When Top Management Matters (Too Much)
Top Management Teams (TMTs), also known as Executive or Leadership Teams, are groups of senior-level executives responsible for driving a company’s business success by building and executing the strategy. Not only do they come from different functional expertise or divisional areas, but they might also have different hierarchical levels in the company. For instance, in 2021, all members of Johnson & Johnson’s TMT had the same hierarchical level (they were all “Executive Vice Presidents”), while in Walt Disney’s TMTs, members had different hierarchical levels (some were “Senior Executive Vice Presidents,” some “Executive Vice Presidents,” some “Senior Vice Presidents,” and some “Chairmen.” These differences are not neutral but have substantial implications for running the company. With greater structural power, members with higher hierarchical levels are more likely to influence the other TMT members, thereby promoting more centralized decision-making. With greater behavioral integration, TMT members are more likely to collaborate, exchange more and better information and share decision-making. Extant theory suggests the existence of a tradeoff between achieving greater behavioral integration and promoting greater structural power determined by the hierarchical structure of the TMT. More hierarchical levels within the TMT grant power to managers at the higher levels to influence the other members of the TMT, thereby centralizing the decision-making and reducing behavioral integration. Conversely, fewer hierarchical levels reduce the structural power of certain members by favoring behavioral integration within the TMT. This led my coauthor, Can Aktan, and I to conduct a study to explore the determinants of TMT’s hierarchical structures.
Using a sample of 260 S&P 500 firms from 2007 to 2018, we first found that even though TMT sizes remained constant during the years of observation, they became less hierarchical, i.e. more behaviorally integrated. We also saw several factors driving the TMTs’ hierarchical structure changes. On the one hand, we discovered that industry growth, board independence and outsider CEOs reduce the hierarchical distinctions in the top management team. When these distinctions are minimal, members see each other as part of the same social entity and become more salient toward each other, translating into better decision-making processes needed to tackle the challenges introduced by growth, independence or the presence of an outsider CEO. On the other hand, factors such as CEO duality, size and functional diversity of the top management team, board age diversity, firm size, divisionalization, good firm performance and industry concentration make the TMTs more hierarchical. Changes in these factors could lead to different levels of task demands, complexity and uncertainty for various firms’ stakeholders. Therefore, TMT members might be better positioned to manage the task demands, complexity and uncertainty through the structural power granted by higher title grades.
Our findings show that firms react to different contingencies to manage them better. For example, with high industry growth levels, the top management team hierarchy is minimized as it is believed that a more robust behavioral integration is better to cope with the uncertainties and complexities that the industry growth may present. Conversely, when firms face greater market competition, an increase in structural power for decision-makers is believed to be essential for reacting to competitors quickly. Overall, this exploration study suggests that firms’ decision-makers consider the hierarchical structure of their Top Management Team as a key tool to respond to specific contingencies.