2.1 Research on CSQ
CEO CSQ is expected to play a vital role in firms’ adaptation to changing environmental conditions and is assumed to be a cognitive component of strategic rigidity (McClelland et al.
2010). The CEO is crucial to the strategic orientation of the firm (Carpenter et al.
2004; Hambrick
2007). As “chief cognizers and decision makers” (Nadkarni and Herrmann
2010: p. 1050), the CEO’s mind-set can be decisive for the medium- to long-term fate of the firm. Following this, the CEO’s CSQ is expected to figure prominently in either organizational inertia or change (Hambrick et al.
1993). A CEO with a high CSQ is convinced that the current strategy is correct and thus perceives little or no need for any adjustments, even in the case of essential changes of environmental conditions (Geletkanycz and Black
2001). Consequently, the CEO would not initiate the necessary strategic change or, in the worst case, even would actively prevent it. In contrast, a CEO with low CSQ is expected to challenge the current strategic positioning and, if necessary, align it to the changing environmental conditions. The CEO will meet the responsibility as “champion[s] of change” as Geletkanycz and Black (
2001: p. 4) call it. In contrast, overly radical shifts in strategies and practices initiated by the CEO “…may waste valuable organizational resources […] resulting in impaired performance” (McClelland et al.
2010: p. 1257).
This attributed importance to the CEO for the strategic outcome of the firm reflects the main idea of the upper echelons perspective that an organization is a reflection of its top managers (Hambrick and Mason
1984; Carpenter et al.
2004). Introduced in 1984 by Hambrick and Mason, the upper echelons perspective has been a decisive catalyst for the rise of Top Management Team (TMT) research and especially research on CEO personality and mental cognition (Priem et al.
1999; Carpenter et al.
2004). This main proposition of the upper echelons perspective is based on two central premises: (1) executives’ values, experiences, and cognition influence their information processing and, as a result, influence their strategic choices; and (2) executives’ values, experiences, and cognition are associated with their observable demographic characteristics, such as age, tenure, or work experience (Carpenter et al.
2004; Priem et al.
1999; Hambrick and Mason
1984). These premises provide the basis for analyzing executives’ psychological orientation by demographic proxies (Hambrick and Mason
1984; Carpenter et al.
2004), and indeed earlier research has shown that the personal characteristics of top managers can explain much about firms’ business strategies (reviewed by Carpenter et al.
2004). Since the introduction of the upper echelons perspective, demographic characteristics have been the dominant tools in TMT research (Priem et al.
1999; Carpenter et al.
2004). However, this research practice comes with criticism, specifically that the presumed intervening psychological processes remain in a “black box” (Lawrence
1997; Priem et al.
1999). For example, Finkelstein and Hambrick (
1990) discussed CSQ as one possible explanation for the association between long tenure and strategic persistence; however, they left the role of CSQ in this relationship imputed but unobserved.
An important step toward overcoming this criticism was taken by Hambrick et al. (
1993) when they assessed the direct impact of observable characteristics on CEO CSQ. New to their study was that they analyzed the relationship between demographic characteristics and psychological orientation instead of the relationship between observable demographic characteristics and firm outcome. They were the first to use CSQ as an explicit variable and not as an imputed intervening mechanism. By directly examining the determinants of CSQ, they shed new theoretical and empirical light on CEOs’ psychological orientation with relevance to the adaptation of the firm. Based on a large-scale survey, they found empirical evidence for a positive relationship between firm performance and CSQ, as well as partial support for a positive association between tenure and CSQ. A limited number of other studies extended the research into the determinants of CSQ. Geletkanycz (
1997) used a survey among senior executives in 1988 to measure their CSQ via a five-point scale that tested the effects of the country’s cultural value score for individualism, uncertainty avoidance, masculinity, power distance, and long-term versus short-term orientation on the managers’ CSQ. She was able to show that all cultural values, except masculinity, were significant predictors of the executives’ CSQ. Furthermore, Geletkanycz and Black (
2001) used a survey-based international sample to test the impact of work experience in functional tracks (e.g., marketing or finance) and educational level on CSQ. Their results provide evidence that experience in certain functional tracks relates positively with CSQ, whereas graduate education does not seem to have an influence. Most recently, McClelland et al. (
2010) used computer-aided text analysis (CATA) to assess CEO CSQ by analyzing CEO letters to shareholders. They built on the original study of Hambrick et al. (
1993) and found that determinants of CSQ are multilevel, ranging from the individual CEO (age and tenure) to the organizational (size and financial slack) and environmental (industry discretion) levels.
2.2 CEO succession and CSQ
CEO successions are often far-reaching milestones in firms’ development and have been the focus of academic research for decades (Hutzschenreuter et al.
2012; reviewed by Giambatista et al.
2005). Based on the assumption that top managers are crucial to firms’ strategic profiles, the literature has shown a close link between CEO succession and the pursuit of strategic change (reviewed by Hutzschenreuter et al.
2012). Later studies deepened this finding by focusing on the context of the succession event (Shen and Cannella
2002) and strengthening the result that CEO succession is a meaningful, often change-initiating event for firm strategy (Zhang and Rajagopalan
2010; Barron et al.
2011; Du and Lin
2011; Westphal and Fredrickson
2001).
To explain this positive relationship, prior studies have provided a number of arguments without explicitly analyzing the empirical validity of these arguments (Hutzschenreuter et al.
2012). In their literature review, Hutzschenreuter et al. (
2012) classify the explanatory arguments under the
leader internal impetus perspective, assuming that strategic change as a consequence of a CEO succession event has its source in factors residing within the new leader. Among the cognition argument and the matching argument, the CSQ
2 argument pertains to the
leader internal impetus perspective. The mandate to implement change, expectancy argument, environmental pressure, and power relationships are grouped under the
leader external impetus perspective, assuming that strategic change occurring after CEO succession is the result of external factors that motivate the new CEO to take action.
Although the CEO succession literature assumes a low level of CEO CSQ after CEO succession, valid arguments might also exist for a high level of CSQ after CEO succession. Indeed, there are prominent examples of CEOs revealing high levels of CSQ directly after being appointed as new CEO, such as Wolfgang Büchele who followed Wolfgang Reitzle as CEO of Linde and stated that he is convinced of the validity of Linde’s current strategy and wants to continue the current course of action (Manager Magazin
2014), thus revealing a high level of CSQ. For example, when taking over a well-positioned firm, as in the case of Linde, or taking over a firm acting in a stable environment where no real changes of the strategy are needed, the new CEO might not question the current strategy and instead reveal a high level of CSQ. Further, the new situation and the new task might be so complex that the new CEO needs some time to fully comprehend the situation and question the strategy and thus might, at the beginning of his or her time in office, reveal a high level of CSQ.
However, the basic rationale behind the assumption that differences in the CSQ between the outgoing CEO and the successor explain strategic change occurring after CEO change is that the new CEO is not committed to prior courses of action and thus questions the current strategy (Miller
1993; Wiersema
1992,
1995). In contrast, the incumbent or outgoing CEO is committed to prior courses of action and inhibits strategic adaptation to changing environmental conditions (Ndofor et al.
2009; Hambrick et al.
1993). This commitment of the incumbent CEO arises from the CEO’s responsibility for prior decisions and the need to justify these decisions (Staw
1981). The CEO has a lot invested psychologically and even emotionally in the current strategy, making it difficult to take into consideration any other strategic alignment of the firm (Hambrick et al.
1993; Hambrick and Fukutomi
1991). Because new CEOs are not responsible for the current strategic positioning of the firm when taking office and have a low level of psychological and emotional investment in the prior course of action (Wiersema
1992,
1995; Romanelli and Tushman
1994), they are assumed to reveal lower levels of CSQ. Therefore, we formulate our baseline hypothesis as follows:
It is important to note that this hypothesis is strongly related to the tenure hypothesis tested by Hambrick et al. (
1993) and McClelland et al. (
2010), assuming higher CSQ with increasing tenure, but it does state a slightly different relationship. The tenure hypothesis argues that tenure has a positive monotonic relation with CSQ at all states of a CEO’s tenure. Likewise, previous studies argue and partially support the view that CEO tenure positively affects CEO CSQ (Hambrick et al.
1993; McClelland et al.
2010). The assumption of a positive relationship between CEO tenure and CEO CSQ is based on the CEO life cycle theory because previous studies mostly found an association between top executives’ tenure and absence of strategic change (e.g., Finkelstein and Hambrick
1990; Grimm and Smith
1991). Long tenure is associated with strategic rigidity and a high commitment to the current course of action (Staw
1981; Miller and Shamsie
2001). The arguments suggesting a positive relationship between CEO tenure and CSQ can be divided into two groups: (1) long-tenured CEOs often do not question established processes and structures (Staw
1981) but rather are convinced about their enduring correctness due to an inner conviction of the validity of their action and due to a nonobservance of alternatives; and (2) long-tenured CEOs often become rigid (Staw
1981) due to a certain kind of organizational “blindness.” Consideration of alternatives and shifts to new directions are less likely with increasing tenure because CEOs’ basis for decision-making is biased by their earlier experiences and decisions in the same position (Eisenhardt and Zbaracki
1992; Katz
1982; Miller
1991). Long tenure usually stands for successful actions on the part of the CEO (Hambrick and Fukutomi
1991; Huson et al.
2004; Salancik and Pfeffer
1980). Their success record confirms their course of action. They do not see any inducement to challenge or even to change the strategy. This might even lead to a certain kind of overconfidence (McClelland et al.
2010; Hambrick and Fukutomi
1991; Miller
1991) but at the least a high CSQ.
Hutzschenreuter et al. (
2012) challenge this argumentation and question the validity of the assumption of the CEO life cycle theory
3 that long-tenured CEOs are less like to initiate strategic change. Usually, a long CEO tenure is only possible if the CEO is successful and is responsible for good firm performance. Firm performance, however, is dependent on the firm’s strategic positioning within its external environment; when environmental conditions change, the firm’s strategy needs to be realigned (Pfeffer and Salancik
1978; Geletkanycz and Black
2001). To continuously realign a firm’s strategy to changing environmental conditions, the CEO needs a low CSQ that causes him or her to question and challenge the firm’s current strategic positioning. The experience accumulated over the long CEO tenure, as well as the respective knowledge and discretion, can be an advantage when positioning the firm for future challenges. Following this argumentation, Hutzschenreuter et al. (
2012) propose that long tenure might not stand for strategic rigidity but rather for an ongoing willingness to continuously initiate strategic change. A more detailed comparison and some deeper analyses of both related hypotheses will be made when presenting our results in the Sect.
4.2.
To more precisely analyze the relationship between CEO succession and strategic change, researchers have focused on and gained insights into the differences between inside and outside successors (Rowe et al.
2005; Helfat and Bailey
2005; Zhang and Rajagopalan
2010). Outside successors are believed to initiate more change than internal successors (Kesner and Dalton
1994; Friedman and Saul
1991; Wiersema
1992). Again, explanations of this asymmetric change are found frequently in mental cognition arguments such as CSQ. The arguments of responsibility for and psychological and emotional investment in prior courses of actions could hold true for inside successors to some extent. Like incumbent CEOs, inside successors are expected to succumb to self-justification. As leaders with exposed positioning, for example, as members of the board, they also have responsibility for major strategic decisions made in the past (Wiersema
1992; Wiersema and Bantel
1992). A low CSQ and a high willingness to undertake radical changes would imply abandonment of structures they implemented themselves. In contrast to outside successors, inside successors share at least a certain amount of experience and knowledge with the former CEO. Interaction, discussions, and mutual decision-making create internally shared perspectives (Pfeffer
1983). The result is a “social construction of reality” (Burrell and Morgan
1979; Hambrick et al.
1993), making it difficult for the members of the TMT or, more specifically, the inside successor, to consider alternative views (Pfeffer
1983) or to envision anything other than the status quo (Hambrick et al.
1993). In addition, due to socialization and self-selection, individuals who are successful and move up in the hierarchy of an organization become convinced of the correctness of the organization’s view (Hambrick et al.
1993). Inside successors have invested a lot and fought for years to achieve their outstanding position and to be selected as CEO. Inside successors have been judged appropriate for the position of CEO, as internal successors. In contrast to outside successors, they stand for and represent the firm’s current strategic positioning. Thus, they have more to lose than to gain when initiating strategic change and are committed to the status quo (Hambrick and Fukutomi
1991; Hambrick et al.
1993). We assume that these differences between inside and outside successors manifest in differences of their CSQ. In contrast to inside successors, outside successors reveal a lower CSQ and greater impetus to undertake strategic change. We hypothesize as follows:
The reason for succession is the second crucial characteristic of CEO successions in the context of CSQ. The degree of a new CEO’s commitment to the firm’s current strategy is influenced by the reasons for the CEO’s appointment. Frequently, forced CEO turnovers are intended to overcome organizational inertia (e.g., Furtado and Rozeff
1987) and improve shortcomings that result in poor performance (e.g., Huson et al.
2004; Rowe et al.
2005). Firms likely select candidates they believe are not committed to the existing strategy, providing the necessary mind-set for the intended turnaround. New CEOs are often appointed with a mandate to take certain actions (Romanelli and Tushman
1994; Hambrick and Fukutomi
1991). This mandate argument becomes more valid when the new CEO assumes the office after a forced CEO dismissal. Expectations from the board of directors or shareholders and an explicit change mission are more likely when the former CEO has been dismissed (Hambrick and Fukutomi
1991). As Gordon and Rosen (
1981: p. 239) argue, “Newly appointed leaders do not function totally independently of their sponsors and of how those around them expect them to function.” Therefore, we assume that these expectations affect the successor’s mind-set and increase the probability that the new CEO will question the current course of action. Previous research provided evidence that external factors, such as firm performance, induce CEOs to challenge the current course of action and thus shape CSQ (Hambrick et al.
1993; McClelland et al.
2010). In the same vein, a mandate for change will have similar effects on the CEO CSQ. In long and intensive discussions with the new CEO, the board of directors will outline their view on the current situation and explain their arguments for a necessary strategic change. Taking the concerns of the board of directors seriously, the new CEO will at least evaluate these arguments and critically analyze the situation. The discussion with the board of directors, their insights, and information provided should increase the probability that the new CEO critically assesses the situation and also comes to the conclusion that the strategy needs to be adapted, thus revealing a low CSQ. Without such a mandate for change, the motive and evidence to critically challenge the current strategy will be lower, and thus the CEO CSQ might be higher.
In contrast, a voluntary turnover generally happens when the incumbent CEO reaches a certain age or after a predefined period. The fact that the outgoing CEO was able to fulfill his or her contract and was not forced to leave office up front can be interpreted as a signal of shareholder satisfaction. The new CEO takes office in a well-positioned firm and thus has no direct reason to actively question the current strategy. When taking office, the new CEOs will believe that they were selected on the basis of the appropriateness of their abilities to the firm’s current situation (Hambrick et al.
1993; Hambrick and Fukutomi
1991), fostering their commitment to the current strategy. Therefore, we expect the following: