Background—What theory reveals
Research involving Upper Echelons Theory (UET) in business has provided executives with a novel approach to improving corporate efficiency. Interestingly, unexpected patterns in data revealed valuable information for organizations regardless of the industry. However, researchers have had mixed and inconclusive results to support UET. Primarily, causal factors from mixed sample populations skewed the results. Furthermore, subtle changes to the original interpretation of the UET altered the fundamental scope of application. As an example, sampling multiple industries and hierarchies as singular entities led to results that assumed the need of other variables or theory for consideration.
Hambrick encouraged researchers to examine the black box or psychological behaviors of the upper echelons in strategic decision making. Strategic decision making requires interactive relationships of individuals to enhancing the exchange of information and risk taking at a cognitive level. The difficulty in studying this phenomenon is limited access and openness of individuals that could introduce research bias leading to unreliable findings.
Empirical evidence in research has yet to provide results that are usable. The link between cognitive and demographic diversity may be plausible in complementing each other.
Complementing theories such as agency, social identity, behavioral and evolutionary have introduced a holistic approach to studying board’s diversity, composition, dynamics, structure, and roles. In addition, contingency, resource dependence, stewardship, stakeholder, and board power theories have traditionally been used as different types of theoretical frameworks. The above-mentioned theories have a relational component that is driven by individual’s experiences and socialization. See Figure 2.1, representing the research theoretical framework that complements UET.
Figure 2.1 Research theoretical framework and scope
In this section, we explore various aspects of UET as it relates to women having an important role on corporate boards.
We also present a summary of UET and some results of recent business research on this topic concerning the health care sector.
Hambrick and Mason suggested that UET for top management teams could predict organizational outcomes such as strategic choices and performance levels. In turbulent environments, a challenge for upper echelons is to develop new management processes. A strategic performance level such as organizational survival could benefit from team heterogeneity.
Upper echelons research is multileveled and involves individuals, teams, organizations, and their environments. However, research in UET lacked multilevel theory and proper methodology, resulting in studies that focused on a single industry, did not use multiple data sources skewing results, did not have clear definitions of variables used and interpreted results independently. Consequently, a match between theory, measurement, and statistical analysis essential in research on multiple levels was absent.
The upper echelon characteristics are independent variables as causes of strategic choices that lead to organizational performance. The basis of UET propositions is that dependent variables are strategic choices for performance levels. Gender, an independent variable, male or female, when applied to UET removes research bias.
Hambrick and Mason developed 21 propositions characterizing UET’s dependent variables that correlated with the independent variables of age, functional track, career experiences, formal education, socioeconomic background, financial position, and group heterogeneity.
Propositions related to age are as follows:
1. Firms with young managers will be more inclined to pursue risky strategies than those firms with more mature managers. They further indicate that specific forms of risk include unrelated diversification, product innovation, and fiscal leverage.
2. Firms with younger managers will experience greater growth and variability in profitability from industry average than will firms with more mature managers.
Functional track propositions are as follows:
3. A positive association exists between the degree of output-function experience of top managers and the extent to which the firm emphasizes outputs in its strategy; specifically, indicators of an output emphasis include product innovation, related diversification, advertising, and forward integration.
4. A positive association exists between the degree of throughput-function experience of top managers and the extent to which the firm emphasizes throughput in its strategy, which includes indicators of output like automation, plant and equipment, and backward integration.
5. The degree of output-function experience of top managers will be positively associated with growth.
6. In stable, commodity-like industries, throughput-function experience will be positively associated with profitability.
7. In turbulent, differentiable industries, output-function experience will be positively associated with profitability.
Hayes and Abernathy (1980) suggested adding the following:
8. The degree of peripheral-function experience of top managers will be positively related to the degree of unrelated diversification in the firm.
9. The extent of peripheral-function experience of top managers will be positively related to administrative complexity, which includes formal planning systems, coordination devices, budgeting, and incentive compensation schemes.
Career experience proposition hypotheses are as follows:
10. Years of inside service by top managers will be negatively related to strategic choices involving new terrains like product innovation or unrelated diversification.
11. For an organization in a stable environment, years of inside service will be positively associated with profitability and growth.
12. For an organization facing a severe environmental discontinuity, years of inside service will be negatively associated with profitability and growth.
Propositions related to formal education are as follows:
13. The amount, but not the type, of formal education of a management team will be positively associated with innovation.
14. There is no relationship between the amount of formal management education of top managers and the average performance (either in terms of profitability or growth) of their firms. However, firms whose managers have had little formal management education will show greater variation from industry performance averages than will firms whose managers are highly educated in management.
15. Firms whose top managers have had substantial formal management education will be more complex administratively than will firms whose managers have had less such training.
Propositions related to socioeconomic background are as follows:
16. Firms whose top managers come disproportionately from lower socioeconomic groups will tend to pursue strategies of acquisition and unrelated diversification.
17. Furthermore, such firms will experience greater growth and profit variability than will firms whose top managers come from higher socioeconomic groups.
Propositions related to financial position are as follows:
18. Corporate profitability is not related to the percent of shares owned by top managers, but is positively related to the percent of the total income that top managers derive from the firm through salaries, options, dividends, and other benefits.
Group heterogeneity propositions are as follows:
19. Homogeneous top management teams will make strategic decisions more quickly than will heterogeneous teams.
20. In stable environments team, homogeneity will be positively associated with profitability.
21. In turbulent, especially discontinuous environments, team heterogeneity will be positively associated with profitability.
In summary, three distinct propositions were related to group heterogeneity:
1. Homogenous top management teams will make strategic decisions more quickly than will heterogeneous teams.
2. In stable environments, team homogeneity will be positively associated with profitability.
3. In turbulent, especially discontinuous, environments, team heterogeneity will be positively associated with profitability.
Organizational survival, a strategic performance level, is a challenge for upper echelons to develop new management processes.
In the health care environment with the current situational condition, boards are predominantly male and hospital performance shows minimal efficiencies. Although several efficiency initiatives are occurring in hospitals such as Lean Processes1, greening2, hiring freeze, salary freeze, pay for performance, waste management, and wait-times management, those initiatives are focused on reducing spending and differentiating hospitals based on the patient’s experience.
The health care leadership of the future is in crisis. New paradigms are influencing the recognition for changes to board composition and diversity.
Women have been on the frontline of health care for more than 375 years in Canada since the first hospital opened in Quebec to present. UET rationalizes the assimilation of females on male-dominant boards because of the benefits of differing perspectives and additional associations.
In this section, we argue that the expected performance of hospitals in Canada is to provide quality health care that is equitable and affordable.
Board accountability, mandated by government, is changing the landscape of hospital services with an emphasis on customer service.
The Ontario Ministry of Health and Long-term Care (MOHLTC) requires transparency of public hospitals. Transparency enables the public to access pertinent information from annual reports, strategic plans, financial statements, wait times, and others to choose where to receive patient care.
Nevertheless, boards are transitory, and hospital system characteristics are historical. Candidates who meet board qualifications with required knowledge and skills could change the effectiveness of hospital performance. However, hospital boards are regulated under the Public Hospitals Act that comprises best practices for hospital governance, including board composition. In 2004, the MOHLTC-funded report Hospital Governance Accountability in Ontario, commissioned by the Ontario Health Association (OHA), assessed hospital governance across the province. The results show that the competency levels in technology and legal skills are underrepresented by 70 percent and 50 percent of respondents respectively.
The Hôtel-Dieu de Québec, located in Montréal, Quebec, was the first and oldest hospital in Canada, established in 1639; this hospital is run by an order of nuns, the Religious AugustinesHospitalières of St. Joseph. However, decision making was by the priesthood. Historically, hospital boards were predominantly male.
More than 375 years later, males dominate the running of hospital boards in Ontario. This is a conundrum, because we observe the dominant presence of females in daily hospital operations, at the frontline of patient care, and on senior management teams in hospitals located in Toronto. Although a lack of female corporate directors in Canada exists, women are managing to break the gender barrier of all-male boards of directors.
The results from a study of 193 Canadian firms of the Financial Post Directory of Directors for 2004 indicated that women appointed to all-male boards between 1996 and 2004 have specialized knowledge and skills. They have firm-specific knowledge either as insiders or as support specialists with a specific expertise in areas such as finance or legal. Diversity is a near-universal value in the corporate world, but the upper tiers of management remain stubbornly homogeneous.
Ibrahim, Angelidis, and Howard (2011) suggested in their empirical study of board of directors with or without health care background the composition of hospital boards with members having a health care background are less likely interested in strategic issues. However, expertise in financial fiduciary, legal, and regulatory requirements are not gender-based, rather they represent the necessary skills for effective decision making in the current environment.
Although board composition has remained stagnant, board member development needs to focus on diversifying its members’ expertise and skills. Specifically, board members having various perspectives to complex environmental challenges encourage more efficient participation in processes related to strategic decision-making (Ford-Eickhoff, Plowman, & McDaniel Jr., 2011).
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1Lean Processes
Womack and Jones recommend that managers and executives embarked on lean transformations think about three fundamental business issues that should guide the transformation of theentire organization:
- Purpose: What customer problems will the enterprise solve to achieve its own purpose of prospering?
- Process: How will the organization assess each major value stream to make sure each step is valuable, capable, available, adequate, flexible, and that all the steps are linked by flow, pull, and leveling?
- People: How can the organization insure that every important process has someone responsible for continually evaluating that value stream in terms of business purpose and lean process? How can everyone touching the value stream be actively engaged in operating it correctly and continually improving it? (Source: Lean Enterprise Institute—www.lean.org/WhatsLean/)
2Greening is the process of transforming artifacts such as a space, a lifestyle, or a brand image into a moreenvironmentally friendlyversion (i.e., greening your home or greening your office). The act of greening involves incorporating green products and processes into one’s environment, such as thehome, workplace, and general lifestyle. (Soucre: Wikipedia https://en.wikipedia.org/wiki/Greening)