The Role of Managerial Discretion

Business Policy and Strategy

Fall 2014Yuliya Ponomareva, PhD Candidate.

Linnaeus University

2FE017 Yuliya Ponomareva

Short Outline

• The influence of top managers on organizational outcomes

• The main theoretical perspectives

• Defining managerial discretion

• Dimensions of managerial discretion

• Presentation of papers

• “Corporate strategy is the pattern of decisions in a company that determines and reveals its objective purposes or goals …” (Foss, 2003 p. 52)

• Who is responsible for creation and execution of corporate strategy?

- In European context: strategy is jointly created by the board and theTMT

- In Anglo-Saxon context: strategy is created and executed by the TMT

•

Do managers matter?

Google CEO Eric Schmidt (Creative Commons)

Strategic Choice Perspective

• The Central Assumption:

• Managers have a profound influence on organizational

outcomes.

• ”The fundamental attribution error” (Weber et al., 2001)

CEO Decisions that changed the history

of a company• Paper production,

• Rubber production,

• Electricity production,

• Telecommunications cables,

• Consumer electronics,

• Personal computers,

• Electricity generators,

• Robotics,

• Military communications equipment,

• Plastics, aluminium, chemicals

• www.Nokia.com

CEO as the ”Savior”

CEOs as the ”Failure”

matt buchanan/http://www.flickr.com/CC BY-ND 2.0

The Still Man/http://www.thestillman.com/CC 3.0

Strategic choice perspective: Theories I

• Organization Man vs. Economic Man (Simon, 1947)

• Behavioral Theory of a Firm (Cyert and March, 1963):

• How internal organizational factors influence firm’s

strategic decisions (price, resource allocation, output, the

goal).

• - The emphasis on decision-making process.

Strategic choice perspective: Theories II Upper Echelon’s Theory (Hambrick and Mason, 1984)

• Top-Managers are responsible for creation and execution

of firm’s strategy

• Top-Managers are bounded in their rationality:

http://goo.gl/A8ykMA using a Creative Commons licence.

Empirical Evidence:

• Study 1:

• Methodist ministers with experience in successfullyaccoplishing their prior assignments are more likely tosuccessfully accomplish their present assignment in a church. (Smith, Carson, and Alexander, 1984)

• Study 2:

• Prior experience of professional sports coaches may predict their performance with present teams. (Rowe et al., 2005)

• Study 3:

• TMTs composed of members with different length oftenure outperform TMT composed of members withsimilar tenures. (Murray, 1983)

Strategic Choice Perspective Environmental Determinism

Perspective

“Managers Matter”

Behavioral Theory of a Firm

Upper Echelons Theory of a Firm

CEO and TMT characteristics

Environment determination perspective

- Organizational Ecology: organizational inertia

- Institutional theory: Institutional forces

- Contingency theory: Situational influence

•Managers are constrained by the environmental forces,

organizational inertia, and social norms.

Empirical Evidence

• Study 1:

• 6.5% to 14.5% of firm’s performance variation can be

attributed to the function of executives (Lieberson and

O'Connor's, 1972)

• Study 2:

• 5% to 15% of variance in city expenditures are attributed

to the individual roles of mayors (Salancik and Pfeffer's,

1977).

• Study 3:

• 5% of variation in firms’ returns on assets can be attributed

to firm’s executives (Bertrand and Schoar,2003).

Organizational Environmental Adaptability

Strategic choice Environmental Determinism

Hambrick and Finkelstein 1987

Managerial Discretion: 2 central

perspectives

• Strategic perspective: the scope of managerial actions

• Governance perspective: the scope of managerial

objectives

Managerial Discretion: Dimensions

(Hambrick and Finkelstein,1987)

Individual

Organizational

Environmental

Environmental Level of Managerial

Discretion

- Product differentiability

- Market growth

- Industry structure

- Demand instability

- Quazi-legal constraints

- Powerful outside forces

Industry Clasifications

•High Discretion Industries

Computers and Electronics, Cosmetics, Engineering, Toys

•Low discretion Industries

Oil and Gas, Water Supply, Railroads

Hambrick and Abrahamson (1995)

Empirical evidence

• CEO compensation is higher in high-discretion

environments (Finkelstein and Boyd, 1998)

• CEO compensation predicts corporate performance more

in high-discretion environments (Rajagopalan, 1997)

• The higher the level of diversification the higher the level

of variable executive compensation (1987)

Headlines From Wall Street Journal

” Oil and Gas CEO Pay Beats Other Industries” (by D.

Mattioli, 2012).

The influence of culture

Steiman (creative commons)

Guillaume Paumier on Wikimedia Commons under a Creative Commons license

Creative Commons

The ”effect” of the CEO is significantly

higher in the US firms when compared to

German and Japanese CEOs• Potential explanations:

• Formal insitutions:

• - legal tradition, firm ownership structure, board structure

• Informal Insitutions:

• - cultural values: uncertainty avoidance, power distance,

http://geert-hofstede.com/

External governance mechanisms:

• Market for managerial labor

• Financial Audit

• Market for corporate control

Organizational Level: Strategic

determinants

- Inertial forces: size, age, strong culture, capital intensity

- Resource availability

- Powerful inside forces

Organizational Level: Governance

determinants

Internal mechanisms:

• Ownership concentration

• The board of directors

• Executive compensation

Individual Level (Habrick and Finkelstein,

1987)Manager’s Individual Characteristics:

• Aspiration level

• Commitment

• Tolerance for ambiguity

• Cognitive complexity

• Locus of control

• Power base: personal reputation, authority

Empirical Evidence

• Executives with internal locus of control and impression

management tendencies have a positive effect on

managerial discretion. (Carpenter and Golden, 1997)