Top Management Team
The Role of Top-Level Managers
In general, top-level managers make many decisions such as the strategic actions and responses that are part of the competitive rivalry. More broadly, they are involved with making many decisions associated with first selecting and then implementing the firm’s strategies.
When making decisions related to using the strategic management process, managers (certainly top-level ones) often use their discretion (or latitude for action).
Because strategic leaders’ decisions are intended to help the firm outperform competitors, how managers exercise discretion when making decisions is critical to the firm’s success and affects or shapes the firm’s culture.
Managerial discretion differs significantly across industries.
The primary factors that determine the amount of decision-making discretion held by a manager (especially a top-level manager) are (1) external environmental sources such as the industry structure, the rate of market growth in the firm’s primary industry, and the degree to which products can be differentiated; (2) characteristics of the organization, including its size, age, resources, and culture; and (3) characteristics of the manager, including the commitment to the firm and its strategic outcomes, tolerance for ambiguity, skills in working with different people, and aspiration levels.
What is a Top Management Team?
The top management team is composed of the individuals who are responsible for making certain the firm uses the strategic management process, especially for the purpose of selecting and implementing strategies.
Typically, the top management team includes the officers of the corporation, defined by the title of vice president and above or by service as a member of the board of directors.
Reasons to Have a Top Management Team
Complex Environment
Top-level managers’ roles in verifying that their firm effectively uses the strategic management process are complex and challenging. Therefore, top management teams, rather than a single top-level manager, typically make these types of decisions.
The complex challenges facing most organizations require the exercise of strategic leadership by a team of executives rather than by a single individual.
The quality of a top management team’s decisions affects the firm’s ability to innovate and change in ways that contribute to its efforts to earn above-average returns.
Managerial Hubris
Using a team to make decisions about how the firm will compete helps to avoid problems when these decisions are made by the CEO alone. In general, when CEOs begin to believe glowing press accounts and to feel that they are unlikely to make errors, the quality of their decisions suffers.
Top-level managers need to have self-confidence but must guard against allowing it to become arrogance and a false belief in their own invincibility. To guard against CEO overconfidence and the making of poor decisions, firms often use a top management team to make decisions required by the strategic management process.
Diverse Expertise and Knowledge
The job of top-level management is complex and requires a broad knowledge of the firm’s internal organization as well as the three key parts of its external environment (general, industry, and competitor environments).
Therefore, firms try to form a top management team with the knowledge and expertise needed to operate the internal organization and who can deal with the firm’s stakeholders as well as its competitors.
Thus, firms that could benefit by changing their strategies are more likely to make those changes if they have top management teams with diverse backgrounds and expertise.
When a new CEO is hired from outside the industry, the probability of strategic change is greater than if the new CEO is from inside the firm or inside the industry. Although hiring a new CEO from outside the industry adds diversity to the team, such a change can affect the firm’s relationships with important stakeholders, especially the customers and employees.
Characteristics of an Effective Top Management Team
Heterogeneous Team Structure
Firms need to structure the top management team in a way to best utilize the members’ expertise (e.g., create structural interdependence to make the best decisions). To have these characteristics normally requires a heterogeneous top management team.
Thus, a heterogeneous top management team is composed of individuals with different functional backgrounds, experiences, and education.
In general, members of a heterogeneous top management team benefit from discussing their different perspectives. In many cases, these discussions, and the debates they often engender, increase the quality of the team’s decisions, especially when a synthesis emerges within the team after evaluating different perspectives. In effect, top management team members learn from each other and thereby develop better decisions. In turn, higher-quality decisions lead to stronger firm performance.
Substantive expertise
Having members with substantive expertise in the firm’s core businesses is also important to a top management team’s effectiveness.
In a high-technology industry, for example, it may be critical for a firm’s top management team members to have R&D expertise, particularly when growth strategies are being implemented.
However, their eventual effect on decisions depends not only on their expertise and the way the team is managed but also on the context in which they make the decisions (the governance structure, incentive compensation, etc.).
Cohesive Synergies
The effectiveness of top management teams is also influenced by the value gained when members of these teams work together cohesively.
In general, the more heterogeneous and larger the top management team, the more difficult it is for the team to cohesively implement strategies effectively. Communication difficulties among top-level managers with different backgrounds and cognitive skills can negatively affect strategy implementation efforts.
As a result, a group of top executives with diverse backgrounds may inhibit the process of decision-making if it is not effectively managed. In these cases, top management teams may fail to comprehensively examine threats and opportunities, leading to suboptimal decisions. Thus, the CEO must attempt to achieve behavioral integration among the team members.
Executive Succession
What is an Executive Succession?
Executive succession is the process of replacing a key top executive.
The choice of top-level managers, particularly CEOs, is a critical decision with important implications for the firm’s performance. Selecting the CEO is one of the boards of directors’ most important responsibilities as it seeks to represent the best interests of a firm’s stakeholders.
Modern corporations worldwide replace their CEO at least once in a five-year period. It is especially important for a company that usually promotes from within to prepare its current managers for promotion.
Executive Succession Tools and Practices
Some of the best practices for top management succession are (1) encouraging boards to help CEO create a succession plan, (2) identifying succession candidates below the top layer, (3) measuring internal candidates against outside candidates to ensure that development of a comprehensive set of skills, and (4) providing appropriate financial incentives.
Screening Systems
Many companies use leadership screening systems to identify individuals with strategic leadership potential as well as to determine the criteria individuals should satisfy to be a candidate for the CEO position.
The most effective of these screening systems assess people within the firm and gains valuable information about the capabilities of other companies’ strategic leaders. Based on the results of these assessments, training, and development programs are provided to various individuals in an attempt to preselect and shape the skills of people with strategic leadership potential.
Training Programs
In spite of the value that high-quality leadership training programs can create, there are many companies that have not established training and succession plans for their top-level managers or for others holding key leadership positions (e.g., department heads, sections heads).
Unfortunately, the need for continuity in the use of a firm’s strategic management process is difficult to attain without an effective training program and succession plan in place.
Career Life Cycle of Top Management
The route to the CEO position is relatively stable considering the core capabilities and overall strategic orientation of the company.
CEO in a company tends to have the same functional specialization as the former CEO, especially when the past strategy continued to be successful. Many prosperous companies tend to recruit their top executives from one particular area.
There are 3 stages in the career life cycle of top executives.
The learning stage is when during the early years of the tenure, management tends to experiment intensively with product lines to learn about their business.
The harvest stage is when their accumulated knowledge now allows them to reduce experimentation and increase performance.
The decline stage is when during the later years of the tenure, they reduce experimentation even further, and performance declines.
Selecting Leaders from Labor Markets
Organizations select managers and strategic leaders from two types of managerial labor markets: internal and external.
Internal Leaders
An internal managerial labor market consists of a firm’s opportunities for managerial positions and the qualified employees within that firm.
Employees commonly prefer that the internal managerial labor market be used for selection purposes, particularly when the firm is choosing members for its top management team and a new CEO.
Several benefits are thought to accrue to a firm using the internal labor market to select a new CEO.
One of which is the continuing commitment to the existing vision, mission, and strategies for the firm.
Also, because of their experience with the firm and the industry in which it competes, inside CEOs are familiar with company products, markets, technologies, and operating procedures.
Another benefit is that choosing a new CEO from within usually results in lower turnover among existing personnel, many of whom possess valuable firm-specific knowledge and skills.
In summary, CEOs selected from inside the firm tend to benefit from their (1) clear understanding of the firm’s personnel and their capabilities, (2) appreciation of the company’s culture and its associated core values, (3) deep knowledge of the firm’s core competencies as well as abilities to develop new ones as appropriate, (4) feel for what will and will not work in the firm.
External Leaders
An external managerial labor market is the collection of managerial career opportunities and the qualified people who are external to the organization in which the opportunities exist.
Boards of directors sometimes prefer to choose a new CEO from the external managerial labor market.
Conditions suggesting a potentially appropriate preference to hire from outside include (1) the firm’s need to enhance its ability to innovate, (2) the firm’s need to reverse its recent poor performance, (3) the fact that the industry in which the firm competes is experiencing rapid growth, (4) the need for strategic change.
Interim Leaders
An interim CEO is commonly appointed when a firm lacks a succession plan or when an emergency occurs requiring an immediate appointment of a new CEO. Companies throughout the world use this approach.
Interim CEOs are almost always from inside the firm. Their familiarity with the company’s operations supports their efforts to maintain order for a period of time.
Indeed, a primary advantage of appointing an interim CEO is that doing so can generate the amount of time the board of directors requires to conduct a thorough search to find the best candidate from the external and internal markets.
Internal Leaders versus External Leaders
Overall, the decision to use either the internal or the external managerial labor market to select a firm’s new CEO is one that should be based on expectations.
When the top management team is homogeneous (its members have similar functional experiences and educational backgrounds) and a new CEO is selected from inside the firm, the firm’s current strategy is unlikely to change. If the firm is performing well, absolutely and relative to peers, continuing to implement the current strategy may be precisely what the board of directors wants to happen.
Alternatively, when a new CEO is selected from outside the firm and the top management team is heterogeneous, the probability is high that strategy will change. This, of course, would be a board’s preference when the firm’s performance is declining, both in absolute terms and relative to rivals.
When the new CEO is from inside the firm and a heterogeneous top management team is in place, the strategy may not change, but innovation is likely to continue. An external CEO succession with a homogeneous team creates a more ambiguous situation.
Furthermore, outside CEOs who lead moderate change often achieve increases in performance, but high strategic change by outsiders frequently leads to declines in performance.
Firms tend to look outside for CEO candidates only if they have no obvious internal candidates.
Hiring an outsider to be a CEO is a risky gamble. CEOs from the outside tend to introduce significant change and high turnover among the current top management. CEOs hired from outside the firm tend to have a low survival rate.
In general, companies using relay executive succession, in which a candidate is groomed to take over the CEO position, have significantly higher performance than those that hire someone from the outside or hold a competition between internal candidates.
The outsiders tend to perform slightly worse than insiders but had a very high variance in performance. Compared to that of insiders, the performance of outsiders tends to be either very good or very poor.
Relative Power of CEO and Top Management Team
An effective working relationship between the board and the CEO and other top management team members is the foundation through which decisions are made that have the highest probability of best serving stakeholders’ interests.
The relative degrees of power held by the board and top management team members should be examined in light of an individual firm’s situation.
For example, the abundance of resources in a firm’s external environment and the volatility of that environment may affect the ideal balance of power between the board and the top management team.
A volatile and uncertain environment may create a situation where a powerful CEO is needed to move quickly. In such an instance, a diverse top management team may create less cohesion among team members, perhaps stalling or even preventing appropriate decisions from being made in a timely manner.
Sympathetic Outsiders
A powerful CEO may appoint a number of sympathetic outside members to the board or may have inside board members who are also on the top management team and report to her or him.
Thus, the CEO may significantly influence actions such as appointments to the board. The amount of discretion a CEO has in making decisions is related to the board of directors and the decision latitude it provides to the CEO and the remainder of the top management team.
CEO Duality
CEOs and top management team members can also achieve greater power by having the CEO who also holds the position of chair of the board. This duality CEO usually has more power than a regular CEO.
Although it varies across industries, CEO duality occurs most commonly in larger firms. A number of analysts, regulators, and corporate directors believe that an independent board leadership structure without CEO duality has a net positive effect on the board’s efforts to monitor top-level managers’ decisions and actions, particularly with respect to financial performance.
Some criticize this practice of CEO duality because it can lead to poor performance and slow responses to change, partly because the board often reduces its efforts to monitor the CEO and other top management team members when CEO duality exists.
Even though CEO duality may have a positive effect on performance when a firm encounters a crisis, certain modern firms have begun to separate the CEO and board chair positions.
In some cases, the separation is created to allow an experienced board chair to mentor a new CEO. Thus, nuances or situational conditions must be considered when analyzing the outcomes of CEO duality on firm performance.
Steward of Assets
CEO can act as a steward of the firm’s assets. In this instance, holding the dual roles of CEO and board chair facilitates the making of decisions and the taking of actions that benefit stakeholders.
The CEO, desiring to be the best possible steward of the firm’s assets, gains efficiency through CEO duality. Additionally, because of this person’s positive orientation and actions, extra governance and the coordination costs resulting from an independent board leadership structure become unnecessary.
Family Ownership
Power differentials can occur among top management team members when a family holds an important ownership position even in large public firms.
Typically, top managers who are also members of the family may have a special form of power which can cause conflict unless the power can be balanced across the top management team.
Contract Tenure
Top management team members and CEOs who have long tenure usually have a greater influence on board decisions.
In general, long tenure may constrain the breadth of an executive’s knowledge base. With the limited perspectives associated with a restricted knowledge base, long-tenured top executives typically develop fewer alternatives to evaluate when making strategic decisions.
However, long-tenured managers also may be able to exercise more effective strategic control, thereby obviating the need for board members’ involvement because effective strategic control generally leads to higher performance.
Intriguingly, it may be that the liabilities of short tenure appear to exceed the advantages, while the advantages of long tenure seem to outweigh the disadvantages of rigidity and maintaining the status quo.
Overall, the relationship between CEO tenure and firm performance is complex and nuanced, indicating that a board of directors should develop an effective working relationship with the top management team as part of its efforts to enhance firm performance.
Resources
Further Reading
- Are You Confused About How to Organize Your Leadership? (inc.com)
- Execution: Organizing Self and Others (solidleaders.com)
Related Concepts
References
- Hitt, M. A., Ireland, D. R., & Hoskisson, R. E. (2016). Strategic Management: Concepts: Competitiveness and Globalization (12th ed.). Cengage Learning.
- Hitt, M. A., Ireland, D. R., & Hoskisson, R. E. (2019). Strategic Management: Concepts and Cases: Competitiveness and Globalization (MindTap Course List) (13th ed.). Cengage Learning.
- Hill, C. W. L., & Jones, G. R. (2011). Essentials of Strategic Management (Available Titles CourseMate) (3rd ed.). Cengage Learning.