Research on Top Management Team Heterogeneity and Firm Performance in Chinese Listed Companies

Master Thesis for International Business and Management

Research on Top Management Team Heterogeneity and Firm

Performance in Chinese Listed Companies

By

YIKANG YUAN

Supervisor: Drs. Huib C. Stek Referent: Dr. F. A. A. Becker-Ritterspach

University of Groningen Faculty of Economics and Business

ABSTRACT

Much academic attention has been drawn to the relationship between top management team heterogeneity and firm performance; however, our knowledge on this subject is still limited when it comes to developing countries. The purpose of this study is to apply the previous theory in the unique social context of China by examining the 75 biggest Chinese listed companies with 1172 board members. Under the influence of traditional Chinese culture, the study has shown inconsistent results with those in developed countries. Among the four employed dimensions, tenure heterogeneity, educational background heterogeneity, functional experience heterogeneity are all negatively related to firm performance. The only result contrary with expectation is that age heterogeneity is not related to firm performance in Chinese companies.

Table of Contents

ABSTRACT...2

INTRODUCTION...4

LITERATURE REVIEW...8

Age Heterogeneity and Organizational Performance Existing theories ...8

Age Heterogeneity and Organizational Performance The Chinese case ...10

Tenure Heterogeneity and Organizational Performance: Existing theories ... 11

Tenure Heterogeneity and Organizational Performance: The Chinese case ...13

Educational Background, Functional Background Heterogeneity and Organizational Performance: existing theories Educational background Heterogeneity ...14

Functional Background Heterogeneity ...14

Educational Background, Functional Background Heterogeneity and Organizational Performance: the Chinese case ...15

METHODOLOGY...17 Sample...17 Variables ...18 Dependent variable...18 Independent Variable ...19 Control Variable ...22 Data Sources ...24 DESCRIPTIVE RESULTS ...25

Basic Information of Sample Companies...25

Descriptive Statistics for Variables ...25

TESTING HYPOTHESES ...29

CONCLUSION ...33

LIMITATIONS AND FUTURE RESEARCH...35

INTRODUCTION

In recent years, studies dealing with the Top Management Teams (TMTs) of the companies proliferate. Most of these studies are based on the upper echelon theory which has been formulated by Hambrick and Mason (1984). This perspective argues that characteristics, such as sex, age, tenure, socio-economic background, and personality attributes influence the preferences and attitudes of members, as well as the manager’s strategic choice and the resulting organization outcomes (Carpenter, Geletkanycz, Sanders, 2004; Hambrick and Mason, 1984; Chen, 2008)).

advantages and disadvantages of different alternatives. Therefore, the TMT could make high-quality decisions and obtain a greater capability to solve problem (Richard and Maier, 1961; Simons, 1995).

Other studies have found negative effects from top team heterogeneity (Hambrick et al, 1996). O'Reilly and Flatt (1989) showed that company innovation was negatively related to team heterogeneity in firm tenure in a wide cross section of firms. O'Reilly, Snyder, and Boothe (1993) similarly found that team heterogeneity in firm tenure was negatively related to adaptive change in a sample of electronics firms. Although heterogeneity may provide wider cognitive resources, it may also create gulfs or schisms that make the exchange of information difficult (Ancona and Caldwell, 1992). In some instances, heterogeneity may engender outright distrust and acrimony, as widely dissimilar group members may have different vocabularies, paradigms, and even objectives. Thus their aggregate cognitive endowment can become a net liability, with organizational innovation and performance suffering. Further supporting this latter logic, Wagner, Pfeffer, and O'Reilly (1984) found that heterogeneity in firm tenure was associated with higher turnover in top management teams, and the more distant an individual executive was from the average of the other group members, the more likely he or she was to depart.

My study attempts to fill the gap to some extent by looking at Chinese companies. The first reason why China is chosen is that, as the largest emerging economy, this country has attracted much attention within academia (Chen, 2008). Literature on the Chinese economy and Chinese companies is abundant but the study to examine the effects of TMT heterogeneity on firm performance in Chinese companies is still missing. Second, China has its unique traditional cultural environment, which has large impact on people’s psychological and behavioral patterns, and makes Chinese companies distinct from the ones from western countries. These specialties make it very interesting to see to what extent can those study results about developed economies apply within Chinese context and if there exists different effects of TMT heterogeneity on firm performance in Chinese companies. This paper discusses the relationship between TMT heterogeneity of Chinese companies and firm performance, and intends to obtain new insights.

firm performance which provide good theoretical foundation for this paper. (Whitely, 1992; Hambrick et al., 1996; Knight et al. 1999; Carpenter, 2002; Wei and Wang, 2002). Therefore, the research question is formulated as follow:

How do age, tenure, educational background and functional background heterogeneity of TMTs influence the organizational performance of Chinese companies?

As the first bid for describing and explaining the nationality diversity of Chinese companies’ TMTs, this paper incorporates different arguments in the former literature concerning the effects of age, tenure, educational background and functional background heterogeneity on firm performance which primarily focus on developed countries. Then, these theories will be examined within the Chinese context. After combining them with traditional Chinese culture, hypotheses will be made. Through testing these hypotheses by statistical method, I expect to produce a useful explanation of effects of TMT heterogeneity on Chinese companies’ performance.

LITERATURE REVIEW

We divide this part into following sub-sections: age heterogeneity, tenure heterogeneity, educational background heterogeneity and functional background heterogeneity. Every sub-section start with theories produced in former literature. We will provide different views toward the relationship between each type of TMT heterogeneity and firm performance. Then these theories are examined in Chinese context after the background information of the given matter in China is introduced. Based on the literature review, the hypotheses are formulated in the end of each sub-section.

Age Heterogeneity and Organizational Performance: Existing theories

Age heterogeneity is one of the most critical TMT characteristics influencing decision-making process (Tihanyi, 2000). Consensus has not yet been reached about the influence of age heterogeneity and firm performance in research, which mainly explained by Social identity theory and Information and decision-making theory.

to lead to negative consequences such as decreased satisfaction with the group, lower levels of cohesiveness, reduced within-group communication, decreased cooperation, increased turnover and higher conflict levels (e.g. Cocker and Major, 1989; Martin and Shanrahan, 1983).Pelled (1996) notes that visible demographic variables such as age, gender and race are more likely to trigger categorization than less visible attributes. Zenger and Lawrence (1989) find that age diversity in group projects relates negatively to frequency of technical communication within the group. Overall, numerous studies show that age diversity often results in group process and performance loss.

Information and decision-making theory has argued that different opinions provided by culturally diverse groups make for better-quality decisions (Cox, 1994; Mcleod et al., 1996). In addition, Pelz (1956) finds that productivity among scientists and engineers positively correlates with frequent contact with colleagues possessing dissimilar training and expertise. Like a growing number of scholars (Jehn, 1995; Pelled, 1996), we posit that these findings have implications for other visible or observable types of diversity in organizations (Milliken and Martins, 1996), more specifically, age.

Age Heterogeneity and Organizational Performance: The Chinese case

The past three decades have been broadly recognized as one of the most significant reformatory periods in Chinese history. However, the reform brought severe disturbance and confusion to Chinese culture. As a result, those senior Chinese managers tend to hold very much different values compared with junior managers. This phenomenon is generally referred as “Generation Gap” in Chinese society. The most significant reform ever happened in the contemporary Chinese history was called “The Great Proletarian Cultural Revolution”, which was a period of widespread social and political upheaval in the People’s Republic of China between 1966 and 1976, resulting in nation-wide chaos and economic disarray. The effects of the Cultural Revolution directly or indirectly touched essentially all of China's population. Many traditional Chinese principles, values and believes have been shake. Mao Zedong Thought had become the central operative guide to all things in China. People were encouraged to criticize cultural institutions and to question their parents and teachers, which had been strictly forbidden in Confucian culture. As a result, the generation who spent their youth during Cultural Revolution has distinctive values and behaviors compared with their former generations (Yan & Gao, 1996). Since the end of Cultural Revolution and the start of economic reform in 1978, China has experienced the fast social development and opened their gate to Western society. Those people, who didn’t go through Cultural Revolution but grew up in fast-developed 1980s, have shown another distinctive feature to their former generation. All these different generations exist in nearly every Chinese enterprise nowadays, even TMT, which severed as senior managers and junior managers. In realty, the age gap has caused value heterogeneity and brings about many misunderstanding, which finally lower the effectiveness of TMT decisions.

managers (around 30 years-old). The result shows there were significant differences in 7 dimensions including “Ascription Orientation”, which younger managers tend to ignore it when judging people; and “Power Distance”, which are encouraged by older managers. This research suggests that Chinese managers should be treated differently in culture dimensions and levels due to generation gap.

Based on social identity theory discussed above, managers in the same age bracket generally have similar experiences and values, so their behaviors are almost the same and it is easy for them to communicate with each other. Because our country is in a transition economy, and the social structure and the constitutional environment are changing rapidly, managers with a vast age difference tend to have conflicting values and ideas. Under the dual impact of economic transition and globalization, the external environment of Chinese enterprises is getting increasingly complicated, and the competition becomes fiercer （Zhang, 2007）. So we can assume that the ability for TMTs to make decisions quickly can contribute to the improvement of firm performance. Hence, we tentatively propose the following hypothesis.

H1: Age heterogeneity in Chinese top management teams is negatively related to organizational performance.

Tenure Heterogeneity and Organizational Performance: Existing theories

There are two types of tenures for a top management team member. One is organization tenure, which refers to the work time in a particular firm (Wiersema & Bird, 1993; Wiersema & Bantel, 1992; Mooney & Sonnenfeld, 2001); the other is team tenure, which refers to the work time of managers as a team (Wiersema & Bird, 1993;Wiersema & Bantel, 1992; Boeker, 1997).

language born from working in the same organization facilitate internal communication among TMT members (Lawrence & Lorsch, 1967; Allen & Cohen, 1969). On the contrary, TMTs composed by manages owning different organization tenures tend to hold various ideas and cognitive conflicts, which may force firm reform (Mooney & Sonnenfeld, 2001). Athanassion & Nigh (1999) argues that the work experiences and connection net coming from one’s organizational tenure affect the importance and effect of his suggestions; members with different organization tenures can provide various business plans for a firm to exploring global market, thus accelerating its internationalization process.

better performance; in highly internationalized firm, performance is negatively correlated to team tenure heterogeneity (Carpenter, 2002).

Tenure Heterogeneity and Organizational Performance: The Chinese case

As discussed in the above literature, managers with heterogeneous tenure enter organization or TMT at different time and experience different development phase of the firm, which creates different understanding for organization strategies (Katz, 1982), therefore can produce various business plans and evaluate them in a comprehensive way, which in turn guarantee the quality of business decision and facilitate organization development. This view generally cannot apply to Chinese companies, In contrast, when it comes to Chinese context, the length of team tenure affects the nature and depth of internal communications (Zenger and Lawrence, 1989), and the modes of interaction among members (Pfeffer, 1983). The unique Chinese culture largely determines that when TMT members working together, sometimes they interact in a different way from Western society. No matter in large or small work teams, team members always like to establish different smaller groups. It can be seen as a special expression of Guanxi in Chinese organizational culture, since people set up their own small groups to keep close relationship with their friends, gain support with certain colleagues and avoid being exclusive. People enter a team at similar time are especially easy to become close friends and build their own groups, since they are all unfamiliar with other team members and have similar understating on the team’s status quo. On the other side, people newly enter a team are not easy to get a chance to break into another group, thus difficult to get trust and support of others. As a result, the communication among different groups is hampered and work efficiency is reduced. Therefore, the following hypothesis is formulated:

Educational Background, Functional Background Heterogeneity and Organizational Performance: existing theories

Educational background Heterogeneity

Previous studies have divided educational background heterogeneity into two groups: educational level heterogeneity and profession heterogeneity. Educational level heterogeneity has a double-edged effect. On one hand, the larger gap in this level among members of TMT, the easier the conflicts being caused, and more disputes on plans and decisions （Knight, D et al., 1999）; On the other hand, educational level heterogeneity offers diversified information, deeper understanding towards different situations and enhances strategy quality and firm performance (Smith, K.G. et al., 1994).

Profession is largely related to one’s preference and cognition, and even closer related to strategy choice and performance of a firm. TMT with greater profession heterogeneity is better capable of obtain diversified information, skills, new thoughts and profound visions in formulating strategies (Wiersema & Bantel, 1992). Tihanyi (2000) proves that TMTs with heterogeneous educational background have abundant professional skills and social experience and effective control of risk and uncertainty in global competition, therefore more suitable to lead the firm to enter foreign markets.

Functional Background Heterogeneity

relating to functional background also influences TMT on the understanding of external environment, strategy choice and firm performance.

TMT consisting of members with different functional background observe not only various affairs in external environment, but different aspects of the same event, therefore, they acquire more information compared with individuals (Weick, 1987). However, research of Sutcliffe (1994) finds out the higher heterogeneous of functional background of TMT, the worse capable of them to identify the external opportunities, since their communication might be destroyed.

Some researchers have explored the relationship between functional background heterogeneity and firm performance. Hambrick, Cho & Chen (1996) argue first on impact of functional background heterogeneity on firm’s competitive moves, then on performance. The results demonstrate that for both market share and firm profit, the heterogeneity brings positive impact.

Educational Background, Functional Background Heterogeneity and Organizational Performance: the Chinese case

culture. TMT members who have been long educated under the culture of collectivism, value interdependent relationships with other members and integrated action of the team. They like to set clear boundary to differentiate their members from outside the team, which force them to overact to the trivial differences of their members. Therefore, they are favor of working with similar team members and homogeneous teams become more efficient (Liang, 1963; Lee, 1993). Secondly, there is another dominant value in Chinese culture called “majority” orientation, which refers to a strong sensitiveness and attention paid to the opinions, standards, appraise and criticism of others around. Chinese people always try hard to obtain agreement, acceptation, help and appreciation from others, and avoid blame, refuse, embarrassment and conflicts. They consider more of how other people behave, and not to embarrass others when discussing. As for TMT, members always follow the opinions of the majority in order not to be isolated. Thirdly, Chinese enterprises are still in the process of modern enterprise system building, they have not developed a sound coordinating mechanism and a formal communication system that can tap the potential advantages of TMT heterogeneity. Therefore, this paper makes the following hypotheses.

Hypothesis 3: Educational background heterogeneity in Chinese top management teams is negatively related to organizational performance.

METHODOLOGY

In this section, samples, variables and data sources are discussed.

Sample

As the first attempt to examine the effects of TMT heterogeneity on organizational performance of Chinese companies, my study focuses on big listed Chinese companies. First, it is very important to clarify that Chinese companies in my research refer to companies listed in two domestic stock exchanges: Shanghai and Shenzhen Stock Exchanges. In order to identify the biggest Chinese companies, the market capitalization of all Chinese public companies on the 31st of December 2008 is retrieved from the annual statistics of Shanghai, Shenzhen Stock Exchanges. Based on their reports, 107 companies whose market capitalization exceeds 20 billion RMB (about 2.08 billion Euros1) each are selected in the first place. Since share prices of listed companies are very volatile and there was a huge financial crisis in World stock markets since the second half year of 2008, which China is also involved, the market capitalization of some companies may reduce greatly and therefore not included in the sample. To the author’s knowledge, there is no ranking of Chinese listed companies by the indicators like total assets or total revenues. “The 2009 BCG Global Challengers List” is therefore consulted. Thirty-two Chinese companies are identified by BCG (2008) as the top companies which are changing the world2. Twenty of these companies are already included in the 107 companies which have been chosen by market capitalization. All these 119 companies are selected again and some of them are excluded from my study. The criteria for elimination are: (1) financial and public-utility firms as these service industries are different from the rest of manufacturing industries in terms of investment nature, industry characteristics and competition patterns, therefore their performance are not comparable to others; (2) firms where the CEO or general manager is replaced or more than 1/3 of the members in the TMT are replaced during 2007-2008, as then the new TMT needs time to

1 _{Converted by the exchange rate on 2008 December 31}st_{: 1 RMB=0.0961EURO}

familiar with each other, and the conflicts may be caused by this unfamiliarity rather than heterogeneity ; (3) firms of which TMT members’ personal data are incomplete. We are finally left with 75 that meet the requirements for this study.

Companies incorporated in mainland China embrace the mechanisms of both executive board and supervisory board at the same time. This is the outcome of the reforms of SOEs supported by China’s 1993 Company Law that accepts the ideology of co-determination originating form Germany, the Netherlands and France (Wei, 2006), and the China Securities Regulatory Commission promoted the Code of Corporate Governance for Listed Companies in 2003 (Chen, 2008). Therefore, in my research, TMT refers to all members of the executive boards and supervisory boards, which is 1172 in total.

Variables

Multiple regression is used to test the hypotheses. The dependent variables, independent variables and control variables are introduced as follow.

Dependent variable

(Walter, 1992; Birchard, 1994) EVA can be measured as Net Operating Profit After Taxes(or NOPAT) less the money cost of capital. To put it simply, EVA is the profit earned by the firm less the cost of financing the firm's capital.

This paper uses EVA as a measure of firm performance based on the following reasons. First, Wang et al. (2003) indicate in their research that EVA is better than accounting measures (such as ROA, ROE and EPS) on the interpretation of Chinese listed companies’ value alteration. Second, since the Chinese stock market is still imperfect, the stock prices of Chinese listed companies deviate from their value and the replacement value of company assets is also difficult to estimate and at the same time only 40% of the total shares are bought and sold in the stock market. Under these circumstances, Tobin’s Q cannot reflect genuine firm performance. So Tobin’s Q is not a suitable measure of the performance of Chinese listed companies (Zhang, 2007).

Instead of calculating the EVA of each company by strictly following the formula, this paper uses the related data provided by Chinese listed companies EVA database published by Stern Stewart & Co., and this approach is consistent with the similar research abroad.

Independent Variable

Age and tenure heterogeneity: Top management team’s age heterogeneity and tenure heterogeneity are measured using the coefficient of variation, which is the standard deviation divided by the mean, with higher values indicating greater age or tenure diversity. Allison (1978) has noted that among heterogeneity measures, the coefficient of variation is preferable when numerical data such as age or time frames are used, since it is more stable than standard deviation and variation.

Educational background heterogeneity: Measurement of TMT educational background heterogeneity relied on Herfindal-Hirschman coefficient, which is also called Blau’s index. The formula is

Where pi is the percentage of the i type members in the team and the range of the value of H is 0 to 1, and the bigger the value, the higher the degree of team heterogeneity. Wiersmema and Bantel (1992) divide the disciplines into two groups in their research as engineering and others; Tihanyi et al (2000) combines the disciplines and levels and classifies them into ten categories: bachelor in literature and arts, bachelor in natural science, bachelor in engineering, bachelor in business administration, bachelor and master in law, master in science and arts, master in engineering, MBA, PhD, others (e.g., technical education); Hambrick el al (1996) divides into 8 groups: engineering, science, business administration, economics, arts, law and commerce (accounting, finance etc.). Based on the classification of disciplines by the National Ministry of Education and the classification adopted in previous studies (Tihanyi et al., 2000; Hambrick et al., 1996), this paper readjusts the educational backgrounds of TMT by dividing them into five categories: science and engineering (science, engineering, agriculture and medicine), economics and management (economics, management), literature and arts (philosophy, literature and history), law, and others (education, military science). See table 1 below.

TABLE 1:

Divisions Standard of TMT Education Discipline, Functional Background and Education Level

Education Discipline Functional Background Education Level science and engineering

(science, engineering, agriculture and medicine),

manufacturing, High school graduate and below

Economics and management (economics,

management)

R&D Technical college

Literature and arts (philosophy, literature and history)

Finance Bachelor

Law Marketing Master

Others (education, military science and others)

Law PhD

Administration (Party

affairs, the Communist Youth League, and labor unions),

Government staffers

Scholars

Control Variable

Enterprise size: big companies usually own more resources and have more authority institutions. Both of them influence the firm performance. This paper adopts the index of measuring enterprise size similar with that of Carpenter (2002), and Richard and Shelor (2002), which are the total employees of the enterprise. Considering the original outstanding data will exaggerate their impact, we adopted a logarithm of the number of employees since it is good to do regression analysis (Lan, 2004).

Team size: It is believed that TMT heterogeneity is related to team size and team size also influence firm performance. In this paper, team size refers to the number of the TMT as defined in this paper that the company had.

Average age of the team: It is argued that the age is highly related to one’s knowledge, experiences and social contact, thus influence his decision on firm strategy. Average age of the team in this paper refers to the average age of all members of the TMT.

Average education of the team: education level is directly connected with one’s knowledge, skills and perceptive ability, which influence the communication between team members, work effectiveness and firm performance. Therefore, we have to control the interaction of average education level when measure the effect of education heterogeneity. According to the traditional way of classification, this paper classifies education as consisting of five levels (table 1): high school and below; technical college; bachelor; master; and doctor. The larger the means, the higher the team average education level. A dummy variable is used to measure it. (1=high school and below, 2=technical school, 3=bachelor, 4=master, 5=PHD)

all members of the TMT, ranging from the time when they joined the team up to 2008.

Data Sources

Annual reports, the companies’ websites and Eastmony.com (one of the biggest Chinese financial portals) together provide very detailed biographies of top managers which cover their age, functional experiences, education background and the time when they entered TMT. ZoomInfo.com and other online sources are consulted when some data about senior managers is still missing.

Economic value added (EVA) of the sample Chinese listed companies are obtained from the database of Stern Stewart Consulting Company (China). Information about the total revenue, net profit and industry classification are collected from the annual reports of Shanghai and Shenzhen Stock Exchanges.

DESCRIPTIVE RESULTS

This study selects 75 out of all the companies listed in the Shanghai and Shenzhen Stock Exchanges in accordance with the research needs. These sample companies have a short listing age of around 8 years on average and nearly half of them did their IPOs during the last five years. The sales revenue in 2008 of the sample companies has a huge range, with 1452 billion RMB as the maximum and 1.7 billion RMB as the minimum. 20 of them have annual revenue above 50 billion RMB. The average sales revenue is 76.7 billion RMB and the standard deviation is 231.2 billion RMB. The net profits also have a very huge range, with 113.8 billion RMB as the maximum and 0.62 billion RMB the minimum, 5.0 billion in average and standard deviation of 15.7 billion. 35 of them exceed 10 billion. Among the 75 companies, 38 of them are operating in industries including energy exploitation and production, mineral resources exploitation, metallurgy and pharmacy, accounting for 50.6% of the total.

TABLE 2

Descriptive Statistics of Sales and Profits in Sample Companies (billion RMB)

Mean St. deviation Max Min

Sales revenue 76.7 231.2 1452 1.7

Net profits 5.0 15.7 113.8 0.62

Descriptive Statistics for Variables

fact, 28 out of 75 companies were in the top100 EVA list, with most of them are state-owned enterprises (SOE) operating in energy-related industries. Besides, although the most of the sample companies all have at least around 10 thousands employees, the number is not similar, with a range from 638,158 to 1,680. Some of the SOEs are extremely large, such as China Petrochemical Corporation. In contrast to this, team size of the sample companies is very similar, with an average of 15.9 top managers. The majority of them have 16 members on the two-tier boards. Actually, most of the large firms have the same number of people in both executive boards and supervisory boards, including 3 to 4 independent directors on the supervisory boards, which was stipulated by the China Securities Regulatory Commission in the code of Corporate Governance for listed Companies in 2003.

Among the 75 TMTs, the average ages range from highest of 58.35 to lowest of 43.33, with a standard deviation of 1.97. When checking the TMT members’ information, it is obvious that the majority of them are in 40s and 50s, some in 60s, with only a few in 30s and 70s, none of them below the age of 30. The average education levels of all TMTs range from 4.25 to 2.56. In fact, 989 of them have at least bachelor degree, accounting for 84% of total. The average tenures have a large range from 8.67 years to 1 year, and the standard deviation is 1.28 years.

TABLE 3

Descriptive Statistics of Variables

Variable Code Mean Standard

deviation

Max Min

EVA（million RMB） EVA 3,007.84 10,971.10 81,140.56 89.58 Company size Size 23435.03 10,643.82 638,168.00 1,680.00

Team size Tsize 15.90 1.04 18.00 14.00

Average age Mage 50.74 1.97 58.35 43.33

Average education level Medu 3.15 0.43 4.25 2.56 Average tenure (year) Mten 3.19 1.28 8.67 1.00

Age heterogeneity Hage 0.15 0.06 0.41 0.01

TESTING HYPOTHESES

In this part the model for testing hypotheses is established, and the relevant results are provided at the same time.

Previous studies in the literature review have come up with different results regarding the relationship between age, tenure, educational background, functional background heterogeneity and organizational performance. Some argue that heterogeneity will bring new ideas, enlighten discussion and improve firm performance; while others argue that heterogeneity bring conflicts, hinder communication and deteriorate firm performance. Considering the influence of traditional Chinese culture, this paper makes four hypotheses all assuming negative effects for heterogeneity on firm performance.

A linear regression model is established to test hypotheses:

Y = a X1

+ b X

+ c X

+ d X

+ e X

In this model, Y represents firm performance;

X

X

educational background and functional background heterogeneity.

X5

TABLE 4

Correlation Matrix of All Variables

Variable EVA Size Tsize Mage Medu Mten Hage Hten Hedu Hexp

EVA 1 Size −0.157** 1 Tsize -0.092 0.185** 1 Mage −0.120* 0.118* 0.03 1 Medu -0.018 -0.072 -0.087 −0.273** 1 Mten -0.049 0.05 -0.028 0.290** −0.122* 1 Hage -0.063 -0.038 0.075 0.007 0.061 −0.165** 1 Hten -0.081 0.146** 0.016 -0.081 0.109* -0.089 -0.017 1 Hedu -0.042 -0.009 0.145** -0.086 −0.208** -0.054 0.035 0.033 1 Hexp -0.057 −0.138** 0.133 -0.084 0.038 0.027 0.036 -0.018 0.221** 1 Note: N=75 ** p＜0.01. * p＜0.05. two-tailed tests

In order to control the correlations among the independent variables, multiple regression analysis is followed. The results are showed in table 5 and 6 below.

functional experiences (β =−0.126, p<0.05).

As for hypothesis 1, the result shows a negative correlation between age heterogeneity and firm performance, but they fail in the significance test, which means H1 is rejected. The insignificant result might be the consequence of difference in attributes between age heterogeneity and the other three independent variables. Tenure, educational background and functional background belong to the group of TMT heterogeneity that has large relations with job itself, whereas age heterogeneity belongs to non-job TMT heterogeneity （ Sambharya, 1996 ） . Job-related heterogeneity has a more obvious effect in causing disagreement when a group decision is being made, therefore showing a prominent correlation in the t-test. Another possible reason can be found in previous descriptive result, where the average age heterogeneity is 0.15, and only 0.06 in standard deviation. Also the data of average age of TMT tells us that the majority of team members are in their 40s and 50s, with standard deviation of only 1.97. These indicate that all sample TMT member have a relatively homogeneous age, therefore it has weak impact on firm performance.

TABLE 5

Summary of Regression Model

R R Square

Adjusted R Square

Std. Error of

the Estimate F Sig.

.385a .148 .128 .10439 2.774 .003a

a. Predictors: (Constant), Hage, Hten, Hedu, Hexp, size, Tsize, Mage, Medu, Mten

TABLE 6

CONCLUSION

Since the establishment of Upper Echelon theory, the relationship between TMT heterogeneity and organizational performance has drawn much attention within academia, some confirm a positive relationship while others find they are negatively correlated. However, our knowledge on this topic is still limited when it comes to developing countries. This paper contributes to prior literature by examining the effects of TMT heterogeneity on firm performance in Chinese context. Four dimensions are selected in the first place: age heterogeneity, tenure heterogeneity, educational background heterogeneity and functional background heterogeneity. Research question is formulated as:

How do age, tenure, educational background and functional background heterogeneity of TMTs influence the organizational performance of Chinese companies?

To answer this question, I first examine how previous classic theories argue about the relationship between each type of heterogeneity and firm performance and select the one suitable for Chinese companies. Within the discussion the Chinese context, attention is particularly paid to the unique Chinese traditional culture.

The regression results prove to support three of my hypotheses. Tenure, educational background and functional background heterogeneity of TMT all have a negative impact on organizational performance. It indicates that within the TMT of Chinese companies, the more diversified of members’ tenure, educational level or functional background, the worse the performance of that company.

provide two possible explanation: one is age heterogeneity as a non-job related variable has weaker impact on causing cognition conflict and communication barrier than the other three types of job-related heterogeneity. The other explanation is there are indeed trivial differences among the age heterogeneity in each sample firm, hence having no significant effect on firm performance.

This paper has provided one possible reason for the difference in final results from that of the foreign mainstream researches. The collectivism in Chinese traditional culture values unanimity, obedience and similarity, which isolates those people value individual thought, and increase conflicts among members; the “little group” culture and Guanxi orientation also influence the communication and the way they get along with each other in a TMT.

LIMITATIONS AND FUTURE RESEARCH

In this section, the limitations of my study and some interesting topics for further research are discussed.

The first limitation of my study is the sample comprises of only seventy-five biggest Chinese listed companies. Since most of them are important SOEs with similar ownership structure and operating pattern (government control and intervention), and they operating in concentrated several industries, their EVA are all above certain level and within limited range. As a result, my research results are hard to be applied to those small-sized private companies operating in other industries. Future research may enlarge this sample to include companies from more industries, in different size and different ownership structure.

The second limitation of this study is that the data employed for all variables are only constrained in 2007 to 2008, but the impact of TMT characteristics on firm performance has an obvious lagging effect, especially TMT heterogeneity, which may need longer time to shows. Future research could extend this time period and it will provide a more detailed examination of the change in firm performance.

Third, this paper only select EVA as the only indicator of firm performance. Although it can be used to avoid the impact brought by managers “managing” the firm’s surplus, and provides a more real estimation of real economic profit of the firm, it should be realized there are different ways to measure firm performance in long and short period, and market performance or financial performance, etc. Adopting only one indicator weakens the application of this study to different situations.

features of different industry or the internationalization strategy of a firm. All these variables will influence the decision process of the TMT and the how the TMT decisions change firm performance. Future research should take them into consideration.

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