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Networks of Influence: within and between firms impact of upper echelon's mobility

Applicant Wezel Filippo Carlo
Number 122236
Funding scheme Project funding (Div. I-III)
Research institution Istituto Media e Giornalismo Facoltà di Scienze della comunicazione Università della Svizzera italiana
Institution of higher education Università della Svizzera italiana - USI
Main discipline Science of management
Start/End 01.02.2009 - 31.03.2011
Approved amount 109'362.00
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Keywords (7)

Inter-firm mobility; demography; Organization theory; Ecological theories of organizations; Top management team demography; Network ties among professionals; Organizational survival

Lay Summary (English)

Lead
Lay summary
IntroductionThe present research project aims at studying the impact of inter-firm mobility on the internal functioning of top management teams and on the competitive relations among peers by employing a relational perspective. The empirical tests will be carried out by using a dataset that portrays the evolution of the entire Dutch accounting population across different levels of analyses - ranging from the individual, to the organization, and to the population of firms. Theoretical overviewIn modern and knowledge-driven economies, individual members and their experiences are essential components of organizations. Their mobility and actions affect a wide range of organizational (e.g., performance) as well as inter-organizational (e.g., cooperative and competitive) outcomes. Behavioural theorists (Cyert and March, 1963) have long time ago argued that firms, to a certain extent, are a reflection of the characteristics of their upper echelons and of the distribution of their demographic traits. In a seminal paper, Hambrick and Mason (1984) claimed that organizations are the reflection of its top managers. Their proposition was inspired by Cyert and March's (1963) behavioral theory of the firm. Because of bounded rationality, multiple and conflicting goals, different preferences and varying aspiration levels, complex decisions (e.g., strategic choices) are largely the outcome of behavioral factors rather than a mechanical quest for economic optimization. As strategic choices are guided by behavioral principles, they may be inferred from the characteristics of their decision maker(s). As a result, differently composed top management teams will develop different worldviews, to pursue different strategies and to implement different routines.The bulk of the early empirical studies inspired by Hambrick and Mason's ‘upper echelons’ approach investigated the main effects of observable team composition variables on organizational outcomes. This strategy advanced by Pfeffer (1983) is justified on the basis that psychological measures “are very difficult to obtain for senior executives in major firms and are unavailable for past, disbanded top management teams” (Hambrick et al., 1996: 663). Specifically, the focus has been on the composition of top management teams in terms of demographic characteristics such as tenure, age, functional experience, gender, and ethnic background (for a review see Williams and O´Reilly, 1998). Broadly speaking, researchers studied the impact of both the mean and the spread (i.e., diversity) of these characteristics on outcomes such as turnover, team performance, innovation, diversification, and organizational performance. Note that the most frequently studied compositional variable is TMT tenure distribution and organizational performance the preferred outcome (Carroll and Harrison, 1998). Managers’ demographic profiles enter into the performance argument because their characteristics are presumed to occasion psychological dispositions and subsequent strategic choices (Hambrick and Mason, 1984). A person’s cognitive base influences in fact his/her assumptions about future events, alternatives, and presumptions about the consequences of each alternative. A manager’s cognitive base, thus, filters and distorts his/her perceptions of what is going on and about the actions to be taken. The assumption behind this reasoning is that TMT decision-making is severely limited by bounded rationality. As the entire spectrum of stimuli overcomes individual capacity to process information, the cognitive base of a manager reduces the manager’s field of vision and his/her perception. Demographic characteristics affect managers’ decisions through three filters. First, managers’ background delimits the problems and information by which their attention is attracted. Second, selective perception occurs because managers devote disproportionately more attention to the stimuli in their field of vision. Finally, the information they receive is filtered through their cognitive lenses. So, the more demographically heterogeneous is the TMT, the more a diverse set of stimuli is taken into account in decision-making. The degree of heterogeneity of demographic characteristics amounts to a “proxy for cognitive heterogeneity, representing innovativeness, problem-solving abilities, creativity, diversity of information sources and perspectives, openness to change and willingness to challenge and be challenged” (Finkelstein and Hambrick, 1996: 125). Teams with diverse demographic attributes typically exhibit divergent schemata or ways of seeing the world (Michel and Hambrick, 1992). Building on this logic, demographic diversity has been argued to hinder organizational performance. Two main intervening variables have been claimed to explain the negative relation between top management team diversity and organizational performance. The most commonly used explanations refer to social integration (O’Reilly et al., 1989) and to cognitive diversity (Glick et al., 1993) as a key intervening variable (Harrison and Carroll, 2006). The two processes are not independent as argued by Finkelstein and Hambrick (1996: 126) because “social integration is facilitated when group members are more similar, while many of the effects of demographic heterogeneity, such as greater diversity of perspectives and willingness to challenge others, can create conflict that detracts from team cohesiveness and social integration”. Cognitive heterogeneity and social integration reduce consensus that, in turn, influences organizational behavior and firm performance (Harrison and Carroll, 2006). Consider, for instance, the case of market experience. If members are demographically similar in their market exposure, they are likely to acquire equivalent assumptions about their environment and converge towards a distinct and unequivocal market position. By contrast, if they exhibit heterogeneity along this dimension - e.g., having gone through dissimilar career steps - they will express divergent preferences for strategic action to such a degree that the strategic commitments may become diluted and the firm’s positioning dislodged. Indeed, if demographic diversity does produce diminished focus and confusion about the firm’s direction, performance will be compromised.The literature on managerial cognition supports this claim, as documented by empirical studies on managerial cognition and strategic decision-making (e.g., Tripsas and Gavetti, 2000). Demographic heterogeneity enters into the fray because divergent mental frames produce cognitive and attitudinal heterogeneity by alternatively interfering with intra-group communication (Lawrence 1997; Zenger and Lawrence, 1989); exacerbating internal conflict (Jehn et al., 1999); increasing the time required to reach decisions (Hambrick et al., 1996); lowering adherence to budget and schedule (Ancona and Caldwell, 1992), reducing strategic consensus (Knight et al., 1999) and increasing the strategic alternatives under evaluation (Finkelstein and Hambrick, 1996). The negative link between TMT diversity and performance can also be justified on the basis that heterogeneous teams are more likely to undertake risky changes. Hambrick and his colleagues (1996) for instance found that demographic heterogeneity is positively associated to the scope (i.e., the extent to which the action affects the full breath of the firm’s operations) and the significance (i.e., those strategic actions that involve substantial investments in fixed assets, people or structures) of organizational changes. Demographic heterogeneity is positively associated with risk taking (Palmer and Wiseman, 1999) and increases the likelihood that uncertain, risky, innovative strategies will be undertaken (Bantel and Jackson, 1989). One problem and two critical limitationsWhile intriguing, the findings of this literature have been recently challenged on the basis that the relationship between team composition and organizational outcomes appeared to be more complex than originally thought (Lawrence, 1997; Priem et al., 1999). Recent reviews of the psychological literature have underscored the multifaceted nature of the relationship between demographic heterogeneity and performance (Guzzo and Dickson, 1996). A positive effect of heterogeneity was found for complex, uncertain tasks, such as those facing a top management team, for which “informational diversity should theoretically be more beneficial than in routine tasks” (Barsade et al., 2000: 809). Other studies found a positive relation between managers’ diversity and firm performance for tasks requiring creative problem solving and innovation (e.g., Bantel and Jackson, 1989; Eisenhardt and Schoonhoven, 1990). While this discrepancy reflects the more general issue of whether demographic variables proxy cognitive proclivities well (Lawrence, 1997; Kilduff et al., 2000), the specific outcome under investigation partly explains these seemingly conflicting findings. Our understanding of the literature suggests that two crucial limitations are potentially responsible for the confounding evidence obtained so far: first, static research designs have limited attention to the dynamics of organizational demography - i.e., to managerial turnover; second and related, firms and managers have been treated as atomistic entities and scant attention has been devoted to the structure and histories of interactions among them. Let’s now review these two points in more detail.Demographic research has mostly relied on samples of organizations (hardly random) belonging to different industries and adopted a cross-sectional design. That makes difficult to rule out industry specific unobserved heterogeneity and runs against the insight of Hambrick and Mason (1984) who have advocated for an industry-centered longitudinal design (Carroll and Harrison, 1998). A more substantial limitation however relates to the dynamics of organizational demography. Extensive research using simulation techniques allows us to safely argue that “individual TMTs show a strong relationship between demographic events of entry and exit to the team, on the one hand and measures of heterogeneity on the other hand … This relationship implies that the effects of diversity are inextricably tied up with the effects of disruption, making interpretation of the conventional heterogeneity measures and their estimated effects on organizational outcomes problematic” (Harrison and Carroll, 2006: 137). This finding echoes the considerations of Williams and O’Reilly (1998: 99) who claimed that “once turnover does occur, the heterogeneity of the group will, by definition, change.” Turnover then may be considered the critical driver of the evolution of team heterogeneity. Whenever an outsider enters a management group he/she alters the demographic heterogeneity upwardly or downwardly, depending on her profile in relation to the demographic make-up of the host firm. Consider, for instance, the case of a new hire. Carroll and Harrison (1998: 658) claim that “a major source of [this] diversity comes from the disruption by newly entering individuals.” When a new manager joins an existing top management team the problems associated with social integration and cognitive diversity (the main mechanisms regulating the impact of demographic diversity on organizational performance) should be especially at work. TMTs absorbing newcomers are at risk of social disintegration: a discordant outsider reduces their cohesiveness of the group and puts the truce (e.g., agreement on the framing of problems, on key strategic issues) in jeopardy (Nelson and Winter, 1982).As a longitudinal approach to team demography may substantially improve our understanding of the relationship between top management team heterogeneity and organizational performance, a second and related problem appears immediately clear. When managers move across firms they bring with them their individual histories. Because of that networks of interaction among managers across firms (but also within) should be taken into account. The TMT literature assumes that individuals part of group do possess equally strong ties to all the other members. However, consider for instance the role of a continued interaction among the managers of a team - or having taken part in a previous team. Stable teams are more likely to converge around norms, values and decision making procedures (Goodstein and Boeker 1991: 312). As Pfeffer (1983: 328) stated, “(teams with) longer period of association would tend to develop more stable, predictable, and shared expectations about behaviours … Additionally the shared and stable expectations that had developed would tend to make conflict less likely and less severe”. The logic should also be extended to histories of previous interaction - i.e., having worked together in the past for another firm - which are equally likely to reduce conflict among dyads of members. A comparable reasoning may be developed when considering the continued exchanges of managers among firms. The existing literature (e.g., Phillips, 2002; Klepper and Sleeper, 2005) adopts a dyadic perspective (i.e., donor-recipient) and lacks a structural approach. Depending however on the aggregate structure of exchanges among firms (and the history of their interactions), different effects on organizational performance may be observable. A theory concerned with the impact of inter-firm mobility on demographic diversity should recognize that firms are embedded in a set of competitively interdependent/interacting organizations. Nonetheless, while it is widely understood that firms do not operate in a social vacuum, “organizational demographers attribute no causal or mediating force to the demographic characteristics of other organizations” (Sørensen, 1999: 714). The transfer of people shapes the interaction among networks of firms and empirical investigations should be extended beyond the focal firm to comprehend the impact of the evolving demography of its team of top decision makers on organizational performance. Research design and dataBased on the review of the literature, several questions remain still open. A few of them concern the role of network ties and their influence in moderating the effect of mobility and team diversity on organizational performance. The underlying assumption of much of the TMT literature concerns the fact that individuals are presumed to exert equal influence upon each other (Harrison and Carroll, 2006). On the contrary, top management teams are durable, reliable and dependable and such reliability depends on the development of common histories. A few researchers have speculated that “executives who have a history together have probably learned how to get along and communicate with each other” (Eisenhard and Schoonhoven, 1990: 509) and others have suggested that the time length of membership is positively associated with social ties (Huckman and Pisano, 2006). Notwithstanding these findings, new managers injected into relatively inert teams - i.e., having worked together for a long time - may however reinvigorate the team’s membership and expose organizations to better performance prospects (e.g., Harrison and Carroll, 2006). If so, a study that aims at mapping the consequences of demographic diversity on organizational performance should take histories of interactions among managers and among firms into account. The present project will be organized around the collection of data that may inform us about such histories of interactions.Our longitudinal research design collects information concerning the dynamics of personnel turnover across a large amount of firms. The multi-level, longitudinal data already collected in the Dutch accounting sector is well suited to explore the dynamic consequences of social ties among organizations and among professionals. In particular, we will study the disbanding rates of each of the about a thousand accounting firms that existed in the Netherlands over one hundred years with particular attention to the mobility of thousands of professionals and to the history of their careers. On a qualitative standpoint, a description of the key developments in the profession will be provided. Quantitatively, event-history techniques (i.e. a multivariate method of analysis) will be adopted to explore the forces impinging on the survival of Dutch accounting firms. Then, the main and the moderating effect of network ties among professionals on the rates of organizational disbanding will be explored. Moreover as inter-firm mobility creates bridges also among organizations, holding constant the social and macro-economic forces influencing the survival of the firms included in our sample, we propose that positive or negative influences on firm survival may be triggered by inter-firm mobility depending, on the underlying and time-varying structure of relation among peers.
Direct link to Lay Summary Last update: 21.02.2013

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Number Title Start Funding scheme
135313 An Ecological Perspective on the Antecedents to and on the Consequences of the Top Management Team Diversity 01.04.2011 Project funding (Div. I-III)

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