INSTITUTIONAL LOGICS, PERFORMANCE FEEDBACK, AND THE

ADOPTION OF CORPORATE GOVERNANCE PRACTICES

TIMOTHY J. ROWLEYUniversity of Toronto105 St. George StreetToronto ON M5S 3E6

rowley@rotman.utoronto.ca

ANDREW V. SHIPILOVINSEAD

Boulevard de Constance77305 Fontainebleau France

Tel: 33 1 60 72 44 24E-Mail: shipilov@insead.edu

HENRICH R. GREVEINSEAD

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.

1

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

2

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. 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

3

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 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.

4

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

5

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 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

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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

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

7

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 e-mail 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.

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

8

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,

9

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 ---

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 [governance-scoring] 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.

10

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.

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

11

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,

12

promotion decisions and authority structures (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

13

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 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

14

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 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

15

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

16

to the aspiration level, the more likely the organization is to adopt other board

reform practices. These arguments lead to the following hypotheses:

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

17

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 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

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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 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

19

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.

20

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 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

21

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. 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

22

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 re-allocating 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 firm’s management) when at least two thirds of its directors

23

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-to-peer 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

24

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 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%.

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).

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.

26

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.

27

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 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).

28

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).

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

29

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 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

1 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).

30

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).

31

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).

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

32

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 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

33

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 suit (i.e., the coefficient for

Interlock practice is positive and significant). This finding is consistent with prior

34

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

35

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 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.

36

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

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

37

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 own characteristics matter

38

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

39

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 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

40

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 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

41

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.

42

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 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

43

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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47

Table 1: Descriptive Statistics

VariableMean S.D. 1 2 3 4 5 6 7 8 9 10 11 12 13

1Board reform practice 0.199

0.399 1

2 Financial sector 0.1510.35

9

-0.03

9 1

3Extremely low BSCI 0.050

0.219

-0.06

30.02

6 1

4US stock crosslisting 0.342

0.474

0.079

-0.05

0

-0.15

0 1

5 CCGG ownership 0.4470.49

70.07

4

-0.05

00.10

70.12

3 1

6Market/book value 0.363

20.795

0.020

0.020

0.005

0.051

-0.04

9 1

7 Ln net sales 7.0702.06

80.00

70.14

10.03

30.02

30.02

5

-0.03

2 1

8 Centrality 4.07514.7

47

-0.08

70.50

90.04

6

-0.17

3

-0.00

60.01

30.29

9 1

9 Interlock practice 43.74

337.8

850.07

90.14

0

-0.00

50.08

30.07

00.03

50.54

20.19

6 1

10 Own practice 7.504

1.714

0.077

-0.03

8

-0.43

40.15

0

-0.16

60.03

00.01

3

-0.16

10.18

3 1

11 ROA below AL

-1.182

3.279

0.020

0.054

0.051

0.031

0.086

-0.02

70.22

90.05

80.14

9

-0.09

0 1

12 ROA above AL 1.380

2.782

0.023

-0.16

9

-0.05

4

-0.01

70.00

40.04

1

-0.06

5

-0.10

7

-0.09

20.03

80.17

9 1

48

13

BSCI × ROA below AL

-12.91

615.1

240.10

4

-0.15

6

-0.57

50.20

7

-0.02

0

-0.01

8

-0.14

1

-0.24

3

-0.00

70.70

0

-0.09

10.07

3 1

14

BSCI × ROA above AL 3.459

6.247

0.097

-0.06

9

-0.12

80.12

20.06

90.02

4

-0.04

2

-0.12

70.11

70.58

3

-0.03

2

-0.01

30.47

3

Note: N = 3,506

49

Table 2: Logit Models of Governance Practices Adoption

Model 1 Model 2 Model 3 Model 4 Model 5Financial sector

0.167 0.159 0.219 0.229 0.252

(0.180) (0.181) (0.183) (0.182) (0.219)Extremely low BSCI

−0.655*(0.303)

−0.651*(0.303)

−0.496(0.330)

−0.575+

(0.331)−0.692+

(0.377)US stock crosslisting

0.160(0.118)

0.158(0.118)

0.140(0.119)

0.127(0.118)

0.202(0.140)

CCGG ownership

0.100(0.273)

0.097(0.273)

0.104(0.277)

0.087(0.276)

0.173(0.301)

Market/book value

0.005(0.004)

0.005(0.004)

0.005(0.004)

0.005(0.004)

0.005(0.004)

Ln net sales 0.027 0.020 0.028 0.025 0.037(0.032) (0.032) (0.032) (0.032) (0.037)

Centrality −0.032*** −0.032*** −0.030*** −0.032*** −0.036***(0.008) (0.008) (0.008) (0.008) (0.008)

Interlock practice

0.007***(0.002)

0.007***(0.002)

0.008***(0.002)

0.008***(0.002)

0.009***(0.002)

Own practice −0.051 −0.048 −0.225*** −0.215*** −0.289***(0.035) (0.035) (0.058) (0.058) (0.070)

ROA below AL

0.018 0.019 −0.005 −0.006

(0.017) (0.017) (0.019) (0.021)ROA above AL

0.000 0.001 −0.021 −0.028

(0.017) (0.017) (0.021) (0.024)BSCI below AL

0.016** 0.012+ 0.015*

(0.006) (0.006) (0.007)BSCI above AL

0.030** 0.022* 0.025*

(0.010) (0.011) (0.012)BSCI × ROA −0.005* −0.005* below AL (0.002) (0.003)BSCI × ROA 0.004+ 0.005+

above AL (0.002) (0.003)Constant −1.906*** −1.862*** −0.740 −0.785+ −0.542

(0.346) (0.350) (0.462) (0.461) (0.525)Observations 3,506 3,506 3,506 3,506 3,506Degrees of freedom

26 28 30 32 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

50

Weight for BSCI Social Aspirations (GBSCI)

Weight for ROASocial

Aspirations

(GROA)

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.00.0 224

3388 2243388

2243388

2253388

2263387

2283385

2293383

2313380

2333377

2333374

2343372

0.1 2243388

2243388

2253388

2253388

2263387

2283385

2293382

2313379

2333376

2343373

2343371

0.2 2243388

2253388

2253388

2253388

2273387

2293384

2303381

2323378

2343375

2353372

2353370

0.3 2243388

2253387

2253388

2263387

2273386

2293383

2313380

2333377

2353373

2363371

2363369

0.4 2243387

2253387

2253387

2263387

2273386

2293383

2313380

2343377

2353373

2363370

2363368

0.5 2243387

2253387

2243387

2253388

2273386

2293384

2313380

2333377

2343374

2353370

2353369

0.6 2243387

2253387

2253387

2253388

2263387

2283384

2303381

2323378

2333375

2343372

2343370

0.7 2243387

2253387

2243387

2253388

2263387

2273385

2293382

2313379

2323376

2343373

2343371

0.8 2243387

2243387

2243387

2253388

2263387

2273385

2293382

2313379

2323376

2333373

2333371

0.9 2243387

2243387

2243387

2253388

2263387

2273385

2293382

2313379

2323376

2333373

2333371

1.0 2243387

2243387

2243387

2253388

2263387

2283385

2293382

2313379

2323376

2333373

2343371

Table 3: Effects of Varying the Weights Assigned to Social Aspirations for BSCI and ROA

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 best-fitting 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

51

aspirations based on governance score GBSCI = 1.0. This model’s BIC statistic is 3369 and the Wald statistic is 235.

52

53

54

Figure 2: Predicted probability of