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Why do firms strive for non-pecuniary performance?
Paper No. http://ssrn.com/abstract=1269509
Dr. Thomas M. Zellweger
Robert S. Nason
Dr. Mattias Nordqvist
Electronic copy available at: http://ssrn.com/abstract=1269509
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Why do firms strive for non-pecuniary performance?
Dr. Thomas M. Zellweger
University of St. Gallen and Babson College
Dufourstrasse 40a
9000 St. Gallen
Tel. +41 71 224 71 00
Email: [email protected]
Robert S. Nason
Babson College
Institute for Family Enterprising
Arthur M. Blank Centre for Entrepreneurship
02457 Babson Park (MA)
Email: [email protected]
Dr. Mattias Nordqvist
Jönköping International Business School and Babson College
P.O. Box 1026
SE - 5511 11 Jönköping
Tel. +46 36 101853
Email: [email protected]
Electronic copy available at: http://ssrn.com/abstract=1269509
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Abstract
The present paper develops an explanation of non-pecuniary performance of firms, which
extends current ethical and financial rational and encompasses multiple levels of stakeholder
analysis. Drawing from social identity theory and the literature on organizational reputation,
we show that identity overlaps between managers and organizations create an incentive to
protect and build corporate reputation, thereby motivating managers to produce non-pecuniary
performance outcomes that satisfy reputation forming stakeholders. We suggest that the link
between identity overlaps and the incentives to build and protect corporate reputation is
moderated by the type of the manager's commitment and provide empirically testable
propositions for our claims. We use the family business, a particularly high identity overlap
organization, as a context to explore our arguments.
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1. Introduction
The existence of non-pecuniary performance outcomes related to businesses activity is
widely acknowledged in various streams of literature. For example, Cyert and March (1963)
noted that all organizations are characterized to some degree by multiple goals and not only
the economic outcomes often assumed. Chakravarthy (1986) provides empirical evidence
suggesting that traditional performance measures solely based on economic performance (e.g.,
profitability and growth) are inadequate for evaluating the performance of any firm. Several
studies in the private benefits of control literature provide evidence to the relevance of non-
pecuniary performance dimensions like independence, status, prestige and control (Demsetz
& Lehn, 1985; O‟Neal & Thompson, 1985; Nagar, Petroni, & Wolfenzon, 2002). Beyond the
individual manager unit of analysis, the literature surrounding corporate social performance
impressively shows the relevance of non-pecuniary performance in the organizational context,
as for example environmental strategies, treatment of women and minorities, nature of
products produced, relationships with customers, community relations and philanthropic
programs (e.g., Waddock & Graves, 1997; McWilliams & Siegel, 2000).
While the existence of non-pecuniary outcomes is widely acknowledged and some
individual non-pecuniary outcomes have been identified, there has not been a stringent effort
to explain why firms create non-pecuniary performance outcomes. Scholars investigating
corporate social performance, which suggests that firms have the obligation to be
economically and socially responsible citizens (Wartick & Cochran, 1985), have proposed a
moral dimension underpinning socially responsible behavior. These authors argue that firms
should “do good” because it is the right thing to do (Donaldson, 1982; Rawls, 1971). Other
scholars have suggested that corporate social behavior is also the profitable thing to do
(Waddock & Graves, 1997). Our approach extends existing ethical and financial based
rational by suggesting the reputation concern is a key driver for non-pecuniary performance.
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Whereas studies on corporate social behavior focus on the audience evaluating
organizational performance (e.g., societal stakeholders), we focus on the nature of
performance outcomes of firms, independent of the audience (stakeholders). Thereby we
specifically investigate non-pecuniary performance that can be assessed by any type of
stakeholder (e.g., owner, manager, employees, and further societal stakeholders). In
particular, we explore the question why firms strive for non-pecuniary performance, with
firms presumably only having economic goals (Friedman, 1970). With this approach we do
not wish to minimize the importance of financial performance nor disregard the fact that
financial performance is a major factor in satisfying arguably the most critical stakeholder, the
shareholders. However, our focus is on stakeholders who demand non-pecuniary satisfaction
and those aspects of stakeholder satisfaction for all stakeholders which are non-pecuniary in
nature.
We build our explanation using social identity theory (Tajfel, 1959; Schein, 1983;
Hogg & Abrams, 1988; Hogg, Terry & White, 1995; Hogg & Terry, 2000; Dyer & Whetten,
2006) and the literature on organizational reputation (e.g. Fombrun & Shanley, 1990;
Fombrun, 1996; Rao, 1994; Rindova, Williamson, Petkova & Sever, 2005; Whetten &
Mackey, 2002) as our theoretical lenses through which to theorize on the reasons for non-
pecuniary performance outcomes. Our considerations are relevant to all types of
organizations, to the degree that there is an overlap between the managers‟ identity and
corporate identity. All organizations have varying degrees of identity overlap, but examples of
such organizations which can be considered to have particularly high overlap are
cooperatives, partnerships, universities, churches and family businesses.
We use the family business as the context to test our arguments. We do this for three
reasons. First, the relevance of non-pecuniary outcomes is particularly pronounced in the
family business literature. Numerous scholars have suggested that profit maximization may
have been inaccurately assumed to be the primary or even sole objective of a family business
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(Westhead & Cowling, 1997; Lee & Rogoff, 1996; Chrisman, Chua, & Litz 2004; Dunn,
1995). Scholars have suggested that family firms have multiple and changing goals rather
than a singular and constant goal, and that this type of firm displays a stronger preference
towards non-pecuniary outcomes like independence, prestige, tradition and continuity than
non-family firms (Tagiuri & Davis, 1982; Ward, 1997; Stafford et al. 1999; Corbetta &
Salvato 2004; Sorenson, 1999; Dunn, 1995; Sharma, Chrisman & Chua, 1997). Second, in
family firms there is an high identity overlap between family, management and firm (Dyer &
Whetten, 2006). Given this overlap, it has been shown that there exists high reputation
concerns (Anderson & Reeb, 2003), making our analysis of the family business a natural
context for our arguments. Third, family firms constitute a clear majority of all firms in
developed economies (Schulze, Lubatkin & Dino, 2003), yet relative to their dominance are
significantly under researched.
By investigating the reasons why firms create non-pecuniary outcomes we contribute
to literature in at least three ways. First, by using social identity theory we offer a more
stringent explanation of why firms search for non-pecuniary performance outcomes. This
explanation extends the current ethical and financial rational. Second, we expand the literature
on organizational reputation by showing that identity overlaps between managers and
organizations create an incentive to protect and build corporate reputation, thereby motivating
managers to produce non-pecuniary performance outcomes that satisfy reputation forming
stakeholders. Third, we link our theoretical analysis to the growing family business literature.
More specifically we extend the very common, but rarely empirically or theoretically
scrutinized observations that family businesses in particular are driven by a complex mix of
financial and non-financial performance goals.
Our paper proceeds as follows. In the next section we elaborate on the dimensions of
non-pecuniary performance. Then we introduce social identity theory and lay out how identity
overlaps between managers of an organization and the organization create incentives to
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protect and build corporate reputation. Subsequently, we extend our analysis by exploring
how incentives to protect and build organizational reputation leads to non-pecuniary
performance to satisfy reputation forming stakeholders. In the following section we apply or
model on the case of the family firm. In the last section we conclude and discuss the
implications of these findings for researchers and practitioners.
The Nature of non-pecuniary Performance
The discussion surrounding non-pecuniary outcomes extends back to early economists
who viewed utility independent of pecuniary or non-pecuniary nature of things. Jules Dupuit
(1853) for example, wrote“[…] the domain utility exists not only over material objects
susceptible to exchange, but over natural wealth, over the pleasures of the mind and heart,
which also have the property of satisfying our desires even at a higher degree and,
consequently, of being useful […] It is a mistake to believe that man attaches a price only to
material things.” In his seminal work Schumpeter (1934) proposed that owner-managers
tended to value aspects like challenge and social status related to their activity. More recently,
scholars have empirically shown that non-pecuniary performance outcomes even influence
firm survival. Gimeno, Folter, Cooper and Woo (1999) state that “organizational survival is
not strictly a function of financial performance, but also dependent on a firm’s own threshold
of performance” (p. 750) and that this threshold is determined in part by non-pecuniary
outcomes such as the psychic income from the managerial activity. Similarly, Gómez-Mejía,
Haynes, Núñez-Nickel, Jacobson, and Moyano-Fuentes (2007) recently showed that in the
context of family firms socioemotional wealth defined as the “non-pecuniary aspects of the
firm that meet the family’s affective needs, such as identity, the ability to exercise family
influence, and the perpetuation of the family dynasty” are important factors even when
considering managerial decisions like risk taking that seemed to be entirely driven by
financial considerations.
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Applying this line of thinking beyond the entrepreneurial context, Cyert and March
(1963) suggested that all organizations are characterized to some degree by multiple goals and
not only the financial outcomes often assumed. For example D‟Aveni and Kesler (1993)
propose that prestige of managers plays a role in the managers‟ response to tender offers.
Similarly, Lane, Cannella and Lubatkin (1998) propose that unrelated mergers can be the
result of managers striving to protect their self-interests including social status. Further
support for the relevance of non-pecuniary aspects related to business activity can be found in
the private benefits of control literature (e.g. Becker, 1974; Fama & Jensen, 1983, Demsetz &
Lehn, 1985, Harris & Raviv, 1988, Aghion & Bolton, 1992). Dyck and Zingales (2004)
propose that a central factor of private benefits of control is the psychic benefit some
shareholders attribute simply to being in control.
The issue of non-pecuniary aspects of firm performance is distinct from the growing
fields of corporate social responsibility (e.g., McGuire, Sundgren & Schneeweis, 1988),
corporate social performance (e.g., Clarkson, 1995), and social entrepreneurship (Thompson,
2000). These areas of research focus primarily on external societal stakeholders and not on the
nature of the performance, e.g. pecuniary versus non-pecuniary. Our investigation focuses on
the nature of performance, i.e. the non-pecuniary nature, taking a broader perspective to
incorporate unique outcomes pertinent to all constituents of a firm.
In this way, we focus on the nature of non-pecuniary performance outcomes
pertaining to multiple levels of analysis and firm stakeholders. This is in line with Davidsson
and Wiklund (2001), who encourage research studies to consider micro and macro
perspectives which incorporates multiple levels of analysis. In our study, this includes the
individual level (e.g., managers), the organizational level (e.g., employees, customers,
suppliers), and the societal level (e.g., local community, government, society at large). Within
the individual level, non-pecuniary benefits include pride, sense of accomplishment and
reputation (Douglas & Shepherd, 2000). At the organizational level this includes positive
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human resource practices or satisfaction of customers (Waddock & Graves, 1997). On the
societal level there are non-pecuniary outcomes such as environmental initiatives, treatment
of minorities and philanthropy (McWilliams & Siegel, 2000).
We are defining non-pecuniary performance quite literally to pertain to all firm
performance outcomes which are not monetary. We realize that that such an approach is quite
broad, but intentionally so. It seems important to note that our text does not propose a
complete list of types of non-pecuniary outcomes across stakeholders. Neither will we discuss
the relation between pecuniary and non-pecuniary performance outcomes (e.g., substitutional
versus synergistic relations, Chrisman & Carroll, 1984) nor will our text strive to contribute to
the moral aspect of non-pecuniary performance for example to societal stakeholders. Rather,
we outline our main argument that the higher the social identity overlaps between managers
and the organization, the higher the incentive to protect against an undesired reputation and
the higher the incentive to build on a desired reputation. In addition we propose that the link
between identity overlaps and the incentives to build and protect corporate reputation is
moderated by the type of the manager's commitment. To understand how this is linked to why
firms search for non-pecuniary performance we propose the model presented in Figure 1.
-------------------------------------------
Insert Figure 1 about here
-------------------------------------------
Social identity theory and organizational reputation
Social identity theory (Tajfel & Turner, 1979; Hogg & Abrams, 1988; Hogg, Terry &
White, 1995; Hogg & Terry, 2000) claims that people are concerned about the impression
they make and the reputation they have in the community since the way others see them
significantly determines their own self-esteem. Social identity theory proposes that a social
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category (e.g., nationality or political affiliation) into which one falls, and to which one feels
one belongs, provides a definition of who one is, in terms of the defining characteristics of the
category (Hogg, Terry & White, 1995). Thereby self-categorization processes play an
important role in accentuating dimensions in which members of the group seem to be equal
and differ in a positive way from group-outsiders, in order to imbue it with a positive
distinctiveness. These categorization-accentuation effects highlight in-group similarities and
out-group discontinuities and create self-esteem for the individual (Hogg & Abrams, 1988;
Hogg, Terry & White, 1995).
Organizational membership has been found to affect the self-concept and the self-
esteem of people (Hogg & Terry, 2000). Ashforth and Mael (1989) propose that organizations
may provide one answer to the question, Who am I? It is argued that organizational
identification is a specific form of social identification. To the extent the organization, as a
social category, is seen to embody or even reify characteristics perceived to be prototypical of
its members, it may well fulfill such motives for the individual. At the very least, social
identity maintains that the individual identifies with social categories, as for instance
organizations, partly to enhance self-esteem (Hogg & Turner, 1985).
The need to maintain self-esteem is reported to be one of the most powerful and
pervasive of all social needs. People engage in a wide array of impression management
strategies aimed at generating a positive reputation in the case of salient threat of reputation of
the social group defining their identity (Doby & Caplan, 1995; Leary & Kowalsky, 1990).
Within social identity theory these impression strategies need to be understood as attempts to
preserve positive in-group similarities, individual reputation and self-esteem.
Reputation literature rooted in institutional theory characterizes corporate reputation
“as a global impression, which represents how a collective – a stakeholder group or multiple
stakeholder groups – perceive a firm” (Rao, 1994; Rindova, Williamson, Petkova & Sever,
2005). In a similar vein, Whetten & Mackey (2002: 401) define corporate reputation as a
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“particular type of feedback, received by organizations from their stakeholders, concerning
the credibility of the organization’s identity claims.” Thereby reputation is coined as the
collective awareness and recognition that an organization has accumulated in its
organizational field. According to this perspective, reputation forms as a result of information
exchanges and social influence among various stakeholders interacting in an organizational
field, which reduces the uncertainty about the “true” attributes of the organization (Rao, 1994;
Rindova & Fombrun, 1999).
Organizational reputation has been found to impact the self-concept and self-esteem of
the managers of that organization to the extent that there is an identity overlap between the
organization and the managers of the organization. Dutton et al. (1994) propose that a
person‟s self-concept is influenced, in part, by the attributes that others may infer about them
from their organizational membership. With regard to entrepreneurs, Foreman and Whetten
(2002) propose that to the extent that there is an overlap between the entrepreneur‟s and the
firm‟s identity, entrepreneurs view their organizations as an extension of themselves. In the
context of newly created firms scholars propose that founders are likely to view their business
as a critical part of their identity or self-view (Kets de Vries, 1977; Schein, 1983; Dyer, 1986).
Thus, joining, and to even a larger extent founding, a particular organization is a concrete
public expression of a person‟s values and abilities (Popovich & Wanous, 1982).
We expect that identity overlaps between managers and the organization can create
incentives for two types of postures regarding the desired reputation. First, managers can
display an incentive to protect the organization‟s reputation against any undesired, in most
cases negative impact, by avoiding activities that are negatively evaluated by key constituents.
Such a reactive behavior has been coined reputation concern and has been found to be driven
by the motive to protect the personal reputation of the managers (Dyer & Whetten, 2006).
Second, we argue that identity overlaps can create an incentive to actively build on the desired
corporate reputation, since a heightened reputation of the organization immediately affects the
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identity of the manager. In contrast to reputation concern, reputation building is characterized
by activities that strive to actively improve the satisfaction of reputation forming constituents.
Hence, whereas in the first case identity overlaps result in a more reactive posture to protect
reputation against any undesired effects, in the latter case, identity overlaps result in an active
building of reputation. In sum, based on social identity theory, which argues that the identity
of the organization (at least partly) defines the identity and the self-esteem of managers of an
organization, we propose that individuals face an incentive to protect and build corporate
reputation.
Proposition 1:
The identity overlap between the managers of an organization and the organization is
positively related to the incentive to protect and build corporate reputation.
Stakeholder satisfaction
In order to ensure a favorable reputation, managers need to understand how reputation
is developed. As outlined above, reputation has been coined as a feedback a firm receives
from its stakeholders regarding its identity claims. Freeman (1984: 6) defines a stakeholder as
"any group or individual who can affect, or is affected by, the achievement of a corporation's
purpose".
In Freeman‟s (1984) definition the term stakeholder refers to both individuals and
groups who can be internal or external to the organization. One may contend that non-
stakeholders and ex-stakeholders can also contribute to the formation of reputation. For
example, loyal Macintosh users have arguably contributed significantly to the reputation of a
Macintosh competitor, Microsoft, whose products they do not use. Or a former supplier to a
business could significantly impact that business‟ reputation by talking about his experience
with the firm, even though a former supplier could be considered by some to be an ex-
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stakeholder. In line with Freeman‟s definition (1984), we would argue that if any person or
group is able to form a perception of a particular organization, and thus contribute to the
formation of its reputation, that person or group is considered a stakeholder.
Stakeholders may differ in terms of the strength of the impact on reputation (Fombrun
& Shanley, 1990). Mitchell, Agle and Wood (1997) describe the disparity of stakeholders in
terms of (1) the stakeholder's power to influence the firm, (2) the legitimacy of the
stakeholder's relationship with the firm, and (3) the urgency of the stakeholder's claim on the
firm, and (4) stakeholder saliency, as the degree to which managers give priority to competing
stakeholder claims. This theory produces a comprehensive typology of stakeholders based on
the normative assumption that these variables define the field of stakeholders: those entities
which managers must satisfy.
Fombrun and Shanley (1990) propose that reputation may differ significantly by
audience and domain. Depending on the audience (e.g., stakeholders) corporate reputation can
be more or less favorable (Bromley, 2000). For example internal stakeholders as employees
might have a differing impression about the firm's actions for work safety than external
stakeholders who face asymmetric information about this aspect. Similarly, stakeholders
could assess different domains of corporate reputation. For instance, community groups could
be assessing environmental issues at the same time customers are assessing product reliability
issues and owners are assessing return on equity issues (Wartick, 2002).
Furthermore, reputation may also vary according to the preferences of the manager.
For example Richard Branson from Virgin might strive for a young, dynamic and risk liking
reputation, whereas Ingvar Kamprad from IKEA strives to stand for a modest, genuine,
simple and thrift reputation. Depending on the identity claims of the owner-manager, the
desired corporate reputation might be adapted.
Hence, it seems to be unsatisfactory to define "good" corporate reputation and
aggregate all stakeholder perceptions to one measure as proposed by some scholars (Fombrun
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& Shanley, 1990). Rather, corporate reputation seems to differ depending on the domain, the
audience (stakeholders), the stakeholder's power, legitimacy, urgency and saliency just as the
preferences of owner-managers for a specific corporate reputation. Rather than maximizing
corporate reputation we can therefore assume that businesses generally try to pursue a
reputation, which they determine to be in their best interest, thereby balancing the influence of
multiple reputation forming constituents. In more general terms:
Proposition 2
The incentive to protect and build corporate reputation is positively related to the satisfaction
of multiple organizational stakeholders.
Organizational reputation has been proposed to be a possible antecedent to firm
economic performance and lower cost of debt financing (Anderson, Mansi & Reeb, 2003;
Anderson & Reeb, 2003). These authors conclude that due to reputation concerns owners with
high identity overlaps with their firms face a substantial incentive to keep economic
performance high in order to preserve the desired reputation of the individual family member,
the family group and the organization.
Just as importantly as building incentives to create economic outcomes, incentives to
protect and build reputation concerns may also be useful in explaining initiatives to create
non-pecuniary performance outcomes. Fombrun and Shanley (1990: 234) have stressed the
importance of how different outcomes satisfy different stakeholders with the following: “A
theoretical articulation of reputation as a construct should anticipate the multiple economic
and non-economic criteria different constituents are likely to use in assessing firms.” Freeman
(1984) notes that since different publics attend to different features of firms' performance,
reputations reflect firms' relative success in fulfilling the expectations of multiple
stakeholders.
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Fombrun and Shanely (1990) find that publics appear to construct reputations from a
mix of signals derived, amongst others, from market information, media reports, and other
non-pecuniary cues as for example social concerns. Regarding the satisfaction of employees
(employees forming a key firm-internal stakeholder category) researchers have found causal
links between routinization, integration and work load and employee satisfaction (e.g. Curry,
Wakefield, Price & Mueller, 1986). Scholars discussing satisfaction of environmental
stakeholders call for non-pecuniary measures of corporate performance like social
responsibility goals and market strategies (Menon & Menon, 1997). Regarding the
satisfaction of customers and employees, being key constituents to corporate reputation,
Strong, Ringer and Taylor (2001) have proposed that the factors critical to the satisfaction of
these stakeholder categories were timeliness of communication, the honesty and completeness
of the information and the empathy of treatment by management. In a more general way,
Clarkson (1995) states that firms who strive to satisfy primary stakeholders need to balance
wealth and value created for these stakeholders, considering that "wealth and value are not
defined adequately only in terms of increased share price, dividends, or profits."
Furthermore, Chakravarthy (1986) argues that a firm‟s ability to satisfy multiple stakeholders
(beyond the stockholder) is an important determinant of strategic performance.
In sum, these considerations provide evidence that non-pecuniary performance
outcomes are key elements to the satisfaction of stakeholders. Consequently we argue that key
constituents express their judgments about firms based on judgments related to the relative
success of firms in meeting their expectations, with non-pecuniary criteria playing a crucial
role in this attempt. Therefore we propose that the higher a firm's inclination to satisfy
multiple stakeholders to assure a desired reputation, the higher the firm's non-pecuniary
performance. More formally stated:
Proposition 3
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The satisfaction of multiple organizational stakeholders is positively related to non-pecuniary
performance outcomes.
We further propose that the link between identity overlaps of managers and the
organization and the incentive to protect and build reputation is moderated by the
commitment managers display for the organization. Meyer and Allen (1991) propose three
types of commitment to an organization, affective, normative and continuance. In line with
Meyer et al. (1993) who suggest that individuals can become bound to organizations in
different ways and that the implications for occupation-relevant behavior like performance
and citizenship can be quite different, we expect that the positive link between identity
overlaps and reputation concern and building will be depend on the influence different types
of commitment can have.
Affective commitment has been found to be induced by work experience, in terms of
comfort and competence, personal dispositions (e.g., need for achievement, locus of control),
and organizational structures (e.g., decentralization of decision making or formalization of
policy and procedures). Meyer and Herscovitch (2001) define affective commitment to a
given organization as an attachment characterized by an identification to and involvement in
it. Meyer et al. (1993) note that with strong affective commitment managers remain with the
organization because they want to. Since managers experiencing affective commitment
commit due to the experience from being member of that organization (Vandenberghe,
Bentein, & Stinglhamer, 2004) they will face a high incentive to protect the reputation of their
organization since a negative reputation would trouble their attachment to the organization.
Beyond protecting reputation, thereby avoiding activities that might be of concern to
reputation forming constituents, we expect that this type of organizational commitment will
also lead to an incentive to build on the desired reputation, for example via performance and
citizenship behavior. Meyer et al. (1993) and Vandenberghe et al. (2004) indeed find that
17
affective commitment is positively related to organization citizenship behavior, hence
individual discretionary behavior that is not directly or explicitly recognized by the formal
reward system. However, in the aggregate affective commitment promotes individual
prosocial behaviors (Angle & Lawson, 1994), which benefit the efficient functioning of the
organization and the way it is perceived by organizational stakeholders (Williams &
Anderson, 1991). Hence, we expect that affective commitment will magnify the positive
relation between identity overlaps and both, reputation concern and building.
Normative commitment arises from a feeling of obligation to remain with an
organization, which may result from the internalization of normative pressures exerted on an
individual prior to entry into the organization (e.g., familial or cultural socialization), or
following entry (e.g., organizational socialization) (Meyer et al., 1993). Managers with
normative commitment, who consign because they feel they ought to do so due to social
norms or organizational socialization and hence obligation, are expected to have an incentive
to protect their organization‟s reputation since facing a negative reputation is inacceptable
given the normative pressures and obligations from being a member of that organization
(Meyer & Allen, 1991). Beyond protecting the desired reputation, normative commitment has
been found to provide incentives to increase job-related performance and corporate
citizenship behavior, albeit at lower levels than affective commitment (Meyer, Stanley,
Herscovitch, & Topolnytsky, 2002). Social identity theory proposes that, as a consequence of
a high identity overlap between the group and the individual, people can become
depersonalised. Individuals are then perceived as, reacted to, and act as embodiments of the
relevant in-group prototype (Hogg, Terry, & White, 1995). Thereby, the higher the degree of
depersonalization of the individual induced by the socialization in the organization, the higher
a person‟s reputation concern due to normative commitment. Consequently, managers with
normative commitment have heightened incentives to ensure that their organization is seen in
a positive light in order to imbue the firm and ultimately the self with a positive
18
distinctiveness. Thereby normative commitment bolsters the link between identity overlaps
and reputation concern just as reputation building.
Continuance commitment develops as a result of anything that increases the costs of
leaving one's organization (Meyer & Allen, 1991). As a result, individuals who display a high
degree of continuance commitment tend to feel “stuck” and continue employment by virtue of
necessity and cost. Meyer, Allen and Smith (1993) propose that managers experience exit
costs due to a lack of alternative employment opportunities or sunk costs (e.g., status
associated with membership, time and effort put into acquiring occupation-specific human
resources) that would be lost or reduced in value if he or she were to change organization.
Exit costs can also be induced by a long-term investment that will only pay-off in the very
long-term (Fama & Jensen, 1983), or a firm specific investment in financial capital, with a
missing possibility to trade the shares on a liquid market, owners thereby facing illiquidity
discounts for their shares (Chatterjee, Lubatkin & Schulze, 1999). A feeling of being stuck
with an organization due to high exit costs will provide incentives to protect the
organization‟s reputation, since a negative reputation that affects the self-esteem of the person
will be costly to avoid. Consistent with Meek, Woodworth and Dyer (1988) we argue that
managers facing high exit costs from organizational membership may find it more difficult to
buffer their personal self-view if their companies develop a bad reputation since they see their
employment as a proposition with high exit costs. Hence, high continuance commitment
translates into high reputation concern. In contrast, commitment rooted in high exit costs has
not been found to induce an increased job-related performance or professional involvement
and on-the-job behavior (e.g., performance, absenteeism, citizenship) besides the level
required to continue membership (Iles, Forster & Tinline, 1996; Meyer et al., 1993; Meyer et
al., 2002). Randall and O‟Driscoll (1997) proposed that continuance commitment discourages
individuals to undertake actions in favor of the organization. Indeed, in a related study
Carmeli and Freund (2002) found no relation between continuance commitment and
19
perceived external prestige of a firm. In turn, in contrast to reputation concern we expect that
continuance commitment will not provide incentives to build on the desired corporate
reputation, since building reputation makes exit from the organization even more costly.
Consequently, whereas the positive link between identity overlaps and reputation concern is
expected to be magnified by continuance commitment, we propose that the link between
identity overlap and the incentive to build on the organization‟s reputation is unsupported if
commitment is solely continuance based.
Our considerations on the moderating impact of different types of commitment on
reputation concern and reputation building are summarized in below Table 1.
-------------------------------------------
Insert Table 1 about here
-------------------------------------------
Accordingly, we argue that reputation concern, hence the incentive to protect against
an undesired reputation, is strongest when high levels of identity overlap between managers
and the organization is accompanied by much affective, normative and continuance
commitment. With regard to the incentive to build on the organization‟s reputation we
propose that the positive impact of identity overlaps will be supported by affective and
normative commitment, but not by continuance commitment.
Proposition 4a
The link between identity overlaps and the incentive to protect corporate reputation is
strengthened by normative, affective and continuance commitment.
Proposition 4b
The link between identity overlaps and the incentive to build corporate reputation is
strengthened by normative and affective commitment, but not by continuance commitment.
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4. The case of family firms
In this section we draw upon the case of the family firm to provide a specific
application of the discussion so far. It is widely acknowledged that most family firms
deliberately strive for a mix of pecuniary and non-pecuniary performance outcomes
(Westhead & Cowling, 1997; Sharma, 2004). Common examples of such non-pecuniary
outcomes are independence, prestige, tradition and continuity (Anderson & Reeb, 2003;
Corbetta & Salvato 2004; Sorenson, 1999; Sharma, Chrisman & Chua, 1997; Stafford et al.
1999; Ward, 1997). Based on the previous discussion we expect two main implications in the
context of family firms. First, we expect that the incentive to protect corporate reputation and
to strive for non-pecuniary outcomes is particularly pronounced in family firms. Second, we
expect that the extent to which family firms are more inclined to build corporate reputation
than nonfamily firms depends on the quality of family commitment.
It has been suggested many times that families face great loss of reputation in case of
business failure, thereby creating incentives to protect the firm‟s reputation (e.g., Anderson,
Mansi & Reeb, 2002; Sirmon & Hitt, 2003; Sonnenfeld & Spence, 1989). Eponyms, when the
family name is the same as the brand name, may be a specific way this type of organization is
able to uniquely ingrain reputation. Westhead (2001) proposes that the name of the family
member will be identified with the organization in the long-run, even beyond the professional
tenure of managers. This long-term orientation and identity overlap between the individual,
the family and the firm is expected to lead to a heightened concern for corporate reputation in
the long-run, since reputation is by definition a perception of the past and present and is
developed over time (Fombrun, 1996).
What is more, investigating the relationship between time and reputation Fischer and
Reuber (2007: 67) describe the concept of reputational “stickiness” where “evaluations
(positive or negative) become entrenched such that they have an ongoing impact on the firm’s
21
performance.” While Fischer and Reuber (2007: 67) recognize this concept in their research,
they “do not know what conditions must exist for such stickiness to occur.” We suggest that
the high identity family firm system can be one such condition which, over time, creates
reputation stickiness. More specifically, the tight identity overlap between family managers,
family and firm could lead to a deep entrenchment of the reputation due to an inextricable
bond between the three. This reputational stickiness is expected to create strong incentives to
protect the desired reputation since it could prove to be detrimental in the case of negative
reputation.
Consequently, and in line with Dyer and Whetten (2006), we argue that the link
between identity overlaps of family managers, family and the firm and reputation concern is
reinforced by continuance commitment of the family managers. The obvious problem family
managers leading their family‟s firm face is that in response to bad publicity they cannot,
practically speaking, switch groups. Although they may sell off their shares in disgust, they
cannot escape the fact that their family, in some sense, is the offending firm. Family managers
of privately held firms not only face exit costs when selling their stock on an illiquid market.
Moreover, they also forgo certain rights like perquisites, and non-pecuniary benefits as status
or intimacy with other family members (Schulze, Lubatkin, & Dino, 2003). Facing these
heightened exit costs even highly dysfunctional families have been found to cover bad
behavior of family members in order to maintain a positive image in their respective
communities.
By showing that family firms in the S&P 500 in contrast to their nonfamily
counterparts had fewer social concerns that could endanger their corporate reputation, Dyer
and Whetten (2006) provide evidence that family firms indeed face high incentives to protect
corporate reputation. However, Dyer and Whetten (2006) also found that family firms did not
display more social initiatives and therefore did not more actively build on their corporate
reputation than nonfamily firms. In light of the framework we propose here, this
22
counterintuitive finding can be explained as follows: whether family involvement leads to an
active building of a desired corporate reputation is influenced by the type of commitment the
family experiences for its firm. In case of solely continuance commitment, we do not expect
to see an incentive to actively build reputation. However, in the presence of normative and in
particular affective commitment we expect that family firms will actively build on their
desired reputation.
Hence, when LeBreton-Miller (2006) and Steier (2001) suggest that significant
publicly listed family firms build reputational resources and enhanced organizational
legitimacy by actively creating positive relationships with the community, such as through
charitable investments in civic and social institutions, we expect that these business families
will display high levels of affective and normative commitment and not solely continuance
commitment to their firms.
In sum, we argue that since family firms face high identity overlaps between family
members, the family and the firm reinforced by high exit cost for family members to leave the
family and the firm, this type of firm will display a higher incentive to protect corporate
reputation than non-family firms and thereby create non-pecuniary outcomes to satisfy
reputation forming stakeholders. However, in line with our considerations on the type of
commitment, we expect that the link between identity overlap and the incentive to build
corporate reputation is supported in case of affective and normative commitment, but
unsupported when solely continuance commitment is at play.
5. Conclusion
In this paper we have focused on the question what drives non-pecuniary performance
outcomes among firms that supposedly exist for the purpose of generating financial outcomes.
The quest to produce non-pecuniary performance outcomes related to businesses activity has
been acknowledged for many years in various streams of the management literature. While
23
the content and motivation of some individual non-pecuniary outcomes have been identified
in previous research there is, however, still little effort to theoretically explain why managers
create non-pecuniary performance outcomes for their organizations. Corporate social
responsibility and performance scholars are today perhaps the most active in terms of
addressing this research question in part pointing at the moral obligation of firms to be
economically and socially responsible citizens (e.g., Wartick & Cochran, 1985). We approach
the nature and reason for non-pecuniary performance outcomes in a way that extends current
ethical and financial oriented rational.
Drawing on social identity theory and literature on organizational reputation we
focused particularly on firms where there is a high identity overlap between the identity of
managers and the identity of the organizations they lead. In essence, our conclusion is that a
firm‟s strive for non-pecuniary performance outcomes can be explained by this identity
overlap since it motivates managers to protect and build organizational reputation, which is
created by satisfying stakeholder groups which demand non-pecuniary performance.
Importantly we also argued that the link between identity overlap and the inclination to
protect and build reputation is moderated by the type of commitment managers have to the
organization. More specifically the concern for reputation should be strongest when the
identity overlap between managers and the organization is based on strong affective,
normative and continuance commitment, while building organizational reputation is
supported by affective and normative commitment, but not by continuance commitment.
While churches, partnerships and cooperatives constitute common examples of
organizations with high identity overlap between managers and their organizations, we have
paid particular attention to the family business. The reason is simple. Family businesses
continue to represent the most common but perhaps least researched type of organization
worldwide. Both social identity theory (Dyer and Whetten, 2006) and organizational
reputation performance (Anderson & Reeb, 2003) have previously been proposed as
24
antecedents to family business performance. While Anderson & Reeb (2003) concluded that
due to reputation concerns, family owners have strong incentives to keep economic
performance high in order to preserve the desired reputation of both the family and the firm,
we argued that reputation concerns is also appropriate in explaining the creation of non-
pecuniary outcomes. Extending Dyer and Whetten‟s (2006) work on social identity and
corporate social responsibility of family businesses we conclude that the social identity lens is
not just an appropriate theory for explaining corporate social responsibility but also the quest
for non-pecuniary performance outcomes more generally. To make this extension we argued
that the type of commitment a family manager show to his or her firm influences the extent to
which they are engaged in active building of organizational reputation in the following
fashion: only continuance commitment should logically not lead to actively building
reputation, but in the presence of normative and affective commitment we expect that family
managers will actively build on their desired reputation and thus strive to a greater extent for
non-pecuniary performance outcomes.
In sum, the application of social identity theory has permitted us to offer a stringent
and conceptually grounded explanation of why firms search for non-pecuniary performance
outcomes that we have lacked previously. Moreover, the observation that the overlap between
the individual identity of managers with the identity of their organizations motivates
managers to protect and build corporate reputation as well as to strive for non-pecuniary
performance outcomes that satisfy reputation forming stakeholders, which extends the
literature on organizational reputation. Finally, we have expanded the growing literature on
family businesses by adding a new explanation to the very common, but still largely
anecdotal, observations that family businesses in particular are driven by non-pecuniary
performance outcomes.
We have been forced to leave out many important dimensions of the topic we explore
in this paper. It is therefore clear that much more research is needed to more fully understand
25
the nature and drivers of non-pecuniary performance outcomes in different types of
organizations. It should also be emphasized that our focus on non-pecuniary performance,
does not mean that we do not regard financial performance as unimportant or irrelevant form
firm with high identity overlap. Rather, our analysis is directed towards the observation that
many firms and organizations strive for, sometimes even officially, a mix between financial
and non-financial outcomes. While the reason for financial performance is rather easy to
explain, the rationale behind the relevance of non-pecuniary outcomes has not yet received
sufficient theoretical and empirical research attention. A logical progression for researchers
interested in this topic should therefore be to conduct empirical research guided towards
testing the model suggested in this article.
In this paper, we have talked rather generally about the nature of non-pecuniary
performance outcomes since the main purpose has been to explain what drives the quest to
produce such outcomes. We believe studies are needed that clarify the nature of and even
categorize different types of non-pecuniary performance outcomes. Some outcomes, for
instance, independence, status and prestige, may be better explained by our framework than
other outcomes. Only future research can address this potential limitation of this paper.
Beyond the need for empirical research to address one of the inherent limitations of
this article, we also encourage future researchers to better discriminate between types of
organizations with high levels of overlap between the identity of the organization and the
identity of its managers. It would for instance be very appropriate to further our understanding
of non-pecuniary performance by comparing for instance family businesses with churches,
partnerships or cooperatives. Do they differ in how and why they strive for non-pecuniary
performance? Are some non-pecuniary performance outcomes more important in one type
than in the other? Conducting such research it is however important to keep in mind that the
populations of firms that we say are characterized by high identity overlap between the
manager and their organization is not homogenous either. There is for instance not one type of
26
family business (Melin & Nordqvist, 2007). Rather, it is plausible to assume that the identity
overlap, reputation concerns and the importance of non-pecuniary performance outcomes
differ between families and businesses (Sharma, 2004). We regard this as a research
opportunity since the framework we have presented in this paper could be expanded in order
to serve as a conceptual tool in these future research attempts.
27
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Figure 1: Research Model
Identity overlap between
managers and the
organization
Incentive to protect organizational reputation
Incentive to build organizational reputation
Stakeholder satisfaction
Non-pecuniary
performance outcomes
Commitment
- Affective
- Normative
- Continuance
P1
P2
P3
P4
33
Table 1: Types of commitment and incentive to protect and create reputation
Type of
commitment
Affective Normative Continuance
Rationale Want to commit Should commit Have to commit
Induced by Work experience:
comfort, competence,
personal dispositions,
organizational structures
Obligation:
internalization of
normative pressures
prior to entry (e.g.,
familial or cultural
socialization), or
following entry (e.g.,
organizational
socialization)
Exit costs:
lack of alternative
employment
opportunities, sunk costs,
financial investments,
illiquidity discounts
Incentive to protect
against undesired
reputation
High, because undesired
reputation would reduce
the affective experience
High, because undesired
reputation is morally or
socially inacceptable
High, because avoiding
undesired reputation is
too costly.
Incentive to build
desired reputation
High, since it increases
the affective experience
of the individual
Medium, since it
increases the self-
esteem of the individual
via identity overlap with
the group
Low, since commitment
persists only due to exit
costs
