Corporate Ownership Structure and Top Executives’ Prosocial Preferences: The Role Of Relational and External Blockholders

• DOI: http://doi.org/10.1111/corg.12111
• Published date: 01 November 2015
• Date: 01 November 2015
• Author: Hossam Zeitoun,Paolo Pamini

Corporate Ownership Structure and Top

Executives’Prosocial Preferences: The Role Of

Relational and External Blockholders

Hossam Zeitoun*and Paolo Pamini

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: The relationships between corporations and their stakeholders are often based on incomplete con-

tracts, which are diff‌icult to enforce in courts. Corporate managers play a key role in safeguarding incomplete contracts with

stakeholders. This role requires a strong prosocial motivational orientation. Although the managers’motivational orientation

is invisible, stakeholders can make inferences about it from managers’choices and behavior. Based on these ideas, this paper

asks whether managers’motivational orientat ions vary according to f‌irms’ownership structures, i.e., ownership by relational

and external blockholders.

Research Findings/Insight: Results show that ownership by relational blockholders is associated with more prosocially ori-

ented managers, whereas ownership by external blockholders is related to more self-interested managers. This study adopts

an unobtrusive measure to infer the managers’motivational orientation. This measure ref‌lects the managers’willingness to

pay taxes and can be assessed systematically in the Swiss empiricalcontext. The results are corroborated using multivariate re-

gression analysis and prof‌ile deviation analysis.

Theoretical/Academic Implications: This paper joins incompletecontract theory and behavioraleconomics to analyze how the

shareholder primacy model and the stakeholder model f‌it with different types of managers. Based on the idea of prof‌ile devi-

ation, we suggestthat corporate ownership structure is an important factor inf‌luencing the degree to which f‌irms approximate

these two corporate governance models, and thereby their f‌it with the respective manager type.

Practitioner/Policy Implications: The theoretical arguments and the empiricalevidence suggest that the f‌it between corporate

ownership structure and managerial motivation merits consideration. When selecting managers, boards need to pay attention

not only to their skills and competencies, but also to their motivational orientation in order to capitalize on the strengths of al-

ternative corporate governance models.

Keywords: Corporate Governance, Ownership Structure, Prosocial Preferences, Stakeholders, Top Managers

INTRODUCTION

The dominant agency theoretic perspective on corporate

governance considers shareholders as the residual claim-

ants of the corporation (Fama, 1980; Jensen & Meckling,

1976). Thismeans that shareholders areentitled to the residual

surplus of the corporation after all contractual claims of other

stakeholders have been satisf‌ied. Underlying this p erspective

is the assumption that other stakeholders of the corporation

are able to protect theirclaims fully through formal contracts.

As a consequence, it is suggested that maximizing share-

holder valueis equivalent to maximizingthe value of the f‌irm,

and that managersshould manage the f‌irm exclusively in the

shareholders’interests (Hansmann & Kraakman, 2001).

In contrast, the incomplete contracting perspective in prop-

erty rights theory submits that corporationshave multiple re-

sidual claimants (Asher, Mahoney, & Mahoney, 2005). The

idea is that in addition to shareholders, various other stake-

holders –such as employees, suppliers, customers, or thelocal

community –contribute to organizational value creation, but

can only partlyprotect their interests throughformal contracts

(Blair & Stout, 1999). Unless these stakeholders are provided

with protectionbeyond formal contracts, theyhave few incen-

tives to make f‌irm-specif‌ic investments, which are important

to organizational value creation (Zingales, 1998). Together

with shareholders, these other stakeholders that make f‌irm-

specif‌ic investments are also regarded as residual claimants

(Machold, Huse, Minichilli, & Nordqvist, 2011). As a conse-

quence, maximizing their joint value is equivalent to

*Address for correspondence: Hossam Zeitoun, Warwick Business School,

UniversityofWarwick,CoventryCV47AL,UK.Tel.+442476528058;E-mail:

hossam.zeitoun@wbs.ac.uk

© 2015 JohnWiley & Sons Ltd

doi:10.1111/corg.12111

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Corporate Governance: An International Review, 2015, 23(6): 489–503