particular effort in how they serve the company. Given the nature and dependencies of engagement, exploring how it unfolds under the influence of institutional investors requires a cognitive explanation, resting on the assumption that directorial conceptions of a variety of factors might shape individual and corporate actions (Crilly & Sloan 2012; Porac, Thomas &
Baden-Fuller 1989). Therefore, a review of strategic cognition (SC) theory (Hodgkinson &
Thomas 1997; Kaplan 2011; Narayanan, Zane & Kemmerer 2010; Schwenk 1988; Walsh 1995) seems appropriate to guide the exploration of the nature and dynamics of director engagement. I offer this in the next section.
who have limited capacity to process information, and therefore use ‘mental models’ (Walsh 1995, p. 282), i.e. thinking patterns reflecting how they perceive issues, to help them make sense (sense-making) of situations (interpretation), as a base for decision-making (Adner &
Helfat 2003; Hambrick & Mason 1984; Hambrick & Snow 1977; Walsh 1995), sense-making referring to processes of cognition-action, including scanning (of the environment),
interpretation and responses (Gioia & Chittipedi 1991; Thomas, Clark & Gioia 1993; Weick 1979). The cognitive decision-making repertoire also includes valuable problem-solving expertise (Rindova 1999), previous experience, value systems, assumptions about the future, and knowledge (Abelson & Black 1986; Cyert & March 1963; March & Simon 1958; Nisbett
& Ross 1980).
Dating back to the 1980s, strategic cognition (SC) has developed as a way of capturing the cognitive perspective in strategic management (Hodgkinson & Healey 2008; Hodgkinson &
Thomas 1997; Kaplan 2011; Narayanan, Zane & Kemmerer 2010; Schwenk 1988), with growing recognition of the importance of understanding cognition in strategic processes (Hodgkinson et al. 1999; Huff 1990; Rindova 1999; Schwenk 1984). SC assigns causal importance to cognitive mechanisms in explaining strategic choices (Child, 1972), including external and internal constraints, such as cognition (Whittington 1988). To study SC,
Narayanan, Zane and Kemmerer (2010) proposed a set of antecedents, comprising external factors such as industry, internal factors such as size, decision factors such as complexity and urgency, and individual factors, such as educational background, decision style and
personality traits, as those which potentially influence SC.
Studies have shown how cognitive structures lead to strategic decision-making (Porac &
Thomas 2002), to explain strategy (formulation, implementation, change, company’s
learning) and competitive advantage. My interest is in exploring director engagement as a SC process which can lead to a gestalt of strategic decisions for value creation, without further differentiation between formulation and implementation. Cognitive structures enable processes of making sense of and interpreting strategic decisions. At an individual level, studies have demonstrated a link between managerial cognition and strategic actions in a wide range of instances including strategic change in a university (Gioia & Chittipeddi 1991);
strategic reorientation (Lant, Millichen & Batra1992); crisis (Smircich & Stubbart 1985);
new venture performance (Ensley & Pearce 2001); strategic reorientation in declining corporations (Barker & Barr 2002); strategy selection (McCormick & Martinko 2004); CEO dismissal (Haleblian & Rajagopalan 2006; Wiersema 2000); and competitive advantage in dynamic environments (Shang, Huang & Guo 2010).
The relevance of board and directorial research to strategic decisions is a central theme in governance research (Golden & Zajac 2001; Hillman & Dalziel 2003) but research on this topic is nevertheless scant. Given the difficulty in accessing directors (and boards) (Bezemer, Nicholson & Pugliese 2018; Brundin & Nordqvist 2008; Leblanc & Gillies 2005; Leblanc &
Schwartz 2007; Machold & Farquhar 2013; Pettigrew 1992), strategic cognition at directorial level has been difficult to capture, and remains under-researched (Bundy, Shropshire &
Buchholtz 2013), even though value creation is essential for strategic success (Tantalo &
Priem 2014), and directors are ultimately responsible for strategy. It is assumed that board and directorial cognition exist, yet they remain a black box (Bergman et al. 2016; Haleblian
& Rajagopalan 2006; Narayanan, Zane & Kemmerer 2010). A few studies have examined
board cognition in strategic actions, including boards as strategic decision making groups (Forbes & Milliken 1999), board discussions of entrepreneurial issues (Tuggle, Schnatterly &
Johnson 2010), and board strategic interpretation of sustainability issues (Bergman et al.
2016).
At an individual level (including but not limited to directors), SC studies have focussed on how CEOs’ cognitive structures and processes influence strategic choices (Narayanan, Zane
& Kemmerer 2010; Porac & Thomas 1994) how managers respond to activist pressures (Waldron, Navis & Fisher 2013); conceptualisations of company responsiveness to
stakeholder concerns centred on issue salience; or ‘the degree to which a stakeholder issue resonates with and is prioritized by management’ (Bundy, Shropshire & Buchholtz 2013, p.
353).Studies have also shown that directors who possess valuable problem solving skills can contribute to strategic decisions (Rindova 1999), that directors with domain specific expertise (strategy) can advise on strategy (Filatotchev & Allcock 2013; Finkelstein, Hambrick &
Cannella 2008) and can influence strategic decisions (Carpenter & Westphal 2001; Garg &
Furr 2017). They can also bring about more frequent or successful acquisitions (McDonald, Westphal & Grabner 2008); diversification (Carpenter & Westphal 2001); and globalization (Sanders & Carpenter 1998). Director demographics, human and social capital also affect strategic decisions (Johnson, Schnatterley & Hill 2012). In addition, research has used demographic characteristics, such as managerial background, age, tenure or education, to measure cognition for responsiveness to change or risk taking attitudes (Finkelstein &
Hambrick 1990; Finkelstein & Mooney 2003; Hambrick & Mason 1984; Kaplan 2011;
Norburn & Birley 1988; Wiersema & Bantel 1992). However, there is growing recognition that demographics are relatively weak approximations for cognitive processes and studies
seek to uncover the nature of individual cognition. Most recently, Phadnis et al. (2017) studied the SC of operations executives in their choices of operational strategy, discovering that individual regulatory focus and level of optimism about the future play a role. Lungenau and Zajac (2019) have argued that directors with deep and broad expertise have a critical influence on strategy, while Durand, Hawn and Ionnou (2019) propose that decision-makers’
willingness and ability to address salient issues are also a contribution in explaining responsiveness to stakeholders. Eckardt et al. (2018) remind us that individuals interact within the context of a system, hence when a phenomenon is emerging, it originates in individual attitudes, cognitions, behaviours, and other characteristics. Engagement with purpose, therefore, as an emerging phenomenon, requires an exploration of directorial cognitions. Bamberger (2008), Smith and Semin (2004) and Johns (2017) call for greater attention to context in studying cognition.
In summary, the key insight from this review is that SC appears to be the theoretical
framework best suited to explore director engagement as it affects directorial actions towards value creation. Although research on directorial cognition is scant, borrowing from what is known about individual cognition, the set of factors at play in engagement might be industry, size, issue salience, decision urgency and complexity, together with individual factors such as demographics, age, tenure, human and social or relational capital (Hillman & Daziel 2003), in other words experience, expertise and reputation, network ties to other companies and constituencies, deep and broad expertise, educational and professional background,
personality traits and decision style. Possible outcomes of engagement might be at the level of process (decision quality and speed), strategy (resource allocation and competitive moves) or economics (stock market responses or profitability), the strategic level being the one of
interest to this study. Having reviewed the relevant SC literature, I now turn to the next area of interest to this study, namely that of institutional investors.