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LINKING THE EXECUTIVE EXPERIENCE OF CSCOs-CEOs TO FIRM
PERFORMANCE: THE UPPER ECHELONS THEORY
Master thesis, Msc Supply Chain Management
University of Groningen, Faculty of Economics and Business
ACKNOWLEDGEMENT
I would like to express my sincere thanks to my supervisor dr. X. Tong of the Faculty of Economics and Business at the Rijksuniversiteit Groningen. He supported me with professional guidance and enabled me to get new insights of thesis writing and theoretical framing. Additionally, I would like to thank my second supervisor dr. ir. T. Bortolotti for providing professional feedbacks. Finally, I would like to express thanks to my research peers: Mario, Nick, Jurgen, Douwe, and Gergely. We divided tasks of collecting data and share our data throughout our project.
ABSTRACT
Chief Supply Chain Officers (CSCOs) have been appointed into top management teams (TMTs) in recent years. Their experiences play a vital role in decision making processes and ultimately affect firm performance. This paper explores whether executive experience affects corporate performance in the relationship between CSCOs and CEOs. Based on the upper echelon theory, this paper measures executive experiences regarding educational heterogeneity, international experience heterogeneity, and financial experience. Three hypotheses are formulated based on these three characteristics. Hierarchical regression analysis is applied, with the sample of 623 observation firm years of 175 S&P companies. The results show that firm performance is negatively influenced when high heterogeneity of educational background and international experience exist among CSCOs and CEOs. Additionally, CSCOs’ financial experience improves firm performance. These results reveal executive experiences of CSCOs-CEOs influence corporate outcomes.
CONTENTS Acknowledgement ... 1 Abstract ... 1 Contents... 2 Introduction ... 1 Literature Review ... 7
Chief Supply Chain Officer (CSCO) ... 7
Chief Executive Officer (CEO) ... 9
The Upper Echelons Theory ... 9
Managerial Implications ... 31
Limitations and Future Research ... 32
Conclusion ... 33
References ... 34
INTRODUCTION
Top executives have become a key focus of strategic management research because these chief officers are both strategic director and implementation leaders (Chaffin, Gamache, & McNamara, 2014; Finkelstein, Hambrick, & Cannella, 2009). Recent scholars have focused on how top managers make strategic decisions for corporates and how they affect corporate performance (Henderson, Miller, & Hambrick, 2006). Rooting in the upper echelons theory, Hambrick and Mason (1984) found that executive experience has significant influence on the type of strategic decisions taken by executives. Executive experience refers to “the events that occur in an individual’s life that are perceived by the individual (Quinones, Ford, & Teachout, 1995).” Executives’ personal experiences shape the extent to which they identify opportunities and threat-based information, and ultimately influence decision making processes (Tyler & Steensma, 1998). Since their experiences influence the way of interpreting situations and decision making processes, executive experience can exert some impacts on firm performance (Hambrick & Mason, 1984; Jiang, Zhu, & Huang, 2013). When measuring executive experience, Hambrick and Mason (1984) further proposed that observable demographic characteristics can be more direct variables that linking executives’ attributes to firm performance because it overcomes the difficult problems of measuring psychological and dynamic variables (Smith et al., 1994). There are various types of executive experiences, Finkelstein, Hambrick, and Cannella (2009) proposed that three characteristics account for significant majority of studies: functional experience (e.g., finance), educational background, and international experience. Additionally, Hambrick and Mason (1984) suggested that an in-depth analysis of the interactions between demographic characteristics is needed to further explore the impact of executive experience on corporate outcomes (Hitt & Tyler, 1991).
demographic characteristics in terms of heterogeneity (Sambharya, 1996). Heterogeneity reflects “the diversity in a team’s cognitive bases (Wiersema & Bantel, 1992).” As for three demographic characteristics, many scholars have highlighted the impact of the relative heterogeneity on firm outcomes (Carpenter, 2002; Finkelstein & Hambrick, 1996). For example, compared with executives without financial experience, those with finance or accounting background have been examined in promoting financial performance (Randall & Farris, 2009; Ritchie & Eastwood, 2006). Specifically, executives with financial experience can better identify profit opportunities and better manage cash flow than those without financial experience (Randall & Farris, 2009). Additionally, educational background shapes executives’ knowledge and skill base, and the heterogeneity of educational level is associated with the conflict degree of information exchanging processes, which ultimately impacts firm performance (Datta & Guthrie, 1994; Nielsen, 2009). Finally, international experience is a valuable resource for developing inimitable cognitive and value (Carpenter, Sanders, & Gregersen, 2001; Le & Kroll, 2017). International working experiences shape executives with broader worldwide views, compared with those without foreign experience (Hsu, Chen, & Cheng, 2013; Le & Kroll, 2017; Reuber & Fischer, 1997). If executives have different international experiences, they will provide different decisions and the coordination among them will be less speedy, further impairing firm performance (Carpenter, 2002). Given the importance of three characteristics in influencing firm performance, this paper examines the relationship between executive experience and firm performance, based on educational background, financial experience, and international experience.
2004; Ding, 2011; Richard, Wu, Markoczy, & Chung, 2019; Schubert & Tavassoli, 2020). Additionally, scholars have investigated how TMTs’ international experience influences firm internationalization (Reuber & Fischer, 1997; Sambharya, 1996). As for functional experience, scholars have extensively examined the relationship between TMTs’ functional background heterogeneity and firm strategy (Finkelstein, 1992; Wiersema & Bantel, 1992). Previous studies have also studied how TMT composition affects firms financial performance (Carpenter et al., 2004; Pollock, Chen, Jackson, & Hambrick, 2010). Besides, as TMTs have different structures, research also examines how the relationship between TMT heterogeneity and corporate outcomes is moderated by structural interdependence (Hambrick, Humphrey, & Gupta Abhinav, 2015). In this regard, there is a gap that many previous studies focus on TMTs’ characteristics, meaning that executive experience is mainly considered as entire TMTs’ level.
remained unknown (Menz, 2012). For instance, little is known about chief supply chain officers (CSCOs) and how they affect firm performance (Roh, Krause, & Swink, 2016). CSCOs have appeared in TMTs during recent years, and their presence is closely associated with firm performance (Hendricks, Hora, & Singhal, 2015; Roh et al., 2016; Wagner & Kemmerling, 2014). CSCOs are significantly important for corporates because “CSCOs increasingly control 50% or more of a company’s annual spending, with two-thirds of all employees directly reporting to the role. More important, CSCOs have begun to play a vital role in strategy development, product and service innovation, and even sales (O’Marah, 2016).”
However, CSCOs are neglected in previous studies, only few scholars have investigated how TMT’s supply chain experience affects firm performance (Kumar & Paraskevas, 2018). To my knowledge, there are only three articles focus on CSCOs specifically. Firstly, Wagner & Kemmerling (2014) propose that CSCOs presence is negatively impacts firm’s operate margin. Secondly, Roh et al. (2016) reveal that firm performance will be improved by appointing CSCOs, when leverage and internationalization levels are high. Finally, Hendricks et al. (2015) examine how firm financial performance changes if appointing supply chain and operation management executives (SCOMEs), based on the characteristics of SCOMEs’ tenure and functional experience. As extent research mainly tests the effects of CSCOs presence, the influences of their experiences remain unknown. This leads to insufficient research on CSCOs. Furthermore, considering the “sub-team” research stream, there is also a research gap on how the dynamic between CSCOs and other TMT members affects corporate performance.
for this profit increase. Firstly, CSCOs can better translate business needs and strategic decisions into supply chain implementation (Roh et al., 2016). As CSCOs directly communicate with other TMT executives, CSCOs can better understand firm’s top-level strategic decisions and incorporate those decisions into supply chain actions more accurately (Roh et al., 2016). Secondly, as CSCOs are specialists in managing supply chain, reducing costs, and making purchasing and outsource decision, TMTs with CSCOs can achieve more efficient supply chain and higher operational productivity. (Larson, Poist, & Halldórsson, 2007). Finally, in many corporates, more CEOs look for CSCOs to achieve cost efficiency and more CSCOs directly report to CEOs (Groysberg, Kevin Kelly, & MacDonald, 2011), providing a feasible setting to explore the interaction of CSCOs and CEOs. Combining with the significance of executive experience, as mentioned previously, this paper addresses the question ‘Do the differences in executive experience between CSCOs and CEOs affect firm performance?’
To address the research question, I draw on the upper echelons theory and measure executive experiences based on three major characteristics: educational background, international experience, and functional experience (mainly focus on financial experience). My analysis applies a sample of 175 firms with 623 observation firm years between 1933 and 2020. I use hierarchical regression to examine to what extent those three characteristics influence firm performance. I find that high educational heterogeneity and high international experiences heterogeneity negatively impact firm performance. Additionally, CSCOs’ financial experiences slightly enhance corporate outcomes.
dynamic between CEO and COO, or the interaction between CEO and CFO (Chaffin et al., 2014; Hambrick & Cannella, 2004; Levinson, 1993; Marcel, 2009; Zhang, 2006). However, few of them examine the joint impact of CEOs and CSCOs, because CSCOs are new job title which appears only in recent decades (Groysberg et al., 2011). As I examine the impacts of CSCOs and CEOs, I enrich the upper echelons theory by providing broader frontier for the “sub-team” research.
Secondly, I examine whether the predictive strength of the upper echelons theory also applies in CSCOs and CEOs. According to the upper echelons theory, the heterogeneity of executive characteristics affect firm performance (Pitcher & Smith, 2001; Smith et al., 1994). Previous studies have shown that TMTs’ heterogeneity affects innovation, and the heterogeneity of CEOs and other TMT members is related to strategic change (Bantel & Jackson, 1989; Ding, 2011; O’Reilly III, Caldwell, & Barnett, 1989; Richard et al., 2019). However, the heterogeneity of CSCOs and CEOs remains to be explored. In other words, it is unknown that whether the insights of upper echelons theory also apply to the relationship between CSCOs and CEOs. In this paper, I test whether CSCOs and CEOs’ experiences heterogeneity affects firm performance. Thus, by examining the experiences of CSCOs and CEOs, I strengthen the predictive power of the upper echelon theory.
The outline of this paper is as follows. In the next section, a theoretical background will be introduced to explain related concepts. Following this, three hypotheses will be proposed in the hypothesis sector. Then, methodology sector provides sample, variable, and data analysis to show research design and data collection method. Next, I analyze the results of three hypothesized relationship between executive experience and firm performance. Finally, this paper proposes discussion of key findings, limitations, and recommendation for future research.
LITERATURE REVIEW
Before developing hypotheses, it is necessary to explain related concepts that to be examined (Sturman, 2003). To deeply analyze the influence of CSCOs and CEOs, the definition of CSCOs and CEOs will be introduced firstly. Additionally, as this paper examines executive experience from upper echelon perspective, the theory will also be introduced. Finally, a conceptual model will show the overview of this paper.
Chief Supply Chain Officer (CSCO)
performance (Wagner & Kemmerling, 2014).
CSCOs contribute to firms through better managing supply chain and operation processes (Kumar & Paraskevas, 2018). Mentzer, Stank, & Esper (2008) indicate that “CSCOs are broad responsibility for the processes that cross the focal firm and extend to goods and service suppliers as well as customers.” Specifically, CSCOs improve firm performance through (1) better risk management. CSCOs are expertise who can better manage uncertainty and avoid demand-supply mismatches, which avoid significant loss in financial performance (Hendricks et al., 2015); (2) better cooperation among subunits in TMTs. As CSCOs are appointed into TMTs, they can communicate with other TMT members about risks and opportunities of supply chain implementation directly (Hendricks et al., 2015). In turn, CSCOs can know the latest business requirement and the top-level decisions so that they can better translate strategic decisions into supply chain actions (Roh et al., 2016); (3) better supply chain management. CSCOs are the leader of supply chain management (Roh et al., 2016). They are specialists in resource allocation, sales and operations planning improvement, insource or outsource decisions, purchasing, and alignment in strategies (Hendricks et al., 2015). With such knowledge, CSCOs can better manage supply chain and ultimately improve firm performance.
Chief Executive Officer (CEO)
Despite the research of CSCO's impacts, this paper also pursues to analyze how the relationship between CSCOs and CEOs influence firm performance. Therefore, the concept of CEO also needs to be introduced to understand who is CEO and what (s)he does. CEO is defined as “powerful when no other person holds the title of President or Chairman and no other person co-signs the letter to shareholders in the annual report (Bebchuk, Cremers, Peyer, Centrality, & Harvard, 2007).” CEOs are the most powerful role in TMTs and their jobs mainly focus on strategic decisions and activities, which ultimately contribute to different corporate performance (Hambrick & Cannella, 2004). When making decisions, CEOs are mainly based on their belief structure and cognitive base (Bowman & Daniels, 1995). The cognitive base is derived from CEOs’ experiences (Bowman & Daniels, 1995). And their experiences have been proposed to be linked to their strategic decisions (Stone & Tudor, 2005). Besides, as CEOs are the highest ranking executive, they also need to supervise all decisions made by TMTs (Peni, 2014). This means that the overall decision-making process is mainly dominated by CEOs, including the decisions of CSCOs. As the impact of CEOs is significant, this paper also aims to clarify whether the joint impacts of CSCO and CEO on firm performance is significant.
The Upper Echelons Theory
decision-making processes and ultimately corporate outcomes (Angriawan & Abebe, 2011; Carpenter et al., 2004; Hambrick, 2007; Hambrick & Mason, 1984; Margarethe & Bigley, 2017). Second, executives’ cognition, knowledge, and values are influenced by their experiences and background characteristics such as educational level, functional experience (e.g. finance), international experience, tenure, and age (Angriawan & Abebe, 2011; Carpenter et al., 2004; Hambrick, 2007; D. C. Hambrick & Mason, 1984; Sambharya, 1996).
Executive Experience
Executive experience refers to events that an individual faces and perceives (Quniones et al., 1995). According to the upper echelon theory, different experiences shape various cognitive base, knowledge, attitudes, skills, behaviors, and belief systems (Hambrick & Mason, 1984; Sambharya, 1996). When making decisions or interpreting situations, executives are guided by their belief systems and cognitive base (Sambharya, 1996; Smith et al., 1994). Managers have a variety of experiences, leading to different decision-making processes and thus various firm performance (Hambrick & Mason, 1984; Jiang et al., 2013; Tyler & Steensma, 1998). There are various executive experiences (Hambrick, 2007). Among them, educational background, functional experience (e.g. finance), and international experience have account for the most majority of research because those experiences significantly determine executives’ decision preferences and the way of information interpretation (Hambrick, 2007; Jensen & Zajac, 2004; Wiersema & Bantel, 1992). Following this stream, this paper develops hypotheses based on these three characteristics.
Heterogeneity is defined as a group-level degree of dissimilarity among team members (Murray, 1989). It is an indicator of team members’ cognitive diversity, knowledge base, skill sets, and expertise ties (Finkelstein & Hambrick, 1996). Heterogeneity may results in interpersonal conflict among group members, which impairs teams’ cooperation and ultimately firm performance (Carpenter et al., 2001). This negative influence may also appear in the heterogeneity of educational background, functional experience (e.g. finance), and international experience (Mason A Carpenter, 2002; Carpenter et al., 2001; Murray, 1989; Sambharya, 1996). Thus, this paper pursues to test whether the heterogeneity of these characteristics affects firm performance.
When investigating the effect of heterogeneity, TMTs and executive groups are major unit of analysis in previous years, based on the belief that executives need to coordinate with each other in the decision-making processes (Finkelstein & Hambrick, 1990; Hambrick & Mason, 1984). TMT heterogeneity influences team efficiency through communication processes and the conflict level, which ultimately impacts firm performance (Mason A Carpenter, 2002; Hambrick et al., 2015). A number of scholars have empirically examined the heterogeneity of TMTs’ educational level, international experience, and functional experiences (e.g., finance). For instance, the impact of TMT education on the decision-making process (Carpenter et al., 2004) and educational heterogeneity negatively affects firms’ strategic change (Richard et al., 2019). Besides, TMT international experience is positively related to firm internationalization, and ultimately enhance firm outcomes (Sambharya, 1996). Finally, if TMTs members have more financial experience, there will be more acquisitions that firms may make and ultimately improve corporate outcomes (Finkelstein, 1992; Hambrick, 2007).
to deeper explore the influences of top executives on corporate outcomes (Kumar & Paraskevas, 2018). Specifically, many studies have investigated that CEOs’ educational level is associated with innovation and creative decisions (Bantel & Jackson, 1989). Besides, CEOs’ international experience is positively associated with firm financial performance (Carpenter et al., 2001; Reuber & Fischer, 1997). Finally, CEOs with financial experiences can better guide earnings management, enhance the quality of financial disclosure, and ultimately improve firm performance (Jiang et al., 2013). Apart from individual CEO, Hambrick (2007) also suggested that it is more worthwhile to identify subgroups that responsible for specific decisions and examine the influences of their characteristics on firm performance. As CSCOs are responsible for specific decisions (supply chain management), this paper chooses CSCOs and CEOs as “sub-team” to explore its impact on firm performance.
Conceptual Model
decision-making processes (Roh et al., 2016). Thus, this paper also tests whether CSCOs with financial experience affect firm performance.
Figure 1. The Conceptual Model
HYPOTHESES
Educational Background
Educational level is crucial for reflecting a person’s cognitive ability and skills (Hambrick & Mason, 1984; Wiersema & Bantel, 1992). Extent research finds that education is closely related to information solving process and innovation abilities (Geletkanycz & Black, 2001; Wiersema & Bantel, 1992). Higher level of formal education allows individuals to gain more professional knowledge than less educated people (Ding, 2011). The more specialized knowledge, in turn, shapes more cognitive complexity and greater capability in managing information processing (Ritchie & Eastwood, 2006). For instance, effective supply chain management requires the ability of managing cross-organizational resources and integrating complex informational flows (Kumar & Paraskevas, 2018). In order to manage raw materials and information process more effective, executives need to learn several supply chain theories, such as six-sigma, lean, total quality management (Mentzer, Stank, & Esper, 2008). This professional knowledge can be gained from formal education. Individuals learn a number of theories of supply chain management in universities, and the knowledge enables executives to better understand practical supply chain situation, identify
Executive Experiences
- Educational heterogeneity (H1)
- International experience heterogeneity (H2) - Financial experience (H3)
practical problems in supply chain, and select corresponding theories to solve problems. Besides, as educational level is related to cognitive ability, higher level of education allows executives to develop more rational decision-making and more creative solutions to complex situations (Bantel & Jackson, 1989; Papadakis & Barwise, 2002). In the supply chain management, executives face various situations and make complex decisions, including inventory reduction, resource allocation, purchasing, supplier management, delivery service, and product development cycles (Fawcett, Magnan, & McCarter, 2008). As higher educational level enables executives to better interpret situations and solutions, individuals with supply chain educational background may develop deeper understanding of firms’ supply chain, which improves firms’ supply chain and thus firm outcomes. In contrast, lower educational level leads to less rational decisions and different solutions. When dissimilar educational background appears in a team, it means that educational heterogeneity may exists (Murray, 1989; Pitcher & Smith, 2001).
be transported to customers in time. When customer needs cannot be fulfilled immediately, they may buy products from competitors, resulting in the negative influence of firm performance. Thus, the relationship between educational heterogeneity and firm performance is formally hypothesized as follows:
Hypothesis 1: If the educational differences between CSCOs and CEOs are large, firm performance will be negatively influenced.
International Experience
international experience may not able to identify opportunities of foreign supply chain correctly because they may not fully understand other culture and customs. When these CSCOs and CEOs work together, they may provide different collaborate decisions. These differences, in other words, reflect the heterogeneity of international experience.
Hypothesis 2: If the international experiences’ differences between CSCOs and CEOs are large, firm performance will be negatively influenced.
Financial Experience
Financial experience is defined as someone who has finance or accounting experience before the current position (Jiang et al., 2013). For example, if firms deploy low cost strategy, executives should possess strong skills to reduce cost. Executives with financial experience can better balance cash flow, cost controls, and investment expense in the strategic level, contributing to lower cost structures and more superior financial performance (Geletkanycz & Black, 2001).
CSCOs because they take more balanced perspectives of specific financial flows and supply chain strategy, whereas chief financial officers (CFOs) are only responsible for the overall finance of firms (Randall & Farris, 2009).
When CSCOs and CEOs work together, CSCOs with financial experience can provide decisions of supply chain finance management to CEOs. In contrast, such decisions cannot be proposed by CSCOs without financial experience. As CEOs gain information of supply chain finance, they can better make strategic decisions for firms’ supply chain. Thus, in the relationship between CSCOs and CEOs, CSCOs’ financial experience helps the “sub-team” better implement supply chain, and ultimately enhances firm performance. In sum, the relationship between financial experience and firm performance is formally hypothesized as follows:
Hypothesis 3: In the relationship between CSCOs and CEOs, CSCOs’ financial experience positively influences firm performance.
METHODOLOGY
The aim of this paper is to examine the influence of executive experience on firm performance, based on the upper echelon theory. Executive experiences can be measured through observable characteristics (Hambrick & Mason, 1984). As the categories of individual’s characteristics are so broad and vague, common databases have existing categorized data that can be used to explore individual characteristics (Fallon, 2016: 135). Thus, I conduct secondary data from several common databases. The detailed databases will be shown in this sector.
variable, international experience and firm performance is accounted as interval variable, and educational background in measured as nominal variable. Quantitative analysis with multivariate data analysis will be applied in this paper. This is because the quantitative analysis is an appropriate method to explore correlation and regression analysis, such as to what extent one variable affects another (Thomas, 2011).
Sample
The population of this paper consists of S&P 1500 firms from January 1933 to January 2020. Focusing on this time period allows us to cover firm-years as much as possible. Since the accounting rules of financial firms differ from other industries, I exclude financial firms. Besides, I also exclude companies that do not assign CSCOs to TMTs. As for firms with CSCOs in TMTs, I find specific firm years when both CSCOs and CEOs are appointed into TMTs. After excluding unnecessary firms, the sample of this paper is 175 firms with 623 observation firm years.
Those 175 firms are large S&P firms. I choose large firms because they have responsibilities to publicize annual report (Nielsen, 2009). Additionally, they also need to publicize their top-level executives and officer-related information every year on Execucomp database. Therefore, the first reason for choosing the Execucomp database is traceability. Since S&P firms publicize their information on this database, it allows scholars to trace back each firm performance whenever they want. Secondly, S&P Capital IQ’s Execucomp database is reliable and valid. This is because the database is widely accepted and frequently used in TMTs’ academic research (Dezso & Ross, 2012; Roh et al., 2016).
title is “Chief Supply Chain Officer” or “CSCO”; (b) the role title includes “Chief”, “Executive” along with “Supply Chain” (Roh et al., 2016). In addition, I identify CEOs when role title contains “Chief Executive Officer” or “CEO”.
After identifying CSCOs and CEOs, the steps of data collection are as follows. Firstly, for each firm, I find whether CSCOs are appointed to its TMT. TMT is defined as the top-level executives who make strategic decisions for companies (Nielsen, 2009). If CSCOs are not appointed to TMT, I exclude the firm from the sample. Secondly, if CSCOs are appointed to TMT, I collect corresponding firm years. After knowing exact years in which CSCOs are appointed to TMT, I search for the CEOs’ director ID of the target firm year. Meanwhile, I collect CSCOs’ director ID in the corresponding firm year. After obtaining exact years in which both CSCOs and CEOs appear in TMT, I input the director ID of each CSCO and CEO to gather executive background characteristics in the BoardEx database, such as educational background, functional working experience, the number of firms they worked before current company, international working experience, and the number of industries they worked before.
Variables
Dependent Variables
firm financial performance. I calculate ROA as “operating income after depreciation divided by book value of assets (Hendricks et al., 2014; Swink and Schoenherr, 2015; Roh et al., 2016).”
Independent Variables
The key independent variables are the finance experience, educational heterogeneity, and international experience heterogeneity. In terms of finance experience, I code ‘1’ if the CSCO has finance or accounting working experience before the current firm years. If not, I code ‘0’.
Educational heterogeneity, the degree of educational differences, is measured through distance measure (Wagner, Pfeffer, & O ’ Reilly III, 1984). This distance measure captures the degree of isolation between a given individual and his/her peers (Tsui & O’reilly, 1989; Wagner et al., 1984). Following the stream of distance measure, Tsui & Ashford (1991) propose relational demography which reflects “the differences in attributes between two individuals”. In terms of educational characteristics, this paper analyzes the relationship between CSCOs and CEOs. So, I apply relational demography by Tsui & Ashford (1991). I modify the formula of Tsui & O’reilly (1989) and Zenger & Lawrence (1989), and educational heterogeneity is measured as:
𝐷" = $𝑥"− 𝑥'$ (1)
Where 𝐷" is the degree of differences for pair 𝑖, 𝑥" is the maximum educational level of 𝐶𝑆𝐶𝑂", and 𝑥' is the maximum educational level of corresponding 𝐶𝐸𝑂'.
based on the formula. For example, if two individuals have identical demographic characteristic, I coded 0 on that attribute. The larger value means larger differences, meaning larger educational heterogeneity.
International experience heterogeneity is calculated through distance measure, using the same formula of educational heterogeneity. Firstly, I count the number of different foreign countries each CSCO and CEO worked before the current firm (Daily, Certo, & Dalton, 2000). Then, I calculate international experience heterogeneity based on the formula. The larger value means larger differences, and thus higher international experience heterogeneity.
Control Variables
Despite from the experiences that I examine, other executive experience also influences firm performance (An, Chen, Wu, & Zhang, 2019; Beal & Yasai-Ardekani, 2000; Easton & Rosenzweig, 2015; Georgakakis, Greve, & Ruigrok, 2017; Johnston, 2002). Thus, I also include several control variables. The first control variable is industry experience heterogeneity. Industry heterogeneity refers to the variety of industry setting (Thomas & Simerly, 1995). The variety of industry experience helps individuals develop multiple knowledge-based abilities, which impacts firm performance ultimately (Georgakakis et al., 2017; Salomon & Jin, 2008; Thomas & Simerly, 1995). I calculate industry experience heterogeneity by the formula of distance measure. Similar to educational heterogeneity and international experience heterogeneity, I calculate the number of different industries each CSCO and CEO work. Then, I calculate the heterogeneity based on the formula. The larger value means larger distance, and thus higher heterogeneity.
influences firm performance (Bantel & Jackson, 1989; Carpenter et al., 2004; Hambrick et al., 1996; Nielsen, 2009; Tihanyi, Ellstrand, Daily, & Dalton, 2000). For example, large teams consist of executives with more diverse experiences (Tihanyi et al., 2000). Additionally, the heterogeneity of small teams will be more sensitive because an increase of one dissimilar executive changes heterogeneity significantly (Tihanyi et al., 2000). Thirdly, as acquisitions affect supply chain and capital investment (Beckman & Haunschild, 2002; Naor, Linderman, & Schroeder, 2010), I also control acquisitions. I code 1 if a company gain revenues from acquisition. If not, I code 0. Fourthly, previous studies have shown that chief operating officer (COO) are responsible for maintaining the effectiveness of the overall operations (Chaffin et al., 2014), and their operations may affect the implementation of CSCOs’ decisions. Thus, I also control COO presence. COO is identified as the job title of “Chief operating officer” or “COO” (Marcel, 2009; Pitcher & Smith, 2001; Roh et al., 2016). When measuring COO presence, I exclude CEO. As for other executives, I code 1 if a chief officer has COO title before the current position. If not, I code 0. I also control firm revenues, which is measured in billions of dollars (Roh et al., 2016). Finally, as TMT tenure influences communication between top executives, and ultimately impacts corporate outcomes (Hambrick et al., 2015; Smith et al., 1994), I control TMT tenure which is measured by the average TMT tenure of firms.
Regression Modeling
regression model, I can compare the effects before and after adding independent variables (Beal & Yasai-Ardekani, 2000). Additionally, I examine random error term and multicollinearity to examine regression quality. Random error term is tested by standardized residual plot and multicollinearity is tested by variance inflation factor (VIF), which are shown in Appendix.
RESULTS
Table 1 shows the descriptive and Pearson correlations among variables. Several independent variables and control variables have significant relationship with firm performance. Specifically, revenues and industry experience heterogeneity are the most significantly related to firm performance (𝑝 < 0.01 ). Additionally, international experience heterogeneity, finance experience, and COO presence are significantly related to firm performance (𝑝 < 0.05). Among these variables, only international experience heterogeneity is negatively associated with firm performance (𝛽 < 0).
TABLE 1
Descriptive Statistics and Correlations
TABLE 2
Hierarchical Regression Results
firm performance. Additionally, there are 623 observation firm years. And F value shows that all regression models, in general, have strongly significant impact on firm performance (𝑝 < 0.001).
Hypothesis 1 predicts that higher educational heterogeneity has negatively influence on firm performance. Model 2 in Table 2 greatly supports the hypothesis. Educational heterogeneity has negatively and significantly impact on firm performance (𝛽 = −0.091, 𝑝 < 0.05). Besides, I draw standardized residual plot to examine regression quality. Appendix B shows that most of residual is randomly distributed between 𝑒 = [−2, 2], meaning the random error term is normally distributed and the quality of regression is accepted. Thus, hypothesis 1 is significantly supported.
Hypothesis 2 predicts that international experience heterogeneity negatively affects firm performance. In Table 2, model 3 support the hypothesis. International experience heterogeneity has negatively and significantly influence on firm performance (𝛽 = −0.101, 𝑝 < 0.05). Additionally, I also draw standardized residual plot to test random error term. Appendix C shows that most of residual is randomly distributed between 𝑒 = [−2, 2], further confirming that model 3 is accepted for regression. Therefore, hypothesis 2 is significantly supported.
Hypothesis 3 predicts that CSCOs’ finance experience positively affects firm performance. Table 2 shows that model 4 supports the hypothesis weakly. Financial experience has positively and weakly impact on firm performance (𝛽 = 0.079, 𝑝 < 0.10). Similar to previous hypotheses, I also draw standardized residual plot for hypothesis 3. Appendix D shows that most of residual is randomly distributed between 𝑒 = [−2, 2], further confirming that model 4 is accepted. Thus, hypothesis 3 is weakly supported.
performance. If CSCOs and CEOs have large difference in educational level, this will impair firm performance. Secondly, higher international experience heterogeneity negatively affects firm performance. In the relationship between CSCO and CEO, if one of them has international working experience while the other has not, firm performance will be negatively influenced. Finally, CSCOs’ financial experience positively affects firm performance, but the effect is weakly.
TABLE 3 Hypotheses Results
Hypotheses Results
H1: If the educational differences between CSCOs and CEOs are large, firm
performance will be negatively influenced. Supported
H2: If the international experiences’ differences between CSCOs and CEOs
are large, firm performance will be negatively influenced. Supported
H3: CSCOs’ financial experience is positively influence firm performance. Partially Supported
DISCUSSION
CEOs into the upper echelons theory, this paper enlarge the number of executives being examined in the theory. Specifically, this paper chooses CSCOs and CEOs as “sub-team” to examine its influences on firm performance, based on the measurement of three executive experience (educational background, international experience, and international working experience).
Firstly, as Table 3 shows, I find that firm performance will be negatively influenced when the differences of the educational level between CSCOs and CEOs are large. This finding supports the study of educational heterogeneity (O’Reilly III et al., 1989), which suggests that educational heterogeneity raises cognitive differences and interpretation conflict. A plausible explanation may be that decisions about supply chain management are complex that include various dimensions, including cost reduction, quality, resource allocation, and purchasing (Harvey & Richey, 2001). There are various theories in each aspect, such as lean, six-sigma, agility, and cost leadership. When CSCOs and CEOs work together, they may need to identify firms’ supply chain situations and choose related theories to improve the supply chain. However, if they have different educational background and different cognitive base, they may propose completely different supply chain interpretations and solving theories. The conflicts need time to solve, which slow down the process of supply chain implementation and further decrease the efficiency of firm performance.
countries have different customs, habits, and cultures, the behaviors of foreign suppliers and customers may also differ. When managing supply chain globally, CSCOs and CEOs have to be familiar with various culture so that they can make specific agreements with different suppliers. For instance, the agreements with global suppliers might include quality monitoring, overseas infrastructure, delivery reliability, and norms of overseas locations (Harvey & Richey, 2001). CSCOs and CEOs have to develop common decisions when making these agreements. However, if one of them do not have international experience, he may not interprets foreign situations properly or even does not fully understand the interpretation of another executive who has foreign experience, resulting in communication conflicts. The communication conflicts can impair the coordination among CSCOs and CEOs, further decreasing corporate outcomes.
Thus, CSCOs’ financial experience weakly improves firm performance.
In terms of the former two hypotheses, I test the heterogeneity of education and international assignments among CSCOs and CEOs. As for the last hypothesis, I split functional experiences into financial experience and focus on the influence of supply chain finance. This is because CSCOs are responsible for supply chain management, and I assume CSCOs with financial experience can enhance the performance of “sub-team” (CSCOs and CEOs). If CSCOs have financial experience, they can better cooperate supply chain management and supply chain financial flow. Compared with CSCOs without financial experiences, those with financial experience can provide decisions of supply chain finance to CEOs. As CEOs receive information of supply chain finance, they can cooperate with CSCOs to make better strategic decisions for optimizing supply chain management, which ultimately improve firm performance.
Managerial Implications
This paper offers several managerial implications. Firstly, it provides suggestions for organizations in assigning and selecting CSCOs and CEOs. The results of this paper show that high heterogeneity among CSCOs and CEOs negatively impacts firm performance. It means that large differences in educational background and international working experiences can impair firm outcomes. Besides, whether CSCOs have financial experience also influences corporate outcomes. Thus, when making decisions of executive selection, firms can select executives with similar educational experience and international working experience. Besides, firms may assign CSCOs with financial experiences into TMTs because those with finance or accounting working experiences can improve corporate outcomes.
result supports the opinions of Carpenter et al. (2001) who proposed that shared views and common communication exist when top-team members have similar international experiences. Thus, when organizations assign top managers to work in foreign countries, both CSCOs and CEOs might have this chance. When both CSCOs and CEOs have international working experience, they may develop shared world view and common interpretation of problems, resulting in more fluent and effective communication and ultimately improving firm performance.
Limitations and Future Research
This study has some limitations that open for future research. A key limitation is the small coefficient of determination. The coefficient of determination (𝑅=) is small,
meaning that the performance of regression model is not optimization. Although linear regression shows that independent variables significantly influence firm performance, there are maybe more optimized models that can better examine the relationship between executive experiences and firm performance. In this regard, future studies might test the relationship through other regression models, such as the curve linear regression or non-linear regression. Besides, as the coefficient of determination is small, other crucial variables might be ignored when building regression model. Thus, future studies might detect and introduce these significant variables into models.
Finally, future research might examine whether the average characteristics of CSCOs and CEOs affect firm performance. This paper mainly examines the heterogeneity of CSCOs and CEOs, instead of average performance. The result shows that when higher heterogeneity exists in education, international working experiences, and financial experiences, firm performance will be negatively impacted. The results suggest firms to assign executives with similar experiences. Although executives with similar experience can improve firm performance, the type or amount of the similar experiences may also affect firm performance (Hitt & Tyler, 1991). For instance, average educational level, average international experiences, and average financial experiences also affect firm performance (Tihanyi et al., 2000). Thus, when analyzing CSCOs and CEOs, future research might examine thse influence of these average variables on firm performance.
CONCLUSION
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APPENDIX
APPENDIX A
The Variance Inflation Factor (VIF) results of Multicollinearity Diagnosis
APPENDIX B
APPENDIX C
The Standardized Residual Plot of International Experience Heterogeneity
APPENDIX D
