How management team traits affect propensity for risk-taking in business

Many studies have explored the relationship between performance and risk taking in business. Research rooted in Behavioral Theory of the Firm (BTOF, 1963) has relatively consistently shown that poor performing organizations are more likely to engage in risk-taking like changes in research and development investments, forming new partnerships, entering foreign markets and implementing strategic divergence.

Kalin Kolev, MBA, Ph.D., Associate Professor of Management at Marquette, wanted to look further into the context in which these decisions are made. In the paper The role of top management teams in firm responses to performance shortfalls,¹ Kolev and his co-author Gerry McNamara, MBA, Ph.D., analyzed the relationship between how much risk top management teams are prepared to take on in relation to the makeup of the team.

Essentially the research combined two theories: the previously mentioned Behavioral Theory of the Firm and Upper Echelon Theory (1984). Upper Echelon Theory is the idea that top executives view their situations through their own perspectives rather than as a neutral analyst. The theory posits that each executive faces challenges with all of their individual experiences, values, personality traits, and therefore strategic decisions must be considered within the context of the person navigating the strategic situation themself.² In other words, you have to understand the decision maker to understand the strategy.

Specifically, Kolev and McNamara were taking into account a few consistently demonstrated conclusions from the two theories. As stated in their paper²:

• According to BTOF, firms compare current performance to predetermined aspiration levels and when performance is below those aspirations firms begin to search for solutions to address the performance gap.
• Negative attainment discrepancy leads firms to break away from their routinized behavior toward non-routine decision making. As performance drops farther below aspiration levels, firms are more likely to move away from the status quo and pursue risky initiatives.
• Performance information affects the motivations of managers to undertake action. For the mechanism to work, managers need to notice and encode that performance information as well as coordinate action to move forward aggressively. Thus, the degree to which performance cues drive action are contingent on the information being seen and used in a coordinated way.

With this foundation, Kolev and McNamara came up with several hypotheses around the social factors that could affect decision making among the top management group including: tenure diversity, gender diversity, pay disparity and size of the team. As their paper states, “We see these four attributes as being most likely to impact [executive team] dynamics, including team members’ coordination, joint decision making, and decision implementation, and thus affect the team’s ability and willingness to recognize poor performance and address it by engaging in strategic risk taking.”

When hypothesizing how gender and tenure diversity impact management teams working together, Kolev and McNamara drew on self-categorization theory which argues that individuals prefer interactions with and feel more comfortable around others who are similar to them. Based on that thought, Kolev and McNamara hypothesized that a heterogeneous executive team would be likely to act defensively with executives of different tenures or of the opposite gender which would reduce their ability to effectively collaborate and strategize together. However, the results of their research suggest that tenure diversity encourages greater risk taking when performance is weak and no statistical effects for gender diversity. These findings suggest that greater cognitive heterogeneity associated with more tenure-diverse teams leads to a broader mindset, sharing of a greater number of alternatives, and higher likelihood of identifying high potential, risky options as a response to poor performance.

When it comes to team size, however, there appears to be more challenges to coordinating on strategy. As Kolev and McNamara hypothesized, when the team size grows, top executives would experience lower coordination and more interpersonal tensions preventing them from agreeing on a coherent strategy and reaching a consensus on how to respond to performance shortfalls. Similarly, the authors found greater pay disparity could increase willingness to withhold information from other executive members and even sabotage their efforts resulting in reduced attention to existing problems and lower desire to effectively address them.

What does this analysis mean for you? As a business leader at any level, it’s critical to know how your personal background can affect your decision-making as well as how you interact with others. Marquette College of Business faculty bring the expertise of both experience and research to their courses, providing a comprehensive learning environment for all management students. Learn the intricacies of effective leadership organizational change, people management, business psychology and much more when you earn an online Master of Business Administration from Marquette University. Schedule a call with an admissions outreach advisor today for more information.