RISKY DECISION-MAKING: THE ROLE OF TOP ...

RISKY DECISION-MAKING: THE ROLE OF TOP MANAGEMENT TEAMS’ DIVERSITY, SELFMONITORING, AND INTERDEPENDENCE Following a resource-action framework, this study proposes to disentangle the mechanisms that firms use to lower their uncertainty in alliances: social contact and salience. We first investigate how racial diversity and selfmonitoring in TMTs affect alliance decisions. Second, we consider how salience made relevant by TMT’s structural interdependence affects the process of translating social effects of racial and psychological attributes into alliance decisions. We hypothesize a U-shaped association between TMT racial diversity and alliance exploration propensity and a positive association between TMT self-monitoring and alliance exploration propensity. The salience imputed by high TMT structural interdependencies increases the effects of diversity but lowers the effects of self-monitoring. This study contours stricter boundaries for the exploration decision-making processes in the alliance context. INTRODUCTION Numerous studies in the learning literature suggest that in competitive environments firms have to tap into external knowledge sources in order to be able to innovate faster or better than competitors (Laursen and Salter, 2006). One of the most used ways to access external sources of knowledge is entering alliances. In particular, firms that use alliance partnerships to innovate have a higher chance to reduce competitive uncertainties (Burgers, Hill, and Kim, 1993), enable efficiencies (Kogut, 1988), improve their market share or learn (Gulati, 1998; Inkpen and Tsang, 2007; Lavie, 2006). However, the decision to enter an exploratory alliance bears high risks for opportunistic behavior, free riding, or knowledge expropriation (Inkpen and Tsang, 2007). In the light of the risks that external exploration carries, the role of the top management team (TMT) members making these decisions is crucial. So far, plenty of attention has been awarded to the performance outcomes of strategic alliances and less attention has been paid to the factors that lead to or affect the decision to enter these collaborations (Tsang, 1998). Thus, we embark in a quest to identify what characteristics of the TMT members may affect these decisions. Our main arguments assert that demographic and psychological diversity of TMTs affect firm’s disposition to enter partnerships for purposes of exploration. The setting of this study is the exploratory alliance decision as it is much riskier than other decisions. External exploration requires trust, sharing tacit knowledge, and it also takes longer time frame to cooperate to see results. We believe that TMTs’ decision to enter such a risky endeavor depends on two main mechanisms: TMT members’ ability to establish social contact and their ability to access resources. Putting these thoughts together, we argue that the mechanisms of social contact and information access are positively associated with risky choices. Responding to previous calls for contingency effects in diversity research (Joshi and Roh, 2009), we approach the concept of TMT structural interdependence as an important contextual factor (Hambrick, Humphrey, and Gupta, 2015). Indeed, findings in the field of diversity research have been mixed. TMT diversity seems to matter to the degree that TMT members interact and exchange information with one another. The way TMT is fundamentally structured may affect how its members interact and how much their demographic and psychological characteristics matter to the decisions they make. While some TMTs may be structured in ways that allow for autonomous action, other TMTs are structured such that members develop high salience for one another. Higher salience makes decisions to be more carefully weighted, helps information integration and exchange, and makes the advantages of diversity matter more. In this study we target to answer two important questions. How do TMTs’ demographic and personality characteristics affect TMTs’ decision to enter exploratory alliances? How does the interdependence imposed by TMTs’ structure influence these effects? Given the importance of firms’ alliance choice in highly competitive industries, it is critical that we further explore the relationships between TMT’s characteristics and firms’ choices.

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Risky Decision-Making: The Role of TMTs’ Diversity, Self-Monitoring, and Interdependence

THE ROLE OF TMT’S CHARACTERISTICS AND STRUCTURE IN ALLIANCE DECISIONS Strategic alliances have been proven critical for the performance and survivability of firms in growing or changing environments. Building on the exploration/exploitation paradigm (March, 1991), learning researchers showed that firms’ motivation to search external knowledge sources is based on an increasing need for competitiveness. In growing environments, exploration alliances play a special role in providing firms with information that helps them renew their competitive advantage. The decision to enter an exploratory alliance is often guided by a need to grow that is beyond the capabilities owned by a single firm. Exploration alliances require a profound exchange of tacit knowledge that makes them prone to opportunistic behavior and subject to the expropriation and therefore riskier than exploitation alliances. Because exploratory alliances involve more intimate relationships with partners, longer or repeated contracts, and higher investments, the decisions regarding the composition of alliance portfolios represent the heart of recent strategic interest (Ozcan and Eisenhardt, 2009; Schilke and Goerzen, 2010). In the 1990s, firms in high-growth industries were involved on average in over 30 alliances simultaneously (Lavie, 2007). In the last decade, software firms may have as many as 250 alliance partners in a year. Thus, the choice to enter exploration alliances became increasingly important for firms’ survival, with firms’ TMTs playing the crucial role. Top management teams’ diversity. Diversity research although abundant, offered us both conflicting (De Dreu, Nijstad, and van Knippenberg, 2008; Tajfel and Turner, 1986) and contextual findings (Joshi and Roh, 2009; Richard, Murthi, and Ismail, 2007). Although no research to date has investigated the effects of TMT’s race diversity on firms’ propensity to enter exploration alliances, there has been some research showing that strategic choice is a function of firm’s leaders (Golden and Zajac, 2001; Wiersema and Bantel, 1992). Taking this challenge further, we draw on Blau’s theory of heterogeneity (Blau, 1977) to argue that various degrees of racial differences within the TMT affect firms’ propensity to explore externally differently. Blau’s theory of heterogeneity argues that groups in which members have more opportunities to socialize face lower cultural barriers with regards to action and thus develop more relations. In homogeneous groups, members are highly similar and thus the group is more cohesive in terms of communication and positive social relations. Groups with low diversity are more homogeneous. Members share perceptions, develop positive feelings of inclusion in the group, and share unified views that they develop together (Dahlin, Weingart, and Hinds, 2005). As heterogeneity increases, subgroups are likely to form, and communication barriers may impede the flow of information between different subgroups. With further increases in heterogeneity, groups become diverse enough to encourage members of different subgroups open the communication channels. According to this theory, a U-shape relationship exists between diversity and firm level outcomes. Self- monitoring in top management teams. Frequently overlooked because of measurement difficulties, deeplevel traits such as personality can have a powerful influence on individual- and firm-level variables. Selfmonitoring in particular, is concerned with individuals’ “active construction of public selves to achieve social ends” (Gangestad & Snyder, 2000: 546). Self-monitoring theory claims that individuals shape the social situations according to their inner personality. Some people are more capable to modify their behavior according to a wide variety of social situations (high self-monitors) while others are less capable to do so (low self- monitors). High selfmonitors depend on the social cues they receive from others and guide their behavior accordingly. Being more adaptable in behaviors, high self-monitors usually resolve conflicts through collaboration, reciprocate actions, transfer information, and focus more on others than on themselves. Low self-monitors stay consistent in their behaviors, care less about the public appearance, and are less motivated to fit others expectations (Ickes, Holloway, Stinson, and Hoodenpyle, 2006). Differentiating between the two is important in the context of TMT because behavioral adaptability conferred by one category but not by the other affects the collaboration, information transfer, and attention within the TMT with direct effects on firm’s decisions (Kilduff and Day, 1994). Structural interdependence in top management teams. The effects of racial and personality-level characteristics of the TMT on firm’s decisions may be contingent on how the firm is structured in terms of hierarchy and rewards. Firms’ structure influences the communication and relationships among its members and further this affects how the organization operates and thinks. The concept of interdependence is the degree to which individuals influence each other (Hambrick, Humphrey et al., 2015). These interdependencies have implications on how individuals integrate knowledge, how they exchange information, whether they pay attention to other team members’ actions or not, and whether or not they engage in collective decision-making. The higher the interdependencies, the more salient other team members become with respect to their colleagues. Higher TMT interdependence builds a more cohesive TMT, with positive indirect effects on firm’s strategic choices.

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There are three facets of structure shaping interdependencies within TMT. Horizontal interdependence is reflected in the way the organization is functionally or divisionally structured. While a divisional structure allows for autonomy and minimizes the interactions between department heads, a functional structure allows for higher interdependencies among departments’ heads. Vertical interdependence refers to how the hierarchy assigns power and different titles to each executive. When hierarchical distinctions are minimal, TMT members see each other as equal and develop a great sense of peer salience. But if hierarchical distinctions are clear, each TMT member will form sub-groups separating the members that are salient to him/her from those that are not salient to him/her. In groups with high vertical interdependence, heterogeneity will have a higher impact on decision making because all members will be equally salient to each other and each person’s actions will hold significance to the others. Reward interdependence refers to how much personal compensation of each TMT member is dependent on others in the same unit instead of being dependent on the overall performance of the firm. When rewards are based on a common fate, TMT members will be more mindful of the performance of others because their own reward depends on it. As a result, the effects of diversity will carry a higher weight in the decision-making process. HYPOTHESIS FORMULATION The decision to explore external knowledge through alliances involves risk and uncertainty about whether alliance partners will behave opportunistically or not. We claim that there are two essential mechanisms with potential to lower the uncertainty of a risky decision and improve the likelihood of entering external exploration: social contact and resource access. Teams that communicate well are more likely to take decisions involving risk compared to teams that lack social interaction. According to Blau’s theory of heterogeneity (1977), opportunities for social contact are more numerous in racially homogeneous groups but not in moderately heterogeneous groups. TMTs possessing characteristics that favor social contact are better at transferring information among them (Miller and del Carmen Triana, 2009). As such, racially homogeneous TMTs are more likely than moderately diverse TMTs to develop positive social relationships, transfer knowledge, coordinate actions and decisions, and take faster decisions. Racially heterogeneous groups benefit from having the best access to various information and perspectives (Auh and Menguc, 2005), favoring alliance exploration through the second mechanism: resource access. Broader access to resources helps racially diverse TMTs stay better informed, allows for more informed decisions, and lowers the risks associated with external exploration. For moderately diverse teams, having access to resources and information is futile and it may even create more conflict among various subgroups. Overall, social contact favors alliance exploration for racially homogeneous TMTs and resource access favors these decisions for racially heterogeneous TMTs. For moderately diverse TMTs, access to resources under the restrictions imposed by limited social contact creates dissensions among racial subgroups that lower TMTs’ willingness to engage in risky decision-making. This translates into a U-shape relationship between racial diversity and alliance exploration in which moderately diverse teams not only undertake less risk compared to homogeneous or heterogeneous teams but also become more averse to external exploration. H1: racial diversity in TMTs is curvilinearly (U-shaped) associated with exploratory alliance behavior, such that heterogeneous and homogeneous TMTs have a higher propensity for alliance exploration compared to firms with moderate levels of TMT racial diversity. High level of TMT self-monitoring mainly lowers the uncertainty associated with external exploration through the mechanism of risk mitigation. High self-monitoring TMTs are more sensitive to what happens in the external environment and more likely to use informational cues from the social environment to lower the uncertainty faced in exploratory partnerships (Flynn, Reagans, Amanatullah, and Ames, 2006). They are less likely to see external exploration as a risky endeavor and are more comfortable with changing situations compared to low self-monitors which see the environment as a constraint to their personality rather than a source of information (Bizzi and Soda, 2011). Because high self-monitoring TMTs develop more positive social identities, they communicate better, fostering deep friendship relations (Toegel, Anand, and Kilduff, 2007), increase the cohesion of the group, take decisions faster, and are good conflict solvers (Flynn, Reagans et al., 2006). Moreover, they are more comfortable with risk, perceive less risk in their choices, and communicate better and faster within and across the organization. Compared to high self-monitoring teams, low self-monitoring teams are more inflexible, lack social contact and are likely to be more risk averse. We therefore hypothesize that high TMT self-monitoring is an important factor that makes risky decisions seem less risky while improving collaboration and decision speed. H2: Self-monitoring in TMTs is positively associated with alliance exploration propensity, such that high levels of TMT self-monitoring are more strongly associated with a higher involvement in exploration alliances.

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THE MODERATING ROLE OF TMT INTERDEPENDENCE The role of interdependence on encouraging social contact In competitive environments, firms are pushed to explore beyond their boundaries if they want to survive. An increase in TMT’s interdependence boosts the likelihood that these firms choose in favor of alliance exploration because members become more salient about each other’s actions. The salience mechanism boosts the effects that diversity has on risky decision-making, with homogeneous and heterogeneous TMTs becoming more inclined to engage in alliance exploration and moderately diverse TMTS becoming even less inclined towards risky decisions. Salience aligns TMT members’ goals, making them more focused on working together to maximize common returns. Since diversity matters to the degree to which individuals communicate to each other (Hambrick, Humphrey et al., 2015), we hypothesize that higher interdependence increases the alignment of interests boosting collaboration, support, information sharing, and use of knowledge. Because moderate levels of racial diversity create faultlines between different subgroups weakening social contact, higher interdependence may lead to more prominent attributions of guilt to the out-groups and success to the ingroup. We argue that TMT interdependence makes the Ushaped relationship between diversity and risky decisionmaking steeper as seen in Figure 2. Overall, we hypothesize that the effect of team interdependence as reflected by the horizontal, vertical, and reward structures will enhance the effects of diversity on exploration alliance’ involvement such that teams which communicated well before will communicate even better and teams which suffered from social dissension will suffer even more as they become more salient about out-group’s actions. H3: The greater a TMT’s degree of interdependence, the more pronounced the U-shaped association between TMT diversity and alliance exploration propensity. The role of interdependence on discouraging exploratory behavior of high self-monitors To the degree that TMT self-monitoring affects firm’s involvement in external exploration, TMT structural designs that favor communication among executives should attenuate the risks high self-monitors are willing to undertake. For high self-monitors, social situations carry a very important weight that affects how these individuals behave. Because they attach high meaning to how others see them, higher interdependence constrains high self-monitors to a narrow range of acceptable behaviors (Barrick, Parks, and Mount, 2005). Individuals with adaptive behaviors look to please others and to create favorable impressions in their group. Higher interdependence makes individuals more dependent on each other. The more dependent they are on others, the more likely high self-monitors are to seek less risk because risk has a higher chance to endanger their acceptance when others depend on them. Higher interdependence forces high self-monitors to engage in behaviors that please a higher number of individuals and these behaviors will be tailored towards less risk. Under high interdependence, high self-monitors find themselves restricted to a smaller and more conservative pool of acceptable behaviors to choose from. As a result, their freedom to apply the information they have access to is limited by how this action may affect others. We therefore argue that high self-monitoring TMTs make less risky decision choices when the level of TMT interdependence is high. H4: The greater TMT’s degree of (a) horizontal interdependence, (b) vertical interdependence, and (c) reward interdependence, the weaker the positive association between TMT self-monitoring and alliance exploration propensity. PROPOSED METHODOLOGY Sample and data. For this study we identify industries with active alliances. We select telecommunication industry (SIC 481), software industry (SIC 737), business services industry (SIC 7379, 7389). This diverse data set gives us the opportunity to observe firms’ behavior and motives in alliance formation in various high growth industry contexts. Also, firms in technology intensive industries (6 SIC codes out of 8 in our data set) are more likely to have racially diverse TMTs. In order to eliminate possible confounding effects from other industries, we consider only within-industry group alliances meaning that we keep only those alliances that members of our industries enter with at least one other member of our selected industry group (Yang, Lin, and Peng, 2011). In order to avoid possible inconsistencies introduced by the Sarbanes-Oxley Act of 2002, we retrieve data for the period after the introduction of this act, leaving a one-year delay for the new regulation to settle. Therefore, we cover years 2003-2012 inclusive.

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Measures Alliance exploration. Our dependent variable is firms’ involvement in exploratory alliances. We measure it with an alliance exploration index that assumes that exploration and exploitation are two separate activities that inhibit each other because they fight for the limited pool of resources that firms have (Lavie, Stettner, and Tushman, 2010; Uotila, Maula, Keil, and Zahra, 2009). The operationalization of exploration/exploitation along a single continuum is consistent with previous arguments that balancing both activities is most beneficial (March, 1991). Following Rothaermel and Deeds (2004), we define alliances involving R&D activities as exploration (coded 1), those involving resale, licensing or production activities as exploitation (coded 0), and those involving a combination of both activities as mixed (coded 0.5). Then, we pool all alliances in firm’s portfolio over a five-year moving window (Kogut, 1988) to compute an alliance exploration index. This index is the average percentage of exploration in the total number of alliances formed in the last five years. For example, a firm that formed five alliances between 2008 and 2012, three exploratory alliances, one exploitative alliances and one mixed alliance, will have an alliance exploration index of (1+1+1+0+0.5)/5 = 0.7 for the year 2012, showing an exploratory propensity of 70%. TMT racial diversity. Our first independent variable is operationalized using Blau’s heterogeneity index (Blau, 1977) 1 - ∑ 𝑝𝑖2 where 𝑝𝑖 is the proportion of TMT members in each racial category. Blau’s index is a commonly used measure for categorical variables such as race (Bantel and Jackson, 1989), has been widely used in the context of top management teams, and is recommended by diversity researchers as a measure that attributes equal weights to all categories without skewing the distribution favoring any category (Harrison and Klein, 2007; Richard, Murthi et al., 2007). In our sample, the racial diversity index theoretically ranges from 0 to 0.80. TMT self-monitoring. Our second independent variable is operationalized using Snyder and Gangestad (1986) 18-item scale. The TMT self-monitoring measure is obtained by aggregating individual-level items. The aggregation is possible since self-monitoring is a stable personality characteristic that does not change over time and manifests independent from others’ behaviors or treatment of the focal individual. The level of self-monitoring at the TMT level shows the average personality index of the TMT members. The higher this index, the higher TMT’s selfmonitoring. Sample items on the scale that indicate high self-monitoring are “I’m not always the person I appear to be,” “I guess I put on a show to impress and entertain others.” TMT interdependence. Our moderator variable is calculated by standardizing and averaging the following indicators for each TMT–year observation. We adopt the measure proposed by Hambrick, Humphrey et al. (2015). To test H3a and H4a, we measure TMT horizontal interdependence using two items: functional titles and functional structure. Functional titles item is measured with whether the TMT has functional posts (coded 1) or multiple general managers (coded 0) and functional structure is measured with the proportion of executives with titles indicating they are primarily functional managers. To test H3b and H4b we develop a measure for TMT vertical interdependence using two items: number of distinct hierarchical levels and whether the TMT has a COO or not. This measure is reversed such that higher values represent higher interdependence. We operationalize the number of distinct hierarchical gradations with the count of the number of title gradations in TMT (CEO, COO, EVP, SVP, VP) and presence of a COO indicating this additional level in the TMT or not. To test H3c and H4c, we measure reward interdependence with three items: co-movement of bonuses, co-movement of non-cash pay, and payperformance relationship. Co-movement of bonuses reflects the extent to which bonuses of members change similarly for all members of the TMT and is operationalized using coefficient of variation (CoV) for the percentage change in bonus among executives. We average CoV from t-2 to t-1 and from t-1 to t to increase reliability. The formula used is detailed below: 𝐶𝑜𝑉𝑡 = [𝐶𝑜𝑉((𝑡−1)𝑖 −(𝑡−2)𝑖) + 𝐶𝑜𝑉(𝑡𝑖−(𝑡−1)𝑖 ) ]/2 Co-movement of non-cash pay represents the extent to which non-cash pay (stock options and restricted stock grants) of members change in a similar fashion and is operationalized using the coefficient of variation (CoV) for the percentage change in non-cash pay among executives, and finally averaging CoV from t-2 to t-1 and from t-1 to t. The third item for reward interdependence measures the pay-performance relationship or the extent to which TMT members’ pay is related to firm’s performance. This item is operationalized using the proportion of non-cash pay measured as the ratio of TMT’s sum of non-cash pay to total pay. Controls. In order to minimize possible alternative explanations, we include TMT controls for size, average age, and gender composition, member tenure, and education heterogeneity. We add firm performance controls: previous ROA, R&D spending, firm size (measured with log of employees), firm age, alliance experience (the number of alliance partners in last 5 years), and internal exploration (number of patents weighted by citations in last 2 years). To control for time series effect we include alliance event year. To control for inter-industry variation, we add industry dummies based on 4-digit primary SIC code of each focal firm.

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DISCUSSION Contributions. This study has at least three main contributions to various areas of TMT diversity and strategic alliance research. First, we respond to previous calls for considering the contingency effects in diversity research (Van Knippenberg, De Dreu, and Homan, 2004). We theorize that TMT diversity is associated with alliance exploration to the degree that TMT structural interdependence allows or impedes it. Second, we offer additional guidance into how micro level research may be integrated with firm’s strategic decision making. This link is important both for diversity research as well as for alliance research since the exact effects of racial diversity on macro level outcomes are still unclear. Third, we highlight the importance of considering the effects of both observable (race) and unobservable (self-monitoring) characteristics of TMT members. This is important because personality research found considerable variance in the personality-firm outcomes which implies that there may be variables—such as self-monitoring—that are unaccounted for. Limitations and future research. There are a number of limitations to this study that open the way to interesting future research for the fields of strategic management and behavioral research. First, future research may elaborate on our model and include additional characteristics such as TMT functional background or tenure to obtain a more complete representation of the effect of TMT diversity in decision making. Second, the conceptualization of structural interdependence as incorporating three different facets may be better served if future research would look deeper into how horizontal, vertical, and reward interdependence may covary with one another. CONCLUSION In this study we tackle the question “Why are some firms more open to external exploration than others?” Our study shows that firms’ decisions to enter exploratory alliances are associated with the demographic and psychological characteristics of the TMT members and that the effects of these characteristics vary by TMTs’ interdependencies. High and low racial diversity within TMT favors the development of social processes and the use of resources that foster firms’ involvement in exploratory alliances while moderate levels of TMT racial diversity impedes the elaboration of social contacts or use of resources that favor exploratory search. Also, we claim that high selfmonitoring personalities of executives encourage strategies of exploratory search. Lastly, structural interdependence acts as a potent moderator that accentuates the effects of TMT diversity in alliance decisions while it attenuates the effects of personality on risk taking. REFERENCES Auh S, Menguc B. 2005. Top management team diversity and innovativeness: The moderating role of interfunctional coordination. Industrial Marketing Management 34(3): 249-261. Bantel KA, Jackson SE. 1989. Top management and innovations in banking: Does the composition of the top team make a difference? Strategic Management Journal 10(1): 107-124. Barrick MR, Parks L, Mount MK. 2005. Self‐monitoring as a moderator of the relationships between personality traits and performance. Personnel Psychology 58(3): 745-767. Bizzi L, Soda G. 2011. The paradox of authentic selves and chameleons: Self‐monitoring, perceived job autonomy and contextual performance. British Journal of Management 22(2): 324-339. Blau PM. 1977. Inequality and Heterogeneity: A Primitive Theory of Social Structure. Free Press: New York. Burgers WP, Hill CW, Kim WC. 1993. A theory of global strategic alliances: The case of the global auto industry. Strategic Management Journal 14(6): 419-432. Dahlin KB, Weingart LR, Hinds PJ. 2005. Team diversity and information use. Academy of Management Journal 48(6): 1107-1123. De Dreu CK, Nijstad BA, van Knippenberg D. 2008. Motivated information processing in group judgment and decision making. Personality and Social Psychology Review 12(1): 22-49. Flynn FJ, Reagans RE, Amanatullah ET, Ames DR. 2006. Helping one's way to the top: Self-monitors achieve status by helping others and knowing who helps whom. Journal of Personality and Social Psychology 91(6): 1123. Golden BR, Zajac EJ. 2001. When will boards influence strategy? Inclination ×Power= Strategic change. Strategic Management Journal 22(12): 1087-1111. Gulati R. 1998. Alliances and networks. Strategic Management Journal 19(4): 293-317. Hambrick DC, Humphrey SE, Gupta A. 2015. Structural interdependence within top management teams: A key moderator of upper echelons predictions. Strategic Management Journal 36(3): 449-461. Harrison DA, Klein KJ. 2007. What's the difference? Diversity constructs as separation, variety, or disparity in organizations. Academy of Management Review 32(4): 1199-1228.

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