Reputation

Organizational Reputation can have multiple definitions. In a recent article, Lange et al. (2011) reviewed the management literature discussing reputation.

In their review, they categorize definitions of reputation into three general ideas:

1. Being Known
• Being well-known, broad awareness of the firm irrespective of judgment
• Disagreements on prominence distinction
2. Being Known for Something
• Includes an assessment of a particular attribute of interest or value
• Perceived quality, evaluation, judgment
3. Generalized Favorability
• Includes an assessment based on aggregate multiple organizational attributes
• Affective, long term

The literature focuses on the effects of reputation. Traditionally, these are positive. For example, reputation can help an organization the benefit of the doubt when negative information is exposed. However, there are also negative effects. For example, reputation can result in raised expectations and subject a firm to the burden of celebrity - or intense scrutiny.

Some papers discussing organizational reputation include:

• Elsbach 1994:
• She examined how organizational verbal accounts were constructed after controversial events in order to manage organizational legitimacy, and how effective they are. She drew on impression management research and institutional theory. Her analysis of CA cattle industry shows that organizational accounts that combine acknowledging forms of accounts with references to widely institutionalized characteristics are the most effective in protecting organizational legitimacy. 
• Wade, Porac, Pollock, Graffin 2006:
• They studied the effects of the certification of individual managers on organizational-, and individual-level outcomes. Using the data from Financial World’s CEO of the year context, they found that certified CEOs received higher compensation than noncertified CEOs when performance was high but lower remuneration (rewards) when performance was poor. 
• Mishina, Dyke, Block, Pollock 2010:
• Previous studies suggest that high performing firm are less likely to do illegal activities but in reality there are number of instances. They ask why and under what conditions prominent and successful firms would take risks to do bad things? In their paper they discuss the effects of high aspirations, expectations, and prominence. They define Corporate illegality as an illegal act primarily meant to benefit a firm by potentially increasing revenues or decreasing costs. They discuss underlying psychological mechanisms: Loss aversion, house money effect and hubris impact corporate illegality. Loss aversion: if potential gains and losses are of similar magnitude, the negative consequences of losses will loom larger than the other, therefore dominate decision making. House money effect: prior gains tended to lead to higher levels of risk taking, thinking that prior gains are extra money, “the house’s money”, to gamble with.

Social Capital

Social Capital is defined as the goodwill available to individuals or groups.

As depicted in the figure above, the source of social capital lies in the structure and content of a actor's social relations. The most appropriate theory to examine social capital is Social Network Theory because of its focus on relationships.

Adler and Kwon 2002 did a review of social capital research with an aim to integrate the various relevant streams of research and to encourage dialogue across perspectives. These are some of the most relevant takeaways:

• Definition
• Goodwill toward an actor that he can materialize in the unknown time in the future. It derives from opportunity, motivations and ability. A person tied to the actor, who is willing to and provides benefits. 
• Benefits: 
• Information 
• Influence, control and power 
• Solidarity
• The risk of social capital are:
• Inefficiency in some cases 
• A trade off between power and information benefits
• Overembeddedness in the structure (free-riding, hinder entrepreneurship) 
• Negative externalities 
• Downward leveling norms 
• Three contingencies:
• Task contingencies (strong vs weak ties; Coleman’s closed vs. Burt’s structural holes) 
• Symbolic contingencies (influence the value of a given stock of social capital)
• Complementary capabilities

Social capital has been studied in a number of ways in strategic management. Some relevant ones include:

• Seibert, Kraimer, Liden 2001
• They examined an individual’s social capital (network structure and access to social resources) and its effect on individual’s career success. Their findings show that network structure was related to social resources and the effects of social resources on career success was fully mediated by three network benefits: access to information, access to resources, and career sponsorship (Social capital→ network benefits → career success).
• Zjixing and Tsui 2007
• They examined whether Burt’s structural holes theory holds in different cultural contexts. They argue that, on the level of national culture, the typical collectivistic culture of China will dampen the effects of structural holes and the benefits of brokerage benefits, and at the organizational level, in organizations that foster a high-commitment culture, the information benefits of structural holes cannot materialize due to the communal-sharing values in such organizations. In their study of four high-tech companies in China, they found evidence supporting their arguments. 
• Galunic, Ertug, Gariulo 2012
• They ask if there are spillover effects to an actor's social capital. They specifically look at the second-order connections. In particular is their rank and sparseness had an effect. The found that second-order social capital matters when the contacts have senior positions.

(Adapted from course notes)

(Flashcards and other resources here)

Spinoffs and Spawning

This stream of research looks at how organizations, or more specifically the people working in those organizations, create spinoffs.  Some of the questions in this stream include:

• What types of employees are likely to start a spinoff.
• What types of firms are more or less likely to generate spinoffs 
• What effect does generating a spinoff have on the parent firm?
• What similarities do parent and progeny firms share?  How do they differ?
• Does the parent firm of a progeny firm matter?  How?
• What strategies do spinoffs pursue?  Do they differ from the strategies of de novo firms?
• How do spinoffs ultimately perform?  Is this any different from de novo firms?
• Are there characteristics that predict spinoff success and failure?

These questions have been more or less examined in strategic management:

• Phillips 2002
• He examined organizational geneology and its effect on the likelihood of organizational failure. His analysis of Silicon Valley law firm show that transfer of resources (esp. human capital and social capital) and routines between a parent organization and its progeny organization decrease life changes for the parent firms and increase life chances for the progeny. 
• Agarwal, Echambadi, Franco, Sarkar 2004
• They developed and tested a theoretical framework linking knowledge inheritance to spinout generation, development and survival. They considered two types of knowhow, i.e. technological and market pioneering knowhow. Their analysis of spinouts in the disk drive industry show that incumbents with both strong technological and market pioneering knowhow generate fewer spinouts than firms with strength in only one of these areas. An incumbent’s capabilities at the time of a spinout’s founding positively affect the spinout’s knowledge capabilities and its probability of survival. 
• Fern, Cardinal, O'Neil 2012
• They look at how pre-founding experience influence strategy. They find that structural knowledge is more influential in deciding a strategy than content knowledge.Founders exploit their own knowledge and experience rather than imitate competitors.
• Campbell, Ganco, Agarwal 2012
• They investigate which types of employees are likely to leave. Highly compensated employees are less likely to leave, but if they do it is more frequently to a spin out. Losing employees to spin outs hurts the parent firm.  Losing highly compensated employees hurts more.

(Adapted from course notes)

(Flashcards and other resources here)

Financial Markets

Just in case it needs explanation, financial markets are the markets where people trade financial securities. This is an interesting area for research since it has such a big impact on publicly traded organizations.

There are several research questions and ideas that can be examined in this setting (and many fields comment on them including finance and economics). In management, we are concerned with things such as strategy, top management, corporate governance, etc. This is a small sampling on this research:

• Hayward and Boeker 1998:
• They examined how the conditions underlying intragroup conflict affect analysts’ rating. They argue that an action that appears to be an act of self-interest may be explained by power structure between the departments of an organization, and such effect may be moderated by the reputation of analysts and his or her department. 
• Rao, Greve, and Davis 2001:
• They examined a fragile nature of imitation-based institutionalization. They studied how Wall street stock price analysts’ initiate and abandon coverage of the securities of the firms. Drawing on social cognition literature, they argue that heuristics of social proof leads to imitation of others’ behaviors but it also leads to postestimation regrets that cause the decision makers to reverse their decision. Their findings show that analysts who initiate coverage by imitating peers are more likely to experience disappointment and abandon the coverage later.
• Fanelli, Misangyi, and Tosi 2009:
• They look at whether the projection of charismatic language (or CEO Charismatic Vision) in organizational discourse influences the judgements of institutional intermediaries (analysts). Yes, yes it does.
• Benner and Ranganathan 2012:
• They investigate how pressures from institutional environments influence firm's responses to technological change. Analysts' evaluations, as institutional pressure, affects strategic investment and firms that go against it try to offset it by share repurchasing.
• Wiserma and Zhang 2013:
• They look at how the board's response to corporate misconduct is influenced by the social context, Board sensitively reacts to the pervasiveness of the misconduct and the media attention. This is stronger when the firm is under investigation.

(Adapted from course notes)

(Flashcards and other resources here)

Exploration and Exploitation

Exploration and Exploitation is related to Firm Knowledge and learning. This perspective deals with the decision a firm makes to either seek new knowledge or to use current knowledge.  It is related to learning in that this decision represents the presence or absence of learning. This perspective came about with March (1991) where he points out an inherent tension between exploration and exploitation in adaptive processes.

Exploitation involves refinement and extension of existing competences, technologies and paradigms whereas exploration involves experimentation with new alternatives. The returns from exploitation are positive, proximate and predictable whereas returns from exploration are uncertain, distant and often negative. March argues that adaptive processes, by refining exploitation more rapidly than exploration, are likely to become effective in the short run but self-destructive in the long run because it degrades organizational learning in a mutual learning situation. And it also compromise competitive position because ultimately competitive advantages come from the relationship between knowledge and discovery.

Two important concepts relate to the decision firms make to pursue both activities:

• Ambidexterity:
• Finding a balance between exploration and exploitation
• Punctuated Equilibrium:
• Temporal cycling through short bursts of exploration and exploitation 

Furthermore, there is the question of whether these activities are compatible. Some researchers view them as two ends of a continuum while others see them as orthogonal:

• If both activities are seen as fundamentally incompatible, then it means that
• The activities compete for scarce resources
• That activities are self-reinforcing
• That it requires different mindsets for organizational routines
• This suggests that they are two ends of a continuum
• However, some note that:
• Information and knowledge are infinite
• External environment also has resources (public goods or alliances)
• This suggests that they may be orthogonal
• So:
• The scarcer the resources, the greater the likelihood  exploration and exploitation are mutually exclusive
• Within a single domain,  exploration and exploitation will be mutually exclusive
• Across different, loosely coupled domains,  exploration and exploitation will be orthogonal

(Adapted from course notes)

(Flashcards and other resources here)

Firm Knowledge and Learning

Previous posts discussed how the Resource-Based View of the Firm (RBV) and Dynamic Capabilities were two theories that emerged from strategic management. A third theory is the Knowledge-Based View.

This theory consists of viewing knowledge as the most important resource of the firm. Naturally, this theory is based on RBV as initially described by Penrose (1959) and expanded by Wernerfelt (1984) and Barney (1991).

Knowledge is difficult to imitate, and can be a source of competitive advantage. Furthermore, knowledge is embedded in organizational routines, and is part of the culture and systems of the organization.

There are a number of ways contemporary research is concerned with firm knowledge and firm learning. For example:

• Kogut and Zander 1992: The knowledge-based view of the firm provides alternative answer to the question why firms exist. They argue that what firms are better than markets is the sharing and transfer of the knowledge of individuals and groups within an organization. 
• Cohen and Levinthal 1990: The ability of a firm to recognize the value of new, external information, assimilate it, and apply it to commercial ends is critical to its innovative capabilities (absorptive capacity), and its a function of a firm's prior knowledge.
• Crossan, Lane and White 1999: Organizational learning involves search and exploration. It is a multi-level process: individual, group, organization,.
• Rosenkopf and Almeida 2003: Knowledge is localized within technological and geographical contexts. Mobility facilitates knowledge flows more than alliances.
• Yang, Phelps, Steensma 2010: The effectiveness of learning from knowledge pool is size and similarity.
• Dahlander and McFarland 2013: Tie formation depends on opportunity and preference, but persistence is tied to tie strength and types.

(Adapted from course notes)

(Flashcards and other resources here)

Top Management

Just as Corporate Governance is concerned with the characteristics of Boards of Directors,  Top Management research is concerned with the characteristics of top managers.

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)

Corporate Governance

Corporate governance revolves around understanding the control and ownership of organizations. This has been discussed in the Managerial and Agency Theory posts.

As discussed before, the separation of ownership and control of the firm gave rise to difficulties monitoring managers (Berle and Means 1932).  In the modern corporation, the owner is not a single individual, but rather thousands. With such dispersion of ownership, the owners may have little influence over the managers who run the firm. Furthermore, it is possible for managers to have different priorities than the owners.

The managerial theories discussed that the managers may pursue power, prestige, and personal gratification over profit maximization. In addition, manager’s jobs are tied to the firm, but owners have the opportunity to diversify. This too creates different orientations between owners and managers. Managers may have a more short-term and risk-adverse focus.

Agency theory views the firm as a nexus of contracts. It discusses the principal-agent problem (here, principals are the owners and agents are the managers). It also discusses potential solutions to this problem including incentive contracts to align managers and owners interests.

Corporate Governance is also concerned with the Board of Directors. This group of people traditionally serve as the representatives of shareholders. In this role, they monitor the actions of the firm to ensure that decisions work toward the interests of owners, they set compensation for the top management, they can hire or fire CEO, and approve most major organizational decisions.

The Board of Directors research is concerned with various aspects of the board, including:

• Board composition: Insiders, outsiders, affiliated (representatives of other firms that do substantial business with the firm), family directors.
• Board Structure: Independence of the board typically evaluated by CEO duality (Chair of Board and CEO the same), insiders (employees of firms, beholden to CEO) vs. outsiders, committees.
• The Role of Committees: Audit committees – Role of outside auditor, financial malfeasance, Nominating committees, Compensation committees.
• Board interlocks: Connections, resources, and information flow across organizations through board members. Can help the acquisition of financing, supplies, customers, collusion.
• Board Characteristics: 
• Demographics and background of board members: extent of similarity in age, tenure, industry experience and other characteristics.
• Elites: board members social clubs, education, charity activities

Research in the ownership of firms looks at who the shareholders are and what role they play:

• Institutional (block) ownership: Large ownership positions held by institutions, especially pension funds and mutual funds. Larger owners ostensibly may monitor more (goes against disperse ownership model of Berle and Means), but may also be indexing and less likely to follow specific actions of top managers.
• ‘Activist’ owners: Role of VCs, angel investors, corporate venture capital, private equity, investment banks.
• Outside vs. inside owners.
• Board and top manager ownership.
• Privately-held firms and family firms.

Corporate control has also been an area of research. This typically look at:

• Takeover market – Ultimate market mechanism to remove inept managers. Corporate raiders and leveraged buy-outs of the 1980s. Private equity today.
• Financial analysts predict earnings and recommend stock purchases .
• The investment bank that is chosen for corporate equity/debt underwriting.

The environment plays an important role. In particular, the Sarbanes Oxley Act which requires that CEOs and CFOs personally certify financial statements. There is also the NYSE requirement that firms have nominating, audit and compensation committees made up of non-executive directors.

(Adapted from course notes)

(Flashcards and other resources here)