how managerial discretion impacts the organizational
TRANSCRIPT
How managerial discretion impacts the
organizational performance of municipal
corporations
Master Thesis within Business Administration
NUMBER OF CREDITS: 30 ECTS
PROGRAMME OF STUDY: Civilekonom
AUTHORS: Olof Amade Nylander & Alexander Gjersvold
JÖNKÖPING May, 2020
Abstract
Master Thesis within Business Administration
Title: How managerial discretion impacts the organizational performance of municipal
corporations
Authors: Olof Amade Nylander & Alexander Gjersvold
Tutor: Timur Uman
Date: May 2020
Keywords: Municipal corporations, Performance, Managerial Discretion, Contingency
Theory, Upper Echelon Theory, Control Systems, Triple Bottom Line, Organizational
Performance
Municipal corporations play an important role in our society by providing socially needed
services to its citizens. The performance of those corporations are important as the services
impact our way of living. When examining the performance of municipal corporations, the
social and environmental aspects need to be considered along the financial aspect, considering
their multifaceted nature of organizational goals they are expected to achieve. Managerial
discretion has previously been used to explain the outcomes of firms as it would allow the CEO
to shape the organization in the most beneficial way.
The purpose of this thesis is to examine how managerial discretion impacts the organizational
performance within a municipal corporation and how different management control systems
affect that relationship. The research is done using a quantitative method of surveys sent out to
CEOs of municipal corporations working within the utility industry of Sweden and by using
the financial reports of these companies for the fiscal year 2018.
The results show a positive significant relationship between managerial discretion and financial
performance but no significance regarding the social or environmental performance. The usage
of traditional management control systems had a negative effect on the relationship between
managerial discretion and financial performance.
The thesis contributes to the literature as it strengthens the notion that managerial discretion
impacts organizational outcomes. Furthermore, it examines how different types of control
systems impact that relationship.
Acknowledgements
Firstly, we would like to thank our supervisor Professor Timur Uman. During the supervisions,
he guided us along the way by being clear, collaborative, and motivational to keep on going.
Secondly, we would like to thank our opponents in the seminars as their feedback has been of
great value to the thesis. Thirdly, we would like to thank the CEOs who took the time in their
busy schedule to respond to the survey as their participation was crucial to the thesis.
Finally, we would like to thank our family and friends for their support during this intensive
period of time.
Jönköping, May 2020
___________________________ ___________________________
Olof Amade Nylander Alexander Gjersvold
Table of Content 1.0 Introduction .......................................................................................................................... 9
1.1 Background ...................................................................................................................... 9
1.2 Problematization ............................................................................................................ 12
1.3 Purpose and Research Question ..................................................................................... 16
1.4 Delimitations .................................................................................................................. 16
2.0 Literature review ................................................................................................................ 17
2.1 Performance (Triple bottom line) .................................................................................. 17
2.2 Managerial discretion..................................................................................................... 20
2.2.1 Managerial discretion and organizational performance .......................................... 22
2.3 Contingency theory ........................................................................................................ 23
2.4 Upper Echelons Theory ................................................................................................. 23
2.5 Management Control systems ....................................................................................... 24
2.5.1 TPMCS ....................................................................................................................... 25
2.5.1.1 TPMCS role in the relation between CEO MD and Organizational Performance
.......................................................................................................................................... 26
2.5.2 NPMCS ....................................................................................................................... 27
2.5.2.1 NPMCS role in the relation between CEO MD and Organizational Performance
.......................................................................................................................................... 28
2.6 Overview of theoretical model....................................................................................... 29
3. Method ................................................................................................................................. 30
3.1 Research Approach ........................................................................................................ 30
3.2 Research Method ........................................................................................................... 30
3.3 Research Strategy........................................................................................................... 31
3.4 Data collection ............................................................................................................... 32
3.5 Sample Selection ............................................................................................................ 32
3.6 Analysis of non-response bias ....................................................................................... 33
3.7 Operationalisation .......................................................................................................... 34
3.7.1 Dependent variable - organizational performance .................................................. 34
3.7.2 Independent variable - managerial discretion ........................................................ 37
3.7.3 Moderating variables - control systems .................................................................. 37
3.7.4 Control variables ..................................................................................................... 38
3.8 Data analysis .................................................................................................................. 40
3.9 Reliability, validity and generalizability ........................................................................ 41
3.10 Information Evaluation ................................................................................................ 42
3.11 Ethical consideration .................................................................................................... 43
4.0 Empirics ............................................................................................................................. 44
4.1 Descriptive statistics ...................................................................................................... 44
4.1.1 Dependent variables ................................................................................................ 44
4.1.2 Independent variables ............................................................................................. 45
4.1.3 Moderating variables .............................................................................................. 46
4.1.4 Control variables ..................................................................................................... 47
4.2 Spearman correlation Matrix ......................................................................................... 49
4.3 Multiple Linear regression analysis ............................................................................... 52
4.4 Hierarchical moderating multiple regression analysis ................................................... 55
4.4.1 Moderating effect TPMCS ...................................................................................... 56
4.4.2 Moderating Effect NPMCS.1 Reward Systems ...................................................... 58
4.4.3 Moderating Effect NPMCS.2 Work environment .................................................. 60
4.5 Hypothesis...................................................................................................................... 63
5.0 Discussion .......................................................................................................................... 64
5.1 Organizational performance........................................................................................... 64
5.2 Managerial Discretion and organizational performance ................................................ 66
5.3 Moderating effect of the control systems ....................................................................... 68
6.0 Conclusion ......................................................................................................................... 70
6.1 Overarching Conclusion ................................................................................................ 70
6.2 Theoretical Contributions .............................................................................................. 72
6.3 Practical Contributions................................................................................................... 73
6.4 Empirical contributions .................................................................................................. 74
6.5 Limitations ..................................................................................................................... 76
6.6 Future research ............................................................................................................... 77
7.0 References .......................................................................................................................... 78
Appendix .................................................................................................................................. 86
Appendix 1 Translated survey ............................................................................................. 86
Appendix 2 Checklist ........................................................................................................... 89
Appendix 3 Rotated Component Matrix for managerial discretion ………………………90
List of figures
Figure 1 Overview of theoretical model
Figure 2 Standardized Two-Way Interaction effects TPMCS and Perceived Financial
Performance
List of tables
Table 1 Analysis of non-response bias
Table 2 Descriptive Statistics factual and perceived performance
Table 3 Descriptive Statistics managerial discretion
Table 4 Descriptive Statistics Traditional management control systems
Table 5 Descriptive Statistics New Public management control systems.
Table 6 Rotated Component Matrix control systems
Table 7 Descriptive statistics of new moderating variables
Table 8 Descriptive Statistics CEO information
Table 9 Descriptive Statistics industry
Table 10 Descriptive Statistics part of the country
Table 11 Descriptive Statistics firm size
Table 12 Spearman Correlation Matrix
Table 13 Multiple regression analysis on factual financial performance
Table 14 Multiple regression analysis on factual social and environmental
Table 15 Multiple regression analysis on perceived performance
Table 16 Hierarchical Linear Regression Model TPMCS - Factual Performance
Table 17 Hierarchical Linear Regression Model TPMCS - Perceived Performance
Table 18 Hierarchical Linear Regression Model NPMCS.1 - Factual Performance
Table 19 Hierarchical Linear Regression Model NPMCS.1 - Perceived Performance
Table 20 Hierarchical Linear Regression Model NPMCS.2 - Factual Performance
Table 21 Hierarchical Linear Regression Model NPMCS.2 - Perceived Performance
Table 22 Hypothesis overview
List of abbreviations
CEO - Chief Executive Officer
EBITDA -Earnings before interest, taxes, depreciation, and amortization
EP - Environmental Performance
GRI - Global Reporting Initiative
FFP - Factual Financial Performance
FSP - Factual Social Performance
FEP - Factual Environmental Performance
MCS - Management Control Systems
MC - Municipal Corporation
MD - Managerial Discretion
NPM - New Public Management
NPMCS - New Public Management Control Systems
PFP - Perceived Financial Performance
PSP - Perceived Social Performance
PEP - Perceived Environmental Performance
TPMCS - Traditional Management Control Systems
TBL - Triple Bottom Line
TMT - Top Management Tea
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1.0 Introduction
The introduction consists of the background of the research topic, followed by the
problematization. Based on those, the purpose of the paper and the research questions are
presented, followed by the delimitations.
1.1 Background
Sweden has 290 municipalities which vary notably in size as the largest inhabits close to a
million citizens while the smallest sits at around 2 500 citizens. They all have certain
requirements to provide for its citizens like education, housing, water and electricity, in
addition to having the ability to affect the tax rate for its citizens. Municipal corporations (MC)
are used as a tool for municipalities to perform their intended services in an external entity that
is fully or partially owned by the local government, e.g. the municipality. The MC competes
against companies in the private sector while simultaneously trying to serve the best public
interest of the municipality. MCs in Sweden face the same legislation as other limited liability
companies (or any other legal form of business) while also having to adapt to the Municipality
Act introduced in 1991 which among other things limits the profit seeking ability of MCs,
exceptions apply for certain industries, e.g. the electricity industry (Ellagen, 1997:857). It also
states that a corporation controlled by the municipality needs to serve a purpose for its citizens,
and that they are limited to only operate within their own region. The marketization of
municipal responsibilities is created with the goal of implementing the efficiency and
effectiveness from corporations as outlined in the New Public Management (NPM) by
Christopher Hood in 1991. The shift towards using more corporations to deal with the
responsibilities of local government has started since the 1980s and has spread across Europe
(Argento, Grossi, Tagesson, & Collin, 2010). In Sweden, it has created issues where the
financial aspects of a corporation have challenged the social responsibilities of a municipality
and public access to official documents that municipalities must follow.
Being in the public eye, MCs are under a lot more scrutiny than other corporations because
they are in the business of public service and have far more stakeholders that are dependent on
them. MCs also must follow the principle of public access (Tryckfrihetsförordning, SFS
1949:105) as any other part of the government meaning that journalists and citizens have
10
considerably more access to information compared to other companies. In December 2019 a
newly formed MC that handles the garbage collection in three different municipalities had to
be saved from bankruptcy by the respective municipalities (Boström, 2020). Since the MC had
monopoly of this service within the municipalities, they were forced to back them, as otherwise
no one would handle the garbage collection within the region. Swedish municipalities take up
a large part of the nation's GDP as in 2018 it contributed to 14% of the total (SCB, 2019), with
MCs contributing considerably. The performance of MCs is important for the public to avoid
similar situations where municipalities have to cover their losses, especially when taking into
account that roughly 80% of Swedish municipalities are facing budget deficits and cost cutting
in areas such as schools and healthcare (SKR & SVT, 2019). Considering the number of
stakeholders within the municipalities and being a large part of the country's economy, the
performance of the MC becomes an important area to examine.
Unlike most private companies where financial performance is the end-all goal, MCs have goal
multiplicity, which means that they are pursuing multiple goals and outcomes, where public
service is their perceived primary goal regardless of what sector the MC is operating within.
When trying to assess the well-being and performance of a firm, one tends to go the route of
using performance measures, which are a given part of the assessment of any firm, regardless
of which sector the firm operates in. When carrying out the analysis, the focus usually lies with
the financial performance. However, financial performance does not capture the entirety of the
firm's performance, especially MCs, which do not identify financial performance as the
ultimate outcome (Uman, Smith, Andresson & Planken, 2018). Even though profitability is the
main purpose of a limited liability company, in the case of MCs, the profitability and financial
performance of the corporation is very important, but primarily as a means to stay afloat and
avoid previously mentioned situations where the municipality has to save the MC from
bankruptcy. Municipalities and their corporations also have to adhere to the self-cost principle
(Kommunallagen, 2017:725, 2:6) which means that they are only allowed to charge the same
price for a service or product as it costs to provide it, meaning that in theory there should be no
profits but there are exceptions for certain industries like the electricity industry (Ellagen,
1997:857). If the focus does not lie with maximizing profits and paying out dividends to its
owners, what is performance in MCs given their status in society and the multiplicity of their
goals?
11
Among their multitude of goals, public service quality and non-financial performance such as
the ability to efficiently allocate resources in order to satisfy the needs of the stakeholders
within the municipality (Uman et al., 2018), which constitutes as social performance, are two
of the performance aspects that are perceived to be vital for a MC. Especially when considering
the industries that MCs operate in, e.g. water, garbage, energy and housing which are all crucial
to society. Another performance aspect which is also regarded as important in Sweden is the
environmental performance, particularly for the MCs as they are concerned with the long-term
wellbeing of the municipality while also trying to be a role model for private firms in their
environmental and social impact (Knutsson, Mattisson, Ramberg & Tagesson, 2008). The
social and environmental performance measures and highlights the firm’s success in meeting
its corporate social responsibilities to various stakeholders, such as shareholders, customers,
and society (Turban and Greening, 1997). Along with the financial performance of the firm,
the three aforementioned measures are encapsulated in the Triple Bottom Line (TBL)
framework. Pressure from the many stakeholders MCs are accountable to such as citizens and
government have furthered the need for the TBL framework (Elkington, 1998) within MCs.
TBL allows for organizations to consider the broader perspective while measuring
performance, impact and outcomes, which results in creating greater business value for the firm
if their performance is in line with stakeholder expectations (Elkington, 1998).
But what affects all the aspects of performance in an organization? Previous research has
looked at the top management team (TMT) (Norburn & Birley, 1988), others have looked at
CEO characteristics (Jenter & Kanaan, 2015) or firm characteristics like strategy and structure
(Otley, 1999). There are many different ideas of what could affect the performance, but what
actually is it? Different aspects may explain types of performance, but there is a perceived lack
of a holistic view, what could that holistic view be?
12
1.2 Problematization
The measurement of organizational performance is expected to be vital for all organizations to
evaluate the actions taken by the firm and its managers (Durst, Hinterregger, Zieba, 2019).
The term organizational performance is a multidimensional one since it encapsulates the
performance of the corporations as a monolithic unit, instead of focusing on one aspect of the
corporation’s performance. The organization is performant when it is efficient and effective at
the same time. Therefore, the organizational performance is a function of two variables,
efficiency and efficacy (Taouab & Issor, 2019), especially for MCs considering their goals
multiplicity and that MCs are responsible for vital functions for the society, if they are not
performing well it can have devastating effects as the municipality might have to bail them out.
MCs must ensure that the stakeholders in their municipality can rely on the MC providing them
with needed services delivering the services and reaching expected outcomes efficiently and
effectively. They must perform to the satisfaction of the stakeholders, while also performing
well enough financially to keep them afloat and following the self-cost principle
(Kommunallagen, 2017:725, 2:6). Additionally, they are regarding the TBL framework, since
their diversity of goals usually is in line with environmental and social sustainability (Jörby,
2002). While considering the multifaceted nature of performance, one might wonder what
drives the MC to perform in all aspects to the satisfaction of the stakeholders? In the context
of municipal corporations, you have a situation where sole or shared ownership belongs to the
municipalities, however, the real owners, the citizens are very dispersed, but are to be seen as
owners since the purpose of a municipality is to service them (Sørensen, 2007). Citizens
provide the capital by paying taxes to the municipality that gets distributed among the different
services required to keep the society running. The citizens are also represented by politicians
on the board, in fact 92% of the board in a MC is based on their political profile (SOU 2015:24,
p.344) and given their political agenda, they have different ideas of how the organization should
be run. When politicians are appointed on the board, differences are cast aside, as they are
required to work in the best interest of the MC. As elections are held every fourth year there
could be shifts in the ruling majority of a municipality and therefore result in a change of agenda
and strategic directions within the MCs. This further adds another dimension of dispersion. In
a situation like this, with dispersed and diffused ownership, one could argue that a strong leader
is important to manage the short-term management while implementing the more long-term
13
directions from the new board. It could be argued that keeping the CEO around in times of
changes would be important to the success of the MC. In US context this results in the duality
role of the CEO and chairman (Donaldson & Davis, 1991). However, this is not allowed by
law in a MC, yet the dispersion suggests that the CEO has a very strong position in relation to
the dispersed owners and dispersed board.
Researchers have traditionally focused on the effects of the TMT as a single unit – implicitly
treating the CEO as equally powerful and influential as other top managers (Hambrick and
Mason, 1984), and that has also been the case when studying TMTs and MC outcomes (Uman
et al., 2018). However, the TMT usually reports directly to the CEO, and the CEO has the
authority to fire other top managers, therefore one can argue that implicitly treating the CEO
as an equal to other senior managers will yield an misrepresented image of the role of the
senior executive. Based on this assumption, the focus of this study is on the CEO and his/her
role in driving the performance of the organization. The CEO, who has operational
responsibility and by extension is responsible for the organizational performance, plays the key
role in controlling, organizing and directing the entity and strategically orienting it towards
achieving the goals of the entity (Castanias & Helfat, 1991).
But what about the CEO is it that drives performance? Researchers have looked at different
characteristics like the managerial focus (Smith & Uman, 2015), while others have looked at
which characteristics and abilities could affect the performance (Kaplan, Klebanov, &
Sorensen, 2008). There are still contradicting views on the importance of a CEO but as argued
by Finkelstein, Hambrick, & Cannella (2009, p. 26) the importance relies on the amount of
leeway available to the CEO, and on the strategic decisions and actions made by the CEO
which are of strategic importance and later are reflected in the organizational performance.
This view was first introduced in 1987 by Hambrick and Finkelstein called managerial
discretion (MD). The definition of MD is the amount of latitude of actions that a manager has
when it comes to actions decided by the CEO in any given situation. The paper was introduced
to deal with the debate among organizational theorists whether organizations have control over
their own destiny or not. MD was brought forth as the explanation for these differences as the
leeway available to the top executives varied and therefore so did their impact on the
organization. Shen and Cho (2005) later added to the definition by mentioning that MD also
includes the latitude of objectives which stipulates how much leeway the CEO has to pursue
their own interests rather than the stakeholders. MD has its importance in the academic world
14
as high leeway should increase the performance (Finkelstein & Boyd, 1998; Finkelstein &
Hambrick, 1990 & Frederickson, 1999) but it has mostly been researched in the context of
private corporations where the performance is mostly focused on the financial aspects and it
has previously been used to explain a wide range of outcomes within organizations. Some
examples include executive turnover (Shen & Cho, 2005), CEO compensation (Finkelstein &
Boyd, 1998) and environmental commitment (Aragón-Correa, Matıas-Reche, & Senise-Barrio,
2004). The public sector has had a tradition of being governed politically, which became
particularly complex with the emergence of different management cultures. The attempts to
separate administration from policy increased the presence and need of MD (Karlsson, 2019).
CEOs can shape their own discretion in different manners. To solely have the opportunity for
latitude of action is insufficient, CEOs must also recognize that it is there to be used (Karlsson,
2019). Effective CEOs find and create options that are not accessible for others. This may be
done through insights, persistence, or sheer willpower. For the CEO in a low MD situation,
there is not a strong connection between current performance and a belief in the correctness of
current organizational strategy and leadership profiles. In instances with low discretion,
performance is derived from uncontrollable factors, such as the environment (Finkelstein, et
al., 2009). A high level of MD increases the ability of the CEO to influence firm performance
directly and significantly on organizations, as a high level of MD entails different options for
the CEO to choose from. Considering the multiplicity of options available, the CEO might be
able to make more weighted and at the same time better decisions. Ultimately, the level of MD
paired with the experiences and preferences of the CEO substantially influence what happens
to their firm.
The role that the CEO plays in shaping conditions and processes both inside and outside the
firm, impacts the ability of the firm to perform according to the strategic choice theory which
refers to "the process whereby power holders within organizations decide upon courses of
strategic action" (Finkelstein, et al., 2009). The range of actions available for a CEO is wide
and covers everything from how to allocate resources efficiently, their ability to make decisions
and action, and form the organization is bar none (Child, 1972). However, the CEO does not
operate in isolation, the decisions made or even considered by the CEO are affected by the
current structure and values within the organization. A strategy that works for one firm is not
directly transferable to a similar corporation, as the culture and structure of the organization
might be completely disparate. In any given organization there are control systems that affect
15
the way the organization operates, elements like planning and the structure are examples that
top executives use to control the decisions that its subordinates make (Malmi & Brown, 2008).
Management control systems (MCS) have evolved from providing financially quantifiable
information to include a much broader perspective, e.g. information related to customers,
competitors etc., to assist managerial decision making, combined with an array of decision
support mechanisms and social controls (Malmi & Brown, 2008). Management controls are
multifaceted, they are necessary to ensure that the objectives of the organization are being
worked towards, and safeguard against the risks that management or employees will do
something that is detrimental to the organization or failing to do something they should do.
However, MCS also are used when instilling the culture of the organization (Malmi & Brown,
2008).
The different management control systems grouped together by Malmi and Brown (2008) are
used to control the subordinates but will also affect the top executives as well. Elements that
have been called traditional public management control systems (TPMCS) (Uman et al., 2018)
include administrative and planning which impacts the latitude of actions available to the CEO
that he/she needs to adjust to. Just as with the marketization of MCs, new public management
also has impacted the control systems with the new public management control systems
(NPMCS) (Uman et al., 2018) as it incorporates the idea of reward systems and measurements
of performance (Hood, 1991). These components will interact with the discretion of the CEO
and combined they will affect the performance. It is important for an organization to have a fit
among their usage of control systems and the MD, in an environment of high discretion the
CEO should be judged by the performance of the organization which is why NPMCS like
performance measures and reward systems would be of great importance. If the focus lies on
the usage of budgeting and planning the manager is not able to showcase their ability in the
decision-making as actions are already planned out.
As aforementioned, most studies are on private corporations and have been set in North
America or the UK. The public status and scrutiny of the MCs in Sweden comes with increased
pressure on the MC being well-run. Considering the importance of MCs to Swedish society,
them being responsible for delivering services that are vital for society to properly function.
The gap of research on the corporate governance of MCs in Sweden is apparent and needs to
be filled. Additionally, of the variety services delivered, the choice fell on municipal energy,
water and waste, since there is a perceived research gap concerning the corporate governance
16
of these industries as previous research conducted here has mostly been focused on the public
housing, where MCs are highly represented (E.g. Chanko & El-Bazi, 2019 & Gårdh & Zyrlite,
2019).
1.3 Purpose and Research Question
The purpose of the paper is to explore how CEO’s managerial discretion relates to
organizational performance of municipal corporations and how this relationship is contingent
on and moderated by management control systems in use.
RQ1: How does the CEO’s managerial discretion relate to organizational performance of
municipal corporations?
RQ2: How management control systems moderate the relationship between CEO’s
managerial discretion and organizational performance in municipal corporations?
1.4 Delimitations
One limitation of this paper is that it will only look at the managerial discretion of the CEO in
a MC, instead of researching the entirety of the top management team. The assumption that
this study focuses on, is that the CEO and her/his role in driving performance of the firm. By
delimiting the paper to this assumption might be an oversimplification of triggers and driver
behind performance.
17
2.0 Literature review
The literature review presents the main underlying theories and concepts of the thesis, which
are the performance, triple bottom line theory, managerial discretion, contingency theory
and controls systems. Thereafter, these theories will be related to each other in different
aspects and will merge into three proposed hypotheses.
2.1 Performance (Triple bottom line)
The concept of performance is a vital one when researching corporations of any nature.
Performance is a perception of reality that can be both subjective and objective in nature and
measurement, which may serve as an explanation of the multitude of critical reflections on the
concept and its measuring instruments. Due to the subjective nature of performance, there are
multitude of definitions attributed to the concept of performance, leading to a concept that is
very broad (Darwish & Potočnik, 2015). Researchers have adopted both objective and
subjective measures for assessing performance: objective measures involve using accounting
data, while subjective measures involve the perceptions of managers when it comes to the
performance of their firm. Whichever route is adopted, the goal is to explain what factors
contribute to the superior performance of firms compared to their business rivals (Darwish &
Potočnik, 2015).
The MC is the embodiment of the hybridization of the public and private sector, forming a
hybrid organization (Collin & Tagesson, 2010). This hybridization of the public and private
sector also represents a clash of competing institutional logics, in this case the market,
corporation and state logics are mixed into a single entity. Each institutional logic is
distinguished by particular organizing principles, practices, and symbols that influence
organizational behavior (Thornton, Ocasio & Lounsbury, 2012). This means that the MC
operates in a business-like manner and is governed with a political perspective in order to reach
the objective of providing public services with public funding (Grossi, Thomasson, Kickert, &
Randma-Liiv, 2015) while facing the multiplicity of goals and by adhering to different
institutional logics, diverging performance goals may arise while dealing with the complexity
of the different institutional logics embedded in the corporation.
The task of measuring and conceptualizing organizational performance in the context of a
hybrid organization such as the MC, presents added complexity since one cannot directly adopt
18
and transfer concepts and measurements from the previous literature on entities that are wholly
public or wholly private (Grossi, Reichard, Thomasson, & Vakkuri, 2017). According to the
self-cost principle, MCs are not allowed to organize with the goal of making a profit in mind,
and thus rendering financial performance as more of a control for the MC to stay afloat than an
end-all goal (Kommunallagen, 2017:725, 2:6). However, there is a special legislature for
certain industries that provides vital services for society, such as the Water Act and the
Electricity Act that stipulate that MCs should be run in a businesslike manner (Vattenlag,
1983:291; Ellagen, 1997:857), thus emphasizing on the financial performance of the MC.
However, MCs face multitudes of goals and outcomes when operating. Among their goals and
outcomes, societal interests are expected to be at the forefront, which is often considered from
a political viewpoint for sake of referencing and evaluating (Knutsson et al., 2008). Public
service quality and non-financial performance such as the ability to efficiently allocate
resources in order to satisfy the needs of the stakeholders within the municipality (Uman et al.,
2018), are two examples of the performance aspects that are perceived to be vital for a MC.
The performance of a MC depends on the ability of the firm to continually show its purpose
and provide desirable outcomes to all its stakeholders (Knutsson et al., 2008). In order to face
the continuously growing need and pressure from the stakeholders to explicitly communicate
the performance of the MC the use of a strategic approach was adopted in the public sector.
However, the implication of the decision made is that the objectives of the organization are
ambiguous and considering the number of stakeholders which have ambiguous expectations,
there is a large variance of expected results among the stakeholders (Knutsson et al., 2008).
The ongoing climate has raised questions about environmental issues on the political level in
Sweden, and social issues are always on the agenda for the politicians, regardless of their
political stance. There is pressure from the owner - the municipality (and by effect the state),
from the mass media and from the stakeholders to commit to and comply with business
practices which favors sustainability (Tagesson, Klugman & Ekström, 2013). The MC must
meet the aforementioned pressure while still adhering to the Municipality Act which states that
the objective of the MC is to provide services and facilities that are for the members of the
municipality, however, the purpose of the MC must be public good and cannot be profit
maximization (Kommunallagen, 2017:725, 2:1+7). Considering the goal multiplicity of MCs
and their role in Swedish society, the fact that MCs are meant to serve as good examples for
other firms and the fact that MCs are being scrutinized, the TBL serves a means to meet that
19
pressure and provide the Swedish companies with a good example on how to keep both
sustainability and organizational performance in mind while running the firm. Organizational
performance can also be referred to as the completion of a firm when compared to the goals
and objectives of the organization (Almatrooshi, Singh & Farouk, 2016), in other words, their
success is determined by the completion rate of their objectives and outcomes.
Value creation for stakeholders in hybrid organizations like MCs is the sum of social, financial
and environmental performance outcomes (Ponte, Pesci & Camussone, 2017). The value
creation itself is represented by the MC simultaneously pursuing all three objectives (Szekely
& Knirsch, 2005) which creates difficulties in conceptualizing performance of MCs (Maine,
Florin-Smauelsson, Uman, 2020). If MCs tries to focus on one facet of performance over the
others, there is a risk for the MC to drift (Jones, 2007). If the MC loses sight of their intended
mission, to serve the public, and goal multiplicity, and too much emphasis is being put on
making profits, then the phenomena ‘mission drift’ occurs (Jones, 2007). However, if too much
emphasis is being put on the social and environmental performance, which entails attention
being diverted away from the financial performance by the MC, ‘revenue drift’ might occur,
(Ebrahim, et al., 2014). The balancing act of their goal multiplicity, adds to the complexity of
performance in a MC, however, what represents performance in MCs?
Financial performance is represented by the financial measurements in the financial statements,
as previously discussed, the main aspect of the financial measurements is measured without
profit maximization in mind, however depending on the industry, that changes. Ambiguity
arrives when considering the social and environmental performance. Environmental
performance (EP) has been defined as a “multidimensional construct” by Schultze & Trommer
(2012), which represents the degree to which firms are able to live up to the stakeholders’
expectations of the MCs environmental work. This is done by the usage of different indicators,
such as the use of raw materials (Schultze & Trommer, 2012). For a MC in the utility sector
the use of various EP indicators such as emissions released, becomes vital in measuring their
EP, however emphasis is also being put on implementing sustainable ways to operate
(Tagesson et al., 2013), which can be translated into measuring the use of recyclable materials,
feeding into the sustainable circular economy.
20
For the social performance, there is ambiguity when considering the definition of it, multiple
researchers have proposed various definitions (e.g. Wood, 1991; Clarkson, 1995). The
argument made by Wood (1991) is that social performance is “a business organization's
configuration of principles of social responsibility, processes of social responsiveness, and
policies, programs, and observable outcomes as they relate to the firm's societal relationships.”
This definition is inherently vague but covers all the aspects of social performance of a MC,
e.g. such as having programs for the health of its employees. The social performance of the
MC is tied to the degree to which they prioritize the societal interests, which pressure from
stakeholders have ensured is high (Tagesson et al., 2013). This leads to the MCs’ principles
and policies of social responsibility of ethical and human issues being translated into
observable outcomes (Wood, 1991), in the form of programs, or actions taken to ensure the
social responsiveness of the MC. The social and environmental performance measures and
highlights the firm’s success in meeting its corporate social responsibilities to various
stakeholders, such as shareholders, customers and society (Turban and Greening, 1997).
Social and environmental performance along with the financial performance of an entity
constitutes the three facets of TBL. The framework is highly adaptable since a universal method
for measuring the TBL does not exist. Neither is there a universally accepted method for
measuring each category of the TBL individually. This perceived weakness of the system can
be perceived as a strength since it allows the user to alter it to the different needs of different
entities (Elkington, 1998). Since the framework is so adaptable and serves the MC well as a
performance measurement considering their multifaceted nature of organizational goals
(Grossi et al, 2019) , and also serves as a tool to conceptualize the organizational performance
of a MC, we argue that organizational performance consists of the three facets that are included
in the TBL framework.
2.2 Managerial discretion
Researchers have looked many at different potential drivers of organizational performance.
Aspects like a firm's strategy and structure (Otley, 1999), others have looked at TMT
characteristics (Norburn & Birley, 1988) while others have only looked at the CEO within that
TMT (Jenter & Kanaan, 2015). There are still contradicting views on the importance of a CEO
in the outcome of a firm but as argued by Finkelstein, Hambrick, & Cannella (2009, p. 26) the
importance relies on the amount of leeway available to the CEO, and on the strategic decisions
21
and actions made by the CEO which are of strategic importance and later are reflected in the
organizational outcomes. This view was first introduced in 1987 by Hambrick and Finkelstein
called managerial discretion. Defined as the latitude of actions that managers possess, it has
had its importance within the business world but also for researchers (Finkelstein & Boyd,
1998). It has previously been used to explain a wide range of organizational outcomes (Shen
& Cho, 2005; Finkelstein & Boyd, 1998). In a high discretion environment, the CEO has a
wide range of actions available and is able to better showcase their knowledge in the decision-
making process. Hambrick and Finkelstein (1987) argue that discretion is determined by three
different aspects: managerial characteristics, the internal organization, and the task
environment. All these aspects can help enable or constraint the latitude of actions that a
manager has access to, where managers who are bound by the environmental and
organizational constraints are unlikely to have an important impact on the performance. The
manager characteristics which is the focus of this research is determined by aspects like their
aspiration, tolerance of ambiguity and their beliefs regarding one's locus of control (Finkelstein
& Hambrick, 1987).
The constraints that managers are faced with are primarily unstated, but they are also to a large
extent known to the manager meaning that they are somewhat aware of which decisions they
have available to them (Finkelstein & Hambrick, 1987). As decisions are often met with some
resistance or opposing views, the authority of that side needs to be considered meaning that a
large investor possesses more power and influence on the manager than a single employee or
customer. This led Finkelstein and Hambrick to describe constraint as a function of “the
perceived radicality of an action and the relative power of those who see it as radical. A
decision that lies outside of an important stakeholders” zone of acceptance will lead to negative
repercussions e.g. firing or demotion in response to said action. If there is a miss match among
the zone of acceptance from the stakeholder and the MD there will be agency costs, for example
in a situation where the zone of acceptance is larger than the managerial discretion stakeholders
would want the manager to act with more risk potentially higher rewards (Ponomareva, 2016).
Shen and Cho (2005) noted that managerial discretion has different meanings in the
management and economic literature. In management it refers to the options available to the
executives while for economists it means their ability to pursue their own interests and
incentives to undertake certain actions. This led to the idea of splitting the latitude into two
areas, objectives and actions. Latitude of actions being the one close to the initial idea by
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Finkelstein and Hambrick which describes the range of strategic choices they must accomplish
the goals of the stakeholders. From the actions perspective a manager's capacity to operate and
influence the outcome is of importance. Objectives, however, describe the ability to pursue the
manager's own interests rather than the stakeholders without getting any consequences of their
actions. Within this view agency theory proposes that managers have an incentive to act in their
personal interests rather than the best interests of the stakeholder (Jensen & Meckling, 1976).
2.2.1 Managerial discretion and organizational performance
The CEO is hired to work on behalf of the owners and is judged on his or her ability to achieve
the goals and outcomes set by the owners. In a MC ownership belongs to the citizens of the
municipality (Sørensen, 2007) so the ownership is very dispersed which highlights the
importance of the CEO to set a clear direction of the organization with all different political
preferences from the board. For a CEO to actually have an impact on the organization they will
need some leeway for strategy decisions (Hambrick & Finkelstein, 1987) and in public
organizations MD has been found to be substantial, particularly in years of poor performance
where managers remained in charge with the confidence of the board (Cragg and Dyck, 1999).
The link between MD and firm performance has been studied and proven quite extensively
following the publication by Finkelstein and Hambrick in 1987, most have shown that higher
MD has led to an increase in firm performance (Agarwal, Daniel & Naik, 2009; Lilienfeld-
Toal & Ruenzi, 2014). When managers are given a higher amount of discretion, they are able
to shape and develop the organization in the most efficient way based on their expertise and
experience, showcasing their importance to an organization. Performance in MCs differs from
normal firm performance because of their goal multiplexity of working for its citizens rather
than just profits but the work of a CEO should remain similar to the work within the private
sector as the objective is to achieve the goals set by the board. Thereby we present our first
hypothesis:
Hypothesis 1:
Higher perceived managerial discretion will lead to a higher organizational performance for
municipal corporations.
23
2.3 Contingency theory
The internal and external environment will be always different for companies meaning that
there is no perfect answer on how to run them. Structural contingency theory states just that,
there is no ideal way to structure an organization or make decisions, it is based on the internal
and external environment that will always be unique (Otley, 2016). Contingency theory began
in the 70s as an attempt to explain the differences in management styles and how those came
about. In an overview of the contingency theory in 1980 by Otley he concluded that “a
contingency theory must identify specific aspects of an accounting system which are associated
with certain defined circumstances and demonstrate an appropriate matching” (p.413).
Focusing on the last part, it is important to find the right strategy within the current structure.
As for measuring the matching of strategy and structure has caused issues, but it has been done
by looking at the performance, good match causing a good performance and the other way
around (Otley, 2016).
The theory stipulates that there are specific factors that will influence the relationship between
dependent and independent variables of an organization's outcomes (Fiedler, 1967). This means
that everything within an organization is affected by many different elements many of which
cannot be accurately defined or measured. These internal and external elements will affect what
type of control systems should be used by the organization to achieve the best possible
performance (Kloot, 1997) and the final outcome of the organization should be used to
determine if there is a good fit among the structure and the strategy used by the organization
(Otley, 2016).
2.4 Upper Echelons Theory
With the same purpose as the contingency theory, the upper echelon theory attempts to explain
why organizations act in the way that they do. It draws the link that a manager's background
will in the end affect the outcomes of the organization (Hambrick & Mason, 1984). Hambrick
& Mason (1984) argues that background characteristics like age, education and experience are
considered to have an impact on the strategic choices made in various ways based and therefore
24
impact the performance of an organization. There are also psychological values that are more
difficult to measure and observe like a person's values which affect the way we act and affect
decision making (Hambrick & Mason, 1984). Therefore, Hambrick & Mason (1984) posits that
the background characteristics serve as proxy measures psychological factors such as values,
that influences the strategic direction and choices managers utilize (Olson, Parayitam & Twigg,
2006). Hambrick & Mason (1984) argues that strategic choices that are consistent with the
environmental demands of the firm leads to positive outcomes. However, in this study the
intention of selecting CEOs as part of the research lies not with the demographics or the
psychological of the CEO, but rather that CEOs have a significant impact on the strategic
corporate choices made within a firm which affects the organizational outcomes (Hambrick &
Mason, 1984), which in turns affects the control systems and the internal processes used to
obtain the desirable organizational performance in MCs.
2.5 Management Control systems
MCS have a long history as a topic of academic research, which has brought along multiple
descriptions and definitions of what MCS is; some overlaps with others and others are very
different (Malmi & Brown, 2008). David Otley provided his description of what an MCS is in
1999, he claimed that the MCS is a tool designed to provide useful information that facilitates
managers in performing their jobs, and to assist the organization as a whole in developing,
directing and sustaining desired employee behavior (Otley, 1999). This description by Otley
(1999) is in line with the contingency-based research that regards the MCS as a passive tool
designed to assist the decision making of the manager (Malmi & Brown, 2008). However, this
view is not shared by Malmi & Brown, as they argue that MCS do not operate in isolation, and
that organizations use large and complex combinations of MCS, therefore they studied MCS
as a package (Malmi & Brown, 2008). The contingency-based perspective suggests that there
is not a universally applicable system of MC in place, but that the choice of appropriate MCS
will depend upon the specific organization and the circumstances surrounding it. A central
contingent variable is the strategy and objectives that an organization decides to pursue, these
objectives are very likely to heavily influence the choice of performance measures to be used
(i.e. the desired outcomes) (Otley, 1999).
25
This study has adapted a blend of the perspective presented by Otley and Malmi & Brown by
focusing on two management control systems which have been referred to as traditional public
management control systems (TPMCS) and new public management control systems
(NPMCS) by Uman et al. (2018). The NPMCS which concentrates on output control and
performance is influenced by the NPM reforms highlighted by Hood in 1991. While the
TPMCS has an emphasis on the inputs of the organization like planning and administrative
control (Uman et al., 2018).
2.5.1 TPMCS
Planning is an essential part of input control, since the process of planning sets out goals and
outcomes for the organization to work towards, thus affecting the decisions and actions that
managers and employees make. The planning control is contingent on the idea that by setting
consistent goals, organizations can attain these goals more effectively. Actions are often
planned out over a set time period to determine how your progress compares to what was
planned out in the beginning (Malmi & Brown, 2008). The use of set actions and goals is central
for the TPMCS since it provides the CEO and the organization with clarity regarding the
direction of the organization. Planning control contains and emphasizes both long- and short-
term plans, short-term plans are represented by operational goals and long-term by strategic
goals. Budgeting is central to, and the foundation of, MCS in most organizations and its use is
almost universal. This is due to its ability to intertwine the goals, both short- and long-term, of
the organization into a comprehensive plan which serves many different purposes (Malmi &
Brown, 2008). As illustrated by Merchant and Van der Stede (2007) planning and budgeting
often goes together but planning can include tasks that have little to no financial aspects, such
as operational planning which produces task lists which are used by management to decide
what employees do and how to do it (Malmi & Brown, 2008). The CEO may enforce the
awareness of the previously set goals in order to ensure that the individuals in the organization
know the expectations placed upon them (Uman et al., 2018).
The other major aspect of TPMCS is administrative control, which is a system that monitors
and directs the behavior of the employees of an organization through the organizing of groups
of said employees. The systems also entail who are made accountable for employee behavior
(Malmi & Brown, 2008). Administrative control refers to control through lines of authority and
26
responsibility, and among other things, organizational structure. As argued by Malmi & Brown
there are three different aspects of structure: policies and procedures, organization structure
and governance structure (Malmi and Brown, 2008). Policies and procedures include what
Merchant and Van der Stede (2007) call action controls, which includes pre-action reviews and
action accountability, it is used to specify how decisions within an organization should be
made. Organizational structure is the arrangement of individuals and functionality between
departments, as argued by Flamholtz (1983) it contributes to the control by increasing the
predictability of the employees. Lastly the governance structure is composed of the board
structure and different management groups, the scheduled meetings creating expectations and
deadlines to live up to.
2.5.1.1 TPMCS role in the relation between CEO MD and
Organizational Performance
With high emphasis on planning, a manager's ability to make quick instant moves is limited as
their actions are planned out and even if they feel like there is a better move available they
cannot commit to it, or at least not to the fullest. This could impact the actions available to the
CEO and the implementation of decisions as they have goals to fulfill and decisions that would
hinder the ability to reach short term goals would not be implemented even though in the long
run it might be the best option available.
Having a strong administrative control would yield clarity of command and clear procedures
for employees how to perform their tasks, leaving the leadership to focus on leading the
organization. Which may be perceived as beneficial for CEOs with a low perceived level of
MD, as the strong administrative control hinders the CEOs MD, However, administrative
control is inherently top-down, and may therefore be perceived as bureaucratic and narrow.
This perception may yield an opposite effect of what the TPMCS intends to achieve, i.e.
demotivating employees in their commitment and their effort to ensure that the goals of the
organization are being met (Uman et al., 2018). Using the perspective of the TPMCS, we
hypothesize the following relationship:
Hypothesis 2:
Increasing the use of TPMCS has a negative moderating effect on the relationship between
perceived managerial discretion and performance
27
2.5.2 NPMCS
NPMCS which have an emphasis on output control and performance usually include two forms
of control: performance and reward control. Performance control is usually exercised through
financial and/or non-financial measurements as indicators of employee performance and
budgets (Uman et al., 2018). In the context of NPMCS the budget is the foundation for
performance planning and evaluation of actual performance compared to what has been
planned (Malmi & Brown, 2008). The process of evaluation and feedback with the use of
budgeting as a foundation gives managers of different organizational levels concrete
information to act upon and modify the input so that the desired output is reached. Which is in
their best interest, since they have responsibility and accountability for the performance of their
employees and their ability to adhere to the budget, while the utmost accountability lies with
the CEO. Performance control is among the most extensively used types of control in private
and public-sector organizations (Malmi and Brown, 2008) and by setting goals that are
performance oriented and systematically following up on them gives the staff freedom to
decide on their own which method is best how to achieve these goals (Uman et al., 2018),
which is in line with the NPM and in contrast to the TPMCS which perceives to leave little
discretion to the mid-level managers and employees.
Reward control has its foundation in the idea that the presence of rewards will lead to increased
effort and motivation from the employees to attain the goals of the organization (Malmi &
Brown, 2008). And thus, reward control systems focus on achieving congruence between the
goals of the employees and the organization and establishing various rewards for attaining the
organizational goals (Uman et al., 2018) and by effect enhancing the productivity and
efficiency of the organization. Reward systems are extrinsic or intrinsic in nature: extrinsic
reward systems are usually the ones that come to mind since they are represented by monetary
incentives; intrinsic reward systems are represented by non-monetary incentives, such as
professional development opportunities (Malmi and Brown, 2008). Reward systems, especially
the extrinsic ones because of the monetary nature, can be associated with increased competition
between employees and/or different organizational units. This increase of the use of reward
controls in public organizations might be problematic since some indications posit it may create
competition that is detrimental to the corporation because of the competition being destructive
(Uman et al., 2018). However, a study made by Kim (2010) of public-sector reward controls
found that when combined with clear objectives from management it results in the organization
28
showing performance improvement. Reward control is associated with a clear incentive
scheme that is appreciated by employees, especially in the public sector (Uman et al., 2018).
In the context of public organizations, NPMCSs that incorporate the aspects of performance
and especially reward control is a relatively new phenomenon. The introduction and
implementation of the NPMCS was made with the intention to improve efficiency and reduce
the complexity that usually have been associated with entities in the public sector. NPMCSs
do this by setting performance-oriented goals and continuously following them up, while
providing clarity about the associated rewards for achieving the desired outcome (Uman et al.,
2018).
2.5.2.1 NPMCS role in the relation between CEO MD and
Organizational Performance
With the use of NPMCS within an organization you get a better understanding of the value of
employees and departments with the increased emphasis on performance measurements. With
a clearer understanding of the value that different departments bring you can easily see the
development that a CEO brings that can be compared to his precursor. If the performance is
increasing, more confidence should be put in the CEOs decisions and the process of achieving
those results should not matter as much. If there are rewards on the line for the CEO and the
employees, they will be more motivated to work towards the goal of the stakeholders and the
CEO should in theory be given more space to achieve those goals as it is in everyone's best
interests. When an organization sets out goals for the employees and regularly monitors them,
it gives the employees more freedom in how to achieve those goals and the use of rewards can
also help improve the implementation of changes as it motivates employees to work in a way
encouraged by the manager. Using the perspective of the NPMCS, we hypothesize the
following relationship:
Hypothesis 3:
Increasing the use of NPMCS has a positive moderating effect on the relationship between
perceived managerial discretion and performance
29
2.6 Overview of theoretical model
Figure 1 Overview of theoretical model
30
3. Method
This chapter will start with presenting the research approach, followed by the choice of
method to conduct the research. The chapter also presents the research strategy, data
collection, analysis of non-response bias and sample selection. Operationalization of the
variables follows thereafter. The data analysis paragraph explains how the collected data
will be analyzed. Lastly, the validity and the reliability of the data and the ethical
considerations will be presented.
3.1 Research Approach
The research model used for this thesis is based on pre-existing literature. It tests the
relationship between different variables based on prior knowledge which is known as a
deductive research approach (Bryman & Bell, 2011). This approach tests a known theory with
the use of different hypotheses based on prior knowledge in a different environment and
circumstances to see if the theory is still valid (Bryman & Bell, 2011). A deductive research
approach is used as the concept of managerial discretion has not been used much in the context
of municipal corporations and therefore the use of a deductive approach aims to explore the
relationship between managerial discretion and the performance of municipal corporations. A
deductive research approach also allows the researchers to test theories through the use of
hypotheses that in return leads to more standardized and objective outcomes of the results
(Bryman & Bell, 2011). The hypotheses are also often associated with measuring concepts
through a quantitative research which is also the method used in this thesis. Given the time
limit of our thesis a deductive research fits better given the nature of the approach compared to
an inductive approach which requires more time to observe (Bryman & Bell, 2011)
3.2 Research Method
The purpose of this study is to examine how managerial discretion impacts the performance of
municipal corporations and what effect traditional and new public control systems might have
on that relationship. To test this, we developed and tested different hypotheses with the use of
a quantitative method as is often used in with a deductive research approach (Bryman & Bell,
2011). Our quantitative study is a cross-sectional study based on partly a survey sent to the
CEOs of municipal corporations within the energy, water and waste management sector and
content from reports produced by the MCs. A quantitative research method gives us access to
31
a larger amount of data that can be easily gathered and furthermore presents a more holistic
view of the population which increases the generalizability of the results (Saunders, Lewis &
Thornhill ,2009). With a quantitative method there is a limitation in the possibility of getting a
greater understanding of the subject but at the same time it decreases the possibilities of
different interpretation of the same results compared to a qualitative study (Bryman & Bell,
2011).
3.3 Research Strategy
When developing the research strategy, it is important to consider the purpose of the study and
research question, which for this study is to examine how managerial discretion impacts the
organizational performance of municipal corporations. With that purpose in mind you begin to
examine how that could be explored. Saunders et al. (2009) described different research
strategies that can be used for an explanatory purpose. The different strategies are ethnography,
archival research, action research, experimental study, grounded theory, case study, and survey
study. With a survey the researchers are able to gather all the information that they deem to be
relevant and useful (Bryman & Bell, 2011). The strengths of using surveys as the method of
data collection is the access to a large sample size and therefore creates the possibility to
generalize the results to the population (given no non-response bias). Considering the large
sample size, it covers, the time and effort to gather the data is small compared to other methods
(e.g. archival research or interviews) and the response will be instant (Bryman & Bell, 2011).
One of the most serious criticisms of survey research is that the questions asked are often so
complex that the survey ceases to be the most appropriate method of data collection as
additional information may be needed from the person answering to give an accurate answer
(Chua, 1996). Another difficulty when using surveys is getting a satisfactory response rate from
the population, in order to increase our chances of achieving a good response rate we used the
Dillman method (1978) of sending two reminders to the recipients a week apart and also
increasing our total population by using three different industries, instead of one which was the
original plan.
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3.4 Data collection
This research consists of both primary and secondary data to further explore this research
purpose. Primary data has been collected using quantitative data through an online
questionnaire. It is primary data because it has not been used for research purposes or published
in any other manner before and is collected by the researchers themselves (Bryman & Bell,
2011). The survey included four demographic questions about the CEO, measurements of
managerial discretion and control systems within the organization as well as their perceptions
regarding the organizational performance of their firm. The survey in its entirety can be found
in Appendix 1. In total the questionnaire which contained 30 statements, and all of them were
measured on the seven-point Likert scale (1=lowest value, 7=highest value). The survey was
sent to a total of 164 CEOs, of which 63 answers were received, which resulted in a response
rate of 38,4%. However, one received answer had to be omitted since no financial data was
available at the time of conducting the research.
Secondary data was collected from official reports like financial reports and separate
sustainability reports produced by the organizations. To assist in the collection of the publicly
available financial reports the database Business Retriever was used to gather the MCs’
financial data. The term secondary data is named that since the information is collected by
someone other than the user of the data, usually secondary data is readily available to the public
but that is not always the case (Bryman & Bell, 2011).
3.5 Sample Selection
This study will be performed on Swedish municipal corporations in the utility industry.
Previous studies regarding hybrid organizations such as MCs usually focuses on the public
housing sector. This study is meant to expand the available literature on MCs and corporate
governance into different sectors within the utility industry, since the services provided by the
MCs are essential for society to properly function. Additionally, there is a special legislature
for certain industries that provides vital services for society, such as the Water Act and the
Electricity Act that stipulate that MCs should be run in a businesslike manner (Vattenlag,
1983:291; Ellagen, 1997:857). These laws may affect the CEO has on the performance of the
firm. The selection of companies was done by visiting the municipalities websites and looking
for their MCs, all energy, water and waste corporations that the municipalities owned 50% or
33
more were included in the population. Reason for the 50% cut off is that the municipality needs
to have control over the organization and ability to govern its usage and they are only affected
by for example the municipality act, if the municipality owns the majority. The choice of these
industries is that they are important and have a similar role in the society of providing crucial
services and these services often overlap, meaning that one organization often works within
multiple of the industries. Next, the website was searched for the name and email address of
the CEO and later used with an online survey tool to send the survey and keep track of non-
respondents.
3.6 Analysis of non-response bias
Non-response bias can occur when subjects who refuse to take part in a study, or who drop out
before the study can be completed, are systematically different from those who participate
(Wright, Stern, & Phelan, 2012). Meaning that the results extracted from the statistical testing
of the sample can become non-representative, because the participants may disproportionately
be associated with traits that may affect the outcome. When response rates drop below 70%,
the non-response rate becomes a critical issue (Wright et al., 2012). However, non-response
bias may still occur even at a 70% response rate (Wright et al., 2012). The response rate of the
survey sent out to the CEOs is 39%, which is far below Wright et al.’s limit for non-response
rate and risk for bias being a critical issue. Therefore, an analysis of the non-response bias was
made, to test if it occurred in the collected sample. According to Wright et al. (2012), the
probability of non-response bias having materialized in the data set can be assessed by a
comparison of the characteristics of participants and non-participants (see table 1).
Additionally, to test if a non-response bias had occurred in the collected data set, an
independent sample t-test was run on the firm size and the gender of the respondents and the
non-respondents. The results from the t-test shows that there is no significant difference
between the two tested groups, and therefore, there is no occurrence of non-response bias
within the collected data set.
Additionally, a comparison is made, in line with Wrights (2012) recommendations, in the
following table between the respondents and the non-respondents. Since there is no significant
difference between the two, the probability of non-response bias occurring is deemed to be low.
Which affirms the results extracted from the t-test.
34
Table 1 Analysis of non-response bias
3.7 Operationalization
3.7.1 Dependent variable - organizational performance
The measurement of performance was done in two ways, first a perceived performance from
the view of the CEO of the firm. The other is objective measurements drawn from the financial
reports produced by the organizations covering all three areas included within the TBL which
is motivated by the multifaceted outcomes that municipal corporations strive to achieve.
3.7.1.1 Perceived organizational performance
CEOs who responded to the survey are asked to judge their own performance from a financial,
social and environmental view. They are asked to judge their performance compared to similar
companies and judge based on a seven-point scale of their compared performance, where a
higher score represents better performance compared to similar companies.
The CEOs perceived financial performance (PFP) was judged on three different elements
derived from Carmeli (2008) were they are asked to judge their performance compared to
similar companies on a scale of 1 to 7. The following areas were examined:
Statement 1. Sale growth
Statement 2. Return on sales
Statement 3. Return on assets
35
The perceived social performance (PSP) was inspired by the Global Reporting Initiative (GRI)
and their standards for reporting among economic, social and environmental reporting. The
statements were chosen to cover many different areas of the operation and were the following:
Statement 1. Effect on people's lives
Statement 2. Opportunities for the employees
Statement 3. Social initiatives
The perceived environmental performance (PEP) was derived from the paper by Ilinitch,
Soderstrom & Thomas in (1998) and inspired by the Ceres principles for environmental
sustainability. The CEOs were yet again asked to compare their view of the organization's
performance compared to similar companies. The three statements that they were asked to
judge were:
Statement 1. Reduce pollutants
Statement 2. Reduce waste
Statement 3. Evaluation of own environmental impact
3.7.1.2 Factual organizational performance
The factual organizational performance is examined through the use of the organizations
financial reporting for the financial aspect of organizational performance, which is collected
through the database Business Retriever, and the content analysis made by the authors to
measure the MCs’ social and environmental performance. The latter required coding to be
usable in the statistical test, and the former did not, as a result, the measurement for financial
performance is deemed to be more reliable.
Measurements:
Financial Performance
When measuring the financial performance of a MC, a lot of things have to be taken into
consideration, they have to follow the self-cost principle (Kommunallagen, 2017:725, 2:6)
which means that they are only allowed to charge the same price for a service or product as it
costs to provide it, meaning that in theory there should be no profits but there are exceptions
for certain industries like the energy and the water sector, which are both included in our
sample. Thus, often used measures such as profit-margins may yield a misrepresented image
of some companies in the sample, since profit and dividend payout is not the focus of the MCs.
The choice was made to use the EBITDA-margin as a proxy for the financial performance of
the firm, the EBITDA-margin measures the operating profit of the firm as a percentage of its
36
revenue. The acronym EBITDA stands for earnings before interest, taxes, depreciation, and
amortization. The choice was made to use this proxy variable since it highlights the efficiency
of the firms, which is vital for MCs. The way the variable highlights efficiency is by showing
that the firm is keeping its costs down, which will result in the EBITDA-margin increasing.
The measurement had also been used in previous research in the United States concerning
electrical companies (Bryan, Hwang & Lilien, 2005) which further solidified it as the financial
measure to use.
Social & Environmental Performance
The focus of this paper lies on different industries where vastly different municipal
corporations are represented within the service sector, there was difficulty in finding an
objective way of measuring the social and environmental performance for all of the firms that
are represented in the collected data set. The decision to use a content analysis was made to
find dummy variables that could represent the performance of the companies. However, there
is variance in size between the companies, and therefore also variance in the scope of the firms
reporting. Some companies provided sustainability reports where they presented objective
measures of both their social and environmental performance, while others did not. For the
sake of comparability, the sustainability reports were not considered, the focus was on the
financial reports of the companies. Since an objective measure that represents social and
environmental performance that also includes every recipient was not found using the content
analysis, a tested model for content analysis used for environmental and social disclosures of
Swedish municipalities (Tagesson et al., 2013) was adapted, and adjusted it so that it would
better represent the performance and therefore fit the needs of this paper, and accounted for the
differences between municipalities and municipal corporations. The checklist can be found in
the appendix. Environmental and social disclosures became dummy variables that represent
performance for the firm, since it was the best alternative that would not compromise the
comparability of the companies. The measurement does not directly measure the performance
but is a crude proxy variable that relies on the reporting of the firm. Reporting is different from
the actual performance of the organizations but seen as the comparison is done through various
industries it is seen as the best alternative of comparing the social and environmental
performance, even though it can provide some misrepresented measures of performance.
37
3.7.2 Independent variable - managerial discretion
To measure managerial discretion Finkelstein & Hambrick (1987) brought up different
elements and aspects to consider. One method argued by the authors is the use of questionnaires
among the TMT, board or the manager himself which would rather allude to the perceived
managerial discretion as it is their own view of the leeway available. For this study, the CEO
is asked to assess their own authority from 1 to 7 where the higher score equals higher authority
for 13 different statements. The more authority a CEO perceives to have the higher the
discretion they have available to them. The statements originated from the work by Pearce and
Zahra in 1991 but were adjusted to fit the context of MC and the CEO as the focus with the
help of researchers of local government.
Statement 1. Decisions about changes in capital structure
Statement 2. Decisions about capital expenditures
Statement 3. Decisions about future investments
Statement 4. Decisions about future divestments
Statement 5. Decisions about Establishing long-term goals
Statement 6. Decision in letting other TMT members go
Statement 7. Selection of organizational strategy
Statement 8. Decisions to adopt new technologies
Statement 9. Decisions regarding TMT members compensation
Statement 10. Decisions regarding charitable contributions
Statement 11. Decisions regarding dealings with external stakeholders
Statement 12. Decisions that might go against political pressure from the board
Statement 13. Decisions about performance management systems
3.7.3 Moderating variables - control systems
Measuring TPMCS and NPMCS was done in the same way as in the paper by Uman et al.
(2018) with four statements for each type of control systems. The CEOs were asked to judge
how accurate the statements are for their organization on a Likert scale between 1 to 7, higher
score represents a greater use of either type of control system.
38
Traditional MCS
Statement 1. Our organization place great value into planning of the organization
Statement 2. Our organization use objectives to manage the staff
Statement 3. Our organization strives for working tasks to be completed efficiently
Statement 4. Our organization have clear rules for the employees to follow
NPM MCS
Statement 1. our organization evaluate the employee's performance using financial
measurements
Statement 2. Our organization reward our employees using monetary incentives after a good
performance
Statement 3. Our organization reward our employees using benefits after a good
performance
Statement 4. Our organization incorporates competition between the employees.
3.7.4 Control variables
Firm size
There are multiple ways to measure firm size as a control variable, turnover, total assets or the
balance sheet total just to name a few. However, balance sheet totals and total assets are not
good indicators of size when it comes to Swedish municipal accounting according to Tagesson
et al. (2013), since it is focused on the income statement rather than the balance sheet. The
assumption is that the MCs carries the same focus, and to avoid any accounting errors affecting
the firm size, number of employees was elected as the proxy variable for firm size. The natural
logarithm of the number of employees was used as the final variable for firm size, which is in
line with previous research on MCs (Maine et al., 2020).
Part of the country
Part of the country was chosen as a control variable since it was easily accessible and could
impact the performance by the geographical differences on the prices charged for the different
utilities examined in the research. Research that includes observations from different countries
often include the country as a control variable (Crossland & Hambrick, 2010) but as this
research is focused on one country it is changed to parts of the country to represent these
geographical differences as Sweden is a rather large country in size. Sweden is historically
divided into three traditional lands of Sweden: Götaland, Svealand and Norrland.
39
Gender
According to AllBrights annual report which measures gender equality within the Swedish
business sector, 23% of all companies have a female CEO (AllBright, 2018), which may
represent an increase from previous years, but inequality still exists in Sweden. Even though
most of the MCs are not included in the report, an observation of the participants in our survey
shows that similar conditions exist in the public sector, since 23,8% of the respondents are
female. Interestingly, researchers Khan & Vieito found that firms that employ female CEOs
are linked with an increase in performance compared to the firms that have a male CEO (Khan
& Vieito, 2013). In lieu of this research, gender was included as a control variable to test if the
gender of the CEO affects firm performance.
Age
Previous research done within the private sectors shows as the CEO ages, the firm will
experience lower sales growth, lower investment, and lastly, lower profitability (Belenzon,
Shamshur, & Zarutskie, 2019). However, an aging CEO is not all negatives, firms with an
aging CEO will experience higher probability of survival, which suggests that there is a trade‐
off between the managerial styles of older and younger CEOs (Belenzon et al., 2019). These
results are from the private sector, so they do not directly apply on the MCs, especially
considering the fact that Swedish municipalities will bail out failing MCs since their services
are vital for society. Interestingly, the results are stronger in the service and creative industries
(Belenzon et al., 2019), which the focus of this paper spills into considering that utilities are a
form of service. The control variable was included to test if the age of the CEO influences the
performance of the firm. Age was measured by subtracting the year of birth from 2020 to
determine the respondent’s age.
Tenure with the firm
Firm tenure is defined as the length of employment in an organization (Ng & Feldman, 2013).
Previous literature has shown that there might be differences in innovative behavior between
employees with a short firm tenure and long firm tenure in a specific company (Ng & Feldman,
2013) because of the employees’ specific knowledge and expertise about their work and the
company. Conversely, the argument is made by Ng & Feldman (2013) that increasing the firm
tenure of an employee also increases the risk of the employee getting bored with the tasks at
40
hand to and becomes less motivated to perform. The variable was measured by asking the
participant which year they started their employment at the company.
Tenure as CEO in the firm
Tenure as CEO in the firm is the denomination used in this study for job tenure, which is
defined as the length of employment in an organization in a specific job (Ng & Feldman, 2013).
Like firm tenure, differences might arise and exist between employees depending on the length
of their job tenure (Ng & Feldman, 2013). The longer an employee works in a specific job, the
more knowledge and expertise will the employee accrue, which provides the employee with
the tools to better respond to changes. Longer job tenure may also allow the employee to faster
and more easily come up with solutions for problems (Yuan & Woodman, 2010). This may
lead to the performance of the firm increasing with the CEO’s job tenure. Conversely, a longer
job tenure may also lead to employees getting too used to the organizational processes that are
currently being used, and as a result biased thinking may arise in the employees (Ng &
Feldman, 2013), which may have an opposite effect on the performance of the firm. The
variable was measured by the amount of years the CEO has been the CEO of the firm.
Previous experience from the private sector
The private sector experience of the CEO was included in this study since the private sector,
when in comparison to the public sector, has been characteristically associated with more
proactivity and innovation. Therefore, CEOs with experience from the private sector could be
expected to have a positive influence on the firm’s performance. This variable was measured
by the amount of years that the CEO has worked in the private sector (Smith & Uman, 2013).
3.8 Data analysis
In order to analyze the quantitative data, which was gathered by use of Qualtrics, it was
imported to the statistical software IBM SPSS Statistics 26. The program was used to test the
variables in different statistical tests. Firstly, a Cronbach alpha test was conducted to measure
the level of reliability of the variables. Next, descriptive statistics tests were conducted on all
of the (dependent-, independent-, control- and moderating-) variables in order to summarize
the collected data set and provide an overall picture of the empirical findings. To test if the
sample is normally distributed or not, a Kolmogorov-Smirnov test was chosen and conducted.
In a Kolmogorov-Smirnov test, a low p-value (p<.05) represents a large deviation in the
41
variable, which means that the variable does not follow a normal distribution. The
Kolmogorov-Smirnov test showed that only two of the variables used in study were normally
distributed, which prevented the use of a Pearson’s Correlation test. A Spearman’s Correlation
test was conducted instead in order to find potential correlations between the variables. The
multiple linear regression analysis was conducted in order to test if there is a significant
relationship between managerial discretion and performance, in combination with control
variables, and by extension testing if the proposed hypothesis 1 is supported or not. Finally, to
test if the proposed hypothesis 2 and 3 are supported in the dataset or not, hierarchical multiple
moderating linear regression analyses were conducted. Thereby testing if the NPMCS and
TPMCS have a moderating effect on the relationship between managerial discretion and
organizational performance.
3.9 Reliability, validity and generalizability
For a paper to be considered trustworthy there are some criteria that needs to be met, they are:
reliability and validity. To assess the quality of the research, it is imperative to consider the
reliability and validity of the data and measures (Bryman & Bell, 2011). Reliability refers to
the ability to replicate the research at another time to showcase that the variables are consistent,
meaning that the variables and results hold for different time periods (Bryman and Bell, 2011).
The reliability of the variables in this study is expected to be considered high as some variables
used in the study are obtained directly from the financial reporting of the firm through the
database Business Retriever, and to determine the reliability of the other variables used, a
Crohnbach alpha test was used. The Crohnbach’s alpha coefficient varies between 0 and 1,
where 0.70 is typically used to denote an acceptable level of internal reliability (Bryman &
Bell, 2011).
Validity of the data refers, simply put, to the question of whether the variables measure what
they are intended to measure within the study (Bryman & Bell, 2011). In this study, the focus
lies with construct validity, which refers to deducing hypotheses from theories that are relevant
to the concepts (Bryman & Bell, 2011). To ensure the validity of this study, the decision was
made to only use survey measurements and hypotheses that were supported by the work of
earlier research showcasing their acceptance as indicators of different concepts. The validity
regarding the variables collected from Business Retriever is expected to be deemed as high,
since they did not have to be calculated or coded in any manner for the tests made in this paper.
42
However, the measurement of the social and environmental performance of the firms is deemed
by the authors to pose a threat to the general validity of this study.
Generalizability is defined as how well the findings of an analysis conducted on the sample
presents a fair view of the full population that the sample is intended to represent.
Generalizability is largely affected by two factors, the sample size and the extent of the sample
which can be deemed as representatives for the entirety of the measured population (Elliot,
Fairweather, Olsen & Pampaka, 2016). Since the participating sample size in this study is small
(N=62), one can question how well our findings represent a fair view of the full population.
This is further acknowledged in the limitations section, however, since the population of MCs
in the utility industry is small to begin with (N=163, over 3 industries), the results reached in
this study are not as misrepresented as one might think. Furthermore, a non-response bias
analysis was run to ensure that the sample used did not contain any non-response bias, two tests
were run and both came back negative for the presence of non-response bias.
The trustworthiness of the study is being met by always considering and ensuring that the study
incorporates the concepts of validity and reliability. Additionally, the trustworthiness is being
met by critically reviewing the collected data which falls under the assumption of being
answered as truthfully and in a manner that represents the reality of the CEO in a MC. The
previous experiences and understandings of the subject matter may have affected the
interpretation of the data, however, this was kept in mind and considered by the authors
throughout the process in order to reduce the bias and subjectivity of the authors when
presenting the results of the paper (Bryman & Bell, 2017). The authors believe that the study
made meets the requirements of the criterion for trustworthiness.
3.10 Information Evaluation
The literature used in this study consists largely of academic papers which have been produced
primarily by using the database PRIMO, which is the Jönköping University library’s search
service. The academic search engine Google Scholar was used in addition to PRIMO for the
procurement of academic literature. By only using peer reviewed studies in this paper, a high
base level of credibility and quality was established. A peer reviewed article is examined by
experts in the same field of study as the academic research paper’s subject before publication,
to verify and ensure its credibility and quality. An effort was made to use articles published in
journals which are highly regarded by the Academic Journal Guide (ABS) list, to the extent
43
that it was possible. The ABS list ranks different scientific journals, a high rank means that the
reliability of the study published in the journal is deemed to be high (Bryman & Bell, 2015).
Using a journal that is highly regarded by the ABS list consequently adds to the reliability of
this study.
3.11 Ethical consideration
The gathering of quantitative data comes with certain responsibilities for the researchers,
particularly when the means of quantitative data gathering is through a survey. The authors are
both aware of the ethical considerations that are necessary to have because of the questionnaire
that is used in this thesis. There are four main areas, if deception is involved, a lack of informed
consent, whether there is harm to participants and if there has been an invasion of privacy
(Bryman & Bell, 2011). To meet the listed requirements, the authors have been in contact with
the CEOs of the municipal corporations via email, where a brief explanation regarding the
research that they would potentially be a part of was about. The CEOs were also informed that
their participation is strictly confidential and voluntary, which assures that there is no deception
or invasion of the privacy involved. The participating CEOs therefore gave their consent and
are informed that the information will only be used in this research.
44
4.0 Empirics
The empirics chapter presents the results and findings from the statistical analysis of the
collected data set.
4.1 Descriptive statistics
Descriptive statistics are used to summarize the collected data set and provide an overall picture
of the empirical findings. To provide a clear overview per variable, each tested variable are all
covered with their own table. As some answers received by the respondents were either
incomplete or missed completely, there is a variation of the size of the collected data set.
4.1.1 Dependent variables
The dependent variables are divided into two categories: factual and perceived, both include
financial, social and environmental performance. Every dependent variable except the factual
financial performance (FFP) includes more than one variable which means that they have to go
through a reliability test to see if they can be merged into a single dependent variable. The
reliability test is measured by Cronbach’s alpha, which in this context gives a score on the
internal consistency of the variables. A common rule of thumb is that if the variables have a
Cronbach’s alpha ≥ 0.7, it means that the internal consistency is deemed reliable enough to
merge the variables into a singular one (Taber, 2018). Factual social performance (FSP) passed
the test with a Cronbach's alpha = 0,761 while environmental failed the test with a score below
the 0,7 threshold with a score of 0,661. Since the score was close to the target and this concept
has not been tested much within the context of municipal corporations it was accepted and was
averaged into one variable.
The perceived performance measurements all passed the test with scores of 0.828, 0.818 and
0.782 for financial, social and environmental respectively. Since all three elements were judged
based on three statements, they were all merged into one variable each.
45
Table 2 Descriptive Statics factual and perceived performance
FFP was measured by using the EBITDA margins for the year 2018 and therefore stands out
compared to the others, since it has a much larger variation in the results. FSP and FEP are
close to each other since they are measured in a similar manner with the use of a content
analysis, and the results of the content analysis shows that the environmental disclosures were
more common than social disclosures. Perceived performance was measured through the use
of the survey data which showed that once again the environmental performance had the
highest average score.
4.1.2 Independent variables
Managerial discretion is the independent variable in this study, and it is measured through
thirteen statements in the survey. It passed a reliability test (Cronbach's alpha = 0,765) and
thereby the statements were merged together into one variable.
Table 3 Descriptive Statistics managerial discretion
Table 3 shows how much discretion the CEO feels that they have in their role. The mean value
of 5,46 is well above the mean on the seven-point Likert-scale showcasing that they perceive
to have a lot of discretion available to them in their position as CEOs. A factor analysis was
also conducted on the statements that measured the MD, which showed that there are four
different components of MD according to the CEOs. The result of the factor analysis can be
found in appendix 3.
46
4.1.3 Moderating variables
The use of traditional and new public management control systems is the moderating variable
in this research. They are both measured with the use of four different statements as indicated
below.
Table 4 Descriptive Statistics Traditional management control systems
Table 5 Descriptive Statistics New Public management control systems.
They were both tested with a reliability test where TPMCS got a passing score (Cronbach's
alpha = 0,773) while NPMCS failed the test with a score of 0,374. As that score was far below
the rule of thumb score of 0,7 we decided to do a factor analysis of both types of control systems
together to see if the respondents see any if there is a connection between the statements. This
resulted in three different components as seen below:
47
Table 6 Rotated Component Matrix control systems
TPMCS 1,2 and 3 were connected to the use of financial measurements (NPMCS 1) when
evaluating the employees. The rewards system of both monetary and non-monetary were
connected to each other. Lastly competition between employees and clear rules were connected
to each other but in the opposite direction meaning that a higher score in for example
competition would result in a lower score in the rules to follow, financial measurements was
also linked to this component but since the higher score was with the TPMCS it will be included
in that component. This factor analysis led us to change the control systems into three different
elements based on the factor score as seen below.
Table 7 Descriptive statistics of new moderating variables
4.1.4 Control variables
Gender, Age, Tenure, Private Sector experience
Gender is measured through a dummy variable where 1=male and 0=female. Table 8 shows
that 76% of the respondents were male which represents 47 males and 15 females. Age shows
that the youngest participant was 40 years old and the oldest 65 with a mean of close to 54
years old. The mean tenure with the firm was 6,9 years and as CEO 5,1. 35% of the CEOs had
48
previous experience from the private sector and that length of experience had a mean of almost
7,5 years.
Table 8 Descriptive Statistics CEO information
Industry
Industry is used as a categorical variable, in which 7 different types of companies have been
separated based on which industries they engage in. Table 9 shows the percentage among the
respondents, which shows that most of the respondents work only with energy. As over half
the respondents represented only the energy sector, we dichotomized it by testing if they were
solely an energy company or not. The reason for this is that the number of respondents from
the other sectors was too low.
Table 9 Descriptive Statistics industry
Part of the country
Which part of the country is used as a categorical variable divided into the different parts of
Sweden that the respondents operate in. Table 10 shows that over half the respondents come
from Götaland which is in the south part of Sweden. Just as with the industry we dichotomized
it by testing if it was part of Götaland or not.
49
Table 10 Descriptive Statistics part of the country
Firm size
Firm size is represented through one category, number of employees. However, Due to the
large standard deviation the values are logarithmized but shown here is their actual form to
give an understanding of the size of the municipal corporations.
Table 11 Descriptive Statistics firm size
4.2 Spearman correlation Matrix
The data has been tested on normality through the Kolmogorov-Smirnov test, the test showed
that only FFP and PSP were normally distributed as their scores were higher than 0,05. Since
the other measurements of performance were not normally distributed, the Spearman
correlation matrix was selected over Pearson (Bonett & Wright, 2000). The significance levels
are as follows: **p < 0.01 = strong significance; *p < 0.05 = moderate significance; † p < 0.1
= significance . The correlation coefficients are presented in Table 12.
The matrix shows different correlations of various importance to the study. Firstly, among the
dependent variables, managerial discretion only has a significant impact on the FFP with a
strong significance (0,413**). The other significant impact on the FFP is whether or not the
company works within the energy sector (0,337**) as it also has a positive impact on the
financial performance. This is the only significantly positive correlation between performance
and types of industry. Social and environmental performance from the content analysis are
correlated to each other (0,459**) which is of no surprise, meanwhile the only factual to
perceived performance that correlates to each other is the social performance (0,314*). Firm
tenure has a strong significant correlation with both FSP and FEP. Private sector experience
has strong significance with the PFP and also a moderate significant correlation with the FEP.
The only type of significant correlation between the moderating variables and performance is
50
the use of the NPMCS reward system and the PFP. Which geographical part of the country the
company operates in appears to have no significant impact on any type of performance.
51
Table 12 Spearman Correlation Matrix
Variables 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27
1. Factual Financial Performance
2. Factual Social Performance -0,028
3. Factual Environmental Performance -0,015 ,459**
4. Perceived Financial Performance 0,166 ,423** 0,162
5. Perceived Social Performance 0,072 ,314* 0,108 ,313
*
6. Perceived Environmental Performance 0,011 0,031 0,061 0,005 ,388**
7. Managerial Discretion ,413** -0,058 -0,001 0,155 0,109 0,055
8. TPMCS + Financial measurement 0,201 -0,017 0,173 0,170 0,103 0,187 0,025
9. New Public reward 0,092 0,237 0,020 ,311*
,282* 0,216 0,227 -0,018
10. New Public work environment 0,058 0,196 0,230 0,044 0,222 -0,026 0,095 -0,010 0,021
11. CEO Gender -0,012 0,112 0,111 0,245† ,281* 0,006 0,163 -0,036 -0,082 0,243†
12. CEO Age -0,056 0,160 0,181 ,379** 0,083 -0,104 -0,183 0,025 0,000 -0,124 0,202
13. Tenure with the firm 0,139 0,131 ,260*
,298* 0,199 0,084 0,059 0,102 0,045 -0,079 0,026 ,262
*
14. Tenure as CEO 0,124 0,147 0,134 ,334** 0,232† 0,005 0,091 0,216† 0,147 -0,174 -0,022 ,292
*,861
**
15. Previous experience from the private sector -0,104 0,126 0,133 0,059 -0,184 -0,079 -0,052 0,124 0,048 -0,080 ,262*
,294* -0,192 -0,129
16. Length of Experience from the private sector -0,067 0,147 0,138 0,031 -0,170 -0,085 -0,015 0,069 0,037 -0,087 ,297*
,307* -0,133 -0,068 ,969
**
17. Employees -0,212† ,393**
,418** -0,024 0,000 0,239† -0,127 0,036 0,101 0,104 -0,153 -0,069 0,051 -0,116 0,186 0,145
18. Energy ,337** -0,141 0,079 0,024 -0,082 -0,119 0,078 0,174 -0,058 0,122 0,225† -0,062 0,025 0,071 0,087 0,135 -,286
*
19. Water -0,027 -0,020 0,021 -0,127 -0,113 -0,026 -0,067 -0,007 -0,046 -0,166 -,399** -0,091 0,053 -0,091 -0,010 -0,061 0,082 -0,241†
20. Waste -,280* 0,176 0,017 0,053 0,155 0,212 0,008 -0,057 0,193 -0,110 0,029 -0,133 -0,050 -0,032 0,028 0,052 0,194 -,316
* -0,067
21. Energy & Water 0,058 -0,088 -0,040 0,078 -0,085 -0,123 0,166 -0,038 0,042 0,077 0,185 0,153 -0,071 -0,086 -0,015 -0,016 -0,168 -,349** -0,074 -0,097
22. Energy & Waste 0,162 0,050 -0,026 0,093 -0,009 0,104 0,032 0,086 0,024 -0,095 -0,224† 0,114 0,112 0,199 -0,010 -0,044 ,254* -0,241† -0,051 -0,067 -0,074
23. Water & Waste -,503** 0,013 -0,182 -,305
* 0,039 0,005 -,365**
-,266* -0,124 -0,061 -0,070 -0,089 -0,198 -0,138 -0,015 -0,029 -0,002 -,349
** -0,074 -0,097 -0,107 -0,074
24. Energy, Water & Waste 0,037 0,129 0,077 0,111 0,131 0,066 0,085 -0,010 0,006 0,067 -0,070 0,147 0,152 0,055 -0,129 -0,155 0,230† -,349** -0,074 -0,097 -0,107 -0,074 -0,107
25. Svealand -0,040 -0,049 -0,230 -0,015 0,080 0,085 -0,231† 0,042 -0,185 0,009 0,068 0,043 -0,154 -0,156 -0,079 -0,081 -0,078 -0,045 -0,156 -0,078 -0,109 0,005 0,124 0,241†
26. Götaland 0,069 -0,219† -0,030 -0,178 -0,084 -0,037 0,040 0,034 -0,207 -0,108 -0,059 -0,133 -0,021 -0,085 -0,050 -0,059 -0,109 0,147 0,105 -0,130 -0,144 -0,099 0,005 0,005 -,303*
27. Norrland -0,013 0,207 0,237† 0,146 -0,013 -0,052 0,186 -0,065 ,326* 0,072 -0,019 0,057 0,160 0,208 0,111 0,119 0,153 -0,067 0,068 0,168 0,208 0,068 -0,120 -0,229† -,713
**-,453
**
Note: ** p < 0.01; * p < 0.05; † p < 0.1
52
4.3 Multiple Linear regression analysis
All hypotheses are tested by the use of multiple linear regression analyses. The analysis allows
for exploring potential relationships between the different dependent variables used in this
study, and the independent variable (Pallant, 2013). The regression is an indication of how well
the variables are able to predict various outcomes. Additionally, the variables that were tested
are able to provide information regarding the model as a whole, and the individual contribution
of each of the tested variables (Pallant, 2013). As a multiple linear regression analysis uses
more than one independent variable and control variables, it is important to run a collinearity
diagnostic, which checks for multicollinearity among the variables. Multicollinearity is
detrimental for the regression analysis, and it explains the relationship among the different
independent variables used in the regression and occurs when there is a high correlation
between the independent variables in the regression (Pallant, 2013). VIF-value is used to check
for multicollinearity occurs among the variables, the VIF indicates whether the different
independent variables are correlated to each other. If this value is above 4 it would indicate
multicollinearity (Pallant, 2013).
To test the first hypothesis H1, that managerial discretion has a positive impact on the
organizational performance a multiple regression analysis is conducted. As showcased in the
correlation matrix managerial discretion only has significant correlation with FFP which then
becomes the focus, getting the most appropriate model for explaining the FFP. Another
significant correlation with FFP was whether the company solely worked within the energy
sector as it would have a positive effect on the dependent variable. Number of Employees were
chosen to always be included as size is seen as an important variable on a firm's financial
performance. Götaland was also always included as over half of the firms in the sample came
from that region. As we wanted to limit our control variables to six we were left with three
spots to test. The reasoning behind limiting the control variables used in the testing is due to
the small sample size and following the so called 1 in 10 rule is because too many control
variables cause overfitting and the tests get skewered (Harrell, Lee & Mark, 1996). For model
1,2 and 3 firm tenure was used as we believed it to be the most impactful on a firm's
performance of the ones remaining as that will increase the knowledge of the organization. All
different combinations of control variables were tested before testing the three models in table
13, however, it was deemed unnecessary to include more than three for the sake of readability.
53
Table 13 Multiple regression analysis on factual financial performance
Among the models shown in table 13, model 1 had the highest R2 and adjusted R2 of 0,367 and
0,285 respectively. This score shows that model 1 explains 36,7% of the variance in FFP. The
VIF-value for all models were low as the highest reached a score of 1,291 so multicollinearity
is not an issue with this research. Across all three model’s managerial discretion had a strong
significance on the FFP which supports H1 of managerial discretion having a positive effect
on performance. Being solely an energy company proved to have a moderately significant
effect on the FFP as well across all three models.
As model 1 provided us with the highest R2 , we will use that model to test our other dependent
variables and see if managerial discretion has any significant impact on those different types
of performance.
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Table 14 Multiple regression analysis on factual social and environmental
When testing H1 on FSP and FEP, managerial discretion does no longer have a significant
impact on the performance, which goes against the hypothesis. For both types of performance,
it is instead the number of employees that have a significant positive effect on the different
types of performance. Environmental performance is also significantly affected by whether it
is an energy company and the age of the CEO. The test was better suited for the environmental
performance as it had a better R2 of 0,339 which means it explains 33,9% of the variance in
environmental disclosures compared to the 28,5% of variance explained in social disclosures.
Multicollinearity was no problem for this test either as the highest VIF score was 1,184 for
both tests. The ANOVA-significance shows the statistical significance of the model and the
score of 0,009 and 0,001 supports the fact that managerial discretion does not have a statistical
significance on factual social or environmental performance.
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Table 15 Multiple regression analysis on perceived performance
When the test is conducted on the perceived performances the managerial discretion shows a
strong significant effect on the financial performance as well as age of the respondent. The test
for PFP got an ANOVA-significance score of 0,006 which gives significant statistical support
that managerial discretion affects the PFP. The test for both PSP and environmental
performance got an ANOVA score of well above the 0,1 cut off which means that the model
cannot be used to explain their perception of their own performance.
4.4 Hierarchical moderating multiple regression analysis
To test H2 and H3, a Hierarchical moderating multiple regression analysis has been done to
see if different types of control have a moderating effect on the relationship between managerial
discretion and organizational performance. The test is done in three different steps, first all the
control variables used are tested against the dependent variable. Thereafter, the independent
variable managerial discretion has been added and finally in the last set the interaction between
the independent variable and the moderating variable is inserted to see if it has any impact on
the relationship between managerial discretion and the different types of performance.
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4.4.1 Moderating effect TPMCS
For factual and perceived financial performance, we went with a model as close as possible to
the ones used in the linear regression and they will be presented next. We dropped two control
variables; Götaland and Tenure with the firm, to make room for the moderating variable and
the interaction of the moderating variable and our independent variable, and thus adhering to
the 1 in 10 rule (Harrell et al., 1996).
Table 16 Hierarchical Linear Regression Model TPMCS - Factual Performance
All the models worked to explain the different types of factual performance but the moderating
effect of TPMCS was not significant for any of the dependent variables. Managerial discretion
remained statistically significant for FFP as did the energy variable with an even stronger
significance than before. Gender also became significant with a negative correlation indicating
that the performance is better with a female CEO. The interaction of managerial discretion and
the control system was not significant for any of the tests but showed that it is approaching
significance (0,167) for FFP. As for the FSP and FEP, no plotting was done either since the
interaction showed no significance at a level of 0,722 & 0,343. Meaning that the use of TPMCS
has no significant effect on social or environmental performance.
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Table 17 Hierarchical Linear Regression Model TPMCS - Perceived Performance
It can be observed that the moderating effect of the interaction between TPMCS and MD was
significant (0,071) for the PFP, and for PSP it is nearing significance at a level of 0,149. They
also were both negatively correlated to the dependent variable, indicating that an increase in
the use of TPMCS leads to worse perceived financial and social performance. Managerial
discretion remained statistically significant (0,053) for the PFP as did the age variable with an
even stronger significance (0,035). For the PSP the gender variable was strongly significant
(0,013) and positively correlated, indicating that PSP is higher amongst male CEOs.
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Figure 2 Standardized Two-Way Interaction effects TPMCS and Perceived Financial Performance
The interaction of managerial discretion and the TPMCS was significant for the PFP, this led
the authors to use the excel sheet created by Dawson & Richter (2006) to plot the interaction
effects of TPMCS and PFP. Figure 2 shows the impact of a low and high use of TPMCS as
well as managerial discretion, and the impact they have on the PFP of the MC. Interestingly, a
lower level of TPMCS use has a positive impact on the PFP. A combination of high MD and
low TPMCS results in the best performance when the control system has a moderating effect
on the relationship between MD and PFP. As for the PEP, no plotting was done since the
interaction showed no significance at a level of 0,518. The same applies for the PSP, which
had a significance level of 0,149, which is approaching significance, but still remains
insignificant. Meaning that the use of TPMCS has no significant effect on the PSP and the PEP.
4.4.2 Moderating Effect NPMCS.1 Reward Systems
To test the moderating effect of NPMCS.1 Reward Systems on the relationship between
managerial discretion and organizational performance, a hierarchical moderating multiple
regression analysis has been done.
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Table 18 Hierarchical Linear Regression Model NPMCS.1 - Factual Performance
Testing for the moderating effect of NPMCS.1 Reward, a significant effect of managerial
discretion on the FFP was observed. Energy was as in earlier tests significant as well after
including the NPCMS.1 reward system and this time gender showed significance with a
negative correlation. For the FSP and FEP, only number of employees had a significant effect
on the performance. The moderating effect had no significant effect on either type of factual
performance as the significance levels were 0,980; 0,532 & 0,558. As there was no
significance, no plotting was done on the NPMCS.1 interaction with the factual performance.
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Table 19 Hierarchical Linear Regression Model NPMCS.1 - Perceived Performance
When testing NPMCS.1 Reward against the perceived performance there is still significance
of MD on the PFP but it is weaker than the Factual Performance. The only test that showed any
significance was test 10 on PFP. As the p-values of both the models on social and
environmental were too high, thus indicating insignificance, not much effort should be put into
the results showcased in test 11 or 12. The interaction with the best significance level was with
the PFP (0,192).
4.4.3 Moderating Effect NPMCS.2 Work environment
To test the moderating effect of NPMCS.2 Work environment on the relationship between
managerial discretion and organizational performance, a hierarchical moderating multiple
regression analysis has been done.
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Table 20 Hierarchical Linear Regression Model NPMCS.2 - Factual Performance
As with previous tests the FFP is strongly significantly affected by the MD and moderately
affected by the energy industry variable as well as significantly affected by the gender of the
CEO. This is in line with observations from previous testing (see table 16 & 18). The FSP and
FEP are yet again significantly affected by the number of employees and after an ANOVA-
test, all models were observed to be significant in trying to explain the factual performance of
various sorts. The moderating interaction had no significance which led to the decision to not
plot out the results using the excel sheet created by Dawson and Richter (2006).
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Table 21 Hierarchical Linear Regression Model NPMCS.2 - Perceived Performance
As it was the case when testing for TPMCS, two of the three perceived performance measures
were either not significant or showed weak significance in the initial ANOVA-test. The PSP
showed an insignificance (0,155), but the PEP showed strong insignificance (0,480), while the
PFP showed significance at the strength of 0,01. Which leads to this model not being able to
show any potential moderating effect of the NPMCS.2 with statistical significance.
The decision was made to present the best models available within the collected dataset, so that
they work when it comes to explaining the moderating effect of NPMCS.1 Reward and
NPMCS.2 Work Environment on different types of perceived performance with statistical
significance. Various combinations of control variables were used to provide a model that was
at least significant in regard to more than one aspect of performance. However, such a model
was not discovered in the collected dataset. Therefore, the results are not of use in this study.
Overall, the significance of the different control systems was low with only one combination
of control systems and type of performance resulting in a significance level below 10%
(TPMCS & PFP). The test that was plotted out showed no direct change in results as the lines
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were close to parallel in the test, the only difference was whether high usage of TPMCS would
result in a higher or lower performance. As TPMCS decreases the PFP, this indicates that the
use of these types of elements decreases the effect that MD has on perceived financial
performance, which partly supports H2. Neither of the NPMCS type of control systems showed
any significant level of impact on any type of performance which goes against H3.
4.5 Hypothesis
Since organizational performance is argued to be the elements of financial, social and
environmental partial acceptance of the hypothesis can be made if one or two types are affected
by managerial discretion. As managerial discretion showed significant impact on the financial
performance in both factual and perceived (Table 13 & 15) we partly support H1 as it was the
only type of performance that was positively affected by managerial discretion. No significant
effect was spotted between MD and social/environmental performance (Table 14 & 15). The
only moderating effect spotted was TPMCS on PFP which had a negative correlation which
supports H2 (Table 17 & Figure 2) which also leads us to partially support H2. As no significant
moderating effects can be spotted for NPMCS reward system or NPMCS work environment
(Table 18-21) we reject H3.
Table 22 Hypothesis overview
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5.0 Discussion
The discussion chapter discusses the findings which are presented in the empirics chapter. In
this chapter, furthermore, the results will be discussed in relation to the proposed hypotheses.
The purpose of this thesis is to explain the relationship between managerial discretion
and organizational performance, and how this relationship is contingent on the use of different
control systems in the context of Swedish municipal corporations. The results from the testing
presented in the previous chapter will be discussed in its meaning for organizational
performance, the relationship between managerial discretion and organizational performance,
and the results of the use of different control systems as a moderating variable.
5.1 Organizational performance
The objective of the MC is to provide services and facilities that are for the members of the
municipality, however, the purpose of the MC must be to provide public good and cannot be
profit maximization (Kommunallagen, 2017:725, 2:1+7). The performance of a MC depends
on the ability of the firm to continually show its purpose and provide desirable outcomes to all
its stakeholders. Considering the goal multiplicity of MCs and their role in Swedish society,
and the fact that MCs are meant to serve as good examples for other firms, the TBL framework
serves a means to meet that pressure. It can also provide the Swedish companies with a good
example on how to keep both sustainability and organizational performance in mind while
running the firm. The argument is therefore made that organizational performance in the
context of MCs consists of three facets of performance: financial, social and environmental.
The measurement of performance in this study was done in two ways, first a perceived
performance from the view of the CEO of the firm with the use of a survey. The other is
objective measurements drawn from the financial reports produced by the organizations
covering all three facets of performance.
FFP was measured by using the firm’s EBITDA-margin, which provides a picture of the
efficiency of the firm, which is highly important for a MC. The findings of this study show us
that the MC’s EBITDA-margin in the utility industry has a mean value of 23,37% (Table 2).
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Compared to the EBITDA-margin on American energy companies this result was significantly
higher as over a twelve-year time period between 1990 and 2001 the highest average was 12,2%
(Bryan, Hwang & Lilien, 2005). The PFP had a mean value of 4,57 on a seven-point Likert-
scale (Table 2), meaning that the CEOs perceive their financial firm performance to be a bit
better than its competitors, the same relationship compared to its competitors is shown with the
FFP as well. Even though the studies have been done in two vastly different countries, the high
EBITDA-margin, which indicates high efficiency and financial performance can still be used
for comparability. However, the factual and perceived financial are not correlated, so the
subjective measure from the CEO has no significant impact on the objective measure. This
comparison between factual and perceived is made since they both are significantly positively
correlated with MD in the regression analysis, meaning that both measures increase as MD
increases.
FSP had a mean value of 2,74, meaning that the average social disclosure was 2,74 per entity.
Compared to the study by Tagesson et al. (2013) which provided us with the checklist for the
content analysis had an average social disclosure of 59,36%. when converted to our eight-point
checklist that would equal a disclosure of 5,34 disclosures per report. This big difference in
disclosures can perhaps be explained by the fact that they studied the municipalities rather than
their municipal corporations and will thereby have a larger focus on the social aspects as it is
of high importance to the citizens.
The FEP had a mean value of 3, meaning that the average environmental disclosure based on
our checklist was 3 per MC. Compared to the study conducted by Tagesson et al. (2013) when
converted from percentual disclosures, they had an average environmental disclosures of
44,53%, when converted to our eight point checklist that would equal an average score of 3,56
disclosures per entity, which is not far off from our 3 disclosures per entity. This indicates that
MCs tend to have a similar focus on their environmental impact as their owners, the
municipality has.
When considering the perceived performance, the PSP and PEP cannot be compared with the
FSP and FEP directly. However, the PSP and FSP were both significantly positively correlated
to each other at p >0,05 (Table 12), which indicates that even though the two cannot be justly
compared, higher perceived social performance is likely to occur together with a higher factual
social performance.
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PSP and PEP had a mean value of 5,16 and 5,45 respectively on a seven-point Likert-scale
(Table 2). Both the PSP and environmental were significantly positively correlated (0,388**)
to each other meaning that the respondents perceive their social and environmental
performance as similar. Both scores are on the high end of the scale which can be seen as a
response to the pressure from the municipality, from the mass media and from other
stakeholders to commit to and comply with business practices which favors sustainability and
corporate social responsibility (Tagesson et al., 2013).
What does all this entail for MCs in Sweden in terms of their organizational performance? MCs
are expected to reach various outcomes in all three facets of performance, since they have goal
multiplicity and they have to do so at the satisfaction of their stakeholders (Maine et al., 2020).
The complexity of MC organizational performance is added when considering the balancing
act of their goal multiplicity and the risks of focusing on one facet of performance over others,
causing them to drift (Jones, 2007). Since value creation for stakeholders in hybrid
organizations like MCs is the sum of social, financial and environmental performance
outcomes (Ponte et al., 2017), the usage of TBL as a way to conceptualize the organizational
performance of a MC provides stakeholders with a more accurate way to measure and analyze
their performance. The role and the managerial discretion of the CEO is deemed to be of
importance on how these outcomes are reached, since the CEO's ability to strategically operate
the MC is bar none, even if the complexity is deeply rooted in the structure of the MC and the
pressure from stakeholders for reaching different outcomes within the facets of organizational
performance is high, which is in line with the research done by Finkelstein and Hambrick
starting in 1987.
5.2 Managerial Discretion and organizational performance
The link between managerial discretion and firm performance has been studied and proven
quite extensively following the publication by Finkelstein and Hambrick in 1987, most have
shown that higher managerial discretion has led to an increase in firm performance (Agarwal
et al., 2009; Lilienfeld-Toal & Ruenzi, 2014). When managers are given a higher amount of
discretion, they are able to shape and develop the organization in the most efficient way based
on their expertise and experience, showcasing their importance to an organization. Which
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would lead to a higher organizational performance. The more authority a CEO perceives to
have the higher the discretion they have available to them.
The findings of this study indicate that the respondents perceive their MD to be high, with a
mean value of 5,46 on a seven-point Likert-scale (Table 3) which is in line with prior research
that shows that managerial discretion is high in public organizations (Cragg and Dyck ,1999;
Karlsson, 2019; Garrone et al., 2013). Compared to the study conducted by Lauto, Pittino &
Visintin in 2019 who also used the statements produced by Pearce and Zahra (1991), when
converted from the five-point scale to seven they received an average score of 5,03 which is in
line with what was observed from the testing conducted in this study. The CEOs in the collected
sample had their perceived level of MD, but does that translate to higher performance?
To test our H1, multiple linear regressions were run and showed a strongly significant positive
effect on both the factual (Table 13) and perceived financial performance (Table 15, test 3).
However, no significant effect on either the perceived and factual social or environmental was
observed. These results can partly be explained because of our content analysis skewering the
FSP and FEP as size was a very important variable, the bigger the company, the more
disclosures. Nevertheless, the results mean that higher MD leads to higher financial
performance, in this context of MCs operating in the utility industry. Earlier in this study the
argument was made that organizational performance for MCs, due to the goal multiplicity they
possess, consists of three facets of performance: financial, social and environmental. Thus, only
a partial acceptance of H1 can be done, since MD was found to have no significant effect on
social and environmental performance. However, in line with previous research (Agarwal et
al., 2009; Lilienfeld-Toal & Ruenzi, 2014), it is shown that MD has a significant positive
relationship with financial performance even in the context of MCs, meaning that the higher
MD leads to higher performance.
As discussed earlier one of the core assumptions of this study, built on the work by Hambrick
and Finkelstein (1987), is that the managerial discretion, in the context of this study, of a CEO
is how organizations meet the pressure from stakeholders and reach expected outcomes, both
within the facets of organizational performance and the organizational performance as a whole.
However, since the collected data set only shows statistical significance between MD and
financial performance, the results paint a different image. The MD of the CEO only seems to
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matter when it comes to financial performance, and not when it comes to organizational
performance as a whole.
The reasoning behind this line of logic could be that the CEO knows the company better than
the board, and if given the leeway to operate as they deem fit, they might realize that the social
and environmental performance is an imperative part of the firm’s goals and outcomes, but
they deem that financial performance trumps both of them. This reasoning implies that
providing discretion to the CEO allows the firm to fully capitalize on the professional talents
of the CEO.
Previous studies have shown that managers provided with discretion may not use it in the
interest of their firms, but instead the CEO may also use their discretion for their own advantage
(Andersen, 2017). A base assumption that this study is built on is that MCs in general are more
stakeholder oriented than their private counterparts, however, as observed this does not seem
to be the case with MCs within the service sector as they often abide by different laws from
other MCs that stipulate that they should be run in a businesslike manner (Vattenlag, 1983:291;
Ellagen, 1997:857). Since they have to abide by different laws in order to compete with private
corporations, the politically controlled board might give the CEO incentives to focus the MC’s
performance on the financials, since the dividends will be paid out to the owner; the
municipality. Which might lead to an overlap of both latitudes, and thus might serve as an
explanation for the results.
5.3 Moderating effect of the control systems
The use of management control systems has been found to have a moderating effect on
organizational outcomes within MCs (Uman et al., 2018) which is why the authors choose to
test for it in this research. As the different types of control systems include incentives and
control of employees they can be seen as important elements in the outcome of the
organizations. This research initially focused on two different types of control systems,
TPMCS and NPMCS and test how they would impact the relationship between MD and
organizational performance. However, the control systems had to be altered based on the
responses collected. The answers indicated that there were instead three different types of
control systems used. TPMCS now included the usage of financial measurements and excluded
the clear rules for employees to follow. Clear rules and competition among employees created
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a new category that we call NPMCS work environment which refers to the situation that
employees have to adapt to both in regard to its coworkers and set out rules. The final type of
control system is the NPMCS reward system which showcases the potential incentives that
employees might have in case of a good performance in the forms of both monetary and non-
monetary rewards.
When testing the relationship between the moderating effect of TPMCS on PFP we see that the
PFP decreases when increasing the usage of TPMCS. The usage of elements like planning,
objectives and measurements appears to be hindering the CEOs ability to influence the
organization from a financial aspect as these elements are narrowing the leeway available to
the CEO. When tested against FFP it is starting to approach some significance at a level of
0,167 which shows that it might even have some factual financial impact as well.
However, we tested against the other types of performance no significant moderating effect
can be spotted for TPMCS. Reasoning for these non-findings could be that objectives and
measurements set up by the board or TMT of MCs in the utility industry are more focused on
financial aspects over the social which causes the focus of the CEO and subsequently the
employees to put more emphasis on the efficiency of it all as well. Planning might be focused
around the budgeting which emphasizes the financial aspects and might put social and
environmental responsibility as a secondary objective.
Neither type of NPMCS had any significant impact on the different types of performance.
The fact that we had to change the initial classification of NPMCS into two sections could have
impacted these results which makes it difficult to compare the results to the paper by Uman et
al. (2018) as the measurements worked in public housing but not in utilities. The mean score
of the original NPMCS was also way lower than the mean of the original TPMCS indicating
that the use of NPMCS is not as common as traditional control systems. This could perhaps be
explained as new public management has not been fully introduced within the Swedish utility
sector but has started to make its way into other industries for MCs. Another explanation for
why this occurred can be the small sample size, a small sample size leads to statistical models
being weaker in general (Button et al., 2013), and considering our sample size of 62, this notion
seems to hold true for this study in particular.
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6.0 Conclusion
In this chapter, an overall conclusion of the thesis is presented, followed by the theoretical
and empirical contributions. Thereafter, the limitations and suggestions for future research
are presented.
6.1 Overarching Conclusion
Research regarding the strategic management of MC and other hybrid organizations was
established in the 1990s with the introduction of NPM by Hood (1991) and consequently, many
of the differences between private and public firms have become obsolete. Through the
implementation and use of NPM, Swedish MCs have become more cost effective, and thus
more performance oriented. However, since there still are differences between private and
public firms, solely measuring the financial performance will yield a misrepresented image of
the organizational performance of the public firm. MCs have goal multiplicity, meaning that
they have to achieve multiple goals and outcomes, compared to private firms which usually
have the financial performance of the firm as an end-all goal. Therefore, it is argued that
organizational performance consists of three facets of performance, financial, social and
environmental performance, which is encapsulated in the TBL framework. By using the TBL
framework one can more adequately measure and conceptualize the organizational
performance of the firm, which leads into the purpose of the research.
Since the introduction of the NPM more focus has been laid on the manager of the organization
and besides the demographics of the managers, one area in particular has been associated with
the performance of a firm: the managerial discretion. The purpose of this thesis is to explore
how CEO’s managerial discretion relates to organizational performance of municipality
corporations and how this relationship is contingent on and moderated by management control
systems in use.
The reviewed literature shows that in a MC ownership belongs to the citizens of the
municipality (Sørensen, 2007) so the ownership is very dispersed which highlights the
importance of the CEO to set a clear direction of the organization with all different political
preferences from the board. For a CEO to actually have an impact on the organization they will
need some leeway for strategy decisions (Hambrick & Finkelstein, 1987) and in public
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organizations managerial discretion has been found to be substantial (Cragg and Dyck, 1999;
Garrone, Grilli & Rousseau, 2013).
The link between managerial discretion and private firm performance has been studied and
proven since the publication by Finkelstein and Hambrick in 1987, However, performance in
MCs differs from normal firm performance because of their goal multiplexity. The results show
a positive significant relation between managerial discretion and both perceived and factual
financial performance, which indicates partial support for Hypothesis 1, since no support was
found for the MD to positively affect any kind of social or environmental performance. The
findings are partly in line with the previous that higher managerial discretion leads to an
increase in some type of firm performance (Agarwal et al., 2009; Lilienfeld-Toal & Ruenzi,
2014).
Another focus of this thesis was the influence a management control system has on the
previously discussed relationship between managerial discretion and organizational
performance. Previous literature shows that different management control systems have an
impact on the relationship between certain leadership styles and organizational ambidexterity
(Uman et al., 2018). Organizational ambidexterity can lead to attaining multiple goals and
higher performance in municipal corporations, albeit in the public housing industry (Maine et
al., 2020). Therefore, in this thesis it is investigated if management control systems directly
have a moderating effect on the relationship between managerial discretion and organizational
performance in the utility industry. Initially, the authors set out to test the control systems
presented representing the traditional public and new public by Uman et al. (2018) in; TPMCS
and NPCMS. However, when analyzing the quantitative results from the CEOs, it was observed
that they felt like the control systems in use were not accurately represented by TPMCS and
NPMCS. A factor analysis was conducted, and the control systems were split into three. The
moderating effect of three different MCS were tested and the results showed that the only
moderating effect of the MCS was the TPMCS, this indicates that there is no support for
Hypothesis 3 since NPMCS had no significant impact on the relationship. The TPMCS showed
a negative significant moderating effect on the relationship between managerial discretion and
the PFP, which indicates that there is some support for Hypothesis 2, however, only partially
since the TPMCS only showed this moderating effect on one facet of organizational
performance. A possible explanation could be that the NPMCS have a moderating effect in the
public housing industry (Uman et al., 2018) because they have further implemented the NPM
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within their organizations. This notion seems to hold true, considering that the TPMCS was the
only statistically significant MCS with a moderating effect, and that mean score of the NPMCS
was also significantly lower than the mean of TPMCS indicating that the use of NPMCS is not
as common as the use of TPMCS.
6.2 Theoretical Contributions
This research contributes to previous theories since it has supported the notion that managerial
discretion improves the performances, even though in this case it was only the financial
performance that was improved with a higher MD. This research has increased the knowledge
about MD as it has been done in a context that to our knowledge has not been tested by seeing
how MD affects the organizational performance of municipal corporations in various ways.
Prior studies have often looked at different outcomes (Agarwal et al., 2009; Lilienfeld-Toal &
Ruenzi, 2014; Shen & Cho, 2005) but financial performance has for the most part been tested
in the private sector (Agarwal et al., 2009; Lilienfeld-Toal & Ruenzi, 2014). The thesis also
contributes to Upper Echelon theory by Hambrick & Mason (1984) as it has shown the
importance of the CEO for various outcomes and that different demographics about the CEO
have been significant in these outcomes. Age showed significant impact on the FEP as well as
PFP. Once TPMCS was introduced into the model, gender became strongly significant towards
FFP which showed that performance was better under female leadership.
This thesis also has an additional contribution since it has tested the effect of control systems
brought forth by Malmi & Brown (2008) and see if there is any moderating effect of those on
the relationship between managerial discretion and organizational performance. Evidence of
the research shows that TPMCS has a significant negative effect on the relationship between
managerial discretion and financial performance which also shows the impact that a firm
structure and culture has on firm outcomes, which is brought forth in the contingency theory
(Otley, 2016). In this research TPMCS had a negative impact on the relationship which was
argued to be the case for the hypothesis. The two other types of control system NPMCS work
environment and reward systems showed no significant impact on any type of performance
which is an important distinction in itself. It could indicate that as the usage of these types of
control systems have no effect on performance or that as the descriptive statistics shows, the
usage of these elements have not made it to the utility sector or have not been effectively
implemented. Compared to Uman et al. (2018) the opposite results were found our research
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showed a moderating effect for TPMCS but none for the NPMCS which may show a different
relationship between these types of control systems based on context and which organizational
outcome is examined.
6.3 Practical Contributions
This research has many different practical contributions. Firstly, the fact that managerial
discretion has a significant effect on the financial aspects highlights the notion that managers
perform better when given the leeway to operate in their own way rather than being controlled
by the board. Reason for this could be that managers have a much more detailed understanding
of the business as they manage it on a daily basis whereas the board, especially in a municipal
corporation, have other things on their plates which limits their ability to accurately assess the
situation. For a board, these results could be considered important as giving a manager an
increased amount of leeway will likely increase the financial performance but if social or
environmental improvements are desired, other actions should probably be considered. A
solution could be to create social and environmental measurements and goals for the CEO to
work towards and based on the completion of those goals earn rewards as suggested in NPM.
A manager can also benefit from the result from this thesis since it gives additional support to
the notion that CEOs matter for the outcome of the organization and can use that information
to strengthen their position at the firm or start a discussion about getting some leeway in their
decision making process as they often have the most knowledge about the organization. It is
no longer just logical thinking, there is now actual data for managers within this sector that
managerial discretion increases the financial performance. Managers who have had a high
amount of discretion have not been able to improve the social or environmental performance
or have not been interested in doing so, as they might be judged based on financial metrics
rather than social and environmental contributions. As the use of TPMCS had a negative impact
on the financial performance, managers should be thinking about different alternatives in how
the organization is structured and perhaps the further implementation of NPMCS would give
improved results.
As the managerial discretion only affects the financial aspect and not the social or
environmental leads us to believe that municipal utility corporations are not as stakeholder
oriented as one tends to believe which may be explained by different laws concerning specific
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industries that stipulate that they should be run in a businesslike manner. If this is an intended
outcome by policy makers, that they should be treated as any private firm then the results are
showing that. If it is not, changes could be required to get the MCs to be more socially
responsible and act as a role model for other firms. Politicians who serve on the board of the
might be more interested in the financial contributions of the MC rather than the public good
it could bring as those funds could be used to directly towards social improvements around the
municipality that they deem to be more important.
CEOs do matter for the financial performance of the MC, so when the board of the MC employs
a talent at the position of the CEO and pays out large salaries, it is not in vain, particularly
when the MC ownership belongs to the citizens of the municipality (Sørensen, 2007). This
entails that the ownership is highly dispersed which highlights the importance of the CEO to
set a clear strategic direction of the organization, when considering the potentially different
political preferences from the board. The municipality can also extract the knowledge of how
the CEO and the available MD actually affects the organization and why they have an impact
in certain areas, and not in others. This is to facilitate the CEO in doing his/her job and may
reduce scrutiny, since MCs as a hybrid organization are inherently more complex and have
more stakeholders to satisfy compared to private firms, and have public service as their main
reason for existing. This adds additional pressure on the CEO to perform in all facets of
organizational performance, leading to certain compromises having to be made, which can be
why we observe the MD of the CEO not affecting all three facets of organizational
performance.
6.4 Empirical contributions
Based on the perceived performance, CEOs believe that their best performance is within the
environmental aspect whereas the financial performance came with the highest deviations and
lowest mean shows that there are differences in the financial wellbeing around the different
utility companies. Age had a significant positive correlation with PFP (Table 15) indicating
that the older the CEO is the better they believe their performance is. For factual performance,
CEO age was also positively significant with environmental performance (Table 14). The
gender of the CEO was also significant towards the FFP in a negative way (Table 13) indicating
that performance was better under female leadership. Comparing the factual and perceived
performance, the only correlation found was between the factual and perceived social
75
performance. Which calls to question the decision of solely using subjective measures as
measure of actual firm performance.
The MD among the CEOs was high with a mean of 5,46 out of a max score of 7 which shows
that it is high within this industry. In terms of measurements of MD, the 13 statements derived
from Pearce and Zahra (1991) worked well for measuring the level of MD that the CEOs
perceive to have as we got some variety in the answers to differentiate the cases of low and
high MD. The results from a factor analysis (Appendix 3) conducted on the statements
interestingly showed that there were four different facets of MD in a MC according to the
CEOs. The different components are mostly tied to different aspect of what a CEO has
responsibility of in the MC. Component 1 reflects the financial management of the MC, while
Component 2 reflects the strategic management of the MC. Both components are crucial for
the CEO in order to utilize their MD, but it is an interesting observation that the CEOs feel like
they differ in some manner. Component 3 has some overlap with Component 2 regarding the
charitable contributions, however it revolves around the MCs contact with external parties, and
Component 4 reflects the resistance against political decisions from the board. This was an
unforeseen finding that highlights that MD and the way CEOs in MCs use it differs depending
on the context of the decision that need to be made.
Planning was the most commonly used TPMCS with a mean of 6,1 meaning that is an important
aspect for all organizations. The mean score of the NPMCS was also significantly lower than
the mean of TPMCS indicating that the use of NPMCS is not as common as traditional control
systems. This could maybe be explained as new public management has not been introduced
fully within the Swedish utility sector as it has within other types of MCs (Uman et al., 2018).
As shown and previously discussed we had to alter the classifications of control systems from
two to three components based on the answers from the CEOs. Financial measurement was an
item from NPMCS that had correlation with the other types of TPMCS which shows that it
might have been implemented more than the rest of the aspects from NPM. The two different
types of reward system were connected to each other but so were also rules and competition
among employees in a negative way, when one usage increases the other decreases. The fact
that it was not just splitting of the NPCS into two areas, but to alter TPMCS as well shows that
maybe some movement towards NPM with financial measurements but the rest are not fully
implemented yet.
76
6.5 Limitations
The most glaring limitation of this paper is the low number of responses. According to Pallant
(2013), the size of the sample is dependent on the number of independent variables used in the
study. This study only contained one independent variable, but the argument also is made that
N=63 is far too few to generalize the results of this study onto every MC. The low number of
respondents also affected the statistical models, since a lower number of observations leads to
statistical models being weaker (Button et al., 2013). This may have led to skewered tests and
hypotheses not being able to accept/reject. Therefore, future research should investigate a
larger sample size in order to increase the reliability and generalizability of the study.
Additionally, this study has been limited to only researching MCs within the utility industry,
which are different from many other MCs since they are to act in a business-like manner
according to the Swedish legislation (Vattenlag, 1983:291; Ellagen, 1997:857). Meaning that
added emphasis is being put on the financial performance of the MC. This adds to the results
not being able to generalize onto other MCs which do not follow the same legislation.
Another limitation of the study is the usage of subjective measures of performance as a
dependent variable. In this study, the subjective measurements of performance are represented
by the perceived performance measures. These involve the perceptions of managers when it
comes to the performance of their firm. Letting respondents rank their perceived performance
in the three facets of performance might not translate into an honest observation of the
performance of the MC. However, the effect of a potential dishonest view of the performance
is mitigated by the usage of the factual performance measures as well.
Since an objective measure that represents social and environmental performance that also
includes every recipient was not found using the content analysis, a tested model for content
analysis used for environmental and social disclosures of Swedish municipalities (Tagesson et
al., 2013) was adapted, and adjusted it so that it would better fit the needs of this paper.
Environmental and social disclosures became dummy variables that represent performance for
the firm, since it was the best alternative that would not compromise the comparability of the
companies. The measurement does not directly measure the performance but is a crude proxy
variable that relies on the reporting of the firm. Reporting disclosures is different from the
actual performance of the organizations, so this content analysis may provide some
77
misrepresented measures of performance. This is a limitation that gravely affects the reliability
of the study.
6.6 Future research
As managerial discretion has been used to explain a large variety of outcomes in the private
sector (Shen & Cho, 2005; Finkelstein & Boyd, 1998; Aragón-Correa et al., 2004) it could be
used more within the context of MCs as they have the attributes of both the private and public
sector. Seeing if elements from the private sector hold true when changing to hybrid
organizations would strengthen the results of previous research.
Focusing on utilities among MCs could also be used with more research as the large focus of
research done on MCs in Sweden has been focusing on public housing (E.g. Chanko & El-
Bazi, 2019; Gårdh & Zyrlite, 2019; Maine et al., 2020). Utilities have an important role in our
society as they are affecting all citizens by managing our garbage and providing us with
electricity and water and should be examined to a larger extent because of it. This research
could also be done with measures of social and environmental performance that are actual
representation of those aspects rather than the disclosures done in the financial reports. Because
of the usage of multiple industries within this research that could not be done but a research
focused on one industry alone could find better representation of social and environmental
performance for that specific industry.
Lastly it would be interesting to investigate the use of other moderating effects and see how
that could impact the relationship between managerial discretion and the organizational
performance. Effects like ambidexterity, shared leadership and risk-taking could be interesting
to see how they would affect the relationship or even tested directly against organizational
performance.
78
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Appendix
Appendix 1 Translated survey
Question 1. What year are you born?
Question 2. For how long have you worked at the firm?
Question 3. For how long have worked as CEO at the firm?
Question 4. Do you have any previous experience from the private sector as CEO? If so, for
how long?
MD questions
Please rate the amount of formal authority you as a CEO have regarding each of the
following areas in your organization 1=no authority and 7 – great deal of authority
Statement 1. Decisions about changes in capital structure
Statement 2. Decisions about capital expenditures
Statement 3. Decisions about future investments
Statement 4. Decisions about future divestments
Statement 5. Decisions about Establishing long-term goals
Statement 6. Decision in letting other TMT members go
Statement 7. Selection of organizational strategy
Statement 8. Decisions to adopt new technologies
Statement 9. Decisions regarding TMT members compensation
Statement 10. Decisions regarding charitable contributions
Statement 11. Decisions regarding dealings with external stakeholders
Statement 12. Decisions that might go against political pressure from the board
Statement 13. Decisions about performance management systems
87
Traditional MCS
Please judge how these statements reflect your organization where:
1= strongly disagree 7= strongly agree
Statement 1. Our organization place great value into planning of the organization
Statement 2. Our organization use objectives to manage the staff
Statement 3. Our organization strives for working tasks to be completed efficiently
Statement 4. Our organization have clear rules for the employees to follow
NPM MCS
Please judge how these statements reflect your organization where:
1= strongly disagree 7= strongly agree
Statement 1. our organization evaluate the employee's performance using financial
measurements
Statement 2. Our organization reward our employees using monetary incentives after a good
performance
Statement 3. Our organization reward our employees using benefits after a good performance
Statement 4. Our organization incorporates competition between the employees.
Financial performance
How would you compare your organization's financial performance compared to similar
companies over the last three years?
1= much worse than the competitors 7= much better than the competitors
Statement 1. Sale growth
Statement 2. Return on sales
Statement 3. Return on assets
Social performance
How would you compare your organization's social performance compared to similar
companies over the last three years?
1= much worse than the competitors 7= much better than the competitors
Statement 1. Effect on people's lives
Statement 2. Opportunities for the employees
Statement 3. Social initiatives
88
Environmental performance
How would you compare your organization's social performance compared to similar
companies over the last three years?
1= much worse than the competitors 7= much better than the competitors
Statement 1. Reduce pollutants
Statement 2. Reduce waste
Statement 3. Evaluation of own environmental impact
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Appendix 2 Checklist
Social measurements:
1. Equality
2. Education of employees
3. Health and safety
4. Absence due to illness
5. Human rights
6. Code of conduct
7. Employee Survey
8. Charity and sponsoring
9. Customer satisfaction
Environmental measurements:
1. Environmental policy
2. Effect on environment
3. Environment-friendly improvements
4. Consumption
5. Discharge
6. Environmental certification
7. Environmental objectives
8. Following up of environmental objectives
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Appendix 3 Rotated Component Matrix for Managerial Discretion
91