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CEO-COB prestige distance and change in diversification: Exploring a curvilinear relationship

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Abstract

This study investigates how the prestige distance between a new chief executive officer (CEO) and the chairperson of the board (COB) can influence changes in the firm’s level of diversification. We draw on social comparison theory and activity theory to argue that the prestige distance between a CEO and COB alters the interaction and communication between the two leaders, and accordingly influences the firm’s ability to change its diversification posture. We test our hypotheses on a dataset of 135 firms and find that the prestige distance in CEO-COB dyads has a U-shaped relationship with the change in the firm’s level of diversification. Our results reveal that low CEO-COB prestige distance, and to a lesser extent high CEO-COB prestige distance, creates conditions for greater changes in the firm’s level of diversification. Further, we find that this U-shaped relationship is more pronounced when the CEO-COB dyad has greater age differences and flattens when the dyad shares age similarity.

Introduction

Research has long established that the appointment of a new chief executive officer (CEO) usually initiates change in firm corporate strategy (Berns and Klarner, 2017, Bigley and Wiersema, 2002, Chiu et al., 2016, Weng and Lin, 2014). This may be because new CEOs bring novel cognitive perspectives as well as new skills and experiences, and accordingly react differently to environmental pressures compared to their predecessors (Hutzschenreuter et al., 2012, Schepker et al., 2017). Moreover, new CEOs may enter the firm with a mandate for change from the board of directors (Finkelstein et al., 2009, Westphal and Fredrickson, 2001, Zajac, 1990) or face strong external pressure to achieve strategic change (Hutzschenreuter et al., 2012). Changes to the firm’s diversification level represent a significant form of strategic change (Bergh, 2001, Kunisch, 2017, Schommer et al., 2019), as the business portfolio composition is often an antecedent of firm performance and other strategic outcomes (Ahuja and Novelli, 2017, Baysinger and Hoskisson, 1989, Eisenmann, 2002, Hitt et al., 1994, Mayer et al., 2015, Rowe and Wright, 1997; and several others). Accordingly, scholars have examined how the appointment of a new CEO, as well as CEO characteristics, influence the firm’s diversification (e.g. Bigley and Wiersema, 2002, Boeker, 1997, Chiu et al., 2016, Eisenmann, 2002, Jensen and Zajac, 2004, Jung and Shin, 2019, Nakauchi and Wiersema, 2015, Westphal and Fredrickson, 2001).

Although new CEOs may be inclined toward strategic change, their ability to implement such change is influenced by various industry- and firm-level characteristics, including factors related to the firm’s governance and leadership structure (Barron et al., 2011, Boeker, 1997, Datta et al., 2003, Hutzschenreuter et al., 2012, Lin and Liu, 2012, Nakauchi and Wiersema, 2015, Schepker et al., 2017, Westphal and Fredrickson, 2001). Thus far, however, research has largely overlooked the relationship between the chairperson of the board (COB) and the CEO as an important driver that can either facilitate or hinder firm strategic change. Scholars acknowledge that new CEOs, who face pressure to align the organization with its environment through strategic change, can benefit from advice and counsel offered by the firm’s directors and other managers (Ma and Seidl, 2018, Zhang, 2006). Within the board of directors, the COB is the most involved with monitoring firm-level decisions and operations and hence likely to have an insightful perspective on the firm’s various businesses and their relationship to one another. As a result, the COB has the potential to assist and mentor the CEO in achieving significant change in the firm’s level of diversification. Indeed, Kakabadse, Kakabadse, and Barratt (2006) argue for the desirability of a collaborative relationship between the CEO and the COB. However, Krause and other scholars (Krause, 2017, Oliver et al., 2018) point out that a collaborative relationship between the two leaders cannot be taken for granted, as the COB’s orientation toward the CEO may be characterized by a collaborative approach, a control approach, or both. When the two leaders at the apex of the firm (CEO and COB) have a collaborative relationship, the COB tends to focus on helping the CEO succeed by offering mentoring and guidance for strategic issues, as well as reducing the CEO’s workload by taking on more board-related tasks (Krause, 2017).

This study seeks to advance the understanding regarding the relational dynamics between a new CEO and the COB, and their influence on firm-level strategic change. We suggest that the prestige distance between a firm’s two top leaders is likely to influence their relational dynamics, communication, and hence their decision-making with respect to diversification. Prestige distance, a construct analogous to status distance (Doyle, Lount, Wilk, & Pettit, 2016), is the magnitude of difference in prestige between two individuals, derived from their skills, social connections, and employment experiences (Certo, 2003, D'Aveni, 1990, Piazza and Castellucci, 2014, Podolny, 2005, Pollock et al., 2010). Previous scholarship found that prestige strongly governs individuals’ interactions, influence, and behavior (Adler and Kwon, 2002, Masulis and Mobbs, 2014, Mausner, 1953, Ridgeway and Walker, 1995). However, there has been only limited research on the implications of relative prestige, including prestige distance, among organizational leaders (Belliveau et al., 1996, D'Aveni and Kesner, 1993). We draw on social comparison theory (SCT; Festinger, 1954) and activity theory (Leont’ev, 1978, Vygotsky, 1978) to posit that certain levels of CEO-COB prestige distance yield social comparison outcomes allowing for better communication and interaction between the two leaders, thus enabling them to achieve a greater magnitude of change in diversification. Formally stated, we investigate how the prestige distance between a firm’s new CEO and a COB enhances or hinders CEO-COB communication, in turn influencing the absolute change in diversification level enacted by the dyad.

In addition to examining how prestige distance between a CEO and a COB impacts their ability to develop a common vision and shift the organization toward a new strategic direction, we investigate the moderating effect of age difference on the relationship between CEO-COB prestige distance and the firm’s change in its diversification level. We rely on evidence about the impact of age differences and similarities on cognitive and affective conflicts (Byrne, 1971, Hobman et al., 2004, Pelled et al., 2001, Tucci and Lojo, 1994, Zenger and Lawrence, 1989) and examine how the dyad’s age difference might interact with prestige distance to impact relational interaction and communication between the CEO and the COB, resulting in differential changes in the firm’s diversification level.

We make a number of contributions through this study. First, we add to research on the crucial relationship between a CEO and a COB (Kakabadse et al., 2006, Krause, 2017, Lorsch and Zelleke, 2005, Oliver et al., 2018) and point to the importance of considering the relational dynamics of this dyad. The relationship with the COB is particularly important for new CEOs who need to achieve strategic change, but do not yet possess strong knowledge about or social connections within the firm (Oliver et al., 2018). We theorize that in the presence of optimal prestige distance, new CEOs would be able to establish early, strong communication with their board chairs, enabling the dyad to reach its strategic objectives. Second, we explore why and how the prestige distance between firm leaders influences change in a firm’s diversification. While distance in social hierarchical standings has long been prominent in sociology research (Beshers, Mizruchi, & Perrucci, 1963) and research on status distance has gained momentum in management research (e.g., Doyle et al., 2016, Phillips et al., 2009), our focus on prestige distance points to the importance of social comparison among corporate leaders. Our theoretical logic contributes to the field’s understanding regarding how prestige distance serves as a micro-foundational building block to organizational outcomes. Executives are “finite, flawed human beings. But… the stakes associated with their humanness – both positive and negative – are enormous” (Hambrick, Finkelstein, & Mooney, 2005, p.503). This ‘humanness’ includes the tendency for social comparison, which we posit plays a role in the trajectory of the CEO-COB relationship and determines the extent to which the dyad implements change in diversification level. Finally, by adopting SCT to explain firm-level outcomes, we respond to a concern that this theory has been overlooked by the scholarly community (Moore, 2007), even though “the effects of social comparison on various forms of organizational behavior appear to be more profound than acknowledged to date” (Greenberg, Ashton-James, & Ashkanasy, 2007, p. 31).

Section snippets

Diversification as strategic change

Strategic change is “the multifaceted, dynamic process involving various actors which allows firms to seize opportunities and/or cope with threats in order to become or remain competitive in the market environment” (Kunisch, Bartunek, Mueller, & Huy, 2017, p. 1008). Scholars examine strategic change in terms of firms’ adjustments in resource allocation patterns, capital structures, internal organization, and the extent of product diversification (Barker and Mueller, 2002, Bowman and Singh, 1993

The role of the board chair

Given the recent trend against CEO duality (Krause and Semadeni, 2013, Krause et al., 2014), scholars have started investigating the role of the board chair on organizational outcomes (e.g., Krause, 2017, Krause et al., 2019, Withers and Fitza, 2017) as well as in the post-succession context (Oliver et al., 2018, Quigley and Hambrick, 2012). Researchers have also identified CEO-COB interactions as a potential force in determining an organization’s strategic posture (Berns and Klarner, 2017,

Social comparison theory

Social comparison theory postulates that humans embody the need to evaluate their opinions and abilities by comparing themselves to others (Festinger, 1954). Doing so allows people to assess their relative position within a group, navigate their social environment (Spence, Ferris, Brown, & Heller, 2011), and form and maintain their self-concept (Alicke, 2000). As individuals engage in social comparison, they become aware of similarities and dissimilarities with referent others on specific

Sample and data collection

We generated our sample from publicly-traded U.S. firms where CEO succession had occurred between 1999 and 2007 and were represented in the BoardEx database, which consists of senior executive and board member data. The context of CEO succession provides a setting for clearly determining the starting point and ensuing dynamics of a CEO-COB relationship, and for the same reason has been employed by other studies investigating executives’ social approval assets like prestige, celebrity, and

Dependent variable

To measure change in the firm’s level of diversification, we join a number of prior studies in utilizing the Jacquemin and Berry (1979) entropy measure of corporate diversification, which takes into consideration the total number of segments in which a firm operates and the total sales across segments (e.g. Hoskisson et al., 1993, Hoskisson et al., 1994, Hitt et al., 1997). The entropy measure of total diversification is defined as:DT=tiPitxln1Pit,Pit is the percentage of a firm’s sales in the

Results

Table 1 provides descriptive statistics for the variables. Table 2 provides the results of the regression analysis for our DV as change in total and related diversification3

Post-hoc analyses

To better understand the role of social comparison and communication within CEO-COB dyads and the resulting change in the level of diversification, we conducted two post-hoc tests. In the first, we examine differences in the change in diversification level between firms with CEO duality and firms with shared leadership. In the second, we examine whether change in the level of diversification results in stronger firm performance.

Discussion

The CEO and the COB are the two primary leaders responsible for firm strategy. This study seeks to investigate how their relational dynamics influence the magnitude of change in the firm’s level of diversification. Studies show that CEO-COB interactions present a potential force in determining an organization’s approach toward strategic change (Berns and Klarner, 2017, Krause and Semadeni, 2013). Many scholars have studied diversification as strategic change (Bigley and Wiersema, 2002, Boeker,

Limitations

While our findings offer new insights into the microfoundations of strategic change, we note a number of limitations to our study. First, our dependent variable – change in the level of diversification – represents only one way of examining shifts in corporate strategy, leaving other forms of strategic change unexplored. Second, our empirical analysis, while robust in several respects, is not immune from potential endogeneity arising from omitted variable bias or reverse causality (Antonakis et

Conclusion

This study investigates the influence of prestige distance between a new CEO and the COB on the magnitude of change in the level of diversification. We apply research on social comparison to offer a theoretical explanation regarding how CEO-COB prestige distance alters within-dyad interactions, in turn influencing change in the level of diversification. This relationship is moderated by the age difference between the CEO and the COB. We anticipate that our results will contribute toward

Declaration of Competing Interest

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

Acknowledgment

The authors would like to thank Professors Donald D. Bergh and Albert A. Cannella, Jr for their valuable inputs during the development of this manuscript. Additionally, we are thankful for Professor Jonathan Gerber's expertise that was immensely helpful with the development of our theoretical arguments. We are also grateful to Professors Michael Coon and Mengge Li. Finally, we have deep appreciation for the guidance from Editor Michael A. Hitt, three anonymous reviewers, Methods Advisor Sirio

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