Boards Under Crisis

Board action under pressure

Carmelo Mazza, Alberto Lavin Fernandez

• Publisher: Palgrave Macmillan
• Year: 2014
• Print ISBN: 9781137379214
• eBook ISBN: 9781137379221
• Topic: Betriebswirtschaft
• Subtopic: Unternehmensstrategie

An innovative, research-based review of how boards make decisions during crises – designed to offer insight and accessible theories for invested senior management facing crises situations. This book gathers recent and historical research on boardroom decision making from the field and business literature to review crises, TMT and decision making.

chapter 1

Introduction: The Clash of the Romance of Leadership with Real Practice during Crisis

This is a book about top managers in the boardroom. It is also a book about decision-making. Ultimately, it is about crisis. We combine these three elements because we believe they are the cornerstones needed to improve our understanding of organizations during recent years.

Life in the boardroom, particularly during periods of crisis, has been underexplored. In particular, research examining the impact of changes in external strategic contexts and conditions (e.g. environmental threats or external crises’ effects on directors’ characteristics and decision-making processes) has received comparatively little attention in the strategic-management literature. Moreover, most literature on crisis focuses on short, highly intense crises (e.g. the Cuban missile crisis or serious aviation disasters) rather than sustained, lengthy situations of external crisis such as the one many economies are facing currently.¹

It is, therefore, timely to look at how crisis is affecting key decision-making in business organizations. However, it is too early (in many places the economic crisis is not yet over) and overly difficult to look for quantitative evidence that reveals changes in the decision-making process.

Perhaps hard data would never allow us to grasp the essence of decision-making in the boardroom, which lies essentially in the interaction between board members and other relevant actors. For this reason, we preferred to get into the heart of the issue by interviewing board members. We then tried to interpret what they reported by adopting theoretical constructs rooted in relevant management literature on topics such as top management teams (TMTs) and decision-making in organizations.

To look at boards during recent years is also a way to look for signs of recovery from the current economic crisis. It is expected that recovery may come from better decisions, wiser strategic moves and sounder processes in the boardroom. The hope that boards can drive companies away from stagnation and crisis is present in public opinion and media coverage. It is, therefore, important to understand whether boards are actually developing discontinuities towards this crisis, or just reacting to environmental challenges. In other words, it is crucial to understand whether boards are actually succeeding or failing in overcoming corporate crises. It is also important to understand whether any learning is taking place at board level on how to avoid deep financial crises and their effects in the future. This is important in order to understand whether the functioning of boards is part of the problem or part of the solution.

Boards are expected to find solutions to the crisis. Nevertheless, it can be argued that decision-making processes in the boardroom are reproducing constitutive elements of the crisis (Davis, 2009).

To clarify the potential clash between expectations and actual behavior it is necessary to take a close look at corporate decisions.

Do corporate leaders make decisions?

You want to explore decision-making in the boardroom during crisis and that’s interesting. However, you should try to establish if boards actually make decisions in the first place.

An international executive director

Senior teams in the business world are often idealized. They are venerated by corporate citizens, who attribute miraculous powers to their bosses. They are also idealized by society at large, often influenced by the iconography of films and mass media on the topic. There is a vulgata of senior teams assuming that corporate leaders have quasi-magical traits that help them achieve their goals, no matter how difficult to achieve they are. According to this image, the average CEO is some kind of Gordon Gekko,² filthy rich, practically almighty and on occasion unscrupulous.

The management literature consistently tells us that top executives still give rise to more oral folklore than real observation (Vancil, 1987; Pye and Pettigrew, 2005). For a long time now, folklore about corporate leaders has been presenting a romantic view of the men and women at the top (Meindl, Ehrlich and Dukerich, 1985). For instance, part of James Meindl’s work analyzed an attribution perspective in which leadership is interpreted as an explanatory idea to describe organizations and performance as causal systems.

People expect rainmaking from their leaders, since not only the general public, but also managers and employees, feel reassured and more comfortable with sound (though perhaps not fully rigorous) accounts of organizational performance. Thus it is not surprising that—particularly during times of crisis, and despite the difficulty of decision-making at board level—employees, the media and society as a whole turn their gaze to corporate leaders. They are perceived as crucial in facing the situation affecting their companies, harming employment and reducing social welfare. However, although we might like to think otherwise, observations in our academic and professional lives reveal that senior managers during times of crisis feel the same type of confusion and hassle every one of us feels. As we shall see later, during turmoil the feeling of ‘losing ground under your feet’ has not been uncommon among corporate leaders.

It is therefore hard to admit ambiguities in organizational life, and it is particularly tough to concede that senior leadership figures such as CEOs and top politicians do not always master a solution. Very often, the solutions at hand just do not fit the problems. Just as often, solutions for problems are simply unavailable. This is particularly alarming during times of crisis; we human beings are always in search of certainty, and want to increase our perception of having control over our environment (Conner, 1992).

Decisions made under high contextual ambiguity are the landmark of James March and the Carnegie School’s investigation. We look at his main tenets, as outlined by Gavetti, Levinthal and Ocasio (2007): (a) bounded rationality, (b) the role of specialized decision-making structures, (c) the role of conflicts of interest and cooperation among organizational members and (d) routine-based behavior and learning. In particular, within this impressive theoretical enterprise, we look at the garbage-can model of choice (Cohen, March and Olsen, 1972), as an ‘ante litteram agent-based’ interpretation of the decision-making process (Lomi and Harrison, 2012).³

The garbage-can model was intended to be applied in the realm of organized anarchies (Cohen, March and Olsen, 1972). There are three main general properties characterizing what organized anarchies are made of: (a) uncertain preferences, since organizations act according to a variety of inconsistent priorities of preference, (b) unclear technology, as organizational processes and environments are not fully understood by participants and ‘trial and error’, as well as pragmatism (inventions born from necessity) affects the collective output and (c) fluid participation, as participants vary in the amount of time and energy devoted to different activities, including decision-making. It is self-evident how this description does not only identify organized anarchies, but also most organizations facing internal or exogenous crisis and transformation (Eisenhardt and Zbaracki, 1992).

Of course, the garbage-can model speaks the same language as many other behavioral theories, the older ones rooted in administrative and organizational literature and the newer ones developed in the fields of economics and finance. We decided to remain as close as possible to the original conceptualization of the garbage-can model of choice as developed in Cohen, March and Olsen (1972), Cohen and March (1986), March and Weissinger-Baylon (1986), Levitt and Nass (1989) and March (1994). Application in the boardroom domain is new to the garbage-can model (for an exception, see Levinthal, 2012) so we prefer not to stretch the genuine concepts. Moreover, we believe that the stimuli of the original theorization are still intact despite the four decades that have passed from the initial formulation, as extensively shown by Lomi and Harrison (2012) in their recent 40-year celebration of the original Cohen, March and Olsen (1972) piece.

The model suggests that when under crisis (because of the increased complexity of issues), boards will act according to principles of bounded rationality and, hence, will not explore all potential alternatives at hand, but will seek to reach satisfactory solutions rather than try to maximize opportunities. This has, as it will be later shown, potential implications on decision-making processes effectiveness, boards of directors and organizational participation and, eventually, overall organizational performance.

A significant point we want to raise here is the relevance the garbage-can model has regarding organizational decision-making during crisis. According to this conceptual representation of choice, many decision-making processes within organizations do not follow economic rationality-choice models (March, 1994). Instead, there are streams of loosely coupled issues, solutions, actors and choice opportunities. Choice opportunities flow into the organization at different paces and connect (or decouple) issues, solutions and actors based on a temporal rather than a causal logic.

In later research, some of the restrictive traits of these organized anarchies were relaxed to test applicability of the theory to a wider organizational realm. Padgett (1980) relaxed the fluid participation characteristic and applied the garbage-can model of choice to an organized bureaucracy, meant as an organized anarchy with formal participation. The conclusion holds that the anarchy paradigm could still be potentially applicable. In Padgett’s (1980) words, ‘relative lack of emphasis on the stable and the routine … encourages the misperception that the organized anarchy paradigm can be usefully applied only [emphasis added] to highly decoupled and unorthodox organizational systems’.

Our contention here is that organized anarchies can be seen as organized systems of choice filtered through the lenses of different time perspectives. A longer time perspective seems to improve the fit with the garbage-can model, whereas a short time frame is better captured by rational and political models of choice (Eisenhardt and Zbaracki, 1992). A lengthy crisis, in comparison to a short-duration crisis, increases the variety of participants; the scope of decisions and the number of solutions also becomes larger, and hence may be more appropriately characterized as akin to a garbage-can model.

Building on that perspective, other more recent constructs to explain changes like institutional work (Lawrence and Suddaby, 2006) or behavioral integration (Hambrick, 1994) are, in a way, research efforts to introduce a specific order (see Levitt and Nass, 1992, for an attempt on how to ‘put a lid on the garbage can’) and logic in the board-of-directors garbage can. In other words, they are alternative perspectives to decipher the causal logic behind the apparently loosely coupled garbage-can connection between issues, choices, actors and decisions.

The loosely coupled connection underlying the garbage can generates three different decision styles. Decision by ‘resolution’ corresponds to the traditional problem-solving outcome. Decision by ‘flight’ occurs when a choice has not been made for some time and problems attached to that choice move to another choice, so when the original choice is made, it solves no problems (which are now attached to other choices). Conversely, decision by ‘oversight’ occurs when a new choice is made quickly—using little time and energy from decision makers—before any problem is attached to it. A consideration worth exploring here is that crisis seems like a time in which ‘flight’ and ‘oversight’ are more often used as mechanisms for decision-making, compared with times of growth and reduced external ambiguity. This pattern is suggested given the intrinsic difficulty of reaching resolution during times of crisis. Departing from Cohen, March and Olsen (1972) it can be assumed then that during times of crisis more decisions are postponed or passed on to other decision makers or used as a symbolic action, rather than as an opportunity to actually solve a problem. Nevertheless, the way decisions are actually made largely depends on the characteristics of the board members and on how they play their roles and interact within the board.

How does corporate leaders’ decision-making activity affect organizations?

The question of the impact of TMT characteristics and functions on organizational behaviors and results has been a constant feature in academic research beginning with the seminal paper by Hambrick and Mason (1984) about the ‘large and long’ shadow of leaders’ characteristics in their organizations’ performance. Theory states that decision-making activity is one of the key tasks at the board level (Lorsch and MacIver, 1989; Judge and Zeithaml, 1992; Forbes and Milliken, 1999; Hillman and Dalziel, 2003). Indeed, decision-making and TMT literature has to some extent evolved together and contributed largely to the theoretical body of management thinking during the last 50 years.

Most of previous research on the TMT/boardroom topic has been related to composition and has remained largely quantitative in nature, while internal processes—notably decision-making processes—have been comparatively less studied and qualitative approaches have been less frequently used. For these reasons, our work entails qualitative enquiry of this mostly unexplored phenomenon.

While most research effort on TMTs has been comparatively done on the composition side (size of the team, tenure of their members, biographies and functional and educational backgrounds in the directorate), the exploration of the process view at the top (Pettigrew, 1992) is increasingly important, particularly to understand the idiosyncratic decision-making aspects in management activity.

Decision-making is at the heart of executive activity, at least in corporate narratives about corporate settings. This is the way executives often see themselves. A more detached (and more detailed) view will tell us later that this decision-making activity is not always as pervasive in management action. At the same time, the degrees of freedom in individual decision-making are limited by the social constraints in which decision makers are embedded (Perrow, 1986). Participation in business organizations does not necessarily produce a more rational person or drive increased economic rationality in the individual. Later, when discussing the micro-dynamics of decision-making at the top during crisis, we shall argue that the converse may prove more correct. Managers decide individually, but they simultaneously decide in relation to a social context, because we live in groups. This is not different for the organizational apex, whether we talk about the CEO or the rest of the board.

While there might be shortcuts to get to know board composition in great detail in almost any company, particularly public firms (indeed in most organized markets worldwide, the composition of boards is part of the open information that public corporations mandatorily need to communicate externally), limitation of access is keenly important for process-focused research around boards.

The process view of how boards function already has a longstanding tradition of study in management literature, despite seeing comparatively less than the composition view. Table 1.1 reports a comprehensive view of TMT/board composition literature. Table 1.2 shows a more in-depth landscape of the TMT/board process view.

However, there is not a u...

Table of contents

• Cover
• Title
• Copyright
• Contents
• Figures and Tables
• Acknowledgments
• Foreword
• 1 Introduction: the Clash of the Romance of Leadership With Real Practice During Crisis
• 2 The Crisis in the Boardroom, or How This Crisis is Perceived in Corporate Settings
• 3 Short-Termism: What You Can Do Tomorrow Will Largely Depend On Your Thinking Today
• 4 ‘We Will Need to Check That’: Centralization and Control in the Boardroom During Crisis
• 5 Parochialism and Conflict in the Boardroom During Crisis: Does Ransom Make It Random?
• 6 Board Activity as Routines
• 7 Moving Forward: Do Boards Need to Improve Their Decision-Making During Crisis, and How?
• Afterword
• References
• Index