THE RELATIONSHIP BETWEEN CEO INTERNATIONAL EXPERIENCE AND ORGANIZATIONAL PERFORMANCE: THE MEDIATING EFFECT OF TOP MANAGEMENT TEAM DIVERSITY P.H. (PETER HENK) ZUIDERBAAN S2564343 January 21, 2019

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THE RELATIONSHIP BETWEEN CEO INTERNATIONAL EXPERIENCE AND ORGANIZATIONAL PERFORMANCE: THE MEDIATING EFFECT OF TOP

MANAGEMENT TEAM DIVERSITY

P.H. (PETER HENK) ZUIDERBAAN S2564343

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P.H. (PETER HENK) ZUIDERBAAN S2564343

Master Thesis International Business and Management January 21, 2019

First supervisor: Dr. M.J. Klasing Second supervisor: Prof. dr. D.J. Bezemer

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ABSTRACT

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TABLE OF CONTENTS

ABSTRACT ... 3

1. INTRODUCTION ... 5

2. THEORETICAL BACKGROUND ... 6

2.1 Upper echelons theory ... 6

2.1.1 CEO international experience ... 7

2.1.2 Top Management Team diversity ... 8

2.2 Organizational performance ... 11

3. METHODOLOGY ... 12

3.1 Data ... 12

3.2 CEO international experience ... 13

3.3 Top management team diversity ... 13

3.4 Organizational performance ... 14 3.5 Control variables ... 15 3.6 Missing values ... 16 3.7 Analytic approach ... 16 4. RESULTS ... 16 4.1 Main analyses ... 16 4.2 Robustness check ... 20 5. GENERAL DISCUSSION ... 22

5.1 Theoretical and practical implications ... 25

5.2 Limitations and directions for future research ... 27

5.3 Conclusion ... 28

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1. INTRODUCTION

“Today's organizational leaders manage in an increasingly global environment” (Hoffman & Gopinath, 1994 in Daily, Certo, & Dalton, 2000: p. 573) and the issues that come with that are some of the most critical issues that an organization faces. In an environment where effectively managing international business issues is critical to a firms' success, it was found that executives’ international experience is a very valuable resource for firms in globalized markets (Le & Kroll, 2017). Endowing CEO’s with host countries’ knowledge and networks, international experience contributes to the internationalization of a firm and enhances its competitive advantage and performance (Le & Kroll, 2017).

Even though there has been a lot of research on both upper echelons theory and TMT diversity and its influence on organizational performance, far less is known about the processes through which this upper echelons theory works. That is, the mediating factors through which CEO’s have an influence on firm performance are hardly explored (Wang, Holmes, Oh, & Zhu, 2016). Additionally, there is a lack of literature on the possible antecedents of TMT diversity, as studies on TMT diversity only tend to look at the effects of the diversity of the TMT (Hambrick, 2007; Lawrence, 1997; Nielsen, 2010; Pettigrew, 1992). In the current study, I try to address this research gap and propose the international experience of the CEO has an influence on organizational performance through his/her influence on TMT diversity. This mediation model will be tested with data from the European automotive industry, as it is the world’s leading automotive manufacturing region and it contributes about 7% to the total European manufacturing output (European Commission 2004; European Commission, 2012).

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organizational performance. Therefore, it interesting to see what influence a CEO can have on the diversity of the TMT and subsequently on organizational performance.

One factor that influences the effect of the CEO on the TMT (composition) is the international experience of the CEO. It is expected that a CEO with more international experience knows what benefits a more diverse TMT can bring to the organization, because of his or her experience with working and dealing with a variety of different people. Therefore, I argue that a CEO with more international experience chooses for and decides upon a more diverse TMT, which subsequently has a positive effect on organizational performance.

This research will continue by starting to discuss what is already known about the upper echelons theory and the accompanying CEO characteristics, TMT diversity, and the influence of both on the ultimate organizational goal, that is organizational performance. Following the theoretical discussion, I will present the research methodology and the data used for testing the different hypotheses. After that, I will present the key findings and discuss their implications for both theory and practice together with the limitations of the study and a general conclusion.

2. THEORETICAL BACKGROUND

2.1 Upper echelons theory

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performance. Thus, why organizations do the things they do greatly depends on the biases, dispositions, and characteristics of the top executives within an organization and it is important to consider these biases, dispositions, and characteristics.

This study focuses on the international experience of the CEO and the diversity of the TMT as characteristics of the top executives. Next, I will discuss how the (characteristics of) top executives (i.e., CEO and TMT) influence the organizational performance and how the CEO influences the TMT in terms of diversity.

2.1.1 CEO international experience

As the business environment is changing into a more and more globalized and internationalized environment, active business actors need to change as well, in order to account for this globalizing process (Shalley, Zhou, & Oldham, 2004; Van Woerkum, Aarts, & De Grip, 2007). One of these business actors and top executives is the CEO. CEO’s as leading actors within organizations often set the course for the whole organization. Therefore, factors that influence the decision-making of these CEO’s are logically of high importance to understand how and why the CEO exerts his/her influence on the corporation. One of such factors is the international experience of the CEO, which was found to have a significant effect on the decision-making of the CEO (Daily et al., 2000; Nielsen & Nielsen, 2011). In addition, it was also found that the international experience of the CEO has a positive effect on the performance of his/her organization (Wang et al., 2016). International experience of the CEO can have positive effects on the firm performance because of several reasons.

Firstly, “international experience may serve as a proxy for the reduction of uncertainty and as a surrogate for accumulating cultural knowledge” (Daily et al., 2000; p. 516). This greater knowledge and reduction of uncertainty in the business environment can help organizations to survive in today’s highly competitive business environment (Le & Kroll, 2017). This gives a clear indication of the importance of the international experience of the CEO for the entire organization, because it has a direct effect on the daily operations of the organization.

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gathered by the CEO is exclusive to that individual and that the acquired valuable knowledge, which may benefit the company, can only be applied and transferred to the company by the individual him/herself. Therefore, the international experience of the CEO can become a (sustainable) competitive advantage for the company and can drive the firm’s organizational performance.

Thirdly, there has been a lot of research on a CEO’s prior career experience (Dearborn & Simon, 1958; Lawrence & Lorsch, 1967) which suggest that prior career experience can influence “the knowledge, skills, attitudes, values, and information processing that they bring to bear when making future judgments and decisions about firm strategy” (Wang et al., 2016, p. 783). For example, Wang et al. (2016) find that CEO’s learn about interpreting future objectives, difficulties and potential solutions, and business opportunities in their prior international career and that these attained abilities and capabilities can be very important for an organization. Ultimately, this leads to the conclusion that CEO’s can be of high importance for the company and its strategy, which in turn is likely to positively affect the organizational performance.

Based on the reasons above, it becomes clear that it is crucial to consider the influence of the international experience of the CEO, as it can have great positive effects on the organizational performance. Therefore, the first hypothesis of this proposal is as follows:

Hypothesis 1: Higher CEO international experience leads to higher organizational performance.

2.1.2 Top Management Team diversity

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agency mission (Bear et al., 2010; Boulouta, 2013). For example, previous research suggests that a more gender diverse company board (i.e., more women are added to the team) can have a positive influence on organizational parameters (Erhardt et al., 2003; Farrell & Hersch, 2005). Moreover, other research found that a higher national diversity in a TMT can yield significant positive results in term of organizational performance (Nielsen & Nielsen, 2013). Furthermore, Siciliano (1996) argues that adding women to a company’s TMT leads to new perspectives brought in by women, which in turn may be value-enhancing for the company. This argumentation is further strengthened by Cannella, Park, and Lee (2008), who say that the positive aspects of greater diversity of the TMT include generating more alternatives, better evaluation of alternatives, and better prediction of environmental changes. Based on these findings, I assume that there is a positive relationship between the diversity of the TMT of a corporation and the organizational performance (i.e., financial performance) of that organization.

The assumption that the TMT has an influence on organizational performance is primarily grounded in the upper echelons theory (as discussed earlier), but can also be traced back to the resource dependency theory as described by Siciliano (1996). This theory assumes that TMT’s are part of the organization and its surrounding environment. Due to the individual background of TMT members, they bring information and resources to the organization on an individual level, which can be important for the company (Zald, 1969). By providing information and resources to the organization, the members of these teams help the organization to cushion against an uncertain environment. In addition, diverse perspectives in a team “help a team avoid cognitive homogeneity and simplification, both of these resulting problems tend to reduce the quality of information exchanged and obviate the need for joint decision making” (Ling, Simsek, Lubatkin, & Veiga, 2008, p. 559). This means that homogeneity within a TMT (i.e., all TMT members with the same demographics) should be avoided to be able to overcome these problems and that heterogeneity within the TMT can yield some important benefits. Therefore, the importance of individual characteristics in the TMT is stressed once more and it is crucial to consider this diversity of TMT, as it can have a positive effect on organizational performance. This argumentation about TMT diversity and organizational performance results in the second hypothesis of this study, namely:

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Even though a lot of research has been conducted on TMT diversity, in the meta-analysis of Nielsen (2010), the author finds that there is limited theory development and empirical research on antecedents of the diversity of the TMT. I observe that in a vast amount of literature the diversity of the TMT is almost always used as an independent variable and that organizational demography researches only tend to look at the effects of heterogeneity in the executive suite (Nielsen, 2010). In a similar vein, Lawrence (1997) finds that researchers completely ignore antecedent theories of TMT diversity and only examine the effects of it. As a result, far less is known about the antecedents of TMT diversity and several researches argue that there is a need to understand this “black box of organizational demography” (Lawrence, 1997; Pettigrew, 1992). To understand why the TMT’s look the way they do, I try to identify one of the possible antecedents of TMT diversity, which is the international experience of the CEO.

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Hypothesis 3: Higher CEO’s international experience leads to a higher diversity in the Top Management Team.

2.2 Organizational performance

The final goal for a lot of firms is of course to improve their exhibited performance in terms of improving profitability, cost-effectiveness, process efficiencies etc. Therefore, it is of crucial relevance to identify what factors can be identified as drivers of organizational performance. However, in the current literature there are many definitions and ways to measure organizational performance (e.g., financial, social, operational performance). Consequently, it is necessary to narrow down organizational performance to a more operational concept. To specify the concept, I assume that the financial performance of an organization is the organizational performance of a firm, because in the end, money/profit is the main driver in the business environment that determines whether a corporation survives, expands or goes bankrupt.

Based on the arguments and findings mentioned above leading to the different hypotheses, an overall hypothesis can be proposed about all the relationship and constructs of this study. This overall hypothesis is the fourth hypothesis and is as follows:

Hypothesis 4: TMT diversity mediates the positive relationship between CEO international experience and organizational performance.

The above-mentioned relationships and the resulting hypotheses are illustrated in the conceptual model of this research proposal, which can be found in Figure 1.

Figure 1

Conceptual model of this study. Note: a + indicating a positive relationship between the concepts, a – indicating a negative relationship between the concepts.

CEO’s International Experience

Top Management Team diversity

Organizational Performance

+

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3. METHODOLOGY

To be able to conduct this research, a proper methodological base is needed in order to get results for the proposed relationships between the different constructs in the conceptual model. To do so, data for all three of the constructs discussed above will be needed. To test the mediation model (Figure 1), quantitative data is needed, as I would like to test the relationships for a whole industry (i.e., European automotive industry), which could not be achieved by qualitative data. Moreover, analysis of the quantitative data will allow me to come to conclusions and implications that are relevant for the whole industry. To retrieve this secondary data, I will use the Orbis database published by Bureau van Dijk (BvD), which consists of a broad range of firm-specific data on nearly all companies worldwide, including a lot of detailed information on CEO’s and individuals in the TMT. Besides the Orbis database, other relevant information will be gathered by using official company websites and social media websites of these companies, CEO’s, and individual members of the TMT’s. In the next subsections, I will discuss for every construct what data needs to be retrieved, in which way this data can be retrieved and how the different constructs will be measured.

3.1 Data

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3.2 CEO international experience

To measure the international experience of the CEO, I replicate the measures used by Daily et al. (2000), Sambharya (1996) and Sullivan (1994). They argue that CEO international experience can be measured by looking at the prior career experience of the CEO and in particular at the number of years a CEO has worked in another national context. To retrieve data in this regard, I could have used the method of Daily et al. (2000), who approached organizations of their interest and asking them for the resume of the current CEO. However, today there is a lot more information available online about these CEO’s, both on company websites and on individual LinkedIn profiles. In practice, I gathered information about the international experience of the CEO’s with the use of the Orbis database, the official company websites, and the individual LinkedIn profiles of the CEO’s.

3.3 Top management team diversity

To find data for the diversity of an organization’s TMT, it was first necessary to identify all the individual TMT members. Both the Orbis database and the official company websites were used to identify the individual TMT members. Once it was determined who are in these TMT’s, I assessed how diverse these people are based on information available in the Orbis database, on the official company websites and on individual LinkedIn profiles of these TMT members. Importantly, the diversity of the TMT was determined by the gender, age, country of origin (differing from the home country of the company), outside-industry experience (work in different industries than the automotive industry), and the education, function, and nationality of the members in TMT’s (consistent with the measures used in Kor, 2006; Michel & Hambrick, 1992; Nielsen & Nielsen, 2013). Subsequently, to what extent the TMT is diverse or not can be determined by this information.

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terms of education, function, and nationality, I used the Blau index (Blau, 1977; Carpenter & Fredrickson, 2001; Nielsen & Nielsen, 2013). The formula for the Blau index is:

B = [ 1 -  (pi)2 ]

In this formula, p is the percentage of TMT members in the ith group (i.e., education, function or nationality). For education, I identified 5 categories: no education, BA/BE/LLB, M/MA/MBA/MD, Dr./PhD/J.D., and unknown. TMT members with missing values for education were placed in the ‘unknown’ category. To reflect the TMT and TMT composition in the best possible way, the category ‘unknown’ was also included. The functional categories I used were replicated from Kor (2006) and Michel and Hambrick (1992), who used 9 categories: production-operations, research and development, finance, accounting, general management, marketing, law, administration, and personnel and labor relations. Lastly, all the nationalities of the individual TMT members were used to calculate the Blau index for nationality. One of the limitations of the Nielsen and Nielsen (2013) study was that they could not account for the variation that comes from individuals in the TMT who have dual nationalities, because they identified these TMT members with only one nationality. Therefore, this nationality may not correspond to the place of their upbringing, and so forth (Nielsen & Nielsen, 2013). To account for this variation, I placed TMT members with two or more nationalities into a separate national category than a TMT member with only one nationality. For example, a TMT member with the nationalities German and Dutch was placed in a separate national category than a TMT member with only the single nationality German (or Dutch). So, this TMT member was not placed in the German, nor in the Dutch national category, but was placed in a different national category. Because the Blau index is calculated based on these national categories, I can (partially) account for the variation that comes from a TMT member having a dual nationality, which in turn may give more precise results.

Based on this identification, I can see whether organizations with a higher diversity in the TMT have a higher organizational performance than an organization with a lower TMT diversity.

3.4 Organizational performance

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performance. To be consistent in the measurement of organizational performance, I only focus on and measure the financial performance of the organization in this study. This financial performance was based on financial numbers of the company, which are publicly available in the financial reports of the particular companies as well as in the Orbis Database. Based on previous research, the financial number that will be measured is the return on assets (ROA), which was found to be an effective way of measuring financial performance. This way of measuring financial performance (i.e., organizational performance) is consistent with the used methods in Bathala and Rao (1995), Erhardt et al. (2003), Farrell and Hersch (2005) and Nielsen and Nielsen (2013). Moreover, the measured ROA of the company was set on the end of the calendar year, while the TMT diversity was based on the TMT composition in the beginning of the same year. Here, I follow Hambrick (2007) and Nielsen and Nielsen (2013) who say that this lag structure is needed “to ensure that our antecedent variables temporally precede the dependent variable and avoid problems with causality of the studied relationship” (Nielsen & Nielsen, 2013, p. 377). Based on this measurement of financial performance, I can indicate which companies are more successful than others and more importantly, whether the proposed antecedents and mediators have an influence on the organizational performance.

3.5 Control variables

In addition to the variables I want to examine, some potential control variables were included in the main analysis. I controlled for firm size in terms of the number of employees and company age, as it was found that these factors could have an influence on organizational performance as well (Hitt, Hoskisson, & Kim, 1997; Jung, Chow, & Wu, 2003). Furthermore, because larger TMT’s can be more diverse by definition, measures of TMT diversity are size-dependent (Carpenter, 2002). Therefore, TMT size was also added as a control variable, as the total number of managers in the TMT. The data for the control variables was also retrieved with the use of the Orbis database.

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3.6 Missing values

When searching for the TMT diversity characteristics for every TMT member, I found that for several TMT members, certain characteristics could not be identified. Simply because there was no information available on these characteristics. For example, for some TMT members the nationality could not be identified, for others the age could not be retrieved or the education level could not be identified. Instead of deleting these TMT members from the analysis due to missing values, I kept these members in the dataset. The reason for this is that removing these members for the analysis would give a skewed image of reality. That is, TMT members with missing values remain important for the TMT and the TMT composition, just like the other TMT members. By including the members with missing values and, as mentioned earlier, placing members with multiple nationalities in a separate national category, I could also account for variation coming from these TMT members. Doing this would reflect the TMT and TMT composition in the best possible way and would give the most precise results.

3.7 Analytic approach

After the data was retrieved, I ran several analyses on the data to see whether the proposed relationships between the constructs is really present in the examined industry, which is in line with the methodology used by Baron and Kenny (1982). Firstly, I conducted some basic analyses to show some descriptive statistics as well as the pairwise correlations. Second, to test the mediation model as proposed in Figure 1, I ran several regression analyses to test the hypotheses separately. Lastly, the overall mediation model was tested with the use of the PROCESS tool by Hayes (2017) which analyses the total, direct, and indirect effect (through the mediator) of the dependent on the independent variable. Based on these effects, this tool indicates whether the overall mediation model is significant or not.

4. RESULTS

4.1 Main analyses

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Table 1

Means, standard deviations, and correlations of all variables.

Variables Mean s.d. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

1. Natural log of CEO international experience 1.7745 1.67816

2. TMT age coefficient of variance 0.107 0.07557 0.013

3. TMT female proportion 0.1052 0.16612 0.012 0.176*

4. TMT outside industry experience 0.8169 0.29944 0.137 0.033 -0.03

5. TMT blau index education 0.3723 0.25527 0.240**_0.423**_0.187*_0.313**

6. TMT blau index function 0.3385 0.29694 0.135 0.155 0.054 0.127 0.424**

7. TMT blau index nationality 0.2715 0.26654 0.314**_0.296**_0.073 _0.272**_0.464**_0.203*

8. Organizational performance (ROA2017) 2.9602 13.36456 0.036 -0.034 0.024 -0.170*_{-0.034 -0.131 0.078}

9. Log employees 3.4675 0.76931 0.18 -0.027 0.092 -0.171 0.225*_0.13 _0.373**_-0.015

10. Company age 49.7171 39.72879 -0.041 -0.036 -0.011 0.177*_0.172*_0.173*_0.103 _0.068 _0.119

11. TMT size 4.4803 3.07731 0.170*_0.219**_0.173*_0.146 _0.533**_0.321**_0.466**_0.062 _0.465**_0.181*

N = 152, except for TMT age coefficient of variance (N = 139) and log employees (N = 113).

* : Correlation is significant at the 0.05 level (2-tailed) **: Correlation is significant at the 0.01 level (2 tailed)

To test the hypothesis mentioned above, I conducted a linear regression analysis for hypothesis 1, 2, and 3. To test hypothesis 4, I conducted a mediation analysis using the PROCESS tool by Hayes (2017).

Looking at hypothesis 1, I conducted a regression analysis with the natural log of CEO international experience as independent variable and the organizational performance (ROA 2017) as dependent variable. The results of this analysis, which are reported in Table 2, show that there is no significant relation between the international experience of the CEO and the organizational performance (B = 0.563, p = 0.406).

Table 2

Results of the regression analysis between CEO international experience and organizational performance (with control variables).

Variable ROA 2017

Constant 22.468*

(8.851)

Ln CEO international experience 0.563

(0.674) Log employees -2.941† (1.567) Company age 0.045† (0.026) TMT size 0.562 (0.583) Unstandardized regression coefficients are reported, with standard errors in parentheses. † : Significant at the 0.10 level (2-tailed)

* : Significant at the 0.05 level (2-tailed)

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performance (ROA 2017) again as dependent variable. The results of this regression analysis are summarized in Table 3. Looking at these results, I see that TMT diversity in terms of age was not a significant predictor of organizational performance (B = -10.431, p = 0.639). Also, the proportion of females in the TMT did not significantly predict organizational performance (B = 0.377, p = 0.966). The third diversity characteristic of the TMT, the proportion of TMT members with outside industry experience was a significant predictor of organizational performance (B = -13.501, p = 0.032). The educational diversity within the TMT was not a significant predictor of organizational performance (B = -7.266, p = 0.162). Similarly, the functional diversity within the TMT did not significantly predict organizational performance (B = -5.365, p = 0.247). Lastly, the national diversity within the TMT did not significantly predict organizational performance either (B = 10.041, p = 0.172).

Table 3

Results of the regression analyses between TMT diversity characteristics and organizational performance (with control variables).

Variable ROA 2017

Constant 22.468*

(8.851) TMT age coefficient of variance -10.431

(22.160)

TMT female percentage 0.337

(7.796)

TMT outside industry experience percentage -13.501* (6.222)

TMT Blau index education -7.266

(5.158)

TMT Blau index function -5.365

(4.611)

TMT Blau index nationality 10.041

(7.294) Log employees -2.941† (1.567) Company age 0.045† (0.026) TMT size 0.562 (0.583) Unstandardized regression coefficients are reported, with standard errors in parentheses. † : Significant at the 0.10 level (2-tailed)

* : Significant at the 0.05 level (2-tailed)

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on the TMT diversity characteristics. The results of this regression analysis are reported in Table 4. For the diversity characteristics TMT age (B = -0.003, p = 0.485), TMT female proportion (B = -0.002, p = 0.772), TMT outside industry experience proportion (B = -0.009, p = 0.487), TMT education diversity (B = 0.016, p = 0.205), and TMT functional diversity (B = 0.009, p = 0.608), the results turn out to be insignificant. However, the international experience of the CEO has a significant positive effect on the national diversity of the TMT (B = 0.026, p = 0.051).

Table 4

Results of the regression analyses between CEO international experience and the TMT diversity characteristics (with control variables).

Variable TMT 1 TMT 2 TMT 3 TMT 4 TMT 5 TMT 6 Constant 0.146** (0.041) 0.074 (0.056) 1.007** (0.058) 0.214† (0.109) 0.220† (0.132) -0.109 (0.090) Ln CEO international experience -0.003 (.004) -0.002 (0.007) -0.009 (0.012) 0.016 (0.013) 0.009 (0.018) 0.026† (0.013) Log employees -0.008 (.011) -0.001 (0.017) -0.041* (0.019) 0.002 (0.033) -0.002 (0.041) 0.073* (0.028) Company age 0.000* (0.000) 0.000 (0.000) 0.001 (0.000) 0.000 (0.001) 0.001 (0.001) 0.000 (0.001) Board size 0.005† (0.003) 0.010* (0.005) 0.001 (0.006) 0.033** (0.009) 0.021 (0.015) 0.025** (0.007) Unstandardized regression coefficients are reported, with standard errors in parentheses.

TMT 1 = TMT age coefficient of variance TMT 2 = TMT female percentage

TMT 3 = TMT outside industry experience percentage TMT 4 = TMT Blau index education

TMT 5 = TMT Blau index function TMT 6 = TMT Blau index nationality † : Significant at the 0.10 level (2-tailed) * : Significant at the 0.05 level (2-tailed) **: Significant at the 0.01 level (2-tailed)

Lastly, to examine the proposed mediation model (hypothesis 4), I used the PROCESS tool by Hayes (2017), which is an add-on to SPSS. The results of this mediation analysis, which can be found in Table 5, suggest that none of the TMT diversity characteristics mediates the relationship between CEO international experience and organizational performance. All the indirect effects of CEO international experience on organizational performance through the TMT diversity characteristics turn out to be insignificant. For TMT age the indirect effect was

B = 0.029 (with 95% Confidence Interval (CI) [-0.092, 0.449]). For TMT female proportion the

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educational diversity the indirect effect was B = -0.120 (with 95% CI [-0.651, 0.027]), for TMT functional diversity the indirect effect was B = -0.049 (with 95% CI [-0.465, 0.119]), and lastly the indirect effect for TMT national diversity was B = 0.265 (with 95% CI [-0.011, 1.064]). The mediators could account for nearly a third of the total effect of CEO international experience on organizational performance, Pall mediators = 0.301. However, the overall mediation model turns

out to be insignificant.

Table 5

Results of the mediation analysis between CEO international experience and organizational performance with TMT diversity characteristics as mediator (with control variables).

Variable ROA 2017 LLCI ULCI

Indirect effects

Ln CEO international experience  TMT 1 0.029 (0.114)

-0.092 0.449

Ln CEO international experience  TMT 2 -0.001 (0.056)

-0.127 0.117

-0.139 0.598

-0.651 0.027

-0.465 0.119

-0.011 1.064

Total effect

(0.523) Log employees -1.576 (1.182) Company age 0.031 (0.024) Board size 0.411 (0.413) Unstandardized regression coefficients are reported, with standard errors in parentheses. TMT 1 = TMT age coefficient of variance

TMT 2 = TMT female percentage

TMT 5 = TMT Blau index function TMT 6 = TMT Blau index nationality

4.2 Robustness check

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variables for the home country of the company. These were included to check whether the company’s home country has an influence on the earlier mentioned main results. Overall, I see that including these dummy variables does not change the results of the original mediation analysis in the sense that none of the variables become significant or change from being significant to insignificant. The results of the robustness check and the influence of company home country dummy variables on the main variables in the model can be found in Table 6. Moreover, median tenure and median industry experience exhibited by the TMT members were also considered as additional control variables but were not included in the robustness check because they did not (significantly) influence the results of the robustness check analysis with only the company’s home country dummy variables as control variable.

Table 6

Results of the mediation analysis in which the home country of the company was included as control variable (with baseline control variables).

Variable ROA 2017 LLCI ULCI

Indirect effects

-0.758 1.284

-.154 0.498

-0.475 0.504

-0.511 0.306

-0.421 0.141

-0.176 0.742

Total effect

(0.697) Log employees -0.382 (1.661) Company age 0.019 (0.027) Board size 0.305 (0.460) Unstandardized regression coefficients are reported, with standard errors in parentheses. TMT 1 = TMT age coefficient of variance

TMT 2 = TMT female percentage

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5. GENERAL DISCUSSION

Since the end of the 20th and beginning of the 21st century, a broad range of academic literature explored and examined the relationship between board diversity and organizational performance (Brancato, 1999; Carter, Simkins, & Simpson, 2003; Mattis, 2000; Miller & Triana, 2009). Even though there is a large range of studies suggesting that this diversity has a positive influence on organizational performance (Carter et al., 2003; Erhardt et al., 2003; Nielsen & Nielsen, 2013), there is also a number of studies that do not find any effect (Dimovski & Brooks, 2006; Dwyer, Richard, & Chadwick, 2003) or even find evidence for a contradicting and opposite effect (Shrader, Blackburn, & Iles, 1997). Milliken and Martins (1996) label group diversity even as a double-edged sword that can both have positive and negative consequences. Even though several studies find that TMT diversity may have mixed consequences, it seems like the number of studies indicating a positive link outweigh the negative ones. Assuming there is an effect of board diversity on organizational performance, I seek to identify whether the international experience of the CEO has an influence on the composition of the TMT in terms of diversity. Moreover, I also examine if the international experience of the CEO has an influence on the organizational performance through the influence the CEO has on the (diversity of the) TMT. I do so in the specific context of the European automotive industry.

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Secondly, the proposed relationship of hypothesis 2 addresses the widely studied and examined question whether TMT diversity has an influence on organizational performance. In this study, the results suggest that generally the diversity exhibited by the TMT does not influence the performance of the organization. Almost all the diversity characteristics of the TMT that I identified and measured (age, female proportion, educational diversity, functional diversity, and national diversity) did not have a significant influence on the organizational performance. Only the proportion of members of the TMT with experience outside the industry has a significant negative effect on organizational performance. This means that a higher proportion of members with experience outside the industry lowers the organizational performance. At first glance, this finding seems logical as I might expect that experience and knowledge gathered in one industry is only relevant for that particular industry. This relationship was also found by Smith, Smith, Olian, Sims Jr, O'Bannon and Scully (1994), who found that a more heterogeneous TMT with respect to outside and inside industry experience leads to a lower ROI of that organization. Following that same reasoning, TMT’s with higher proportions of members with experience outside the automotive industry would possibly use knowledge or experience from another industry (more often), which may be not (fully) appropriate for the automotive industry. Looking more closely, one could also expect the opposite. That is, knowledge, information, and experience gained in one industry could also be valuable in another context. Nielsen (2009) acknowledges this reasoning by saying that: “heterogeneity in executives’ industry experience brings along industry-specific knowledge and expertise. Managers can apply these experiences and acquired contacts in evaluating the trends in the firm’s industry, for quickly assessing threats and opportunities, and recommending strategic actions” (p. 285). Nielsen (2009) concludes that an executives’ wide range of experiences outside the industry can be a potential source for reducing uncertainty and complexity in the context of the other industry.

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apparent explanation and say that because there are simply very few female TMT members, it is hard to establish a linkage between female TMT percentages and financial performance of the firm. In a similar vein, Rosener (1995) argues that there is not enough of a “critical mass” of women in the TMT for them to even be able to have an impact on firm performance indicators. Furthermore, Shrader et al. (1997) add that “it is likely that women have not been in top management and board positions long enough to have much impact” (p. 366). Because in this study there are only 3 female CEO’s and the average female percentage in all TMT’s is 12.5%, the before-mentioned explanations seem like a plausible reason why at least the female proportion in this study does not have a significant influence on organizational performance.

Thirdly, based on previous literature on personality and experience of the CEO, I expected the international experience of the CEO to have a positive influence on the different TMT diversity characteristics. The results of the analyses show however that CEO international experience has a significant positive effect on the TMT national diversity, while the other TMT diversity characteristics are not being influenced by it. This suggests that a CEO who has gathered more international experience in his career influences the TMT in a way that the TMT becomes more nationally diverse (i.e., more different nationalities within the TMT). Following the reasoning of Khavul, Benson, and Datta (2010), Lawrence and Lorsch (1967) and Wang et al. (2016), this might be due to the fact that because CEO’s acquire important skills, knowledge, attitudes, and values in another (inter)national context. These competences and abilities may influence the composition of the TMT through the strategic decisions and strategic role the CEO has on the TMT and the whole organization (Khavul et al., 2010; Lawrence & Lorsch, 1967; Wang et al., 2016). Because of their broader experience in other contexts, the CEO’s know what value a more diverse TMT can bring to the organization and therefore act upon and choose TMT members accordingly. Even though I find that TMT national diversity does not have a direct effect on organizational performance (i.e., financial performance), having a more (nationally) diverse TMT has an important influence on the strategy of an organization (Boeker, 1997; D'Aveni, 1990; Eisenhardt & Schoonhoven, 1990; Hambrick, 2007). This suggests that having a CEO with more international experience can be beneficial for the whole organization, as it increases the national diversity of the TMT.

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for the composition and diversity of the TMT. These possible explanations are however subjective to the limitations of this study which will be discussed later.

Lastly, it was expected that TMT diversity had a mediating effect on the relationship between CEO international experience and organizational performance. Conversely, the results of the analyses suggest that this is not the case. I find that there is no direct effect of CEO international experience on organizational performance and that the direct effect does not significantly decline when the mediator(s) are included. Moreover, the performed robustness check did not change the results of the original mediation analysis, which strengthens the finding that there is no mediating effect of TMT diversity on the relationship between CEO international experience and organizational performance. Based on these findings, I conclude that TMT diversity does not mediate the relationship between CEO international experience and organizational performance. Possible reasons for these findings can be found through the indirect path through TMT diversity. Because the proposed and hypothesized relationships between the (in)dependent variables and the mediator turn out to be insignificant for almost all the TMT diversity characteristics, it is logical that the overall model also turns out to be insignificant. It might be that the international experience of the CEO does not influence the organizational performance through the diversity in the TMT in the setting of the European automotive industry, due to the low levels of diversity in this industry. This reasoning is in line with the explanations of Shrader et al. (1997) and Rosener (1995) who argue that simply because of an absence of diversity in the explored industry or setting, it is hard to identify whether there is indeed an effect of diversity on organizational performance parameters.

5.1 Theoretical and practical implications

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between the different concepts I researched. For theory, this may indicate that potential mediators of the relationship between CEO international experience and organizational performance can be identified.

Additionally, this study tries to identify one possible driver of diversity in the TMT. In the meta-analysis of Nielsen (2010), Pettigrew (1992), Lawrence (1997) and Hambrick (2007) all argue that there is a vast lack of theory development and empirical research on the antecedents of TMT diversity and that there is a “need to understand why the TMT looks the way they do” (p. 309). Almost all studies on TMT diversity focused on the effect of heterogeneity in the executive suite and completely ignore antecedent theories for TMT diversity. To fill this gap, I argue that the international experience of a CEO can have an influence on the composition of the TMT and consequently on the diversity of the TMT. Complementing this reasoning, I find that there is indeed (for at least one TMT diversity characteristic) a positive effect of CEO international experience on TMT diversity. For theory, this means that first steps have been taken to discover a potential antecedent of TMT diversity, but that there remains a need to further discover and explore other potential antecedents of TMT diversity as well.

Especially for practitioners in the European automotive industry this study can have several important implications. Based on the findings of this study combined with earlier findings on the influence of diversity in the TMT on organizational performance, I can conclude that CEO international experience can have a positive effect on the national diversity of a TMT, which in turn can have a positive effect on organizational performance (Nielsen & Nielsen, 2013; Simons, Pelled, & Smith, 1999). Therefore, it may be important for practitioners to consider the influence of the international experience of the CEO when choosing or electing a new CEO. Based on these findings a company should logically choose or appoint a CEO with a larger international experience to increase their organizational performance. Of course, organizational performance is subject to a lot of other variables within and outside the company, but hiring a more internationally experienced CEO may yield some important benefits.

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positions in the TMT who have experience in another industry or come from another industry. Rather, they should hire managers who are acquainted with the (European) automotive industry to circumvent the negative effect of TMT outside industry experience on organizational performance.

5.2 Limitations and directions for future research

Like any other research this study also comes with several limitations. One of the main limitations of this study is the limited dataset. Due to limited time and resources only a cross-sectional analysis could be conducted as there was only data available for the current (i.e., 2017) CEO’s and TMT’s. Additional data from previous years about CEO’s and TMT’s in the European automotive industry would be useful to see if there is, in the specificity of a singular company, a shift in organizational performance levels due to a change in TMT composition (and its diversity) or change of CEO of that company. Stemming from this limitation, a logical direction for future research would be to expand the current data about the European automotive industry with information about previous TMT’s and CEO’s through the years, so that comparison within a singular company over the years would be possible. Possibly, this would give a better reflection of the influence of the different TMT diversity characteristics on organizational performance and a better reflection of the influence of CEO international experience on the TMT diversity.

Another limitation of this study is that the diversity scores of the TMT are also based on some missing data. That is, for TMT members whose diversity information could not be retrieved were still included in the calculation of the TMT diversity scores (e.g., the Blau indices). Even though there is a valid underlying reason for this (explained in the methods section), it becomes clear that the scores would have been different once this missing information would have been available and included in the calculation. Based on that, another direction for future research would be to replicate the current study but with (more) complete data about all TMT members to establish diversity scores which are a better reflection of the TMT composition.

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German/Dutch in a different national category than a TMT member with the nationality German (or Dutch). It is wise to make a distinction between these two members, but it can also lead to a skewed image of reality. As with some TMT members it may be the case that the person is completely born and raised in one country, but simply because one of the (grand)parents has another nationality the person has a dual nationality. In theory, these members are different and should therefore be placed in a separate national category, but in practice these members may be the same as TMT members with only one nationality and are therefore unjustifiably considered to be different from one another. The calculation of the Blau index for nationality was based on these distinctions and therefore this methodological limitation may have tampered with the results and findings of this study.

As mentioned in the implications for theory, a direction for future research would be to further explore and discover additional antecedents of TMT diversity to understand why the TMT’s look the way they do (Nielsen, 2010). The limited time and resources allowed me to only examine one of the potential antecedents of TMT diversity (i.e., CEO international experience). Therefore, there is still a need for future research to further understand and identify potential influencers of the diversity in the TMT. For example, other CEO characteristics such as prior career experience or behavior of the CEO could be tested as well as more firm/micro-level concepts (e.g., degree of internationalization or openness of the firm) to see whether these influence TMT diversity. These exploratory researches could further enlighten the so-called ‘black box of organizational demography’ (Lawrence, 1997; Nielsen, 2010)

5.3 Conclusion

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