Performance feedback and problemistic search: The moderating effects of managerial and board outsiderness

Highlights

• Managers and board members influence problemistic search driven by underperformance.

• Outside-experienced managers increase a firm's R&D intensity in response to underperformance.

• Outsider-rich board also increase a firm's R&D intensity in response to underperformance.

• The effect of outside-experienced managers on performance feedback is substituted by outsider-rich board.

Abstract

Extending the research on performance feedback and problemistic search, which theorizes that firm performance below the aspiration level triggers organizational search behaviors, this study examines how the inside-outside distinction of the firm management team and board members can influence the allocation of organizational attention to the performance feedback process. A longitudinal study of Korean manufacturing firms demonstrates that while a firm management team's outside experience intensifies the firm's R&D investment in response to underperformance, this effect is substituted by the presence of outside directors on the board. Our results indicate that both managers and board members can have notable influence on performance feedback and suggest that performance feedback research should examine the factors that affect the attention processing of key decision makers.

Introduction

The behavioral theory of the firm (Cyert & March, 1963) suggests that a firm's response to performance feedback is a key mechanism of organizational change and adaptation (Levinthal & March, 1981). Since organizational search was first theorized as a response to performance evaluations, the literature has developed the idea of “problemistic search” (Cyert & March, 1963): decision makers engage in various forms of organizational search, such as strategic change, technological search, and risk taking, when problems emerge from below-aspiration firm performance (e.g., Alessandri & Pattit, 2014; Chen & Miller, 2007; Greve, 1998, Greve, 2003a, Greve, 2003b; Makarevich, 2018; Vissa, Greve, & Chen, 2010). Recent research has begun to further elaborate on this theoretical mechanism by studying its moderating factors, including firm size (Audia & Greve, 2006; Greve, 2011), organizational form (Vissa et al., 2010), internal governance (Gaba & Joseph, 2013; Sengul & Obloj, 2017), macroeconomic growth (Deephouse & Wiseman, 2000) and cross-country institutional differences (O'Brien & David, 2014). Despite these efforts to examine organizational and environmental factors, however, we still have a limited understanding of the heterogeneity in decision-making, whereby decision makers' experience can affect their allocation of attention to performance feedback.

Given that the behavioral thesis is built on mental constructs such as bounded rationality and cognitive myopia (Cyert & March, 1963; Levinthal & March, 1993), it is surprising that the performance feedback research has understudied the attention processing of decision makers (Ocasio, 1997). While most previous studies conceptualize performance feedback as a motivational driver for change (e.g., Audia & Greve, 2006), it overlooks the fact that performance feedback is itself a stimulus or a signal that requires focused attention by decision makers to function as a driver of change. Extant research has assumed that cognitive limitation is a propensity of decision makers rather than exploring how specific features of decision makers' experience can shape their cognitive and behavioral orientations, which in turn can affect how they allocate their attention to performance feedback.

To address this research gap, we investigate how decision makers' experience can affect their attention allocation in response to underperformance in the context of the R&D investment of manufacturing firms. We focus on R&D investment as an important form of organizational search, as this investment involves an irreversible and risky but potentially profitable search to improve product development and innovation capability (Kor, 2006). Because the R&D investment of manufacturing firms has been widely investigated in the extant literature on performance feedback (Chen, 2008; Chen & Miller, 2007; Greve, 2003b; Vissa et al., 2010), our examination of R&D investment allows comparability with previous research. In this study of the R&D investment of manufacturing firms, we propose a particular mechanism in which decision makers' attention to performance varies with the origin of their experience, i.e., the extent to which their experience comes from outside firm boundaries. The outside experience of decision makers has been the subject of theoretical interest in upper echelons research (see the review by Finkelstein, Hambrick, & Cannella Jr., 2009). Outside experience, as opposed to internally accumulated experience, connects decision makers cognitively and behaviorally to external entities beyond the focal firm, playing an important role in shifting decision makers' attention processing. By linking performance feedback to the upper echelons literature (Cho & Hambrick, 2006; Finkelstein et al., 2009; Hambrick & Mason, 1984; Zhang & Greve, 2018), we propose that the origin of decision makers' experience is an important source of variation in organizational attention processing.

In doing so, we examine two key decision-making groups: the management team, which comprises strategic formulators/implementers, and the board of directors, which is a monitoring/governing body. While the performance feedback literature rarely differentiates among decision-making groups and often assumes that executives are key decision makers, the corporate board is also a crucial intervening force, especially in the context of poor performance. Given formal authority to approve major initiatives, to evaluate managerial performance, and to control managerial compensation, the board of directors plays a crucial role in management monitoring (Fama & Jensen, 1983; Finkelstein & Hambrick, 1996; Mizruchi, 1983) and exerts a significant effect on the firm's strategic choices (Forbes & Milliken, 1999; Westphal, 1999; Westphal & Fredrickson, 2001). Thus, it is important to investigate the roles of both the management team and the board in the performance feedback process and to explore their interaction in the decision-making process (Desai, 2016; Kor, 2006; Tuggle, Sirmon, Reutzel, & Bierman, 2010). In this study, we examine how the management team can jointly interact with board monitoring in directing organizational attention allocation to performance shortfalls.

We test our theory using data from a set of statutory audited firms in the Korean manufacturing sector from 1992 to 2005. Korean firms used to develop internal labor markets by practicing lifetime employment and operating as a somewhat closed system in which manager sourcing was dominated by internal promotions (Kye, 2008). However, since the 1990s, there has been increasing movement of managers across firms, leading to significant variation in the managerial experience of insiders versus outsiders (Shin & Im, 2011). Furthermore, modern corporate governance practices, including the appointment of outside directors to the board, have been diffused and adopted in this period. In this empirical Korean context, we examine how the outsiderness of key decision-making groups, i.e., the management team and the board of directors, may influence the relationship between performance feedback and R&D investment. By doing so, we aim to advance the performance feedback theory by elaborating on how decision makers' attention processing is shaped by their experience (Greve, 1998, Greve, 2003a; Zhang & Greve, 2018) and to extend previous research linking management and board characteristics with strategic outcomes (Goodstein & Boeker, 1991; Jensen & Zajac, 2004; Tushman & Romanelli, 1985).