Who Lives in the C-Suite?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday March 13, 2013 at 7:23 am
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Editor’s Note: The following post comes to us from Maria Guadalupe of the Economics and Political Science Department at INSEAD, Hongyi Li of the School of Economics at UNSW, and Julie Wulf of the Strategy Unit at Harvard Business School.

In our paper, Who Lives in the C-Suite? Organizational Structure and the Division of Labor in Top Management, which was recently made publicly available on SSRN, we show that top management structures in large US firms have changed significantly since the mid-1980s. Using panel data on senior management positions, we explore the relationship between changes in the structure of the executive team, firm diversification, and IT investments.

We document significant changes in executive team structure over approximately two decades in Fortune 500 firms, with three-fourths of the doubling in the number of positions reporting directly to the CEO being driven by the increased presence of corporate-level functional managers.

In the course of our analysis, our paper addresses two important questions in the strategy literature. First: what is the relationship between the extent of firm centralization and the firm’s investment in information technology (IT)? Second: what is the relationship between the extent of firm centralization and firm scope? Our results show that the answer to these two longstanding questions is more nuanced than has been posited in the literature. In order to shed light on these questions, it is crucial to distinguish between the type of function or activities involved. Empirically, we find no simple relationship between centralization and scope, or between centralization and IT. Instead, both depend crucially on the type of function: product or front-end functions (e.g., marketing and R&D) behave differently from administrative or back-end functions (e.g., finance and human resources). First, firms that become less diversified centralize product functions, but not administrative functions. Second, firms that invest more in IT centralize administrative functions, but only centralize product functions if they operate in related businesses.

Existing management theory does not adequately explain our findings of robust differences in the response of “product” and “administrative” functional managers to changes in diversification and IT investments. To explain our results, we introduce some new theoretical ideas to the study of organizational structure. In particular, we identify a previously ignored aspect of what distinguishes different functions: the nature of information relevant to functional decision-making. We argue that the closeness of the function to the product – its reliance on product-specific information — has important implications for how to aggregate and process information across business units. Importantly, earlier classifications of information types (e.g., tacit vs. explicit or hard vs. soft) cannot explain our full set of results. We hope that scholars thinking about the information-processing view of the firm will find these ideas about the product-specificity of information useful in developing future theoretical work on organizations.

The richness of our dataset allows us to systematically document trends and relationships in a way that was previously impossible. Our results are particularly important because the structure of the executive team reflects the firm’s underlying organizational structure. Notably, our findings suggest that, as large US firms centralized corporate-level functions over the past couple of decades, they moved away from the pure M-form (Chandler, 1962) towards other forms of organization such as matrix (Galbraith, 1972) or the centralized M-form (Hill, 1988). While this may be consistent with small sample studies, to our knowledge, this has not been systematically documented in a large sample of firms over the period of our study (mid-1980s to mid-2000s).

We show how changes in the executive team are related to changes in strategy choices—in particular, firms’ diversification decisions and IT investments. Our empirical results are in the spirit of existing theoretical work in strategy and management on how changes in both strategy and structure are driven by shifts in the environment in which firms operate (e.g., Lawrence and Lorsch, 1967). Therefore, our results systematically illustrate Chandler’s (1962) dictum that “structure follows strategy” for a large sample of firms; and we do so for a period characterized by dramatic environmental changes which include globalization, developing capital markets, and falling costs of information technology.

Taken as a whole, our paper contributes to three related, but often isolated, fields of research. We believe our results should be of interest to strategy scholars interested in understanding the anatomy of changes in organizational structure in Fortune 500 firms over the last two decades and how they relate to changes in strategy choices. We also contribute to the literature on top management teams (TMT) by focusing on the structure of the roles in the executive team and how this has changed over time. This perspective is important in understanding the secular changes in TMTs and ultimately the effects on firm performance. Finally, we contribute to the literature in organizational economics by providing a new set of facts about issues that theoretical models have analyzed, such as the complementarities between organizational choices, organizational form, and the optimal degree of decentralization.

The full paper is available for download here.

 

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