Tuesday, June 8, 2021

Nepotism and Good Management Do Not Combine – or Do They?

Here is a piece of conventional wisdom that I and many others firmly believe: Nepotism is the enemy of good management because it places untested and often unqualified people in important positions simply because of who their parents are. Most of us do not work in organizations owned and controlled by families, and even some of us who do are working in organizations owned by families but controlled by professional managers who have been carefully selected. Then there is the rest of us, who worry about the capabilities of the owner family child in an executive role, and who have read the news about scandals such as the Samsung family ownership.

But every now and then some evidence appears that gives us reason to rethink our beliefs. In a paper published in Strategic Management Journal, Guoli Chen, Raveendra Chittoor, and Balagopal Vissa look at CEO pay in family firms in India, comparing those run by CEOs from the family versus those run by non-family CEOs. Their findings contained some surprises.

Here is an unsurprising finding: CEOs from the family get paid more. Sure, we all know about favoritism and about extracting resources from a firm (which also has non-family owners) to put into the family’s pockets. This is an annoying finding, but it is no surprise. Oh and by the way, the increase in pay depending on the firm performance is nearly the same for low and high performance provided the CEO is a family member, but a nonfamily CEO does not benefit from higher performance.

Here is a surprising finding: When they checked the data more carefully, they found that the family CEOs actually got rewarded very much when the firm had very high performance, less so when it had average or low performance. This is exactly how one would design an incentive scheme for CEOs, because disproportionate rewards at the high end are necessary to compensate for their reluctance to take risk. But why is the incentive scheme especially well designed for family member CEOs?

One more interesting surprise that might be telling: The relation between high performance and higher pay is particularly strong if the firm is named after the family. So, exactly the kind of firm that would embarrass the family if the performance were low has a family CEO with good incentive pay. Interesting way for the family to control their (younger) CEO member, right?

You have probably read through this and concluded that it does not matter. Having a good incentive scheme is not the same as getting high performance. After all, poorly qualified spoiled brats are not going to accomplish much regardless of how they are rewarded. True, except for one thing. The firms managed by family CEOs had higher performance on average than those managed by nonfamily CEOs. This is certainly a paper to make us reconsider our beliefs.

Chen, G.,R. Chittoor, B. Vissa. 2021. Does nepotism run in the family? CEO pay and pay-performance sensitivity in Indian family firms. Strategic Management Journal 42(7) 1326-1343.

Monday, June 7, 2021

Are There Morals in the Stock Market? Reactions to Firm Misconduct

People dislike fraud, so much in fact that they see it as immoral and are willing to make some sacrifices to punish the fraudsters. This is even true when they are trying to earn money through investments. The best evidence on this is from research on individual people managing their personal money, but in today’s stock market most of the money is moved around by professional fund managers who are simply looking for returns. Does the market still have any morals?

Research by Ivana Naumovska and Dovev Lavie published in Administrative Science Quarterly suggests there are some morals left, but they are… selective. They looked at firms involved in financial misconduct, which is the kind of misconduct that investors care the most about because it hurts them directly. (They might be more forgiving of pollution.) It is already known that investors react by withdrawing money held in the firm accused of misconduct—and also from similar firms, because the stigma of misconduct places similar firms under suspicion.

This research goes one step further by asking whether investors are not just reacting to stigmatization but are also strategic in how they respond. An interesting feature of similar firms is that many of them don’t just resemble each other; they also compete with each other. A firm engaged in misconduct is weakened by money withdrawals and other punishments, so shouldn’t that strengthen its competitors? If it does, then that could be a reason to bet money on the competition, even if it is similar. Again, a selective form of morals.

In fact, the research went even further. Recognizing that investors differ in how well they understand how firms compete, Naumovska and Lavie distinguished between the detailed analysis of firms done by mutual funds and hedge funds and the coarser understanding of other investors. All investors will react to stigmatization and competition, but the more sophisticated investors will be less sensitive to stigmatization and more sensitive to competition. More forgiving and more strategic, in other words.

Were they? Absolutely. Measuring stock market returns, it was easy to show that both stigmatization and strategic investment took place. The authors found a U-curved relation between stock market returns and the product market overlap of each firm with the firm accused of misconduct, such that intermediate levels of similarity were the worst. Importantly, less sophisticated investors punished firms more if they were more similar to the firm accused of misconduct, showing no strategic investment. The more sophisticated investors also reacted negatively to any level of misconduct but were significantly more forgiving if the two firms were so similar that the damage suffered by the accused firm might turn out to be profitable for the other firm.

So does the stock market still have morals? Some morals, and selective morals. A somewhat disturbing conclusion is that those of us who prefer to let others invest our money through mutual funds and ETFs (not hedge funds, I hope) actually make the market less of a moral place, because those who manage our money are less willing to deal out punishment for misconduct.

How much of a problem is that? Arguably punishing firms that are similar to one that commits any form of misconduct may be unfair because one should be presumed innocent until found guilty. But that overlooks some important details. First, people are presumed innocent, but we don’t need to hold firms to the same standard. Second, the stock market is not a court, and it is perfectly acceptable to move money away from the possibility of future misconduct. I am perfectly comfortable with stock market morals through stigmatization, and I am uneasy about the implications of this research.

Naumovska, Ivana and Dovev Lavie. 2021. When an Industry Peer is Accused of Financial Misconduct: Stigma versus Competition on Non-accused Firms. Administrative Science Quarterly, forthcoming. 

Sunday, June 6, 2021

Women’s Work? Firms May Penalize Social Impact Work by Male Employees

An important part of the move towards firms showing social responsibility is the spread of social impact work programs. These programs let employees offer part of their time to various initiatives with social impact. For example, my school has built a playground in an area of need. (I agree that a playground built by professors is a scary thought, but most people working for us are not professors.) Social impact work programs are thought to be very useful because they connect organizations and society much better than money donations, and many firms encourage them.

What if the same firms penalize the workers who take part in them? That would make no sense, but now we know it is happening. This is thanks to research by Christiane Bode, Michelle Rogan, and Jasjit Singh published in Administrative Science Quarterly. They looked at a major consulting firm with a social impact program that employees could volunteer for, and they checked what happened to the promotions of those who did or did not volunteer.

The good news is that it is fine to work for social impact if you happen to be a woman. Then there is all the bad news. First, the promotions of men who worked for social impact were delayed. Bad for them, who thought that the firm’s promise to encourage and reward social impact would be followed up. Bad for the firm, which claimed to want a robust social impact program.

Second, the promotions of men who worked for social impact were delayed. Bad for the firm’s (and the world’s) idea that professional workers are generally evaluated based on merit, not gender, because the difference between men’s and women’s consequences clearly demonstrates a workplace with some sexist views.

Third, the promotions of men who worked for social impact were delayed. Perhaps one of the more disturbing findings from this research was that this effect was not specific to the consulting firm. It could also be shown in a random sample of people acting as evaluators for a potential promotion. Their evaluations were very informative, and not in a good way. First, it was clear that the negative evaluation of men doing social impact work was entirely due to men making promotion evaluations. The male evaluators were the ones who acted as if they thought that men – but not women – should stay away from social impact.

Moreover, when reporting the reason for their negative evaluations of men, they were clear that a lower fit to the job was the problem. Doing good outside the job does not lower a woman’s fit to the job, but it lowers a man’s fit to the job. What is going on here? The findings raise a clear suspicion that the evaluators either know that women do lots of non-work work anyway (like most family work) or think that a dual work and society focus is fine for women but not for men.

The findings are discouraging because they suggest that a lot of education is needed to make social impact work a safe and gender-balanced effort for firms. The good news is that it is not too hard to accomplish because promotions are decided by a well-defined group of people, and it is easy to track how well they make decisions. In fact, the main reason the consulting firm findings were so clear is that they had good performance statistics for their employees, so it was easy to check whether the promotions were fair or not. This is exactly the foundation needed to make sure that promotion evaluators act in ways that match firm priorities, not oppose them.

Bode, Christiane, Michelle Rogan, and Jasjit Singh. 2021. Up to No Good? Gender, Social Impact Work, and Employee Promotions. Administrative Science Quarterly, forthcoming. 

Thursday, May 27, 2021

Creativity and Diversity: More Lessons from Management

The idea that creativity is stimulated by combining different kinds of information has been shown to be true many times, most recently in research showing that network brokerage of different groups is most effective when there is also instability of membership. Interestingly, the simplest way to combine different kinds of information is the hardest: bringing together a diverse group of people to work as a team is sometimes good for creativity, sometimes bad, and sometimes there is no effect.

How can we make sense of this? First, we can be patient. Teams trying to be creative quickly face a difficult task that many of them will fail. Instead, looking at creative efforts over time, by multiple teams, gives clearer results. Second, separate different types of diversity. Knowledge diversity creates creativity, but many other kinds of diversity have no effect on creativity but can create discomfort and difficulty working together. Unfortunately, people get along more easily with those who look like them and talk like them, so any team of people who work together can be divided by gender, race, or nation of birth. This is the reason that team diversity often has unclear effects: those who would benefit the most from working with each other often have difficulty doing so.

Alina Lungeanu and Noshir Contractor looked at the effects of knowledge diversity and cultural diversity in teams of scientists involved in the ultimate creative task: the generation of the new scientific field of oncofertility. Creativity in science is demanding because it not only requires new ideas; the ideas also must be objectively correct. Science is stricter than art in assessing the value of creativity. Creativity in science is demanding also because it requires time; it takes many years and publications to produce useful knowledge.

So, what did they find? For scientists collaborating, knowledge diversity means that they draw on different knowledge of past research, which happens to be easily measurable. More diversity produced more creativity. Cultural diversity produced less creativity. As added evidence that difficulty working together held back collaboration, they also found that scientists were especially likely to repeat collaborations with prior collaborators and were also more likely to collaborate with friends of friends than with total strangers.

This repeats a lesson that is worth repeating because it is so often ignored. The creative spark comes from encountering different knowledge, ideas, or norms. Different forms of thinking help creativity. But to make that encounter happen, people need to open up to each other and communicate freely. That requires some level of comfort with each other, so team-building efforts may be needed when team members come from different backgrounds. So first, facilitate communication, then let the communication generate creativity.

Lungeanu, A., N.S. Contractor. 2014. The Effects of Diversity and Network Ties on Innovations: The Emergence of a New Scientific Field. American Behavioral Scientist 59(5) 548-564.

Tuesday, May 18, 2021

Hiring Mental Disorder: How Employee Mobility Spreads Depression, Anxiety, and Stress

Mental disorders should be taken seriously because a condition such as depression, anxiety, and stress takes a significant toll on those who suffer it and their families, and it affects their work performance. Particularly tragic events occur when stressed operators of hazardous equipment (such as trucks, trains, or planes) make mistakes that threaten safety. The only good thing about mental disorders compared with other diseases is that they are not contagious.

Except, asdiscovered in new research by Julia M. Kensbock, Lars Alkærsig, and Carina Lomberg published in Administrative Science Quarterly, they are.

Focusing on the workplace, the authors found that mental disorders are contagious. The behavior of a person suffering from a mental disorder affects others by making their interactions and the work more problematic. The end result is that some coworkers end up with the same disorders of depression, anxiety, and stress. This is especially problematic because mental disorders spread through behaviors, so an undiagnosed patient in the organization is particularly threatening as no treatment or adaptation is possible. In a way, this is similar to how patients with contagious diseases can transmit even when they are undiagnosed or asymptomatic.

But this is not the worst part of the story. Organizations in which many employees have mental disorders – maybe because they have spread within the organization – become unhealthy, so hiring one of their employees carries a similar risk of hiring mental disorder as hiring an employee who has a mental disorder diagnosis. Of course, unhealthy organizations are exactly the places that employees want to leave in order to escape depression, anxiety, and stress, but they do not realize that they may be bringing it to their next workplace.

And there is an even worse part of the story too. To see why, ask yourself who in the organization affects coworkers the most. The answer is obvious – managers do. A manager interacts with many, influences many, and has the power to affect the work and rewards of many others. Hiring a manager with a mental disorder or from an unhealthy organization means that the organization now has a person who is fully capable of transmitting depression, anxiety, and stress to others, and the researcher team found that managers indeed have disproportionately high effects on the mental health of the organization.

We already know how the climate of a workplace, and the work done in it, is negatively affected by hiring jerks, especially jerk managers. The damage from having a manager with a mental disorder is similar, or possibly worse. But, the takeaway here is not that organizations should shun employees and managers with mental health disorders. Given their prevalence, trying to do so would have negative consequences for everyone involved. Instead, this research should be a wakeup call for any organization that is not already educating its people about mental disorders and working to improve their mental health. Mental health disorder is a treatable condition (unlike most jerks, I suspect). Given the dangers of contagion, there is no time to waste.

Kensbock, J. M., Alkærsig, L., & Lomberg, C. (2021). The Epidemic of Mental Disorders in Business—How Depression, Anxiety, and Stress Spread across Organizations through Employee Mobility. Administrative Science Quarterly, forthcoming. doi:10.1177/00018392211014819

Tuesday, May 4, 2021

Organizations Rule! When Self-Organization Became Structured

We often overlook an interesting contrast between the workplace and our private lives. In the workplace, we have an organizational structure in which people have fixed authority, are grouped together in units, and have specified processes for regular operations and for how to handle many exceptions. In our daily life, we have none of these (unless we are the von Trapp family), but we still get things done. To the curious mind, this begs the question of what organizations are for, apart from controlling people who cannot be trusted on their own.

Felipe G.Massa and Siobhan O’Mahony have published research in Administrative Science Quarterly that gives a nice answer to that question. They examined the self-organized Anonymous movement, which started off radically different from normal organizations in structure (they had none), processes (they improvised them), and ethos (freedom of information and action is paramount). Anonymous earned a reputation as an unpredictable group of activists that could suddenly descend on targets through protests and hacker attacks, seemingly organized through little else than internet forum conversations.

The only problem with this reputation is that it is only true of early stages of the Anonymous movement. They did indeed organize through shared forums and used shared norms and jargon to define boundaries and direct action. But Anonymous attracted so many newcomers that these mechanisms were no longer enough to maintain the identity of the movement and the cohesion of their actions, resulting in chaos. Reacting to this, senior members of the movement sought to use norms both for integrating new participants and for directing the protest actions they had become famous for, which were becoming less systematic and predictable.

Norms work well, right? After all, the Catholic church has applied strong norms and has been in operations for a couple thousand years. But churches are organizations too, and they use structure and processes just like any other organization. And the time came when Anonymous started looking more and more like an organization.

Anonymous now has well-defined roles, with different levels of experience and expertise determining what role a member fills. Anonymous has a hierarchy, with decisions made centrally and communicated outwards to the peripheral members. Anonymous has training of new members, manuals for how to act, and tests that allow promotion into higher ranks. In short, Anonymous is an organization.

Is this controversial or surprising? My first guess is that the most surprised people share one of two very different beliefs. One is the belief of economists that coordination of many is a simple matter of aligning preferences through some simple device, such as a price. This belief is correct, but it turns out that prices and mass-market goods are one of the few contexts in which it holds. The other is the belief of ideologists that mass movements can be coordinated by shared beliefs and norms. That is also correct, but only for short periods of time, as Anonymous found.

My second guess is that organizational theorists are the least surprised. We should not be surprised because what we have learned time and time again is that organizations are unbeatable for coordinating the actions of many, whether they be friends, strangers, or in between. Just ask Anonymous, if you can find the right person to ask.

 Massa, F. G., & O’Mahony, S. (2021). Order from Chaos: How Networked Activists Self-Organize by Creating a Participation Architecture. Administrative Science Quarterly, forthcoming. doi: 10.1177/00018392211008880

Friday, April 30, 2021

Church or Science? Moral Authority in Stem Cell Research

Who decides what can be done in society and business? The conventional answer in Europe is that it was the church in medieval times, the state after that, and now it is a free-for-all with business having a prominent role. All parts of the conventional answer are inaccurate, and we know that the correct answer depends on the context. So, let us consider a context with very strong dividing lines: stem cell research. Stem cells are “primitive” cells that have not yet specialized into specific types, so they can be used to cure a wide range of medical conditions provided they can be coached into becoming a type of cell that needs to be replaced or repaired. They are also controversial cells because a primary source of stem cells for research and production is fetal tissue – early-stage embryos.

Church beliefs on what embryos are for and scientists’ ambitions to cure degenerative diseases like Parkinson’s and Alzheimer’s clashed, and this conflict was examined by Joelle Evans in research published in Administrative Science Quarterly. In her study, a research laboratory encountered outside pressures against the stem cell research and reacted by having internal debates and forming a response. In so doing, the scientists took on a second role as creators and marketers of a moral stance explaining why stem cell research was valuable and how it should be done.

What she documented is an unusual role for scientists. More commonly, science is thought to be a free exploration of questions for which there is no moral judgment until the time comes to use the insights. This type of scientific handoff is very common, although it has been known to create complications in some cases – such as among the scientists who developed the atom bomb, with full knowledge of the purpose of their research.

Stem cell research is not nuclear physics and has no weapons application, but the question of what kind of raw materials can be used, and how they can be used, is fraught with moral problems. These moral problems have practical implications. For example, the USA has rich access to surplus blastocysts (pre-embryos) because in vitro fertilization (IVF) procedures create more blastocysts than can be safely inserted. IVF clinics routinely destroy excess blastocysts because they are barred from turning them over for stem cell research. As of 2019, a few hundred stem cell lines had been approved for use, and these are called stem cell lines because each originates in a single blastocyst with cells that keep being reproduced.

The researchers in this study faced two debates. Externally, they faced criticism for their use of stem cells and calls to account for it morally. Internally, they differed in their views on what could and should be allowed, with the internal lines of contention being shaped by the external pressures. The need to make an external account for their work was unfamiliar for researchers and made complicated by their internal divisions.

How did they respond? Interestingly, the combination of external pressure and internal fissures helped the lead researchers formulate a set of moral values that they could justify through connecting with accepted forms of ethical reasoning and explain externally and internally.

This served two purposes. Externally, the scientists gained a role in defining the value of their work and the constraints on how it should be conducted. Internally, they unified an organization that could easily have become divided, maintaining motivation for the team members troubled by the apparent conflict of moral values. They achieved strength through unity while embracing the diversity of beliefs within their laboratory walls.

Evans J. 2011. How Professionals Construct Moral Authority: Expanding Boundaries of Expert Authority in Stem Cell Science. Administrative Science Quarterly Forthcoming.