The Palgrave Encyclopedia of Strategic Management

Living Edition
| Editors: Mie Augier, David J. Teece

Upper Echelons Theory

  • Donald C. HambrickEmail author
Living reference work entry
DOI: https://doi.org/10.1057/978-1-349-94848-2_785-1

Abstract

Explicitly set forth by Hambrick, Donald C. (born 1946) and Phyllis A. Mason (1984), upper echelons theory is the idea that top executives view their situations through their own highly personalized lenses. These individualized construals of strategic situations arise because of differences among executives in their experiences, values, personalities and other human factors. Using the upper echelons perspective, researchers have examined the effects of top management team (TMT) composition and processes on organizational outcomes, as well as the influences of chief executive officer (CEO) characteristics on company strategy and performance. Dozens of studies have confirmed the basic logic of upper echelons theory (comprehensively reviewed in Finkelstein et al. Strategic leadership: theory and research on executives, top management teams, and boards. Oxford University Press, New York, 2009), pointing to the conclusion that if we want to understand strategy we must understand strategists.

Keywords

Echelons Theory Top Management Team (TMT) Chief Executive Officer (CEO) Organizational Outcomes Echelons Perspective 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Definition

The central premise of upper echelons theory is that top executives view their situations – opportunities, threats, alternatives and likelihoods of various outcomes – through their own highly personalized lenses. These individualized construals of strategic situations arise because of executives’ experiences, values, personalities and other human factors. Thus, according to the theory, organizations become reflections of their top executives.

Genesis of the Theory

Upper echelons theory was explicitly set forth by Hambrick, Donald C. (born 1946) and Phyllis A. Mason in 1984. Its roots, however, can be traced to Carnegie School theorists (Simon 1945; March and Simon 1958; Cyert and March 1963), particularly the concept of bounded rationality. Under this view, managers – especially those heading significant organizations – face so much complexity, ambiguity and varied stimuli that they cannot achieve technical rationality in their decisions. Instead, they take mental shortcuts, fall back on what they have seen before, and place their own personal interpretations on issues and alternatives. Executives may strive to be rational, and will almost invariably purport to be so, but they are merely ‘boundedly rational’. Managers inject a great deal of themselves into their actions.

Hambrick and Mason were also invoking the psychologist’s concept of situational strength (Mischel 1977). When an individual is in a ‘strong situation’, in which stimuli are few and clear cut, the stimuli will dictate, or drive, the person’s behaviours. But when an individual is in a ‘weak situation’ – in which stimuli are multitudinous, ambiguous and contradictory – the individual’s experiences, biases and other idiosyncrasies will greatly influence his or her actions. Of course, top executives overwhelmingly face ‘weak situations’, which have considerable scope for personal interpretation.

Upper echelons theory thus serves as a corrective for more deterministic views of organizational outcomes. For instance, population ecology theory (at least in its early forms) and institutional theory argue that managers, constrained by an array of external and internal forces, have little bearing on organizational policies or performance (Lieberson and O’Connor 1972; Hannan and Freeman 1977; DiMaggio and Powell 1983). Even the field of strategic management carries a latent assumption that careful and complete analysis of a strategic situation – market trends, competitive conditions and the firm’s own pre-existing resources – will lead a strategist to a technically correct, or optimal, set of choices (Porter 1980; Barney 1991; Peteraf 1993). Under the logic of upper echelons theory, however, such a complete and objective analysis is rare, if not impossible. Strategic situations are not objectively knowable; they are only interpretable. As such, strategists inject their personal biases into their analyses and their choices. Dozens of studies have confirmed the logic of upper echelons theory (comprehensively reviewed in Finkelstein et al. (2009)).

Focus on Top Management Teams (TMTs)

One of the subordinate ideas in Hambrick and Mason’s (1984) article, often seen as central to upper echelons theory, is that strategic decisions typically involve multiple executives, not only the chief executive officer (CEO), and therefore organization outcomes are best thought of as the result of group decision processes, rather than individual action. As such, the study of TMTs is often viewed as a major aspect of upper echelons theory.

Indeed, when studies have directly compared the predictive power of TMT characteristics with only CEO characteristics for explaining various organizational outcomes, results have consistently shown that TMT characteristics yield better predictions. This recurring pattern is consistent with the reality that strategic work is a shared task, almost always involving multiple executives. The idea of a top management team does not necessarily imply a formal executive committee, but, rather, simply envisions that the characteristics and processes of the 5–15 top managers of an organization will substantially shape the form and fate of the enterprise.

The vast majority of research on TMTs has focused on team composition as a predictor of organizational outcomes (reviewed in Carpenter et al. 2004). Within this stream, some studies have focused primarily on the average compositional characteristics of TMTs. For instance, Finkelstein and Hambrick (1990) hypothesized and found that the average tenure (in the company) of TMT members was significantly associated with subsequent strategic inertia (absence of change) and with strategic conformity (adherence to the central tendencies of the industry), presumably reflecting (unobserved) risk-aversion and passivity of long-tenured teams. Other studies have examined the dispersion, or variety, of compositional characteristics within TMTs, with an interest in understanding the consequences of having homogeneous versus heterogeneous teams. For example, in a study of TMTs in the airline industry Hambrick et al. (1996) found that TMT heterogeneity (on several dimensions) was positively associated with strategic novelty, but negatively associated with strategic speed; as hypothesized, TMT member variety tended to engender innovation and boldness, but slowed things down. This study went on to report a strong positive effect of TMT heterogeneity on airline performance. The possibility that the benefits from heterogeneity might evaporate, or even turn into liabilities, in more stable industries is an interesting concept.

Beyond the primary focus on TMT composition, upper echelons researchers also have shown an interest in TMT processes. For instance, researchers have shown that various forms of TMT compositional heterogeneity are related to team conflict and other breakdowns in collaboration (Li and Hambrick 2005; Simsek et al. 2005). When coupled with other findings as to the effects of TMT composition on strategy and performance, these process-focused studies have helped to demonstrate how and why TMTs matter to organizational outcomes.

Focus on CEOs

Although attention to entire TMTs often provides enhanced predictions of organizational outcomes, a focus on the characteristics of the single topmost executive also can be illuminating. Accordingly, upper echelons theory has also been applied to the study of CEOs. Studies have shown, for instance, that CEOs with finance backgrounds are associated with diversification and acquisition activity (Palmer and Barber 2001; Jensen and Zajac 2004). And research has shown that, as a CEO’s tenure in office advances, he or she makes fewer and smaller strategic changes, eventually exhibiting performance deterioration; the speed and steepness of this deterioration depends on the relative dynamism of the industry (Hambrick and Fukutomi 1991; Henderson et al. 2006).

There also has been an interest in studying the personalities of CEOs. Among early such studies, for instance, Miller and Droge (1986) showed that CEO personality is manifested in an organization’s structure. More recently, Chatterjee and Hambrick (2007) developed an unobtrusive index of narcissistic tendencies in CEOs (such as the prominence of their photos in annual reports and their use of first-person singular pronouns in interviews), and found that CEO narcissism was associated, as hypothesized, with strategic dynamism and grandiosity, as well as with extreme and volatile performance during a CEO’s tenure.

Some research has spanned CEOs and TMTs, exploring the influence of CEO characteristics on TMT processes. For instance, research has shown that a CEO’s personality becomes reflected in the functioning of his or her TMT (Peterson et al. 2003). And upper echelons researchers have shown that a CEO’s values become manifested in TMT processes; specifically, the more a CEO values collectivism, the more his or her TMT engages in mutual and interactive behaviours (Simsek et al. 2005). Thus, CEO characteristics exert their own direct effects on organizational outcomes, but exert additional indirect effects through the processes of TMTs.

Limits of the Theory: Managerial Discretion

Although the central logic of upper echelons theory is that executive characteristics become reflected in organizational outcomes, the reality is that some executives have much more sway over what happens to their companies than others. Thus, in a major refinement of the theory, Hambrick and Finkelstein (1987) introduced the concept of managerial discretion. Defined in this literature as ‘latitude of action’, managerial discretion exists to the extent that there is (1) an absence of constraint and (2) considerable means-ends ambiguity (i.e., where the potential links between actions and outcomes are unclear, or where multiple alternatives are plausible). Some environments provide much more managerial discretion than others. For instance, some national contexts (notably the US) provide more discretion to CEOs than do others (e.g., Japan) (Crossland and Hambrick in press). And some industries (notably those that are high-growth and with differentiable offerings) confer more managerial leeway than do others (mature commodity industries). Organizational characteristics also influence a CEO’s discretion. For example, the CEO of a mid-sized corporation with a relatively weak culture will tend to have more discretion than the CEO of a very large company with a deeply entrenched culture.

The concept of managerial discretion has implications for a wide array of phenomena, including executive pay, succession and governance practices. Most notably, though, managerial discretion serves as a moderator of all upper echelons predictions: namely, executive attributes will only be reflected in organizational outcomes to the extent that executives have discretion. As evidence of this important boundary condition of upper echelons theory, Finkelstein and Hambrick (1990) found that the association between TMT tenure and strategic change was much stronger in the high-discretion computer industry than in the low-discretion natural gas industry. At a more macro-environmental level, Crossland and Hambrick (in press) found that CEOs’ influences on company performance were much stronger in high-discretion countries than in low-discretion countries. In short, executive attributes matter in proportion to how much managerial discretion is present.

Summary

Upper echelons theory provides a counterweight, or corrective, to more deterministic views of company outcomes. The theory essentially proposes that if we want to improve our understanding of why companies behave the way they do, and why they perform the way they do, we must consider the attributes of the companies’ leaders – the experiences, values and personalities of CEOs and top management teams. To understand strategy, we must understand strategists.

See Also

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Copyright information

© The Author(s) 2016

Authors and Affiliations

  1. 1.Department of Management and OrganizationPenn State Smeal College of BusinessUniversity ParkUSA