Strategic corporate governance factors for municipally owned companies: an empirical analysis from a municipal perspective
| Author | Bernd W. Wirtz,Peter Daiser |
| DOI | 10.1177/0020852319845451 |
| Date | 01 March 2021 |
| Published date | 01 March 2021 |
| Subject Matter | Articles |
Review of
Administrative
Article
Sciences
International Review of Administrative
Strategic corporate
Sciences
2021, Vol. 87(1) 135–153
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governance factors for
The Author(s) 2019
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municipally owned
DOI: 10.1177/0020852319845451
journals.sagepub.com/home/ras
companies: an empirical
analysis from a municipal
perspective
Peter Daiser
NSI/HSVN, Germany
Bernd W. Wirtz
German University of Administrative Sciences
Speyer, Germany
Abstract
Empirical research on municipally owned companies is still an under-researched field. In
particular, there is a lack of sound empirical success factor-related studies that take into
account the municipal mission of creating public value, as well as future-oriented stra-
tegic measures by which municipally owned companies can be directed from a munic-
ipal perspective. Therefore, this study examines strategic success factors that have an
impact on the perceived success of municipally owned companies by investigating the
responses from 271 qualified key informants using structural equation modelling. The
analysis of the responses indicates that three factors (shared vision, strategic coordi-
nation and goal clarity) show a positive significant impact on the perceived success of
municipally owned companies. In summary, the study provides insights to academics
and public officials, and contributes to address the prevailing gap of empirical knowl-
edge in the field.
Corresponding author:
Peter Daiser, Municipal NSI/HSVN, Wielandstrasse 8, 30169 Hannover, Germany.
Email: peter.daiser@nsi-hsvn.de
136
International Review of Administrative Sciences 87(1)
Points for practitioners
The findings suggest that creating a shared vision and building a common understanding
with their municipally owned companies concerning their goals, roles and duties is an
important task for municipalities. Furthermore, the results indicate that municipalities
that take an active part in their ownership role are more likely to experience enhanced
municipally owned company success than others that instead rely on contractual agree-
ments. Thus, creating a joint understanding of the intended strategy and operations
seems more promising than creating excessive bureaucratic burdens.
Keywords
municipal level, municipally owned companies, primary data, questionnaire, state-owned
enterprises, structural equation modelling
Introduction
Municipally owned companies (MOCs) have gained great societal significance
since an increasing number of localities use autonomous organizations, in which
they exercise ownership, to produce or deliver public services outside administra-
tive structures (Papenfuß et al., 2019; Voorn et al., 2017).1 The associated provi-
sion of public services via third parties has caused a monumental change in the
organization of the public sector (Borisova and Cowan, 2014). While this situation
requires new skills and competences for the relevant public authorities regarding
the directing and controlling of these companies, empirical knowledge on this form
of public service provision is scarce (Gnan et al., 2013; Peng et al., 2016; Voorn
et al., 2017). Against the topic’s academic and practical significance, several
authors call for further research in this field (Florio, 2014; Grossi et al., 2015).
Besides a general need for research on MOCs, some researchers highlight the
necessity to improve existing knowledge on aspects such as ‘strategy and corporate
governance, [which] need to be better understood under such varying conditions of
state ownership and control’ (Bruton et al., 2015: 93). Although these factors are
expected to have a significant influence on firm performance (Gnan et al., 2013;
Sam, 2008), our empirical understanding regarding the antecedents of the effec-
tiveness and efficiency of MOCs remains limited (Voorn et al., 2017). In particular,
which specific corporate governance mechanisms municipalities can use to enhance
MOC success is still an open issue (Daiser et al., 2017).
In light of these shortcomings, this study focuses on mechanisms that can be
used by the municipality to address strategic matters that have an impact on the
performance of its MOCs. In other words, we examine which strategic corporate
governance factors drive MOC success from a municipal perspective. To answer
this question, we develop a structural model, which is tested empirically by ana-
lysing the data from 271 German municipalities.
Daiser and Wirtz
137
The study provides insights to academics and public officials that are responsi-
ble for the corporate governance of MOCs, and contributes to address the prevail-
ing gap of empirical knowledge in this field. The article is structured as follows. In
the upcoming section, we discuss the theoretical background of the study and
derive the hypotheses from our findings in the literature and the semi-structured
expert interviews. Afterwards, we present the method and measures for testing
these hypotheses and outline important issues concerning the reliability and valid-
ity of the data. Next, we show the empirical results of the analysis and close the
study with the discussion and conclusion section.
Theoretical background and hypotheses
This study takes a principal agency and public value theory perspective. The
agency theory is a dominant theory in corporate governance theorizing. Its key
issues are the relationship between a principal and an agent, who is engaged to
perform a service on the principal’s behalf, and the associated separation of own-
ership and control. Agency theory argues that the agent will not always act in the
best interest of the principal. For this reason, the principal has to take measures to
protect their interests (Jensen and Meckling, 1976; Shleifer and Vishny, 1997).
From an agency perspective, municipalities that provide public services through
MOCs find themselves in a pressing situation: they have to exercise their ownership
without exerting undue political interference, handle the conflicting interests of
principal–agent relations on multiple levels and achieve multiple goals since the
mission of the public sector entails more than just making profits (Calabro` and
Torchia, 2011; Grossi and Thomasson, 2015; Whincop, 2005). Here, corporate
governance comes into play.
At its core, corporate governance is about resolving such conflicts by system-
atically applying specific mechanisms that harmonize the interests of the agent and
the principal, and reduce information asymmetries between them (Aharoni, 1981;
Shleifer and Vishny, 1997). Furthermore, the corporate governance of publicly
owned companies, which can be defined as ‘the rules and procedures by which
[public] corporations are directed and controlled’ (Grossi and Reichard, 2008:
608), is considered an effective instrument to enhance their performance, transpar-
ency and accountability (Gnan et al., 2013; He et al., 2015). Although one can find
varying definitions and perceptions of this concept in the literature, there are
common features that are usually attributed to a corporate governance system.
The rules and procedures that make up this system include the legal form of the
company, its ownership and the applied management and control mechanisms
(Grossi and Reichard, 2008), such as contracts, compensation schemes, manage-
ment autonomy, reporting, strategic monitoring, target setting and so on.
Public value theory argues that public value creation, which can be described as
the public sector’s contribution to the economic, social and environmental well-
being of a society, is the key objective of the public sector (Moore, 1995).
According to this theory, public value creation is the core value proposition of
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International Review of Administrative Sciences 87(1)
public organizations, which they can achieve through an efficient and effective
provision of high-quality services while simultaneously enhancing trust towards
the respective public organizations. By considering more than just the financial
benefits and cost of public service provision, public value theory moves beyond
traditional and new public management approaches, and provides a new perspec-
tive on the objectives and performance of public organizations (Bryson
et al., 2014).
This study examines specific strategic corporate governance factors and their
impact on the perceived success of MOCs from a municipal perspective. Strategic
corporate governance factors are measures that must be planned and conducted
well to ensure lasting success for an organization. To identify relevant strategic
factors that can be used by municipalities to safeguard their interests towards their
MOCs, we consulted related literature and conducted nine semi-structured inter-
views with researchers and 18 with public experts. The first relevant strategic cor-
porate governance factor that we derived from this approach concerns the
specificity of the contracts between the MOCs and the municipality.
From an agency perspective, contracts are a fundamental mechanism to reduce
the agency problem since they allow the principal to set out clear provisions and
arrangements concerning the services that the agent shall provide on behalf of the
principal (Argento et al., 2010; Jensen and Meckling, 1976). The written fixation of
relevant norms, rules, accountabilities and responsibilities allows to ex ante for-
malize ex-post behaviour, which reduces future potential for conflict between the
parties (Ouchi, 1979; Poppo and Zenger, 2002). Contracts are thus seen as an
effective instrument to...
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