale for this criterion is that board
effectiveness increases when shareholders can influence its decisions by voting—influence that is diminished
when only some shares qualify as “voting” shares. A company was viewed by the BSCI as not having a dual
share structure, and thus as enabling the influence of common shareholders, when more than 50% of its
equity controlled more than 50% of the votes. (9) Share dilution occurs when options granted to executives and
directors make up a significant proportion of the outstanding shares, thus diluting returns that would
18
otherwise go to the shareholders and so running counter to board reform logic. A company was scored as
exhibiting share dilution unless options granted to directors and managers (resp., CEO’s) constituted no more
than 10% (resp., 5%) of the company’s outstanding shares. (10) Option repricing. When a company’s share
performance has suffered, the cost of exercising directors’ stock options can be greater than the cost of
purchasing stock at market value. In this case a company may decide to lower the exercise price in order to
align it with the market value of the stock, and such repricing is seen as relieving directors of their
responsibility for the company’s performance. A company was considered not to exhibit option repricing if it
had not lowered the exercise price within the preceding three years. (11) Alignment between CEO compensation
and share price. Setting CEO compensation is a responsibility of the directors, and it should reflect (as dictated
by board reform logic) the company’s actual performance. A company was coded for proper alignment if
CEO compensation did not increase by more than 25% following a year during which the firm’s share price
decreased by more than 25%.
Finally, we emphasize that the actual practices and the specific numeric weights used to determine
their absence or presence (e.g., the ratio of share ownership to annual retainer that determines director stock
ownership) were based on the governance guidelines stipulated by the Toronto Stock Exchange and the
Canadian Coalition for Good Governance and thus directly reflect the demands of these institutional
entrepreneurs.
Each practice defined by the BSCI yielded a binary indicator variable, labeled Board reform practice,
which was set to 1 if the focal company employed a given practice in a particular year (and set to 0 otherwise).
We pooled our data by “stacking” the matrices of single-practice diffusion regressions into one large matrix
(Shipan and Volden 2006; Wei et al. 1989). An organization at risk for adopting a particular practice will
generate an observation for that practice. With respect to board evaluation, for example, our dependent
variable Board reform practice is set to 1 if the organization was observed to adopt board evaluation in year t (and
to 0 otherwise). Once an organization has adopted a practice, it can no longer generate an observation for
that practice. Our data structure therefore consists of organization-year observations only for the companies
at risk for adopting new governance practices (because they do not yet employ them).
19
Independent Variables
Our key performance measures were the firms’ ROA and BSCI score; the former measure was
obtained from Compustat and the latter from the Clarkson Centre. The BSCI score ranges between 0 and 100
points. The Clarkson Centre researchers used 100 points as the initial value for each company and then
subtracted points for each reform practice that the company failed to adopt.
We used the following formula to construct historical aspiration levels for ROA and BSCI:
Historical aspirationst = (1 − a)(Historical aspirationst – 1) + (a)(Performancet – 1).
(1)
Here Performancet – 1 is the ROA (or BSCI, as applies) at time t − 1, and a is a number (between 0 and 1) that
represents the weight given to the immediate prior performance as compared with the weight given to more
distant performances. If the historical aspiration level is weighted more toward recent performance, then it
will adjust quickly to short-term performance variations; if it is weighted more toward past performance, then
short-term performance variations have little impact.
We computed social aspirations for each firm as the average ROA and BSCI for all firms in the TSX
index but excluding the focal firm. Firms are more likely to react to the performance of similar others and so
we weighted each firm’s performance by 1/[1 + w], where w was set to 0 if the two firms were in the same
industry and to 1 otherwise (Greve 2008).
Because firms may use historical and social aspirations simultaneously (Cyert and March 1963), we
aggregated them based on the following formula for aspiration level AL:
ALt = G(Social aspirationst) + (1 − G)(Historical aspirationst),
(2)
where G is the weight given to social aspirations. When G = 0, the firm’s aspirations are solely historical;
when G = 1, its aspirations are entirely social. So if a firm’s aspiration level is based equally on social and
historical aspirations, G = 0.5.
To determine how firms react when their performance is above or below aspiration levels, we
computed separate AL values based on ROA and BSCI and then subtracted them from the actual ROA and
BSCI. To enable comparison of the slopes above and below the aspiration level, we split each relative
20
performance variable for both performance metrics into two variables. ROA below AL equals zero for
observations where relative performance based on ROA is greater than zero and equals the relative
performance otherwise; ROA above AL equals zero for observations where relative performance based on
ROA is less than zero and equals the relative performance otherwise. Analogous definitions hold for the
variables BSCI below AL and BSCI above AL.
We control for a range of additional factors that may affect an organization’s adoption of contested
practices. For each year, we computed the number of practices compatible with board reform logic that an
organization had already adopted, thus creating the Own practice variable. An organization might also adopt
practices simply because it shares directors with prior adopters. We constructed affiliation matrices in which
each Xij entry denotes the number of directors in common between organizations i and j. A matrix of this
type was constructed for each year in our observation window. We then computed Interlock practice as a count
of the number of contested practices adopted by the firm’s interlocking partners.
Network centrality is often associated with early adoption of innovations and with other important
performance outcomes (Shipilov and Li 2008). To capture an organization’s position in the network of
interlocking relationships, we used a measure of normalized eigenvector centrality (Bonacich 1987).
To control for the stock market performance of companies, we computed Market/book value as a
separate control variable. We chose this measure over the alternatives because market-based performance
measures are typically the most salient from the perspective of shareholders. Canadian companies with shares
listed in the United States may be more receptive to new governance practices because US rules on
governance were tougher, especially after passage in 2002 of the Sarbanes–Oxley Act. We therefore
controlled for US exposure via an indicator variable, US stock crosslisting, which was set to 1 only if the focal
organization was cross-listed on the New York Stock Exchange or Nasdaq.
A company with an extremely low BSCI score will likely attract considerable attention from external
stakeholders, especially those that favor board reform. To capture this dynamic we use another indicator
variable, Extremely low BSCI, which was set to 1 only if the company’s BSCI score failed to exceed 25 (i.e., a
score that would put the company at the very bottom of BSCI tables).
21
Governance in banks and other financial institutions is a hot spot, too, given the importance of the
financial sector to the overall health of the economy. We therefore included the indicator variable Financial
sector, which was set to 1 if the focal company operated in that sector (and to 0 otherwise). Directors’
oversight of large organizations also attracts attention from external stakeholders because of the
disproportionate effects that governance failures would have in organizations of that size. Hence our models
include the natural log of net sales (Ln net sales) for each company in the sample. Our interviews and content
analysis of the business press suggested that stock ownership by members of the CCGG influenced board
decisions to adopt the second wave of contested practices. To capture this phenomenon, the indicator
variable CCGG ownership is set to 1 if CCGG members held ownership stakes in the firm (and to 0 otherwise).
We employed an indicator variable for the focal practice of each observation and thereby accounted
for differences in the base rate of diffusion (some practices spread more rapidly because they are easier to
adopt or are viewed as providing greater benefits). For identification, we omit one practice from the set of
indicator variables. Finally, all of our models include year fixed effects to control for the effect of time on the
diffusion rates. The independent variables are lagged by one year.
Estimation
We estimated a panel logit model using either the population average or random effects (via the
“xtlogit” command in STATA) along with Huber–White robust standard errors clustered by organization
(Shipan and Volden 2006); the logit approach is appropriate because our dependent variable is binary. We
predicted adoption of governance practices at time t + 1 as a function of the firm’s BSCI score (and of other
independent and control variables) at time t. The data we used cover no more than eight time periods per
organization,1 which means that the fixed-effects estimator of the logit model is biased (Lancaster 2000).
Simulations have revealed that the population-average estimator outperforms the fixed-effects estimator for
short time panels in logit models (Greene 2004). The disadvantage of using the population-average estimator
is that, unlike a random-effects estimator, it does not yield a likelihood ratio—which is needed to compute
The data for 2001–2010 amount to ten time periods. One time period is lost because we lagged independent variables
to avoid simultaneity bias, and another time period is lost because we initialized historical aspirations (i.e., firms’
historical aspirations for 2001 were undefined).
1
22
the BIC statistic when testing Hypothesis 5. Therefore, we first built our regression models using a
population-average estimator and then replicated our results with a random-effects estimator. Another
advantage of using population-average and random-effects (rather than fixed-effects) estimators is that they
do not require the omission of observations for firms that did not adopt a given practice throughout the
entire observation period. In other words, we are particularly interested in understanding what factors cause
firms to persist in their decisions not to adopt board reform practices, and using a fixed-effects estimator
would have forced us to exclude persistent non-adopters.
ANALYSIS AND RESULTS
Table 1 reports descriptive statistics and correlations between variables. All the correlations are
within a range that indicates the absence of multicollinearity. Because our regression models contain
interactions, we computed the variance inflation factor (VIF) for each model; all the models’ maximum VIF
statistics were well below the cutoff level of 10.
--- Insert Table 1 about here --We built hierarchically nested models to test Hypotheses 1–4, and the results are reported in Table 2.
We used the population-average estimator in the first four models. Model 1 is a baseline; in addition, Model 2
includes ROA above and below aspiration levels, Model 3 includes BSCI above and below aspiration levels,
and Model 4 includes interactions between ROA and BSCI above and below aspirations. Model 5 replicates
Model 4 but uses instead a random-effects estimator. Given equation (2), in each model we assumed that
firms—when adopting or resisting governance practices—react solely to social aspirations for BSCI
(GBSCI = 1) but react equally to social and historical aspirations for ROA (GROA = 0.5).
The results are qualitatively similar across the models, so we interpret the full Model 5. According to
Hypothesis 1, a firm whose BSCI score is below its aspiration level is less likely than other firms to adopt
contested practices. Because BSCI below AL takes negative values only, a positive and significant coefficient
for this variable provides support for H1 (p<0.05). Conversely, Hypothesis 2 indicates that a firm is more
likely to adopt such practices if its BSCI score is above aspiration levels. Because BSCI above AL takes only
positive values, a positive coefficient for this variable supports H2 (p<0.05).
23
In Hypothesis 3 we argued that underperformance of profitability aspirations and contested
performance below the peer group makes firms less likely to adopt contested practices. To test this
hypothesis, we evaluated the interaction between BSCI below AL and ROA below AL; a negative coefficient
for this interaction supports our hypothesis (p<0.05). According to Hypothesis 4, performance above the
firm’s own profitability aspirations and above its peer group’s performance on contested criteria renders the
focal firm more likely to adopt contested practices. To test this hypothesis, we interacted BSCI above AL with
ROA above AL; here our hypothesis is supported by a positive coefficient for the interaction (p<0.1).
--- Insert Table 2 about here --Figure 2 illuminates how interactions between aspiration levels for both goals affect the likelihood of
adoption; it plots the predicted probability of adopting a new practice, where the probability at the graph’s
origin is set equal to the average adoption probability for the data set. Thus, the reported probabilities cover a
realistic range of variation. The curve without interactions (small square symbols) shows an appreciable
increase in adoption of contested practices across the entire range of BSCI scores. The curve for ROA and
BSCI scores above aspirations (large square symbols) shows significant increases in the propensity of firms
above peer adoption levels of BSCI to adopt governance practices. The curve with ROA below aspirations
and governance scores below aspirations (no symbols) shows that this condition significantly decreases the
propensity to adopt governance practices.
--- Insert Figure 2 about here --Finally, in Hypothesis 5 we argued that the attention companies pay to historical versus social
aspirations is a function of the type of performance feedback to which they are responding. Hypotheses
concerning different aspiration levels are tested by comparing the fit of two models: one in which social and
historical aspirations are equally weighted when setting the overall aspiration level versus one in which
aspiration levels are adjusted to reflect theoretical criteria. This approach is similar to that adopted in the
learning literature for identifying “depreciation factors” for past experience (Baum and Ingram 1998), and it
has been implemented in other studies examining heterogeneity in aspiration levels (Greve 2002; Shipilov et
24
al. 2011). Comparing the fit of nonnested models is traditionally based on the Bayesian information criterion
(BIC) (Raftery 1996).
Table 3 summarizes the tests for Hypothesis 5. As reported in the table, we varied the weight G
given to social (versus historical) aspirations for both BSCI and ROA to see how well the results fit the data
as compared with the case where GROA and GBSCI are both equal to 0.5. The top value in each table cell is the
Wald statistic for Model 4 (computed using a population-average estimator), and the bottom value reports the
BIC for Model 5 (computed using a random-effects estimator). We allowed G to vary from 0 to 1 in
increments of 0.1, so this analysis amounted to running 121 regressions for each model. These regressions
helped us identify which weights of the social and historical aspiration levels produce the best-fitting model.
--- Insert Table 3 about here --Wald statistics approximately follow a chi-square distribution, with differences greater than 3.84
lending support to the best-fitting model at p < 0.05 (higher chi-square values indicate a better fit). Yet
because the test is nonnested for these models, the difference in Wald statistics should be viewed as merely
indicative. Between-model BIC differences exceeding 6 indicate strong support for the model with a smaller
BIC, where “strong support” is roughly equivalent to an 0.05 significance level in non-Bayesian inference
(Raftery 1996). For the reference model, in which GROA = GBSCI = 0.5, the BIC is 3384 and the Wald statistic
is 229. There is strong support for our chosen model, in which GROA = 0.5 and GBSCI = 1.0, since its BIC is
3369 (and since 3384 − 3369 > 6); here the Wald statistic is 235, which also supports our choice. Models for
which GROA ranges between 0.3 and 0.5 and GBSCI ranges between 0.9 and 1.0 provide a still better fit,
although not significantly better than when GROA = 0.5 and GBSCI = 1.0. In sum, we find support for
Hypothesis 5 (p<0.05), which states that firms—when deciding whether or not to adopt contested
governance practices—refer only to social aspirations for the governance score and to a mix of social and
historical aspirations for financial performance.
Some results concerning our control variables are of particular interest. First of all, firms whose
interlock partners had adopted board reform practices were themselves, as expected, more likely to follow
25
suit (i.e., the coefficient for Interlock practice is positive and significant). This finding is consistent with prior
research on mimetic diffusion of practices through networks (Davis and Greve 1997).
Second, though our models include indicator variables reflecting the intrinsic appeal of each practice
across the population, these variables do not capture variation in the extent to which practices appeal to
individual firms; that purpose is served by the Own practice variable. The negative and significant coefficient for
this variable confirms the existence of a “high-hanging fruits” mechanism: once a firm has adopted some of
the BSCI governance practices, there remain fewer such practices for them to adopt. Because these leftovers
are evidently practices that the focal firm’s managers and board members had already decided were relatively
unappealing, that firm will naturally be more reluctant to adopt them than the ones initially adopted.
Third, the coefficient for Centrality is negative and significant. This is because a firm with a high
centrality in the network occupies a core position within the field and so is shielded from the pressure of
alternative institutions; this makes it less likely to adopt a new and contested logic. In contrast, it is peripheral
organizations whose adoptions drive acceptance of such institutional logics because they are less wedded to
the status quo (Leblebici et al. 1991).
Supplementary Analyses
The analysis reported in Table 2 is conducted by pooling all three groups of practices—structural,
evaluation, and equity-related—into a single dependent variable. To check whether firms’ adoption (in
response to aspiration–performance gaps) differed by practice group, we performed a separate analysis of
each one’s diffusion. The results were substantially weaker in each of the three analyses due to the loss of
statistical power needed for modeling diffusion dynamics, suggesting that our empirical strategy of analyzing
the practices’ joint diffusion was more appropriate.
We also checked for whether firms with low BSCI scores also had poor financial performance. If
such an effect exists and can be easily observed by managers, then the implication is that adherence to board
reform logic is objectively associated with superior financial performance. To check for the presence of this
effect, we computed a correlation between ROA and BSCI on the full sample of firm-year-practice
observations. This dataset doesn’t drop firm year practice observations after the firms adopted a particular
26
governance practice (as we have done in the main analysis), because we would like to capture whether firms
improved ROA even after the adoption of specific practices. The correlation was extremely low (r = -0.001)
and not significant. Similarly, a correlation between the number of board reform practices adopted by firms
(variable Own Practice) and ROA was also low (r=0.001) and not significant.
DISCUSSION AND CONCLUSIONS
We have sought to extend the work on firm responses to competing institutional logics by specifying
and testing a model that combines the theory on organizational identity (Greenwood et al. 2011) with
performance feedback (Greve, 2003). A key element of our theory is the idea that institutional entrepreneurs
aim to impose goals on organizations in order to gain acceptance of the institution they are trying to
popularize and to spread its associated practices. Institutional entrepreneurs make salient firms’ positions with
respect to other firms on such goals, affecting the firms’ identities and consequently the adoption of
contested practices. However, because organizations are addressing contested logics and goals, we should
expect variation in responses across firms.
We make two specific arguments related to explaining such behavioral patterns. First, firms scoring
relatively low on goals associated with a contested logic are unlikely to accept that logic because doing so
would create a negative identity for them. Instead, publication of contested scores pushes these firms to
affirm a positive identity of the proponents of the alternative logic and they become less likely to adopt the
practices spearheaded by these entrepreneurs. In contrast, firms scoring relatively high on such goals are
pushed to affirm their identity as adopters of the score’s logic, thus they are more likely to adopt more of its
practices. This mechanism helps explain the continued divergence in practices seen in complex institutional
fields (e.g., Greenwood et al., 2011). Second, we also invoke performance feedback theory to predict that
firms with low profitability and low scores on the contested goal are likely to have a further reduction of the
adoption likelihood. This is because they will address profitability shortfalls with other behaviors (such as
investment in R&D, increased innovation or the like) and because they do not consider adoption of contested
practices to be a profitability enhancing strategy given their identity. In contrast, in profitable firms with high
27
adoption levels of contested goals, managers posit causal links between the two and hence further increase
their levels of adoption, especially since such actions represent a low risk strategy given their chosen identity.
Our evidence offers support across the board. The rate of adopting board reform practices increases
when firms’ corporate governance score relative to peers is high and decreases when the governance score
relative to peers is low. In addition, we find that (i) profitability below aspirations reduces adoption rates for
firms whose governance score is below that of their peers and (ii) profitability above aspirations increases
adoption rates for firms whose governance score is above peer levels. In other words, higher profitability
gives organizations the latitude to pursue goals related to board reform, and this effect is strongest in the
organizations that indicate prior acceptance of board reform as a logic. In turn, lower profitability provides
firms that adopt the management control logic an excuse to avoid adoption of the board reform practices.
Finally, organizations set their aspiration levels differently for contested corporate governance goals than for
uncontested profitability goals. With respect to profitability, firms use both the performance of their peers
and their own past performance as a reference; with respect to governance, they refer only to the
performance of their peers.
These findings are an important extension of work on the diffusion of institutions. It has been
shown by others that organizations mimetically adopt new practices of uncertain value, thereby spreading
institutional structures and norms (Davis and Greve 1997; DiMaggio and Powell 1983; Galaskiewicz and Burt
1991). We demonstrate the existence of a more strategic form of diffusion that has not been previously
documented: the imposition of goals by institutional entrepreneurs leads a firm to adopt (or not) depending
on its own performance with respect to these goals irrespective of other firms’ actions. Thus the firms are not
acting through imitation of other firms in their networks or more broadly in the interorganizational field, but
rather they are choosing a position relative to a field-level scoring mechanism. This is a new finding, yet it is
consistent with the more political view of institutions that has been promoted by the theory of institutional
logics—in particular, its recent turn toward logics that do not rapidly displace others but instead remain in
contestation over a period of time (Greenwood et al. 2011). Thus, both the firm’s network position and its
28
own characteristics matter for important organization-level outcomes (Shipilov 2009), such as the adoption of
diffusing practices.
Our findings also contribute to performance feedback theory in several ways. First, the finding that
profitability below aspirations led to less adoption of institutional practices by the proponents of the
management controlled board logic supports the shifting of goals from lower level goals to profitability that
so far has seen little empirical testing (Greve, 2008). Second, the contrast in findings between the goal
imposed by institutional entrepreneurs and the usual findings on goals such as profitability or market share
strongly suggest that contested goals have effects that contrast with accepted goals like profitability, and
likewise that adoption of institutions has causes that are distinct from those of changes in business practices
like R&D investment, innovation, and acquisition strategy. Performance feedback based on profitability
doesn’t have a direct effect on the adoption of contested practices, rather it acts as the moderating
mechanism affecting attention to institutional actions or business actions for firms that perform above or
below contested goals. Additionally, the organization’s identity affects its considerations of appropriate search
behaviors in response to performance feedback. That is, an organization which has an identity of a supporter
for the board reform logic views adoption of new board reform practices as a low risk behavior to be
followed when its financial performance is above aspirations; while an organization with an identity of the
management control firm views the non- adoption of a board reform practice as a low risk behavior, in which
it will engage even if its financial performance is below aspirations. Thus, examining performance feedback
based on profitability in isolation from the performance feedback based on contested goals that forces the
firm to affirm its identity by taking sides with a particular logic will give an incomplete picture of the diffusion
of institutional practices.
The underlying logic of our theoretical model is that managers’ action is driven by their comparisons
of current performance with aspiration levels, but the mechanisms driving action in Hypotheses 1 and 2 are
different from the mechanisms driving action in Hypotheses 3 and 4. In the first two hypotheses, the action is
driven by an organization’s identity, which becomes affirmed and publicized through its performance on a
contested goal. Because it is the pressure towards the positive confirmation of a firm’s identity in the
29
environment of contested goals and not the risk taking in the environment of commonly accepted goals that
drives action in the first two hypotheses, we expect and find different results from what could have been
predicted by a model linking a firm’s profitability performance feedback to its adoption of R&D activities.
Such traditional performance feedback model would have predicted that firms performing below aspirations
will always adopt new practices, as they search for solutions to improve their performance, while firms
performing above aspirations will always reject new practices as they don’t want to make changes that
jeopardize their performance. Instead, we find that firms performing below contested aspirations resist
adoption, while firms performing above contested aspirations are more likely to adopt.
In the second two hypotheses, the action is driven by the relative propensity of the organization to
take risks and to make inferences on whether profitability is affected by the adoption of contested practices
which, in turn, are simultaneously driven by contested and profitability performance feedbacks. Developing
such a model is a new theoretical contribution, as the current institutional logics theory doesn’t examine
aspiration levels and the consequences of comparing performance to aspirations on contested goals for
identity adoption. Similarly, the current rendering of the performance feedback theory assumes that all goals
are accepted by the managers, as profitability goals are, and overlooks contested goals. Thus, the effects in
our theoretical model extend both institutional and performance feedback theories.
More broadly, the move in organizational research from institutions leading to isomorphism
(DiMaggio and Powell 1983) to institutions being replaced by new institutions (Thornton and Ocasio 1999)
or remaining in contention (Hoffman 1999) might be a result of researchers gaining the necessarily
conceptual tools for seeing institutional environments as complex and contentious, and organizations as
choosing how much to adapt to each of the potentially conflicting logics (Greenwood et al. 2011). For
organizational decision making, firm level theories such as performance feedback provide concepts and
processes with strong explanatory power that can augment the explanations at the level of the organizational
field that have been common so far. These behavioral explanations nicely complement the more political
perspective of institutional adoption that is exemplified by research on institutional logics (Thornton et al.,
2012). The most obvious avenues for extending this research include identifying firm identities via the
30
organizational characteristics (e.g. ownership structures) that empower a firm’s proponents of governance
reform as well as examining how firms’ adoption decisions differ as a function of such characteristics.
There are many other possible extensions as well. Although our investigation has focused on
organizations deciding between two different institutional logics, our understanding could benefit from
research on how organizations react to, and choose among, multiple contending logics. Questions also remain
about just how entrepreneurs advance (and render prominent) their own goals. What characteristics of
institutional entrepreneurs, and of the new logics and goals they promote, are most strongly associated with
having an effect on the aspiration levels of organizations? Developing theory and conducting empirical
research along these lines may well benefit from cross-fertilization with the field of social movements (King
and Soule 2007); after all, institutional entrepreneurs can use similar tactics—and benefit from similar
situations—as grass-roots social movements (Rao 1998). In sum, there are many potentially fruitful areas that
are ripe for extending the work in this paper on contested logics and organizational responses to new and
evolving institutions.
Our study does have some limitations, which stem primarily from the institutional context from
which it derives. It is a classical dilemma of institutional research that sensitivity to a specific context is
needed to inform the investigation, even as it leads to limited generalizibility. For example, we have provided
clear evidence regarding the effects of governance performance vis-à-vis a contested institutional logic (board
reform) but we have not established the extent to which institutional entrepreneurs are able to induce such
effects in other contexts. This is an important area for future research. Also, our paper addresses an
institutional context in which multiple specific practices are viewed as being consistent with a new
environment. Analogous phenomena have been observed elsewhere—as in the multiple practices that
constitute due process in the workplace (Edelman 1990)—but it is not a universal feature of
institutionalization. Future research may benefit from comparing multi- with single-practice institutions as
well as from a focus on between-practice relations such as those explored in this paper.
We produce a simplified view of an organization as a unitary entity that either adopts or doesn’t
adopt the contested logic. Clearly, organizations have a considerable degree of internal heterogeneity, which
31
we cannot observe in our dataset. Some groups inside organizations might favor the adoption of the
contested logic while the other groups might resist the adoption. Groups who have power in the organization
might use different tactics to impose its views, for example, using their power for keeping the discussion of
the contested logic off the organizational agendas or using their power to defeat the motions in support of
the logic. Different environmental conditions might give one group more power over the other, and this
could affect whether an organization as a whole accepts or rejects the specific logic (Thornton and Ocasio
1999). Future research could account for this internal heterogeneity and examine how the distribution of
power inside organization among different interest groups interacts with performance feedback in its impact
on the logic adoption decisions.
In conclusion, our aim has been to inform and advance research in institutional theory by drawing
attention to performance goals as a distinct filter affecting organizations’ responses to contested institutions.
We also hope to have advanced the performance feedback theory by tracking the emergence of contested
goals and the organizational reactions to these goals. Our results emphasize that institutions spread not only
through inertial and mimetic processes, as portrayed in previous studies, but also via a feedback cycle between
the contested goals and organizational responses to them that affect, in turn, their further adoption. Such
findings broaden our understanding by showing that firms respond more strategically to institutional
pressures than has been recognized before. Finally, we hope that the ideas and results presented in this paper
become part of a solid foundation for a more complete understanding of the mechanisms that underlie
institutionalization and of the relative importance of various performance goals that shape the this process.
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Table 1: Descriptive Statistics
Variable
Mean
S.D.
1
2
3
4
5
6
7
8
9
10
1
Board reform practice
0.199
0.399
1
2
Financial sector
0.151
0.359
-0.039
1
3
Extremely low BSCI
0.050
0.219
-0.063
0.026
1
4
US stock crosslisting
0.342
0.474
0.079
-0.050
-0.150
1
5
CCGG ownership
0.447
0.497
0.074
-0.050
0.107
0.123
1
6
Market/book value
0.363
20.795
0.020
0.020
0.005
0.051
-0.049
1
7
Ln net sales
7.070
2.068
0.007
0.141
0.033
0.023
0.025
-0.032
1
8
Centrality
4.075
14.747
-0.087
0.509
0.046
-0.173
-0.006
0.013
0.299
1
9
Interlock practice
43.743
37.885
0.079
0.140
-0.005
0.083
0.070
0.035
0.542
0.196
1
7.504
1.714
0.077
-0.038
-0.434
0.150
-0.166
0.030
0.013
-0.161
0.183
1
10
Own practice
11
12
13
11
ROA below AL
-1.182
3.279
0.020
0.054
0.051
0.031
0.086
-0.027
0.229
0.058
0.149
-0.090
1
12
ROA above AL
1.380
2.782
0.023
-0.169
-0.054
-0.017
0.004
0.041
-0.065
-0.107
-0.092
0.038
0.179
1
13
BSCI × ROA below AL
-12.916
15.124
0.104
-0.156
-0.575
0.207
-0.020
-0.018
-0.141
-0.243
-0.007
0.700
-0.091
0.073
1
14
BSCI × ROA above AL
3.459
6.247
0.097
-0.069
-0.128
0.122
0.069
0.024
-0.042
-0.127
0.117
0.583
-0.032
-0.013
0.473
Note: N = 3,506
36
Table 2: Logit Models of Governance Practices Adoption
Financial sector
Extremely low
BSCI
US stock
crosslisting
CCGG ownership
Market/book
value
Ln net sales
Centrality
Interlock practice
Own practice
ROA below AL
Model 1
0.167
(0.180)
−0.655*
(0.303)
0.160
(0.118)
0.100
(0.273)
0.005
(0.004)
0.027
(0.032)
−0.032***
(0.008)
0.007***
(0.002)
−0.051
(0.035)
Model 2
0.159
(0.181)
−0.651*
(0.303)
0.158
(0.118)
0.097
(0.273)
0.005
(0.004)
0.020
(0.032)
−0.032***
(0.008)
0.007***
(0.002)
−0.048
(0.035)
0.018
(0.017)
0.000
(0.017)
Model 3
0.219
(0.183)
−0.496
(0.330)
0.140
(0.119)
0.104
(0.277)
0.005
(0.004)
0.028
(0.032)
−0.030***
(0.008)
0.008***
(0.002)
−0.225***
(0.058)
0.019
(0.017)
0.001
(0.017)
0.016**
(0.006)
0.030**
(0.010)
−1.906***
(0.346)
3,506
26
−1.862***
(0.350)
3,506
28
−0.740
(0.462)
3,506
30
ROA above AL
BSCI below AL
BSCI above AL
BSCI × ROA
below AL
BSCI × ROA
above AL
Constant
Observations
Degrees of
freedom
Model 4
0.229
(0.182)
−0.575+
(0.331)
0.127
(0.118)
0.087
(0.276)
0.005
(0.004)
0.025
(0.032)
−0.032***
(0.008)
0.008***
(0.002)
−0.215***
(0.058)
−0.005
(0.019)
−0.021
(0.021)
0.012+
(0.006)
0.022*
(0.011)
−0.005*
(0.002)
0.004+
(0.002)
−0.785+
(0.461)
3,506
32
Note: All models contain fixed effects of individual years and individual practices.
+p < 0.1; *p < 0.05; **p < 0.01; ***p < 0.001, two tailed tests
37
Model 5
0.252
(0.219)
−0.692+
(0.377)
0.202
(0.140)
0.173
(0.301)
0.005
(0.004)
0.037
(0.037)
−0.036***
(0.008)
0.009***
(0.002)
−0.289***
(0.070)
−0.006
(0.021)
−0.028
(0.024)
0.015*
(0.007)
0.025*
(0.012)
−0.005*
(0.003)
0.005+
(0.003)
−0.542
(0.525)
3,506
32
Table 3: Effects of Varying the Weights Assigned to Social Aspirations for BSCI and ROA
Weight for BSCI Social Aspirations (GBSCI)
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
0.0
224
224
224
225
226
228
229
231
233
233
234
3388
3388
3388
3388
3387
3385
3383
3380
3377
3374
3372
0.1
224
224
225
225
226
228
229
231
233
234
234
3388
3388
3388
3388
3387
3385
3382
3379
3376
3373
3371
0.2
224
225
225
225
227
229
230
232
234
235
235
3388
3388
3388
3388
3387
3384
3381
3378
3375
3372
3370
0.3
224
225
225
226
227
229
231
233
235
236
236
3388
3387
3388
3387
3386
3383
3380
3377
3373
3371
3369
0.4
224
225
225
226
227
229
231
234
235
236
236
Weight for
3387
3387
3387
3387
3386
3383
3380
3377
3373
3370
3368
ROA
Social
0.5
224
225
224
225
227
229
231
233
234
235
235
Aspirations
3387
3387
3387
3388
3386
3384
3380
3377
3374
3370
3369
(GROA)
0.6
224
225
225
225
226
228
230
232
233
234
234
3387
3387
3387
3388
3387
3384
3381
3378
3375
3372
3370
0.7
224
225
224
225
226
227
229
231
232
234
234
3387
3387
3387
3388
3387
3385
3382
3379
3376
3373
3371
0.8
224
224
224
225
226
227
229
231
232
233
233
3387
3387
3387
3388
3387
3385
3382
3379
3376
3373
3371
0.9
224
224
224
225
226
227
229
231
232
233
233
3387
3387
3387
3388
3387
3385
3382
3379
3376
3373
3371
1.0
224
224
224
225
226
228
229
231
232
233
234
3387
3387
3387
3388
3387
3385
3382
3379
3376
3373
3371
Notes: The top value in each cell is the Wald statistic; the bottom value is the BIC statistic. We vary the weight G given to social (versus historical)
aspirations for both BSCI and ROA performance. G=1 means that a firm pays attention only to social aspirations, G=0 means that a firm pays
attention only to historic aspirations, G=0.5 means that a firm pays attention both to social and historic aspirations. We track how changes in GROA and
GBSCI improve model fit as compared to the baseline where GROA =GBSCI =0.5. Higher Wald statistics with differences greater than 3.84 support the bestfitting model at p < 0.05. Between-model BIC differences exceeding 6 indicate strong support for the model with a smaller BIC (equivalent to p < 0.05).
For the reference model, in which GROA = GBSCI = 0.5, the BIC is 3384 and the Wald statistic is 229. There is strong support for the model in which
firms pay equal attention to social and historic aspirations based on profitability (GROA = 0.5) but they pay no attention to historic aspirations based on
governance score GBSCI = 1.0. This model’s BIC statistic is 3369 and the Wald statistic is 235.
38
39
Figure 2: Predicted probability of adoption
40