In their 1984 paper, Hambrick and Mason lay the foundations of top management research, or what they call Upper Echelons Theory. This theory explores how the strategies and effectiveness of firms are related to the characteristics of their top managers.
The basic argument states that complex decisions cannot be economically optimized, and behavior dominates. Sot, the more complex the decision the more idiosyncrasies of decision makers matter. In their argument, they note that the composition of the entire top management team (TMT) matters, not just the CEO. It makes sense to examine the team as a whole and to not just focus on the chief executive; in particular, heterogeneity in the TMT, and power differentials, can have a substantial effect on outcomes.
In addition, the importance of the CEO – and their character - depends on managerial discretion. When an executive has more discretion, upper echelon characteristics will have a larger effect on outcomes. Higher demands on an executive will force them to rely more on their experience and instincts, which makes character matter more.
The figure below describes the theory from Hambrick and Mason 1984:
From this foundation, people have explored many different topics including:
- Hayward and Hambrick 1997: CEO hubris is linked to higher price premiums for acquisitions
- Chatterjee and Hambrick 2007: CEO narcissism leads to more dynamism in a firm's strategy, greater number and size of acquisitions, and the more extreme its performance
- Crossland and Hambrick 2011: Country-level managerial discretion plays a role on how much impact CEOs have.
- Chin, Hambrick, Trevino 2013: Liberal CEOs exhibit greater advances in their firm’s CSR
(Adapted from course notes)
(Flashcards and other resources here)