CEOs Tend to Seek Narrow Advice

by Bruce Watson, Principal & Proprietor, HEADS TOGETHER

In their review of the literature concerning firms' strategic responses to poor performance, McDonald and Westphal found that there are a range of perceptual distortions that top executives often adhere to in the face of organisational adversity. In particular, they are thought to over attribute poor performance to external factors, such as competitive industry environment, and under attribute performance problems to weaknesses in their current strategy, even when competitors have performed better under the same industry conditions.

The literature also suggests that stress brought on by poor performance prompts executives to reduce information processing activity, which decreases their consideration of strategic alternatives. This restriction is attributed in part to the centralization of decision making in response to poor performance and an associated decrease in communication between lower-level managers and top executives. While this literature has significantly advanced our understanding of strategic inertia by demonstrating how managers' thoughts can help explain firm's responses (or lack thereof) to economic adversity, important gaps in our understanding of this phenomenon remain.

Personal Sources for Information

Research on strategic decision making and executive scanning  has shown that executives assign greater weight to information from personal sources, such as colleagues, than to impersonal sources, such as written reports and recommendations or the output of management information systems, in making strategic decisions. Another large body of knowledge shows that people often persevere in their beliefs even when the evidential basis for those beliefs has been largely disconfirmed - executives' confidence in their strategies often persists despite negative performance outcomes. When people's beliefs are challenged, they tend to then seek information from sources that are likely to affirm those beliefs, particularly personal sources of information, and avoid sources that might disconfirm those beliefs.

The uncertainty that results from relatively poor firm performance may prompt CEOs to seek more advice from executives from other firms who they would categorize as as "in-group" members because they share a common professional background, friendship ties, or employment in the same industry. In-group managers are especially likely to offer information and points of view that confirm CEOs' pre-existing strategic beliefs. When executives' advice seeking resources restores their confidence in the correctness of their strategic beliefs, they will be less likely to change firm strategy.

Limited "Social" Input = Organisational Decline

In the authors' research they seek insight into the role that executives' social networks could play in firms' strategic responses to economic adversity. The initial evidence is that the:

1. ... findings suggest that an increased tendency toward social identification would heighten CEOs' susceptibilities to a number of positive biases in their perceptions of in-group member executives and that these biases would ultimately be manifested in high levels of strategic advice seeking from managers who are socially similar to the CEO, and low levels of advice seeking from managers without the same social ties.

2. ... greater the CEO advice seeking from socially similar managers, and the less advice seeking from managers without the same social ties, have the effect of reducing subsequent change in the focal firm's corporate strategy in response to poor performance.

3. ... consequences of this pattern of CEO advice seeking shows that when prior firm performance is relatively low, advice seeking from friends and similar others is negatively related to subsequent performance, and these effects are mediated by lack of change in diversification strategy.

4. ... role of executive social networks could contribute to patterns of organisational decline and downward spirals - negative consequences for strategic decision making and ultimate firm performance.

M. L. MacDonald & J. D. Westphal, Administrative Science Quarterly, 48 (2003): 1- 32

See also: Management and Governance