Firms often
run into problems. The most common one is that low performance causes unrest in
the board of directors and shareholders. More unusual ones (but still too
often) are safety problems with the product, pollution from the production, disputes
with the employees, and so on. When there is a problem, managers and board
members look for a solution, and the question is, which one to pick?
The question is important for the firm because different solutions have different merit. It also reveals a lot about power and politics in the firm, and especially when the board of directors makes the decision. This is because each board member has learnt from their experience and knows some ways of solving problems well, other ways less well. That sets up a power play between different fractions of the board with different experience and different solutions to the problem. Finding out which side wins is the topic of research by Cindy Man Zhang and myself published in Academy of Management Journal.
The context was acquisitions of other firms in China. Globally, acquisitions are a frequent solution for firms trying to improve their performance -- paradoxically so, because most acquisitions are bad for performance. Still, it is hard to find a board that is not confident enough to think they can do better than most others, so acquisitions happen a lot. The key feature of acquisitions in China’s market economy with many regular firms (not state-owned firms) is that many acquisition targets were available, and these came in two types: regular market-based targets and the more unusual state-guided acquisitions, which were firms that the state very much wanted to see acquired by another (wealthier, more capable, or better managed) firm.
It looks like we could determine what solution is chosen just by counting votes in each direction and seeing which one wins, but it is not that simple. What about the director with no state or market experience? What about the director with both? What if the state-directed alternative is economically very attractive (or the opposite, very unattractive)? We cannot treat board members as robots who do one thing only, regardless of circumstances. What we need to consider is that each side tries to build a coalition of like-minded directors, but also draws in all others who might join because they start out in a neutral position.
What we
found was more interesting and also more intuitive. Counting votes does predict
the type of solution provided we take into account the in-between directors –
those with no clear loyalty to the state or market, or those with split
loyalty. These in-between directors are very influential on acquisition
decisions because they can join either one of the coalitions and can change
sides depending on how good each alternative acquisition target is. Experience
matters in firms because each decision makers wants to “do it my way.” Power
and politics matter because there is more than one way, and decision makers
need to build coalitions.