CEO political ideologies and pay egalitarianism within top management teams

Research summary : We examine the influence of CEO and compensation committee liberalism on top management teams (TMT ) pay arrangements. Given that politically liberal individuals tend to value egalitarianism, we test whether firms with liberal CEO s tend to (1) reduce pay dispersion among non‐CEO executives; and (2) reduce pay gaps between CEO and non‐CEO executives, and whether compensation committee liberalism moderates these relationships. We find some evidence of a direct effect of CEO liberalism on TMT pay arrangements as well as some interaction between CEO and compensation committee liberalism on the pay arrangements. This study provides a better understanding of the antecedents of TMT pay arrangements and empirical evidence showing the influence of values at the top of organization . Managerial summary : Do the values of the CEO and compensation committee influence the pay of other top managers? Our study provides evidence that political ideology affects top manager pay. We examine whether CEO liberalism produces more egalitarian pay arrangements among top managers, and whether the liberalism of the compensation committee affects that relationship. We find that CEO liberalism reduces differences in the total pay among top managers, but does not influence the difference between CEO total pay and the total pay of top managers. We also find that compensation committee liberalism strengthens the negative influence of CEO liberalism on differences in total pay among top managers. Finally, we find that CEO liberalism reduces the difference between CEO bonus pay and the bonus pay of other top managers . Copyright © 2016 John Wiley & Sons, Ltd.     

Leveraging foreign institutional logic in the adoption of stock option pay among Japanese firms

Research summary : We investigate why Japanese firms have adopted executive stock option pay, which was developed with shareholder‐oriented institutional logic that was inconsistent with Japanese stakeholder‐oriented institutional logic. We argue that Japanese managers have self‐serving incentives to leverage stock ownership of foreign investors and their associated institutional logic to legitimize the adoption of stock option pay. Our empirical analyses with a large sample of Japanese firms between 1997 and 2007 show that when managers have elite education, high pay inequality with ordinary employees, and when firms experience poor sales growth, foreign ownership is more likely associated with the adoption of stock option pay. The study shows the active role of managers in facilitating the diffusion of a new governance practice embodying new institutional logic. Managerial summary : Why have Japanese firms adopted stock option pay for executives? Inconsistent with Japanese stakeholder‐oriented tradition in corporate governance, such pay has been believed to prioritize managerial attention to the interests of shareholders over those of other stakeholders. However, to the extent that shareholders' interests are legitimate in the Japanese context, executives who have self‐serving incentives to adopt such pay can leverage the need to look after shareholders' interest in their firms to legitimize their decisions. In a large sample of Japanese firms, we find that foreign ownership (representing shareholders' interests) is more likely to be associated with the adoption of stock option pay when managers are motivated to receive such pay, such as when they have elite education, high pay inequality with ordinary employees, or poor sales growth. Copyright © 2015 John Wiley & Sons, Ltd.     

Political hazards and firms' geographic concentration

Research summary : We examine the relationship between the geographic concentration of a firm's sales and the firm's vulnerability to expropriation hazards. Although expanding outside the home location can initially increase a firm's exposure to government expropriation, we find that this effect reverses when a firm's sales outside its home location have reached a point at which it has sufficient resources to better influence government actions and to pose a credible threat to exit the market in which it is being targeted. We supplement this main result by identifying two moderating factors: the firm's level of political capital and the effectiveness of institutional constraints on government behavior. We find support for these hypotheses from survey data on privately owned enterprises in China. Managerial summary : This research advises firm managers that certain market activities might knock their firms' economic interests out of alignment with the government's political interests, and thus, influence the political hazards they face, particularly in emerging markets such as China, which has attracted strong interest of many firms with respect to entering the market. Here, all else being equal, the firms' geographic concentration exposes them to different levels of state expropriation—but not in a simple linear fashion as suggested by the conventional wisdom of local protectionism or that of the bargaining advantage generated by the threat of relocation: Those who are “stuck in the middle” ended up paying twice or even three times as much unauthorized levies as the purely local or the most expansive firms. Copyright © 2015 John Wiley & Sons, Ltd.     

External corporate governance and financial fraud: cognitive evaluation theory insights on agency theory prescriptions

R esearch summary : Agency theory suggests that external governance mechanisms (e.g., activist owners, the market for corporate control, securities analysts) can deter managers from acting opportunistically. Using cognitive evaluation theory, we argue that powerful expectations imposed by external governance can impinge on top managers' feelings of autonomy and crowd out their intrinsic motivation, potentially leading to financial fraud. Our findings indicate that external pressure from activist owners, the market for corporate control, and securities analysts increases managers' likelihood of financial fraud. Our study considers external governance from a top manager's perspective and questions one of agency theory's foundational tenets: that external pressure imposed on managers reduces the potential for moral hazard. M anagerial summary : Many of us are familiar with stories about top managers “cooking the books” in one way or another. As a result, companies and regulatory bodies often implement strict controls to try to prevent financial fraud. However, cognitive evaluation theory describes how those external controls could actually have the opposite of their intended effect because they rob managers of their intrinsic motivation for behaving appropriately. We find this to be the case. When top managers face more stringent external control mechanisms, in the form of activist shareholders, the threat of a takeover, or zealous securities analysts, they are actually more likely to engage in financial misbehavior. Copyright © 2016 John Wiley & Sons, Ltd.     

The more,the merrier? Women in top‐management teams and entrepreneurship in established firms

Research summary: We study the association between firms' entrepreneurial outcomes and their gender composition. Though highly topical, there is little solid empirical knowledge of this issue, which calls for an inductive approach. We match a paired‐respondent questionnaire survey with population‐wide employer‐employee data, and find evidence that the presence of female top managers is positively related to entrepreneurial outcomes in established firms. Yet, this relation is conditional on the proportion between male and female top managers. Another finding is that the overall proportion of women in the firm's workforce negatively moderates the relation between female top managers and entrepreneurial outcomes. We discuss various mechanisms that can explain these findings, and argue that they are best understood in terms of the dynamics of social categorization. Managerial summary : We investigate how companies benefit from having more women on the top‐management team. We show that beyond a threshold level of female top managers, more women are associated with more entrepreneurial outcomes (more products and services profitably launched). However, this positive effect is weakened in firms that have many women in the workforce. These effects may be explained in terms of the ways employees mentally categorize managers and how this influences their work motivation. We find evidence for such an explanation. Copyright © 2016 John Wiley & Sons, Ltd.     

Equity‐based incentives and collaboration in the modern multibusiness firm

Research summary : This paper examines the role of equity‐based incentives in fostering cross‐business‐unit collaboration in multibusiness firms. We develop a formal agency model in which headquarters offers equity and profit incentives to business‐unit managers with the objective of maximizing total expected firm returns. The resulting compensation contract provides a rich mechanism for aggregating value from collaborative interactions across business units, aligning managers' efforts with the firm's growth prospects and organization structure and managing the dual risks in profits and firm market value. The inclusion of equity incentives elicits higher levels of own‐unit and collaborative efforts over the profits‐only contract. Our results suggest that equity‐based incentives are most beneficial when profitability is uncertain relative to long‐term growth prospects, in firms pursuing related diversification strategies, and in periods of rising equity markets. Managerial summary : Equity‐based compensation such as restricted stock grants and options are increasingly common, not only for CEOs and other top executives, but also for business unit managers and other non‐C‐suite employees. The paper studies the role of such “global” incentives in enabling multibusiness firms to benefit from cross‐unit collaboration. Results from our model show that managerial contracts that include appropriate levels of equity incentives, in addition to profit‐based incentives, generate higher own‐unit and collaborative efforts. We also find that equity incentives are likely to be most beneficial for large firms in high‐growth sectors, for firms pursuing a related diversification strategy, and in periods of rising stock markets. The model can also provide useful guidance on designing return‐maximizing compensation contracts for business unit managers in different firm, organizational, and industry contexts. Copyright © 2015 John Wiley & Sons, Ltd.     

How middle managers' group‐focus emotions and social identities influence strategy implementation

The literature on top‐down strategy implementation has overlooked social‐emotional factors. The results of a three‐year field study of a large technology firm show how top executives who favor an affect neutral task approach can inadvertently activate middle managers' organization‐related social identities, such as length of time working for the company (newcomers versus veterans) and language spoken by senior executives (English versus French), generating group‐focus emotions. These emotions prompt middle managers—even those elevated to powerful positions by top executives—to support or covertly dismiss a particular strategic initiative even when their immediate personal interests are not directly under threat. This study contributes to the strategy implementation literature by linking senior executives' actions and middle managers' social identities, group‐focus emotions, and resulting behaviors to strategy implementation outcomes. Copyright © 2011 John Wiley & Sons, Ltd.     

Heavy lies the crown? How job anxiety affects top executive decision making in gain and loss contexts

Research summary: Despite abundant anecdotal evidence that many top executives experience anxiety in their jobs, the upper echelons literature has remained largely silent on the organizational implications of executive job anxiety. In this study, we theorize that job anxiety will cause executives to (1) create a social buffer against threats by surrounding themselves with supportive decision‐making teams, and (2) pursue lower‐risk firm strategies. We further argue that these effects will vary depending upon whether strategic decisions occur in gain versus loss contexts. We test our ideas using a novel multisource, multimethod approach that includes data from 84 top executives of large organizations, their decision‐making teams, their friends and families, and archival sources. Results from an analysis of 154 major strategic decisions provide general support for our theory. Managerial summary: Although many top executives experience anxiety in their jobs, some struggle more with anxiety than others. Our paper is the first to focus on how job anxiety affects executives' decisions. We analyze 154 major strategic decisions made by 84 top executives of large organizations in a range of industries, collecting data from personal interviews with executives and surveys of their decision‐making teams, spouses, and friends. We find that anxious executives take fewer strategic risks, especially when things are going well. We further argue that anxious executives focus more on “buffering” themselves from threats, and find that they surround themselves with close supporters when times are tough. Our results demonstrate a pattern through which anxiety causes top executives to focus more heavily on avoiding potential threats. Copyright © 2015 John Wiley & Sons, Ltd.     

A path to value creation for foreign entrepreneurs

Research summary : Firms founded by foreign entrepreneurs constitute an influential and growing part of the world economy. Yet, the existing research has given little consideration to the strategies of foreign entrepreneurs beyond their decisions to start a firm. In this article, we address this gap by examining how foreign entrepreneurs may bring value to their firms as firm managers. We argue that foreign owner‐managers may benefit their firms by having access to home‐country resources. We demonstrate that, compared to hired local managers, foreign owner‐managers reduce firms' operating costs by disproportionately hiring home‐country labor when this labor is more cost‐efficient. This effect is larger for labor‐intensive industries and for entrepreneurs from less wealthy countries. Managerial summary : Foreign entrepreneurs represent an important part of the world economy. Yet, we know little of how foreign entrepreneurs manage their firms. In this article, we examine whether foreign entrepreneurs and domestic managers hire different employees. We find that when foreign entrepreneurs manage their firms personally, they hire a larger number of foreign workers, and such workers are cheaper and more productive than the local labor. Conversely, domestic managers tend to hire local employees, despite their higher relative wages. Foreign owner‐managers are particularly valuable in labor‐intensive industries and when their home‐country labor is inexpensive. Copyright © 2015 John Wiley & Sons, Ltd.     

Buying bad behavior: Tournament incentives and securities class action lawsuits

Research summary: Tournament theory suggests that a large gap in pay between CEOs and top managers can provide incentives to perform, but we argue that it can also elicit negative effort and even motivate the kind of behavior that leads to lawsuits. We posit that this negative effort is greater when firms have high levels of unrelated diversification because there is less operational interdependency, so tournament effects are stronger. We also contend that the influence of tournament incentives on behavior leading to lawsuits is weaker when environmental uncertainty is high. We discuss the consequences of these findings for research on fraud and tournament theory as well as the practical repercussions for firms, investors, and policymakers. Managerial summary : Each year, the press has a field day when companies announce the outsized compensation packages laid out for CEOs. Economists use “tournament theory” to describe how high CEO pay motivates everyone else to work hard to get into the top job. The problem with this approach is that, yes, top managers work harder when the gap between their and the CEO's pay increases, but as that gap widens, it also incentivizes top managers to cheat or cut corners. As a result, we find that the gap between CEO and top manager compensation predicts the likelihood that shareholders will file a securities class action lawsuit against the company. This gap in pay is an especially good predictor of lawsuits for highly unrelated diversified companies and companies facing a low level of external uncertainty. Copyright © 2015 John Wiley & Sons, Ltd.     

The top management team and corporate performance

This research tested the relationship between the characteristics and background of U.S. top executives, and measures of corporate performance. Data were obtained from 953 top managers; the dominant coalition of the largest 150 companies within five U.S. industries—dairy, footwear, tyres, mobile homes, and machine tools. Results were generally positive: managerial characteristics not only predicted performance variations within industries—the top performers having significantly different managerial profiles than poorly performing companies—but also that the characteristics of managers within high-performing companies were similar across the five industries.     

Blocked But Not Tackled: Who Founds New Firms When Rivals Dissolve?

Research summary: This article examines the role of competitive shocks in creating opportunities for new firm foundings. I argue that the sudden dissolution of rival firms may release resources that create opportunities for firm formation, particularly among employees facing impediments to capturing value in their current organizations. Analyzing microdata from the legal services industry, I use unexpected deaths of solo‐practicing attorneys as quasi‐exogenous sources of rival dissolution. Results indicate that these shocks increase the odds of founding by about 30%, with stronger effects among attorneys with weaker social connections or higher competition for promotion. The article thus highlights the role that founders play in reallocating dissolved rivals' resources while demonstrating that founding may be an important outlet for “blocked” employees to capture value from opportunities. Managerial summary: This article finds that the shutdown and dissolution of a rival organization may spur employees to found new firms. As a consequence, managers may find it valuable to pay attention to employees' turnover intentions following the dissolution of a rival. Findings suggest that employees who are having trouble advancing in the firm may be the most likely to found a new organization when a rival dissolves, so managers may want to focus retention efforts on these individuals. To the extent that managers wish to capture customers, employees, and other resources that were formerly attached to a dissolved rival, managers may wish to be aware that they could be in competition with their own employees for these resources and opportunities. Copyright © 2017 John Wiley & Sons, Ltd.     

Firm‐specific human capital investments as a signal of general value: Revisiting assumptions about human capital and how it is managed

Research summary : Prior scholarship has assumed that firm‐specific and general human capital can be analyzed separately. This article argues that, in some settings, this is not the case because prior firm‐specific human capital investments can be a market signal of an individual's willingness and ability to make such investments in the future. As such, the willingness and ability to make firm‐specific investments is a type of general human capital that links firm‐specific and general human capital in important ways. The article develops theory about these investments, market signals, and value appropriation. Then, the article examines implications for human resource management and several important questions in the field of strategic management, including theories of the firm and microfoundations of competitive advantage. Managerial summary : While managers don't often use the terms firm‐specific and general skills, they certainly recognize that investments employees make in their skill sets are more or less relevant to a specific firm. For instance, investing in specific relationships within a firm or learning a firm's proprietary software would be considered firm‐specific investments. While such skills may seem relevant only to the particular firm in which they were invested, these investments may also send valuable signals to competing firms that such employees are willing and able to make similar investments elsewhere. Hence, managers should be interested in determining if a potential hire has made prior firm‐specific investments to help them know whether that person might be likely to make such investments in his or her future place of employment. Copyright © 2016 John Wiley & Sons, Ltd.     

Performance feedback and middle managers’ divergent strategic behavior: The roles of social comparisons and organizational identification

Research Summary: What drives middle managers to search for new strategic initiatives and champion them to top management? This behavior—labeled divergent strategic behavior—spawns emergent strategies and thereby provides one of the essential ingredients of strategic renewal. We conceptualize divergent strategic behavior as a response to performance feedback. Data from 123 senior middle managers overseeing 21 multi‐country organizations (MCOs) of a Fortune 500 firm point to social performance comparisons rather than historical comparisons in driving divergent strategic behavior. Moreover, managers’ organizational identification affects whether they attend to organizational‐ or individual‐level feedback. These results contribute to research on performance aspirations and strategy process by providing a multilevel, multidimensional framework of performance aspirations in middle management driven strategic renewal. Managerial Summary: Middle managers are essential actors in strategic renewal. Their unique positions offer insights into operations alongside knowledge of strategy. In contrast to typical assessments of managerial performance with reference to a prior year, this research shows that performance comparisons relative to peers and other organizational units better motivate managers’ divergent strategic behavior. Our results also show that managers who identify with the firm are more attentive to organizational rather than individual performance discrepancies. Thus, our study unveils an important approach for organizations aiming to spark strategic renewal.     

Guanxi and leader member relationships between American managers and Chinese employees: open-minded dialogue as mediator

Effective open relationships with employees can help foreign managers rely upon and utilize the local knowledge of their employees. One hundred and sixty-three Chinese employees from various industries in China were surveyed on their relationships (leadership–member relationship and personal guanxi) with American and Chinese managers, their constructive controversy, that is, their constructive controversy with them, and the job assignments and promotions received from their managers. Results support the hypotheses that quality leader–member relationship and personal guanxi promoted their constructive controversy, which in turn facilitated employees receiving challenging jobs and promotions. Results suggest that leader–member relationship and Chinese value of guanxi may be important for enhancing their constructive controversy; this kind of open dialogue can be a foundation upon which American managers can develop the confidence to give their Chinese employees challenging tasks and promotions.

Which boundaries? How mobility networks across countries and status groups affect the creative performance of organizations

Research summary : Losing key employees to competitors allows an organization to engage in external boundary‐spanning activities. It may benefit the organization through access to external knowledge, but may also increase the risks of leaking knowledge to competitors. We propose that the destination of departed employees is a crucial contingency: benefits or risks only materialize when employees leave for competitors that differ from the focal organization along significant dimensions, such as country or status group. In the context of the global fashion industry, we find that key employees' moves to foreign competitors may increase (albeit at a diminishing rate) their former employers' creative performance. Furthermore, firms may suffer from losing key employees to higher‐ or same‐status competitors, but may benefit from losing them to lower‐status competitors. Managerial summary : Losing key employees to competitors can provide organizations with access to external knowledge, but increase risks of leaking knowledge to competitors. We find that an organization's access to external knowledge and its risks of knowledge leakage through employee mobility may be affected by whether its employees leave for competitors in a foreign country or in a different status group. In the context of the global fashion industry, we show that key employees' moves to foreign competitors increase (up to a point) their former employers' creative performance. Furthermore, firms may suffer from losing key employees to higher‐ or same‐status competitors, but benefit from losing them to lower‐status competitors. Hence, executives in creative industries and possibly beyond could welcome losing employees to competitors in foreign countries or to lower‐status competitors. Copyright © 2016 John Wiley & Sons, Ltd.     

Growing in the changing global landscape: the intangible resources and performance of high-tech corporates

The Belt and Road Initiative and Sino-US trade war stand for the trend of globalization and de-globalization. The changing environment motivates innovative high-tech corporates to reassess their intangible resources such as R&D investment and top managers team (TMT) political ties, in order to attain competitive advantages. The study based on a sample of 223 listed Chinese most innovative high-tech corporates (2014–2018) confirms R&D intensity as burden and political ties as support for corporates’ short-term performance. TMT political ties may attenuate the negative effect of R&D intensity on performance. The negative influences of R&D are aggravated when high environmental dynamism in both the US and B&R countries markets. However, the positive influences of political ties are moderated differently by environmental dynamism in the two markets. For the US market, export environmental dynamism implies de-globalization and diminishes the positive effect of the political relations on performance. By contrast, for the B&R market, it suggests globalization and strengthens the positive effect of political ties.

     

Top management conservatism and corporate risk strategies: Evidence from managers' personal political orientation and corporate tax avoidance

We investigate whether managers' personal political orientation helps explain tax avoidance at the firms they manage. Results reveal the intriguing finding that, on average, firms with top executives who lean toward the Republican Party actually engage in less tax avoidance than firms whose executives lean toward the Democratic Party. We also examine changes in tax avoidance around CEO turnovers and find corroborating evidence. Additionally, we find that political orientation is helpful in explaining top management team composition and CEO succession. Our paper extends theory and research by (1) illustrating how tax avoidance can serve as another measure of corporate risk taking and (2) using political orientation as a proxy for managerial conservatism, which is an ex ante measure of a manager's propensity toward risk. Copyright © 2014 John Wiley & Sons, Ltd.     

NGOs and the creation of value in supply chains

Research Summary: Firms and nongovernmental organizations (NGOs) often collaborate to establish new supply chains. With a formal model, we analyze how NGOs can alleviate market failures and improve supplier economic inclusion while strategically interacting with firms. We account for the specific goals of the NGO and the need to induce collaboration between firms and their suppliers. The analysis reveals a “valley of frustration,” when NGO efforts benefit all actors but only marginally the firm. We also show that more powerful firms might prefer to internalize NGO functions, while firms with lower bargaining power and higher investment requirements are better off collaborating with NGOs. Finally, we study NGOs-firms matching patterns and find that firms with higher bargaining power match with NGOs holding stronger capabilities. Managerial Summary: This article analyzes interactions between firms and nongovernmental organizations (NGOs) aiming to improve the economic inclusion of suppliers or to promote the adoption of specific (e.g., sustainable) practices. For firm executives, this study shows the constraints and benefits associated with working with NGOs, the conditions under which integration of NGO functions is preferable as well as the types of NGOs that offer better prospects for a successful collaboration. For NGO executives, it highlights the need to provide enough economic incentives to firms and suppliers alike to ensure their collaboration and the trade-offs associated with this constraint, in particular, if NGO capabilities are limited. Overall, the study provides a comprehensive understanding of how NGO activities can influence value creation in a vertical value chain.     

Informativeness of performance measures and Chinese executive compensation

We provide evidence on the use of accounting versus stock market performance measures as determinants of Chinese top managers’ compensation over 2001–2007. We theorize and find that (1) accounting returns are weighted more heavily in general than stock returns in determining top executive compensation, (2) state-owned enterprises (SOEs) rely significantly less on stock market returns than do non-SOEs, (3) firms located in high marketization regions rely more heavily on stock market returns to reward managers, and (4) firms with better internal governance quality rely more on stock returns to reward executives. We discuss our findings with particular reference to the Chinese context of our research.