Ed Zajac 2013 OMT Division Distinguished Scholar Talk

Reducing Certainty: Increasing Open-Mindedness in

Research, Teaching, Law, and Life

Edward J. Zajac, Ph.D. James F. Beré Professor

of Management and Organizations Kellogg School of Management

Northwestern University

To my collaborators: Thank you! n  John Kimberly n  Randy Beatty n  Charles Fombrun n  Graham Astley n  Steve Shortell n  Max Bazerman n  Brian Golden n  Maggie Neale n  Kathleen Valley n  Yong-Min Kim n  Cy Olsen n  Matt Kraatz n  Jay Barney n  Rudi Bresser n  Jim Westphal n  Ranjay Gulati n  Xiaoli Yin

n  Michael Jensen n  Peer Fiss n  Marvin Washington n  Lihua Wang n  Mark Kennedy n  Don Hambrick n  Axel von Werder n  Sekou Bermiss n  Jing Li n  Changhui Zhou n  Shaz Ansari n  Simona Giorgi n  Hongjin Kim n  Ishtiaq Mahmood n  Ayse Karaevli n  Ming Piao n  Brayden King

n  Sascha Albers n  Franz Wohlgezogen n  Janet Dukerich n  Ithai Stern n  Jo-Ellen Pozner n  Rob Solomon n  Razvan Lungeanu n  Ivana Naumovska n  Peggy Lee n  Mae McDonnell n  Thomas Mellewigt n  Adeline Thomas n  Michael Mauskapf n  Willie Ocasio n  Sheen Levine n  Susan Perkins n  Pieter-Jan Bezemer

Today’s Three (Subversive) Goals

I.  Shift scholarly attention from uncertainty reduction to certainty reduction, with the result of our knowing less and more;

II.  Illustrate this paradoxical outcome by highlighting alternative realities in one domain of scholarship and practice;

III.  Have you appreciate this seemingly disruptive development, and let it change your academic and personal life!

Famous Quotes (from the Greeks) Ø The more you know…

Ø  the more you know you don’t know (Aristotle)

Ø The more you own… Ø  the more you know you don’t own

(Aristotle Onassis!)

Why Discuss Alternative Realities? Ø To gain a deeper understanding of

management and organizational issues Ø How things work (or should work)

Ø Who are we? Ø Academics, Analysts, Board members,

Citizens, Investors, Managers, Students, Voters, Witnesses

Ø In all these roles, we can find alternative realities if we are open-minded

Ø 

Who Has Shown Me Alternative Realities?

I.  Academic Researchers

II.  Managers and Students

III.  Lawyers

Academic Research in Corporate Governance Formal Structure Behavioral Structure Behavioral Process

Firm

Micro

Macro

Firm

Economics

Designing Optimal Incentive and

Monitoring Structures

Power Showing How Positions Affect Political Behavior Of Boards and Senior

Managers

Social Psychology

Revealing How Board and Top Management

Decision Processes May Be Biased

Legal

Creating/Enforcing Governance Rules and

Regulations for Societal Benefit

Social Networks

Mapping Power and Information Flows in Interorganizational

Networks

Symbolic Management

Using Language and Appearance To Match (Changing) Societal

Norms & Values

Symbolic Management as it Relates to… Ø Neo-Institutionalism

Ø  Social Audience; Legitimacy; Appearance Ø Impression Management

Ø  Actors Seek to Influence Target Audience; Language; Framing; Resonance

Ø Strategic Management Ø  From Substance (Signal) to Symbol Ø  From Reputation to Status (earned vs. ascribed)

Ø Philosophical Question of Reality Ø  Truth, Lies, and Bullshit (Frankfurt, 2005)

Symbolic Management: Appearance and Language

n  1994 ASQ: “Substance and Symbolism in CEOs' Long-Term Incentive Plans” t  Firms may formally adopt executive incentive plans but then

decouple actual compensation from those plans (esp. poor performers, firms with powerful CEOs, & late adopters).

n  1995 ASQ: “Accounting for the Explanations of CEO

Compensation: Substance and Symbolism” t  Firms provide varying explanations for new CEO incentive

plans (predictable based on CEO power, board demography, and era of incentive plan adoption)

Alternative Logics for Long-Term Incentive Plans: Human Resource Logic vs. Agency Logic

Alcoa's Board of Directors has decided to place an increasing share of management's overall compensation at risk rather than in fixed salaries. The new approach to compensation was recommended by the Board's compensation committee, which is composed solely of outside directors. The board believes that granting stock options, performance shares and [bonuses] will create a more appropriate relationship between compensation and the financial performance of the company in order to increase key employees personal financial identification with interests of the Company's stockholders. (Aluminum Company of America). The board believes that adoption of the Plan will enhance the Company's ability to attract and retain individuals of exceptional managerial talent upon whom, in large measure, the sustained progress, growth and profitability of the Company depends ... . (AT&T).

0102030405060708090

1976 1978 1980 1982 1984 1986 1988 1990 1992

Percent of Long-term Incentive Plans Using an Agency Explanation

Symbolic Management: Appearance and Language n  1998 ASQ: “Symbolic Management of Stockholders:

Corporate Governance Reforms and Shareholder Reactions” u  Stock market reacts favorably to adoption of incentive

plans with an “agency” explanation, whether or not plans are implemented; other reforms are also deferred.

n  2001 ASQ: “Explaining Institutional Decoupling: The Case of

Stock Repurchase Programs” u  First evidence of decoupling of stock buybacks (also

predictable based on CEO power, network ties, and prior decoupling of LTIPS).

Symbolic Management: Appearance and Language n  2004 ASR: “The Social Construction of Market Value:

Institutional and Learning Perspectives on Stock Market Reactions” u  Extensive longitudinal data on 860 announced stock

buybacks over a fifteen-year time span. u  What do buybacks mean? u  Stock market reacts very differently to stock buybacks,

depending on the prevailing interpretative ideology. u  What do I mean by prevailing interpretative ideology?

0102030405060708090

1976 1978 1980 1982 1984 1986 1988 1990 1992

Percent of Long-term Incentive Plans Using an Agency Explanation

Excess Returns from Stock Buyback Announcements*

-3

-2

-1

0

1

2

3

1980 1982 1984 1986 1988 1990 1992 1994

* t-statistics are presented. For years with less than fifty observations, statistics are derived from a bootstrap distribution of excess returns (Dodd and Warner, 1983; McWilliams and Siegel, 1997).

Symbolic Management: Appearance and Language n  2004 ASR: “The Social Construction of Market Value:

Institutional and Learning Perspectives on Stock Market Reactions” u  Given a dominant prevailing interpretative ideology, can

market reactions to announcements can persist even in the face of non-implementation? Yes

The Adoption and Decoupling of Stock Buybacks

0102030405060708090100

1980 1982 1984 1986 1988 1990 1992 1994

DecoupledImplemented

Numbe r

of

Progr ams

Symbolic Management: Appearance and Language n  2004 ASR: “The Social Construction of Market Value:

Institutional and Learning Perspectives on Stock Market Reactions” u  Markets can be “taught” by active attempts to establish a

dominant ideology that will influence collective perceptions, but that such efforts may paradoxically limit a market’s opportunity for subsequent learning

u  Need for healthy skepticism, i.e., open-mindedness

Diffusion of a Shareholder Value Orientation Among the 112 Largest German Corporations

0

10

20

30

40

50

60

70

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Year

% E

spou

sing

a S

VO

Symbolic Management: Appearance and Language n  2004 ASQ: “The Diffusion of Ideas over Contested Terrain:

The (Non)Adoption of a Shareholder Value Orientation Among German Firms” u  What drives the diffusion of corporate governance models

and practices, particularly when they diffuse in new contexts where the concepts and practices may be very controversial?

u  Results suggest that the diffusion of an SVO is a socio-political process driven by the power of heterogeneous share/stake-holders and by managerial predispositions

Symbolic Management: Appearance and Language

n  2006 AMJ: “The Symbolic Management of Strategic Change: Sensegiving via Framing and Decoupling” u What drives a firm’s linguistic framing to explain a

potentially controversial strategic change, and with what consequences?

u Results: Linguistic framing of an SVO (add vs. replace) is culturally important, can substitute for substantive action, and can affect stock market valuation.

Dutch Corp Gov Code: 2003 n  ‘The code is based on the principle accepted in the

Netherlands that a company is a long-term form of collaboration between the various parties involved. The stakeholders are the groups and individuals who directly or indirectly influence (or are influenced by) the achievement of the aims of the company. In other words employees, shareholders and other providers of capital, suppliers and customers, but also government and civil society. The management board and the supervisory board have overall responsibility for weighing up the interests, generally with a view to ensuring the continuity of the enterprise. In doing so, the company endeavours to create long-term shareholder value’.

Macro-trend: Espousal of SVO by 100 largest Dutch corporations (1992-2008)

0  

10  

20  

30  

40  

50  

60  

70  

80  

90  

100  

1992   1994   1996   1998   2000   2002   2004   2006   2008  

Symbolic Management: What’s Ahead?

§  Expanding research to analyze different: §  Situations (e.g., firm bankruptcy), §  Audiences (employees; creditors, customers,

analysts), §  Reactions (labor strikes, bond ratings, et al.) §  Channels of communication (press releases,

road shows, speeches), and the consistency across channels

Symbolic Management: Is It Real?

n  Ask American Express...

n  6) Non-Executive Chairman/ Lead Director n  Ordinarily and in normal circumstances, the Chief

Executive Officer shall also serve as Chairman of the Board. During difficult transition periods or in periods of reduced investor confidence, it may be appropriate to have a non-executive Chairman as a symbol of the Board’s responsiveness to shareholder concerns.

Prof. Edward J. Zajac © 2012

Legal and Economic Realities for Good Directors… n  They agree on the fundamental issue of

accountability, or…? n  They are rewarded with more board

opportunities, or…?

Legal Reality for Board Members Duty of Loyalty n  Duty of Loyalty: Directors have a fiduciary

responsibility -- but to whom?

u “Duty of loyalty means that a director must demonstrate unyielding loyalty to the company’s shareholders”

u “Corporate law grants directors wide discretion to consider the interests of other corporate participants in their decision making – even when this adversely affects the value of the stockholders’ shares.”

“The obligation of directors … is not merely to be the agent of the residue risk bearers but rather to remember their fiduciary duties to the corporate enterprise itself, in the sense that the directors have an obligation to the community of interest that sustained the corporation and to preserve and, if prudently possible, to maximize the corporation's value to best satisfy the legitimate claims of all its constituents, and not simply to pursue the course of action that stockholders might favor as best for them.” Production Resources Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772, 788 (Del Ch. 2005)

Shareholders vs. Stakeholders

Labor Market Decides Who is a Really Good Director, or…? Being an activist director enhances the likelihood of maintaining existing directorships and adding new ones…

but only at those firms where boards are relatively powerful vis-à-vis management.

Finding One’s Real Self Among Management Researcher Ideal Types

u  Evangelists: Strong, faith-like belief in a single theoretical

perspective; Keen to proselytize to increase numbers of

like-minded folks. u  Contrarians:

Also strong beliefs, but counter-punch to reject dominant views;

Few in number, but highly visible; not keen to proselytize.

Finding One’s Real Self Among Management Researchers

u  Brokers: Look to reconcile rival perspectives -- without offending anyone.

u  Individualists: Seek to gain understanding; Take what is useful and reject what is not.

Open-Mindedness as an Intellectual and Personal Aspiration

n  open-minded (adjective) n  1. having or showing a mind receptive to new

ideas or arguments. n  2. unprejudiced; unbigoted; impartial.

Implications for Us

n  As academics, we have a special duty to be open-minded

n  Why? We have a privileged VIP position with special access to opening minds of each other and our students

n  Risks: Unpopularity; Overthinking; Cynicism! n  Plato’s Allegory of the Cave/ life in a bubble n  We are all philosophers (Ph.D?) and we need to

get out more!