Operational Embeddedness As a Mediator Between Public Discourse and Corporate Practice

The institutional change literature increasingly focuses on the role of corporate actors in shaping their institutional environment through changing interpretation of rules, reflected in firms’ day-to-day practices (Mayntz & Scharpf 1995; Scharpf 1997; Mahoney & Thelen 2010; Streeck & Thelen 2005), necessitating closer examination of the antecedents of change in corporate behavior. Public discourse is arguably an important, yet understudied driver of corporate practice. While the law defines absolute boundaries for what constitutes compliance and legitimate behavior, acceptable behavior within those boundaries is socially constructed. As public discourse reflects changing perceptions of what constitutes acceptable compliance and legitimate behavior, we may thus expect companies to be generally reactive to public discourse in order to meet expectations of other actors (Meyer & Rowan 1977; Westphal & Zajac 1994; Westphal & Zajac 2001; Börsch 2007). However, the extent of such reactiveness is likely mediated by the ability of companies to ‘decouple’ their practices on the issue in question, which, this paper argues, is related to an issue’s operational and strategic embeddedness within the firm.

The concept of operational embeddedness is developed here as the extent to which an issue structures a company’s relationships with its stakeholders and thus influences its strategic and operational capabilities. This draws on the literature on the ‘dynamic capabilities’ of corporations (Teece et al. 1997; Dosi et al. 2001; Whitley 2007), which are concerned with a company’s ability to harness its relationships with financiers, owners, suppliers, employees, and other stakeholder groups to adapt to changing circumstances and realize new opportunities. Practices that structure these relationships can be seen as deeply strategically or operationally embedded. On such deeply embedded issues, companies are unlikely to find behavioral signals that would satisfy public pressure without also having to fundamentally change their strategy and risking to alienate groups they rely on for their strategic or operational capabilities. In other words, issues that are deeply operationally embedded are unlikely to change with shifts in public discourse.

The role of operational embeddedness as a mediator in the relationship between public discourse and corporate practice is empirically tested using a panel regression approach, comparing a range of deeply embedded and not-deeply embedded issues in finance and corporate governance. The panel consists of the largest 130 companies each in four countries (US, UK, Germany, Switzerland) for the time period 1995 to 2013. This cross-country comparison allows to examine country-specific effects, i.e. to what extent the effect of public discourse on corporate practice is institutionally bound. The results provide empirical support for the notion that corporate practices are more reactive to public discourse on less deeply embedded issues, but also point to the need to consider the relationship within the national institutional context. Companies in countries with strong coordinating institutions were found to be less reactive to public discourse, suggesting that they rely on institutionalized non-public channels for reacting to expectations and demands of other actors.