The elephant (and the donkey) in the boardroom

[The following post is re-blogged from the London School of Economics and Political Science Business Review. Click here to view the article from LSE. It is based on a paper recently published in Administrative Science Quarterly titled “The Elephant (or Donkey) in the BoardroomHow Board Political Ideology Affects CEO Pay.” From LSE:]

 

donkey-vs-elephant

Firms governed by politically conservative boards of directors pay their CEOs more money than do firms with more liberal-leaning (the ideological left in the US) boards. That’s the conclusion of our new study on the impact of political ideology in the boardroom. We also find an ideological disparity in the degree to which directors weigh recent firm performance when deciding upon CEO pay. Relative to their liberal counterparts, conservative-leaning boards tie CEO pay more closely to firm performance. They offer bigger financial rewards after periods of strong earnings or stock returns, and impose harsher penalties after periods of weak performance.

How much is a CEO worth to an organisation?

It’s a hotly debated question in American fiscal discourse, especially as the pay gap between chief executives and front-line workers grows ever vaster. Of course, this debate is largely academic for all but the few whose votes really matter: the corporate directors who set compensation packages for their firms’ senior leaders.

Boards have a fiduciary responsibility to ensure that CEOs are paid the appropriate amount to serve the best interest of shareholders. But what’s “appropriate” is highly subjective, and might be directed by political beliefs. Given that pay is the most observable manifestation of directors’ biases about how much CEOs matter to the success of their organisations, we wondered whether corporate boards’ ideological leanings may affect decisions about CEO pay.

To find out, we tracked the pay and performance of more than 4,000 CEOs of S&P 1500 firms from 1998 to 2013. We also tallied donations by those firms’ corporate directors to political parties and candidates over the same period, establishing an ideology score for each board along the left-right political spectrum. To create an apples-to-apples comparison of CEO pay, we controlled for firm size, age, industry, sales growth and other factors in compensation decisions. This allowed us to isolate the relative effect of political ideology on CEO pay across a wide range of public companies.

After levelling the landscape, we found that conservative boards, on average, paid their CEOs four percent more money than liberal boards paid theirs. This translates to approximately $140,000 in additional compensation for the typical chief executive. This pay differential equals more than three times the median income in the United States.

When we factored recent firm performance into the equation, we found that good times brought an even bigger premium in compensation. After a period of strong earnings or increased market capitalisation, conservative boards paid their CEOs 18 per cent more than CEOs who report to liberal boards. The difference in CEO pay across liberal and conservative boards was much smaller, however, following poor performance. Our findings indicated that the poorest performing chief executives fared more or less the same in terms of their pay, regardless of whether their boards were conservative or liberal.

What’s going on here?

Our findings suggest that there may be differences in the way that liberals and conservatives view the impact of individual leaders. While it would be ideal to examine these differences by collecting primary data through surveys, we were unable to do that. Instead, we drew from prior psychological research that has shown that conservatives are more likely to make internal (as opposed to external, or situational) attributions for outcomes.

This logic suggests that directors’ political ideologies may shape their perceptions of how much — or how little —CEOs matter to a firm’s profitability and survival. According to our theory, conservative boards will be more inclined to believe that the fortunes of an organisation hinge on the actions of its CEO. And this higher assessment of CEO impact translates into higher CEO pay. In contrast, liberal boards are more likely to attribute firm performance to social structures, market conditions and broader environmental factors, resulting in lower CEO pay.

What does it mean?

For practitioners and astute observers of business, our findings suggest that the criteria for evaluating corporate governance may be less objectively clear-cut than previously thought. Instead, opinions about whether governance practices are good versus bad may be in part driven by the politics of the beholder. For instance, conservative directors could reasonably argue that higher CEO pay is good governance. After all, it is their responsibility to recruit and retain uniquely talented CEOs, a task that takes on heightened importance when CEOs matter — or are perceived to matter — a great deal to the organisations they lead.

For corporate directors, it may be beneficial to have the awareness that their political beliefs are shaping their views and influencing their approaches to corporate governance. Political biases may creep into these really important decisions. To understand that this is happening is informative. However, the question is: if you knew about your biases, would it make you more reflective? Would it alter your behaviour?

Notes:

 

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Albert Dunlap Style Likability: Those Who Seek Flattery Get Enemies

[The following post is re-blogged from Organizational Musings. Click here to view the original article. It is a commentary based on a recently published article in Administrative Science Quarterly entitled “Those Closest Wield the Sharpest Knife: How Ingratiation Leads to Resentment and Social Undermining of the CEO,” co-authored by Gareth D. Keeves, James D. Westphal, and Michael L. McDonald. From Organizational Musings:] 

I will start this post with an old story. CEO of Sunbeam Corp., Albert Dunlap, known as an expert in turning around troubled firms and selling them for a profit, was sued by the SEC in 2001 for accounting fraud. He was eventually barred from serving as an officer or director in any company, plus ordered to pay investors defrauded money in a class-action lawsuit.  Albert Dunlap was clearly someone in need of flattery, not just money, as he had the classical flattery-sickness symptom of a book written to celebrate his successes (see also his picture!). How he managed things internally in each firm he led is disputed, but much was said about his intimidation of other managers, who probably would conclude that a lot of flattery and ingratiation might help their career. Of course, managers still did better than employees, because his signature move in turning firms around was mass layoffs.

An interesting detail of his downfall was that managers around him were quick to release information that helped the investigation, which is distinct from the many firms with management teams that do all they can to deter and obstruct investigators. Is there a systematic reason for this difference? Possibly. A recent article in Administrative Science Quarterly by Gareth Keeves, James Westphal, and Michael McDonald looks at what happens when managers ingratiate their CEO through flattery and other tools. Their findings are interesting. First, managers who flatter lose their liking of the CEO. Somehow when people artificially put others on a pedestal they also start looking down on them.

Second, managers who flatter may go on to undermine the CEO. The light-handed version of this is to undermine the CEO’s messages to journalists, as this research showed. The heavy-handed version is what happened to Albert Dunlap. Among other events, his comptroller reported that he had been pushing for accounting practices that crossed the legal boundary, and sales people were quick to report “channel stuffing.” Channel stuffing is to sell too many goods and selling them too early, which is not illegal in itself (the sales channel can return unsold goods, so it is safe for them), but it is illegal when the sales are accounted as if they were final.  Those were practices that the SEC (and some investors) suspected, and that meant that what looked like a turnaround in sales and profits was actually a fraudulent scheme.

Seeking flattery is never thought of as a good thing. What we now know is that it also triggers undermining, and for those who have real weaknesses – like a CEO engaged in fraud – that undermining can be very consequential.

Grappa: A Radical Success Story

3351710029_88bd725653_zThere was a time not too long ago when grappa, the popular Italian grape-based brandy, was considered a poor man’s drink. During the 1970s, grappa’s status was a sharp contrast to comparable foreign spirits, like cognac and whisky, both of which were considered higher quality alcohols. And yet, toward the end of the 1970s, perceptions of grappa shifted radically–grappa became not only a popular, more expensive spirit, but also one that was considered on par with cognac and whisky. This radical shift begs the question, how did grappa shed its bad reputation? In the recent article from Administrative Science Quarterly entitled “How Cinderella Became a Queen: Theorizing Radical Status Change,” authors Giuseppe Delmestri and Royston Greenwood explain that the grappa itself never changed. Rather, grappa producers took steps to break grappa from its prior image. The abstract for the paper:

Using a case study of the Italian spirit grappa, we examine status recategorization—the vertical extension and reclassification of an entire market category. Grappa was historically a low-status product, but in the 1970s one regional distiller took steps that led to a radical break from its traditional image, so that in just over a decade high-quality grappa became an exemplar of cultured Italian lifestyle and held a market position in the same class as cognac and whisky. We use this context to articulate “theorization by allusion,” which occurs through three mechanisms: category detachment—distancing a social object from its existing category; category emulation—presenting that object so that it hints at the practices of a high-status category; and category sublimation—shifting from local, field-specific references to broader, societal-level frames. This novel theorization is particularly appropriate for explaining change from low to high status because it ASQ Coveravoids resistance to and contestation of such change (by customers, media, and other sources) as a result of status imperatives, which may be especially strong in mature fields. Unlike prior studies that have examined the status of organizations within a category, ours foregrounds shifts in the status and social meaning of a market category itself.

You can read “How Cinderella Became a Queen: Theorizing Radical Status Change” from Administrative Science Quarterly free for the next two weeks by clicking here. Want to know all about the latest research from Administrative Science QuarterlyClick here to sign up for e-alerts!

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*Grappa bottles image credited to star5112 (CC)

Status Update: How Do Organizations Respond to a Dip in Status?

800px-CornellpictureStatus has the potential to return concrete benefits for organizations, but status is subject to change over time, which begs the question, what happens when the status of a business changes? In their paper, “Status-Aspirational Pricing: The ‘Chivas Regal’ Strategy in U.S. Higher Education, 2006-2012,” published in Administrative Science Quarterly, authors Noah Askin of INSEAD and Matthew S. Bothner of ESMT European School of Management and Technology look to private colleges and universities to understand how organizations respond to changes in status.

The abstract from their paper:

This paper examines the effect of status loss on organizations’ price-setting behavior. We predict, counter to current status theory and aligned with performance feedback theory, that a status decline prompts certain organizations to charge higher prices and that there are two kinds of organizations most prone to make such price increases: those with broad appeal across disconnected types of customers and those whose most strategically similar rivals have charged high prices previously. Using panel data from U.S. News & World Report’s annual rankings of private colleges and universities from 2005 to 2012, we model the effect of drops in rank ASQ Coverthat take a school below an aspiration level. We find that schools set tuition higher after a sharp decline in rank, particularly those that appeal widely to college applicants and whose rivals are relatively more expensive. This study presents a dynamic conception of status that differs from the prevailing view of status as a stable asset that yields concrete benefits. In contrast to past work that has assumed that organizations passively experience negative effects when their status falls, our results show that organizations actively respond to status loss. Status is a performance-related goal for such producers, who may increase prices as they work to recover lost ground after a status decline.

You can read “Status-Aspirational Pricing: The ‘Chivas Regal’ Strategy in U.S. Higher Education, 2006-2012” from Administrative Science Quarterly free for the next two weeks by clicking here. Want to know all about the latest research from Administrative Science QuarterlyClick here to sign up for e-alerts!

Charles Snow on the Evolution of Organizations

JLOS_72ppiRGB_powerpoint[We’re pleased to welcome Charles C. Snow of The Pennsylvania State University. Dr. Snow recently published his article entitled “Organizing in the Age of Competition, Cooperation, and Collaboration” in the November issue of  Journal of Leadership & Organizational Studies.]

This article describes how organizations have evolved across three periods of modern economic history. The time in which large-scale organizing began in the United States up until the present can be divided into three eras: the age of competition, age of cooperation, and age of collaboration. The article summarizes my research over the last four decades and covers traditional organizational forms such as the functional, divisional, and matrix structure as well as newer forms such as network organizations and collaborative communities of firms. Organizations evolve as they reconfigure their resources and capabilities to pursue new opportunities and overcome existing challenges. Pioneering organizations develop new organization designs that fit the particular circumstances in their sectors, and the new designs diffuse as managers in other sectors adapt the designs to their own organizations. Overall, the result is organizations of greater complexity but also of greater speed and capability.

You can read “Organizing in the Age of Competition, Cooperation, and Collaboration” from Journal of Leadership & Organizational Studies by clicking here. Want to know about all the latest news and research from Journal of Leadership & Organizational Studies? Just click here to sign up for e-alerts!


ccs4_bioCharles C. Snow is Professor Emeritus of Strategy and Organization at The Pennsylvania State University. He is the Founding Co-editor of the Journal of Organization Design and currently holds visiting professor positions in Norway, Denmark, and Slovenia.

Evolution of Organizations

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(Public Domain via Wikimedia Commons)

How did organizations become what they are today? Charles C. Snow of the Pennsylvania State University discusses the development of organizations throughout modern history in his scholarly essay entitled “Organizing in the Age of Competition, Cooperation, and Collaboration” from Journal of Leadership and Organizational Studies.

The abstract:

JLOS_72ppiRGB_powerpointThe purpose of this article is to describe how organizations have evolved across three periods of modern economic history. These periods can be called the age of competition, age of cooperation, and age of collaboration. The major organizational forms that appeared in each of the three eras, including their capabilities and limitations, are discussed.

You can read “Organizing in the Age of Competition, Cooperation, and Collaboration” from Journal of Leadership and Organizational Studies free for the next two weeks by clicking here. Want to know about all the latest research like this from Journal of Leadership and Organizational Studies? Click here to sign up for e-alerts!

Submit Your Research on Liabilities of Newness or Smallness!

red-lady-1199922-mGroup and Organization Management is calling for submissions that provide important conceptual and empirical insights about liabilities of newness or smallness for their upcoming Special Issue entitled “New Advantage and Liability Sources in Entrepreneurial Firms: Assessing Progress and Exploring Possibilities.” The issue will be guest edited by Hans Landström of Lund University and Franz Lohrke of Samford University.

GOM 39(6)_Covers.inddThis Special Issue seeks to examine if and how critical issues related to liabilities of newness and liabilities of smallness have changed, given recent technological innovations and other trends. Do new ventures still face the same daunting survival odds scholars first asserted a half century ago or are they innovative, flexible organizations that attract customers, suppliers, and investors? Are small and medium-sized enterprises (SMEs) unable to compete effectively with or can they respond to changing competitive environments better than their larger counterparts?

Some possible topics include:

  • Strategic management
  • Public policy
  • Technology and innovation
  • Social entrepreneurship
  • Ethical and legal issues

The submission window will be open between June 30 and August 31, 2015. For more information, including how to submit, click here. Want to have all the latest news and research from Group and Organization Management sent directly to your inbox? Click here to sign up for e-alerts!