Managerial Finance

Corporate governance, managerial strategies and shareholder wealth maximization: a study of large
European companies
E. Dockey, W.E. Herbert, K. Taylor,
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 Volume 26 Number 9 2000 21

Corporate Governance, Managerial Strategies and

Shareholder Wealth Maximisation: A Study of
Large European Companies
by E. Dockery, Department of Economics, Staffordshire University, W. E. Herbert, Nige-
rian Education Bank and K. Taylor, Cardiff Business School, University of Wales
Abstract
Of all the economic agents of a firm, corporate managers are the most likely targets for both
internal and external pressure. Consequently, they tend to adopt strategies in response to
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these pressures to create shareholder value. This paper reports the results of a survey of
European and UK CFOs drawn from 175 large companies on 21 contextual value-
maximising strategies clustered around three key categories: operating, investment, and
capital strategies. The results show that enhancing operating margins, ability to generate
new/enhanced products internally, and instituting a leveraged buyout are respectively ex-
cellent operating, investment, and capital strategies to create shareholder value. The study
also indicates that European managers take a much longer-term perspective of value-
creating strategies than their UK counterparts. The results support the general proposition
that shareholder value is created through a mix of strategies.
Keywords: Managerial strategies; Shareholder wealth maximisation; Eurropean Compa-
nies
JEL classification: G3, L2
1. Introduction
The question of whether corporate management adopts strategies consistent with share-
holder wealth maximisation is an ongoing issue in corporate finance. In joining the debate,
this paper seeks to investigate the extent to which the strategies of European firms cohere
with the interest of their shareholders. The emphasis is on the possible conflict or agency
problems between shareholders and corporate management, arising from the divergence of
corporate ownership and control. An important objective of corporate governance is secur-
ing accountability of corporate management as shareholders’ agents who are provided with
authority and incentives to promote wealth-creating strategies.
Agency problems may arise when management decisions or actions flow from non-
value or trivial maximising strategies. For example, management may seek to increase the
size of the firm for the sole purpose of empire building (Marris, 1963), or they may seek to
diversify the firm’s portfolio in order to increase their own job security (Amihud and Lev,
1981; Jensen, 1986). Further, the managerial entrenchment thesis suggests that the separa-
tion of ownership and control offers managers an array of discretionary behaviours, includ-
ing shirking (Jensen and Meckling, 1976), and risk aversion or the taking of fewer
investment risks (Morck et al., 1989). Each of these ultimately results in present value loss
for the firm (Hayes and Wheelwright, 1984; Jensen and Meckling, 1979).
Our examination into the type of strategies European managers adopt to enhance
shareholder wealth may be seen as an extension of the agency theory to corporate govern-
 Managerial Finance 22

ance. The focus is on the interaction of agency theory with corporate governance. The inter-
action effects are captured in the following questions: Do corporate managers devise and
implement strategies, which progressively enhance shareholder value? If so, how do corpo-
rate managers in large European firms pursue this objective? What specific strategies do
they design and implement to achieve this objective? What kind of outside pressures, politi-
cal or otherwise, are mounted upon managers along this path?

One factor likely to motivate a European manager is the market value of the firm.
Thus, European managers may adopt aggressive wealth-maximising strategies in the bid to
increase the value of the firm’s share prices. Of importance in this respect are three main
strategies. These are operating, investment, and financial strategies. Operating benefits
flow by way of improved economic efficiency, lower operating costs or through improve-
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ments in the efficient utilisation of factor inputs thus leading to improved profitability. In-
vestment benefits may be realised from implementing investment-based strategies, such as
adjustments in production capacity, technological process, or by corporate restructuring,
where diversification or divestment may give rise to an overall improvement in the level of
firm performance. Financial or capital-based strategies are those that proffer the choice of
equity or debt finance, since dividend payout and restructuring are financing models which
corporate managers can utilise in the bid to increase firm value. Thus, the adoption of strate-
gies should be positively related to shareholder wealth maximisation.

In this study, we explicitly link corporate governance with managerial attitudes,

strategies, and shareholders’ wealth pursuit. The interaction effects of these have not been
subjected to much systematic investigation, although the ambit of corporate governance is-
sues is quite wide. Specifically, this study seeks to evaluate differential strategic ap-
proaches to shareholder wealth enhancement by UK firms and their European counterparts.

The remainder of the paper is organised as follows. Section 2 highlights some underly-
ing theoretical issues and considers the estimating equation. This is followed, in Section 3,
by a brief discussion of our methodology as well as the econometric results. In the final sec-
tion, we offer some concluding remarks.

2. Corporate Governance and Shareholder Value: The Underlying Issues

An important implication of corporate governance is the concern with the ways in which the
suppliers of corporate finance assure themselves of getting a return on their investment
(Shleifer and Vishny, 1997). It is not necessary here to go into the various theories of corpo-
rate governance, nor is any attempt made to cover the market mechanisms associated with
strategies of shareholder wealth maximisation. Instead, we discuss the agency implications
of corporate governance. First, we note that when corporate management makes decisions
that ensure all factors of production are used in their most effective way, it is invariably
seeking to maximise the long-run market value of the firm. This maximisation goal of the
firm is expressed in terms of the total market value of the firm, MV, as a function of the
claims of both shareholders and bondholders of the firm. Thus,

MV = S + B
Where: S is the market value of the stock, and B is the market value of the firm’s bonds
and other outstanding debt obligations.
 Volume 26 Number 9 2000 23

The objective of corporate management is to maximise MV by maximising S, and this

underpins the financial decision making process of most firms. However, maximising MV
is not always the objective criterion of corporate management. In the pursuit of other objec-
tives, management may wittingly or unwittingly bring shareholders into conflict with the
bondholders and other stakeholders who have a direct interest in the firm. The relationship
between corporate management, as agents of the owners of the firm, i.e., the shareholders,
may give rise to a series of agency problems; see Fama (1980), Fama and Jensen (1983a,
1983b), and Jensen and Meckling (1976). For instance, if the manager is a utility-
maximising agent and his personal utility is affected by an investment or financing choice
in a different way than the utility of the owner. Then to the extent that the manager is free to
deviate from owner preferences, he will of course do so. This then is the basic idea behind
the principal agent problem advanced by Jensen and Meckling (1976).
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The agency problems we infer may arise because contracts cannot fully specify the
rights and obligations of the parties. Thus furnishing opportunities for management to
make decisions about the use of corporate resources that benefit them personally and at the
firm’s costs (Jensen and Meckling; 1976). These problems tend to exist in large firms with
dispersed ownership where both ownership and control are vested in different parties. This
kind of relationship raises agency costs because corporate management do not bear the
wealth effects of their own decisions, and dispersed shareholders cannot efficiently moni-
tor corporate management as they would like (Fama and Jensen, 1983a, Jensen and Meck-
ling, 1976). In all of this, there is the potential divergence between owner and management
objectives with implications for maximising firm value. The agency theory addresses prob-
lems that arise from this potential divergence of interests, with the two main problems being
the goal incongruence and information asymmetry between shareholders and corporate
management. Specifically, since shareholders own shares that entitle them to the residual
returns in the firm, they correspondingly bear the risk of zero or negative returns. However,
when shareholders do not own the residual claims, management is viewed to confront too
few direct incentives to maximise firm value (see Hart, 1983; and Grossman and Hart,
1980). This leads Jensen and Smith (1985) to conclude that managers are likely to act in
their own best interests and may, in that process, be unwilling to make additional effort to
undertake new investments. By implication managers may also have a less preference for
investments that are likely to increase the risk of the firm, including foregoing long-term in-
vestments in both capital and research and development projects. To resolve this type of
managerial dysfunctional behaviour and hence limit the manager/agent’s ability to deviate
from owner-utility maximising decisions, the owner must engage in monitoring activities.
Incentive systems are also another means by which firms’ owners can align their interests
with those of the managers. Because of information asymmetry, monitoring is costly, thus
the responsibility for aligning such interests must link managerial performance with the
overall corporate performance.
The central theme of the foregoing submission is that firms seek to maximise share-
holder wealth, implying that corporate management would focus on creating value for
shareholders through the adoption of value enhancing strategies. Among the reasons ad-
duced for such corporate management focus are: the dynamics of the market place, the de-
gree of market competition, the potential loss of corporate control through take-overs and
the need to link managers long term compensation more closely to shareholder returns.
These views however contrast sharply with the findings of Donaldson (1984) who observed
that managers did not seek to maximise shareholders’ wealth but sought instead to maxi-
mise corporate wealth. For Donaldson, corporate wealth includes the stocks and flows of
 Managerial Finance 24

cash and cash equivalents that corporate managers are at liberty to utilise at their discretion
to implement decisions involving the control of goods and services. On their part, Day and
Fahey (1990) posit that shareholder value analysis could mislead corporate managers into
making strategies by overlooking or under/over valuing a given strategy. It has been argued
that corporate strategies, which either increase or decrease a firm’s market value, may only
marginally affect the financial benefits of corporate managers (Jensen and Murphy (1990).
This is because the incentives of corporate managers may be independent of their perform-
ance. Alternatively, private as well as political forces may be the catalysts that drive mana-
gerial strategies rather than a goal of value maximisation. Thus if the financial incentives of
corporate managers are independent of their performance, managers are more likely to
adopt a set of strategies which are beneficial to themselves even if these strategies prove to
be costly to shareholders.
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In a governance system, where the incentives of management are aligned with those of
shareholders, it may be conjectured that the latter will prefer the former to devise and imple-
ment strategies, which maximise the market value of the firm. A large literature exists
which supports the contention that managers make decisions based on a comparison of their
own personal gains and losses in pursuit of a specific strategy (Gomez-Mejia et al., 1987;
Jensen and Murphy, 1990; Kroll et al., 1993; Tosi et al., 1989 and Wright et al., 1996). For
European corporate managers, we hypothesise that such personal considerations (costs)
may include the loss of institutional shareholder confidence resulting in pressure from
non-executive directors and individual shareholders, as well as intense media relations fo-
cus. Thus, corporate management may pursue business strategies either for personal rea-
sons or in response to various pressures, particular from the discontent of large institutional
shareholders with the firm’s existing leadership or for under- performance more generally
(Shleifer and Vishny, 1986). This reasoning is consistent with Jensen and Murphy’s (1990)
contention that private and public political forces may drive managerial and corporate
strategies. This view is supported by the conclusion that among the various interest groups
in the firm, corporate management is the most likely target for public and private pressure to
maximise the firms’ market value. Other interest groups such as small shareholders are,
however, less conspicuous and may be perceived as being less influential as regards the de-
sign and adoption of wealth maximising strategies (see Strickland et al., 1996).

In a European corporate governance system, the board of directors is often the main
link between shareholders and corporate management. The board is also perceived to have
the responsibility of focusing managers’ attention towards the goal of maximising share-
holder value. The board of directors is responsible for setting managerial compensation and
for ensuring that the interest of shareholders is sufficiently protected, although Mizruchi
(1983) and Wade et al., (1990) have questioned the effectiveness of the board as a monitor-
ing agent. The authors suggest that the board may be inadvertently allowing managers to
reap undeserved compensation and perquisites. To safeguard their investment, sharehold-
ers may be compelled to increase pressure on the board or use other means, such as the pay-
ment of board retainers in stock, to align directors’ interests with theirs. Although agency
theory predicts that the separation of ownership from control has efficient properties in risk
allocation, however, some risks, borne by managers and directors in equity holdings, may
be desirable for interest alignment purposes (Admati et al., 1994). Also related is the fact
that corporate managers themselves have personal incentives to align their interests with
those of shareholders. These include risk minimisation, diversification of the firm’s portfo-
lio and the utility derived from increasing the growth of the firm beyond the point that maxi-
 Volume 26 Number 9 2000 25

mises shareholder value (Jensen and Meckling, 1976; Amihud and Lev, 1981, and Murphy,
1985).

The crucial question, however, concerns the type of strategies European managers
adopt to enhance shareholder value. Indeed, given that shareholders in general have little
opportunity for control beyond that which accompanies their stock holdings, their motiva-
tions stems from their desire for behaviours that maximise firm value and can derive little
benefit from non-value maximising behaviour.

A recent trend in corporate governance in the UK and the US is the reorientation of

boards of directors towards shareholder interests. This is facilitated by the increasing role of
institutional investors who, through their eagle eyes, are exerting pressure on companies
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over shareholder returns. They are not only evolving positive changes in corporate govern-
ance but are using their shareholding power to pressure managers to adopt strategies that
maximise shareholder wealth (Maug, 1998). Institutional investors have also become a po-
tent force in making management to refocus their strategies, where the firm is deemed to be
under-performing (Jensen and Warner, 1988). The concentration power of institutional in-
vestors in the 1980s and early 1990s provided a relentless desire for shareholder govern-
ance pressure. Recently too, shareholder activism, particularly in the US, has tended to
force corporate management to adopt strategies that enhance shareholder returns.

3. Data, Methodology and Empirical Results

European corporate governance systems give primacy to outside shareholders. As already

noted, the force of institutional shareholders is central to this study. They exert considerable
pressure when they believe shareholders interests are being compromised by failing corpo-
rate strategies. To examine the sort of strategies managers adopt to enhance shareholder
wealth, we undertook a random sample of financial executives of large firms in 7 member
countries of the European Union, including the UK during the period 1995 through 1997.
The aim of the study was to examine the present and future strategies adopted by European
firms. A survey methodology was adopted in order to reach a dispersed sample. This is ap-
propriate where the objective is to elicit opinions and the data collected to provide empirical
evidence of the various aspects and the type of strategies managers adopt in creating value
for shareholders.1 The questionnaire used to elicit opinions from the European chief finan-
cial officers (CFOs) is a slightly modified version of an instrument used by Schneider’s
(1990) for the US survey.2 Included in the survey questionnaire is a section designed to in-
vestigate whether the right (of shareholders) to vote influenced the managers’ decision to
adopt more aggressive wealth-creating strategies. After pre-testing, the questionnaire was
mailed to 300 European financial executives drawn at random from a wide range of indus-
trial and financial service firms. The companies were selected according to their market
capitalisation, on the premise that the significant amount of their market values would be
critical to the type of strategies adopted than would be the case with smaller companies.

In total, 175 companies (58.3%) responded to the questionnaire.3 In order to gauge the
bias due to non-response, we made the following evaluations:

(1) a comparison of late respondents with early respondents, as recommended by

Oppenheim (1966), Armstrong and Overton (1977) and Wallace and Mellor
(1988);
 Managerial Finance 26

(2) a comparison of company size of respondents and non-respondents, as sug-

gested by Wallace and Mellor (1988);
(3) a comparison of the first and second mailings (Wallace and Mellor, 1988), and
(4) an evaluation of the discrepancy between a set of observed frequencies and
expected frequencies of returns among (i) the first, second, etc. mailings, (ii)
usable and non-usable questionnaire returns, and/or (iii) company character-
istics, as suggested by Herbert and Wallace (1996). Noticeably, the P 2 tests
revealed no significant differences between either the respondents and non-
respondents, the first and second mailings, or usable and non-usable re-
sponses.
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The questionnaire sought responses on the strategies pursued in respect of business

operations, investment decisions, and capital funding decisions. Respondents were asked
to rate a strategy item in terms of its effectiveness in enhancing shareholder value. Our ear-
lier discussion suggests several testable propositions regarding the relations between firm
characteristics and shareholder maximisation strategies. The reduction in agency costs
leads to the following three propositions about the three strategies:

1. Emphasis on operating strategies promotes earnings (through a focus on core

businesses) and enhances shareholder value.
2. Emphasis on investment strategies offers the prospect of improved perform-
ance, which guarantees investors positive returns to compensate for the risks,
they assume.
3. Emphasis on financial strategies leads to either an increase or reduction in
debt, which could result in increase in firm value.

Although across all firms it is expected that the strategies will produce favourable re-
actions, these may vary by type of strategy. The relationships specified by the propositions
are predicted to impact shareholder value, and their influence is assumed invariant with the
cycle of the context in which the firm operates. In other words, the risk and return character-
istics associated with each of the seven strategies in each strategy type examined is gener-
ally constant across the firm’s cycle. In addition, if the proposition holds, the characteristics
themselves can influence the strategy and thus the relative relationship between the strategy
and the variables would be stable. If, on the other hand, the proposition is rejected, the dif-
ference of strategy will be interpreted differently. The propositions also imply that the
strategies adopted will more likely reflect shareholder preferences than the preferences of
managers.

The main contention of the propositions is that the process of devising strategies to en-
hance shareholder wealth is an activity that is primarily aimed at addressing governance
limits as well as bridging the conflict between managers and owners. For instance, the em-
phasis on certain characteristics of the strategy type may represent a correction of or devia-
tion from previous strategies that might not have enriched the worth of the firm’s owners.
To gain insight into how the strategies respond to the focus on shareholder value, we regress
a series of independent variables on the market capitalisation value (MCAP) on UK and
European variables, using the following regression equations:
 Volume 26 Number 9 2000 27

MCAP f = a 1+ j + e
SML 1f
(1)

MCAP f = a 2+ b 1
SMLUKl + 1
e +
SMLEURO 2f
(2)

7
MCAP f = a 3+ b 2
SMLUKl + 2
SMLEURO +f å e X+ j
1j 3f
(3)
j=1

7
MCAP f = a 4+ b 3
SMLUKl + 3
SMLEURO +d å 1k
eY+ k 4f
(4)
k=1
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7
MCAP f = a 5+ b 4
SMLUKl + 4
SMLEURO +p å e Z+ l
1l 5f
(5)
l =1

7 7
MCAP f = a 6+ b 5
SMLUKl + 5
SMLEURO +f å 2j
X+ j d å= 2k
+Yk
j=1 k 1
7

å=
i 1
p 2l
Z 1 + e 6f (6)

7 7 7 7
With restrictions: a) å f 1j
= 0; b) å d 1k
= 0; c)å f 1j
= 0; and d å f 2j
=d =p
2j 2j
)
j =1 j =1 j =1 j =1

The parameters of the model, Equations (1-6), are estimated using ordinary least
squares (OLS) controlling for heteroscedasticity using Whites technique (White, 1980). A
problem associated with the OLS method is that the relations between security market list-
ing and market capitalisation in Equation (1-6) could be jointly endogenous. For example,
the level of security market listing may affect market capitalisation. However, despite this
concern, there are at least two inherent advantages to using OLS over an instrumental-
variable method to estimate the coefficients in Equations 1 to 6. First, the properties of the
OLS estimator are less sensitive to specification errors than are the properties of the
instrumental-variable estimator. Second, since there is some uncertainty associated with
the specification of this study’s models, as with all models, OLS could be the most appro-
priate estimator in this case.
Results
Table 1 displays the results obtained for each of the equations (models 1 to 6) based on the
main effects as well as interaction effects.
We would expect the relationship between the dependent and independent variables
to be positive. First, we test whether the strategies of EU firms in general are different from
those of UK firms. The preliminary test based on model 1 was undertaken to determine
whether the listing of a firm on a stock market does in fact play a significant role in influenc-
ing its market capitalisation (MCAP). The results, as shown by model 1, strongly suggest
that a firm’s stock market listing has a positive and significant effect. Model 2 examines the
 Managerial Finance 28

Table 1
Managerial Strategies and Shareholder Wealth Maximisation: OLS Estimates

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

Constant 7.3243* 7.3243* 7.1984* 7.6038* 7.1913* 7.4021*

SML 1.1834*
SMLUK 0.7012* 0.6945* 1.1138* 0.6923* 1.0161*
SMLEURO 1.3357* 1.3704* 1.3567* 1.2893* 1.3197*
X1 -0.013 -0.0192
X2 0.2232* 0.1917*
X3 0.0731 0.0678
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X4 0.1864* 0.2224*
X5 -0.0255 -0.0424
X6 -0.0587 -0.0036
X7 0.0784 0.091
Y1 0.1351* -0.1139
Y2 -0.0296 -0.0705
Y3 0.1481* 0.1447*
Y4 0.1381* 0.1588*
Y5 0.1037 0.0244
Y6 -0.0562 -0.0904
Y7 0.0551 0.0216*
Z1 0.904 0.0269
Z2 -0.0571 -0.0343
Z3 0.1128 -0.0047
Z4 0.0473 0.1252
Z5 -0.0434 -0.0487
Z6 -0.1504 -0.1968
Z7 0.1526* 0.1626*
2
Restrictions c (1) 0.0108 0.2559 0.1867 0.0592

Adjusted R squared 0.173 0.181 0.222 0.217 0.168 0.246

R2

Durbin Watson 1.40 1.55 1.60 1.60 1.59 1.66

Heteroscedasticity 1.53 (1) 4.91 (2) 8.73 (9) 6.04 (9) 7.72 (9) 10 (23)
c 2(d)

Observations 150

*p # 0.05.

All coefficients are based upon Heteroscedastic Consistent Standard Errors.

 Volume 26 Number 9 2000 29

impact of stock market listing for UK firms vis-à-vis EU firms. The results indicate that the
impact for both UK and EU firms is positive and significant. It would however appear that a
stock market listing seems to have a much stronger and larger impact for EU firms than for
UK firms.
We next analyse the degree to which the types of strategies enhance shareholder
wealth, by examining more closely the impact of operating, investment and capital strate-
gies. Note that there are seven strategy options in each strategy class. Model 3 relates to op-
erating strategies. Respondents were asked to rate each of the seven characteristics on a
scale of effectiveness, ranging from 1 for ‘least effective’ to 5 for ‘most effective’ in in-
creasing shareholder value. The result shows that increasing gross and absolute level of
sales (X1) has a negative although insignificant effect upon enhancing shareholder wealth.
Becoming a market leader (X2) and enhancing operating margins on existing product of-
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ferings (X4) are the only two operating strategy found to have a significantly positive effect
on shareholder wealth. We also find that achieving lowest cost producer status (X3) is the
next most effective operating strategies, although it is only significant in the weak sense.
However, respondents cited X2 and X3 as the two operating objectives to be employed in the
future. These findings are somewhat at variance with Schneider’s (1990) US findings. For
example, the strategy of maximising operating/discretionary cash flows (X7), which was
rated the second most effective operating strategy in enhancing shareholder returns by Cor-
porate America, was found in the present study to have little effect by Corporate Europe. As
with the US study, not much attention is given to the corollary strategy of accelerating asset
turnover (X5). It received a significantly lower utilisation frequency. Further, unlike their
US counterparts, EU and UK CFOs do not accord high priority to the strategy of increasing
the ROA/ROE. In general, these results are not consistent with proposition 1 which hy-
pothesises that emphasis on operating strategies will promote earnings and, in turn, en-
hance shareholder value.
Model 4 captures the impact of investment strategies on shareholder value. The model
specifies seven strategies in the category, of which three were found significant as effective
investment strategies for increasing shareholder value. These are expanding/reducing the
firm’s productive capacity (Y1); ability to generate new/enhanced products internally (Y3),
and purchasing business with complementary product lines (Y4). Interestingly, these
strategies are of less prospective use in maximising shareholder values for Corporate
Europe than at the present. Investment strategies associated with entry into new markets by
acquisition (Y5) or exit from unproductive markets (Y7) have a weak effect on shareholder
value. In addition, strategic pursuits that restrict the efficiency capacity of existing produc-
tion facilities (Y2) or encourage disposal of operating assets etc. (Y6) appear to have little or
no effect on shareholder value creation. This suggests the European managers’ aversion to
diversification beyond core business activities. While there may not be a strong tendency
towards diversification beyond core lines of business now, however, there is evidence
pointing to a strong futurity by Corporate Europe. Over the last five years, there has been
considerable ambiguity and uncertainty surrounding European companies with respect to
both the boundaries of the European Union and cross-border investments. To be sure, with
passage of time and as the diversification benefits of a united Europe are fully integrated
into investment equations, corporate growth will emerge as the common denominator
among UK and European corporate managers.
Finally, perceptions of the significance or effectiveness of capital strategies were ex-
amined, and the results, reported in Model 5, indicate that instituting a leveraged buyout
 Managerial Finance 30

(Z7) is an excellent means to maximise the short-term returns to shareholders. It follows the
theoretical predicted positive sign. However, the proxy variables of capital strategy gener-
ally fluctuate more in values than the other strategies examined. Specifically, there is a
weak emphasis on expanding financial leverage (Z1 and Z2) to fund growth. This is both
consistent with the US pattern and somewhat surprising in the light of the strong empirical
support for leverage buyout. As with their US counterparts, there appears to be a concerted
effort by Corporate Europe to reduce debt levels and associated financial risks. This stance,
which is further captured by the low effectiveness rating accorded to the other related strat-
egy options, may have been informed by the lessons of the 1980s and early 1990s when debt
finance was used excessively. The evidence here suggests a shift in the attitudinal percep-
tion of corporate management towards the use of debt.
Given that dividends are an important component of the returns that shareholders are
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seeking, it is surprising that increasing the level of dividends paid to shareholders (Z5) gen-
erated the least effectiveness rating. Attention to increasing levels of dividend payout and
adoption/expansion of employee stock option plan have been observed as the two distin-
guishing features of top-performing firms (Schneider, 1990). The relative distaste for or in-
experience with take-overs by European managers is displayed in their very low rating for
negotiated/hostile offer to sell the firm (Z6). This posture contrasts with US managers who
perceive the decision to accept a negotiated/hostile sale offer as the most effective capital
strategy to enhance shareholder value. The overall findings indicate that the other strategies
will be of less importance in the future than they had been in the past, perhaps because of the
changing emphasis of future managerial strategies.
To further investigate the above relations, we examine the joint impact of operating,
investment and capital strategies in turn. The results show that they are jointly insignificant,
implying that the restrictions a to d above cannot be rejected, since c 2 (1) = 3.84 at the 5 per
cent level. This result may not be taken as conclusive owing to the sample size, which limits
the capacity to test the underlying theory in a more robust way. However, for each manage-
rial strategy group, there is at least one significant variable which contradicts the expected
theoretical sign, that is:
7 7 7

å=f
j 1
1l
> 0, å d
k =1
>
1k
0 and å p
l =1
> 1l 0.

however such variables are never significant at the 5 per cent level.
Model 6 introduces the 21 strategies simultaneously. As shown in the Table, the re-
sults are consistent with those of Models 3 to 5, the only exception being the expansion/ re-
duction in productive capacity (Y1). The joint test for significance of the 21 strategies did
not reveal any significant difference (p 0.0592). However, across each specification, the re-
sult showed that stock market listing plays a major role in Corporate Europe. European
managers, more than their UK counterparts, use the stock market to evaluate their competi-
tive strengths and weaknesses and then select and execute those strategies that are closely
linked to the creation of shareholder value.
Finally, we investigate the link between pressure groups (outside and inside) and the
type of strategies managers adopt in creating shareholder value. The analysis of responses
of corporate managers shows that they are acutely aware that both outside and inside pres-
sure groups have increasingly become major forces with which they must contend.
 Volume 26 Number 9 2000 31

The economic significance of the differences in managerial strategies raises as many

questions as it answers. How should, or how do, the strategies managers adopt enhance
shareholder wealth? Does emphasising a particular strategy lead to a superior shareholder
value? These questions are however beyond the scope of this study. The increasing Europe-
anisation of corporations makes studies of this kind crucial in enriching the literature on the
relations between managerial strategies and corporate governance.

While Corporate Europe may take a long-term view of wealth-creating strategies be-
cause of the relationships between managers and shareholders, their UK counterparts, by
contrast, tend to have a short-term focus in their planning, investment, and capital strate-
gies. This reflects the short-term contracting and investment environment in which UK
(and US) managers operate. Investment decision can be approached from the context of a
potential linkage between systems of corporate governance, contracting, and investment
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horizons (Kester, 1992). While the network of commercial interdependencies in Europe

(e.g. bank orientated systems of Germany) produces a corporate environment that fosters
long-term investment decisions, the UK business environment mirrors the US market,
which focuses more on the share price. An excessive focus on short-termism (i.e. short-
term investment horizon) leads to a concern with immediate impact of investments on the
bottom line.

In Europe, firms tend to have closer relationships with large financial institutions that
are both lenders and equity investors. Typically, they have board representation and consid-
erable influence on corporate management, even to the point of directly intervening in man-
agement decisions. Such relationships are likely to reduce potential hazards, and of
self-interested opportunism, while serving to promote and maintain long-term relation-
ships and cross shareholding arrangements as supported by the findings.

4. Conclusion

The purpose of this study was to explore the views of European and UK CFOs on the strate-
gies they adopt to create shareholder value, adapted from a similar earlier US survey.
Evaluation was made using responses to a mail survey of 175 CFOs from European and UK
large companies. Through model specifications and estimation methods, we find evidence,
which indicates that European managers take a much longer-term perspective of value-
creating strategies because of the close relationships between corporate management and
investors (mainly institutional investors) than UK firms. The results, however, do not
neatly support the range of characteristics in each strategy group. In sum, the weak associa-
tion of the strategy characteristics for UK corporate management vis-à-vis their European
counterparts does not imply a breakdown in the overall aims of management strategy to-
wards maximising shareholder wealth.
 Managerial Finance 32

Endnotes

1. See Appendix A.

2. Herbert and Wallace (1996) argue that the problem with a replication study is that it usu-
ally inherits the limitations of the original study.

3. This response rate is quite high and positive for a mail survey and considering the
sensitive nature of the research topic, which requires the OFOs to disclose their financial
strategies and practices.
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 Volume 26 Number 9 2000 33

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 Volume 26 Number 9 2000 35

Appendix A: Variable Definition for the three Strategiesa Past Present Future Rank
Operating Strategies
X1 Gross and absolute level of sales
X2 Become a market leader
X3 Achieve lowest cost producer status
X4 Enhance operating margins on existing product offerings
X5 Accelerate the turnover of existing operating assets
X6 Increase the rate of return on invested operating capital or equity
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X7 Maximise operating or discretionary cash flow

A) Comment on any external pressure, institutional or otherwise, you believe brings
additional influence on the strategies you adopt.
B) To what extent are these pressures a direct result of director influence?
Investment Strategies
Y1 Expand or reduce productive capacity
Y2 Restrict existing production facilities to increase efficiencies
Y3 Generate new or enhanced product offerings through internal development
Y4 Purchase business with complementary product lines
Y5 Acquire business which provide entry into new markets
Y6 Dispose or spin-off operating assets, businesses or product lines that are yielding
less than acceptable returns
Y7 Depart from markets that are stagnant, declining or growing at a slower rate than
acceptable
Capital Strategies
Z1 Expand the utilisation of debt in the total capitalisation
Z2 Issue new equity securities to fund growth requirements or to expand the
shareholder base
Z3 Inaugurate or expand a share repurchase program
Z4 Adopt or expand an employee stock ownership plan
Z5 Increase the absolute level of shareholder dividends
Z6 Accept a negotiated or hostile offer to sell the firm
Z7 Institute a management led buy out of the firm
Effectiveness ratings are based on a scale of 1 to 5, with 5 being the most effective and 1 the least ef-
fective.
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