Master Thesis MSc Business Administration Change Management
The influence of CEO regulatory focus on exploration-exploitation: The moderating effect of board skill diversity
By:
Tiffany Theresia S4218515
t.tiffany.theresia@student.rug.nl
University of Groningen Faculty of Economics and Business
February 2021
Supervisor: Prof. Dr. J. D. R. Oehmichen Co-Assessor: Dr. I. Maris-de Bresser
2 ABSTRACT
Following the upper echelon theory, this research argues that the Chief Executive Officer (CEO) personality attributes can explain its exploration and exploitation orientation. Regulatory focus as a psychological framework can influence how people approach their goals, whether through a gain/non-gains condition (promotion) or a loss/non-loss condition (prevention). Furthermore, this study argues that the regulatory focus can influence CEO orientation in exploration-exploitation. Promotion focus of the CEO has a positive effect on both types of orientation while prevention focus only has positive effect on exploitation and negative effect on exploration. Additionally, this study also analysed the moderating effect of board skill diversity, promoting both regulatory foci to engage in exploration and exploitation. The hypotheses are tested on 375 S&P 500 listed firms between 2012-2017. Both regulatory foci were found to have significantly increased both exploration-exploitation tendencies. However, no support can be found on the moderating effect of board skill diversity. These findings contribute to the upper echelon literature on how the CEO’s psychological characteristics can influence strategic decision-making, such as in exploration and exploitation.
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TABLE OF CONTENTS
1. INTRODUCTION ... 4
2. THEORETICAL FRAMEWORK AND HYPOTHESIS ... 6
2.1 Upper Echelon Theory ... 6
2.2 Regulatory Focus ... 7
2.3 Exploration and Exploitation ... 8
2.4 Regulatory Focus, Exploration and Exploitation ... 9
2.4.1 CEO promotion focus and exploration-exploitation ... 9
2.4.2 CEO prevention focus and exploration-exploitation ... 10
2.5 Board Skills Diversity as a moderating effect ... 11
3. METHODOLOGY ... 14
3.1 Sample and data collection ... 14
3.2 Measurements ... 15 3.2.1 Dependent variable ... 15 3.2.2 Independent variable ... 15 3.2.3 Moderator ... 16 3.2.4 Control Variables ... 16 3.3 Analytical Method... 17 4. RESULTS ... 18
4.1 Descriptive Statistics and Correlations ... 18
4.2 Regression Results and Hypothesis Testing ... 18
4.3 Robustness Checks ... 19
5. DISCUSSION AND CONCLUSION ... 23
5.1 Theoretical Implications ... 24
5.2 Managerial Implications ... 25
5.3 Limitations and Future Research ... 26
6. REFERENCES ... 29
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1. INTRODUCTION
From the organizational learning strategies by March (1991), exploration-exploitation has been conceptualized into different viewpoints, including strategic management. Both activities are found to significantly impact a firm’s performance and survival (He & Wong, 2004; Jansen et al., 2006; March, 1991). Companies need to experiment, innovate, and search for new opportunities by performing exploration to maintain their long-term success. At the same time, companies need to secure short-term benefits through refinement and increased efficiency by performing exploitation actions (Lavie et al., 2010). Firms, therefore, face a continuous challenge where they need to balance exploration and exploitation activities simultaneously because oftentimes, they are contradicting and competing due to the firm’s limited resources (Lavie et al., 2010).
Scholars have attempted to understand the drivers of exploitation-exploration in the past; however, determinants relating to the CEO personality is still scarce. Many antecedents of these activities rely on the organization level rather than the individual attributes of executives, such as their personality traits, despite the strong evidence in Upper Echelon Theory (Hambrick & Mason, 1984) that recognize firm’s performance can be influenced by its CEO personality. Lavie et al. (2010) also discussed that one of the determinants of organizations’ engagement in exploration and exploitation is the cognitive and behavioural characteristics of senior management teams. Thus, this study focuses on the well-established psychological framework, regulatory focus (Higgins, 1977; 1998) that explained how individuals pursue specific orientation in goal attainment. The promotion focus pursues gains by seeking rewards and pleasure, while the prevention focus pursues non-loss conditions by avoiding pains and failures. A prior study also found how CEOs’ regulatory focus influences the CEO’s attention, resource allocation, and preferred strategy (Wallace et al., 2010), which makes it suitable to link this concept with exploration-exploitation activities on the CEO level.
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board skill diversity is still relatively limited, especially linking it with exploration and exploitation tendencies. Therefore, this study hypothesizes that skill diversity on board can create more knowledge provision for the organization (Pearce & Patel, 2018) that can influence CEO decisions including their exploration-exploitation orientation.
Thus, the purpose of this thesis is to develop an understanding of the effects of CEO regulatory focus on exploration-exploitation orientation. Moreover, this research also aims to develop insights on board skill diversity as the moderating effect. To summarized the research gaps and boundaries, a research question is formulated as:
What is the effect of CEO regulatory focus on its exploration and exploitation orientation, and how is this effect moderated by board skill diversity?
This research’s sample data consists of 1.662 observations from 375 firms listed on the S&P 500 with a period from 2012-2017. This research uses content analysis through Computer-Aided Text Analysis (CATA) in measuring the variables of interest. The result from random-effect regression found evidence to support the relationship between the CEO’s regulatory focus and exploration-exploitation activities. In contrast to the study hypothesis, prevention focus positively influenced exploration, even exceeding the promotion focus effect. Only partial effects of board skill diversity were found in moderating the regulatory focus and exploration-exploitation orientation. This study aims to contribute to the Upper Echelon Theory and the topic of corporate governance through this analysis.
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2. THEORETICAL FRAMEWORK AND HYPOTHESIS
This chapter discusses the theoretical background and the development of hypotheses of this research. The first section explains how this study contributes to the Upper Echelon Theory (UET) topic, as it aims to understand the influence of CEO characteristics (regulatory focus) with its exploration-exploitation orientation, which also have a significant effect on firm performance and other strategic outcomes. Next, the second section of the chapter will be followed by the description of the concepts and past literatures of regulatory focus and exploration-exploitation orientation that will be used to build the conceptual model and hypotheses of this study.
2.1 Upper Echelon Theory
Hambrick & Mason (1984) upper echelon theory is a rapidly growing research stream which recognizes that firm executives may possess personal attributes that can influence their decisions. Such characteristics thus become the determinants of organizational outcomes such as strategic choice and firm performance (Hambrick & Mason, 1984). There are two aspects where these individual characteristics determined the firm outcomes (Buchholz et al., 2018; Dubey et al., 2018; Hambrick, 2007). First, executives frequently use their personal interpretations to make strategic decisions. Second, such individual interpretations tend to be based upon the executives’ background, personality, and experience (Hambrick, 2007; Hambrick & Mason, 1984). The theory incited a growing number of studies, which then resulted in three main areas of literature (Liu et al., 2018). The first line of literature analyzed the effect of the Top Management Team (TMT) characteristics on firm performance. The second literature focused specifically on CEO's individual attributes on firm performance. The last stream of literature then integrated the two areas by examining the influence of CEO individual attributes toward the firm’s TMT functions and processes. This research thus is in line with the second stream of literature, as it looks at the influence of a CEO’s personal attributes towards his/her tendency to exert strategic decisions on exploratory/exploitation activities (He & Wong, 2004).
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Rakhmayil & Yuce, 2011). Though those demographic indicators are often easily accessible compared to the psychological framework and cognitive base of CEOs, it may provide an insufficient explanation of how CEOs’ individual attributes actually influenced firm performance. As Hambrick & Mason (1984) mentioned, the personality traits of the CEO most likely have a bigger influence on firms compared to their demographics, and thus such features need to be taken into account when examining organizational outcomes. CEO regulatory focus (Higgins, 1997; 1998) as one of the psychological constructs offers a new stream of literature that has been used to explain numerous phenomena in several areas such as marketing (Herzenstein et al., 2007; Kees et al., 2010), finance and economics (Halamish et al., 2008) and also strategic management (Das & Kumar, 2010; Kammerlander et al., 2015; McMullen et al., 2009; Rietzschel, 2011). The concept of regulatory focus will be explained in the next section.
2.2 Regulatory Focus
According to regulatory focus theory (Higgins, 1997; 1998; Higgins et al., 2001), individual’s motivations in attaining their goals can be divided into two mechanisms, promotion focus who approaches ‘pleasure’, and prevention focus who avoids ‘pains’. Promotion focus frames the outcome in the conditions of gains vs non-gains, while prevention focus approaches an outcome through losses vs non-losses conditions (Faddegon et al., 2008). What does it mean to frame a condition through gains is that promotion focus motivated on the condition where he/she can obtain rewards, pleasure, or positive outcomes (e.g., “My business will succeed by maximizing the number of satisfied customers''). On the other hand, prevention focuses drawn on the situation where he/she can avoid failure, pains, or negative outcomes (e.g., “My business will succeed by minimizing the number of unsatisfied customers''). Tuncdogan & Dogan (2019, p. 15) summarize that “regulatory focus represents the chronic differences individuals have in their level of sensitivity to gain/non-gain conditions and loss/non-loss conditions''
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focus is driven by the non-losses condition through security, protection, and fulfillment of responsibilities (Ahmadi et al., 2017; Brockner et al., 2004; Shah et al., 1998). They strive to minimize error and punishment rather than rewards for successful actions where such absence of losses will result in positive feelings while the presence of flosses will lead to negative feelings such as agitation and tension (Idson et al., 2000).
2.3 Exploration and Exploitation
Originally, March (1991) introduce exploration-exploitation as two distinct concepts where exploration activities can be defined into terms such as “search, variation, risk-taking, experimentation, play, flexibility, discovery, innovation” and exploitation can be correlated with term such as “refinement, choice, production, efficiency, selection, implementation, execution.” (March, 1991, p. 71). The two constructs have been conceptualized further by scholars into several different viewpoints. Exploratory activities are most associated with higher risk (Jansen et al., 2006; March, 1991) that focus more on long-term goals (Tushman & O’Reilly, 1996). In contrast, exploitation consists of activities with minimum risk and focuses more on short-term goals. In terms of stability and change, Lewin et al. (1999) addressed that exploration will purpose a change while exploitation will strive for stability through adaptation. Lubatkin et al. (2006) also give some examples that fall under exploration, such as trying out new technologies, expanding into a new customer base, and experimenting with new market segments. While improving product quality, minimizing the cost, and increasing efficiency through higher automation levels correspond with exploitative activities.
9 2.4 Regulatory Focus, Exploration and Exploitation
Empirical research on the antecedents of a firm-level exploration and exploitation are still scarce, produced mixed results and thus not yet fully understood. Lavie et al. (2010) discussed that along with environmental and organizational context, the senior management team’s cognitive and behavioral characteristics can also impact an organization’s exploration and exploitation. For example, in balancing between exploitation-exploration, firms might engage in leadership-based contextual ambidexterity (Kammerlander et al., 2015) where key executives’ “behavioral capacity to simultaneously demonstrate alignment and adaptability” (Gibson & Birkinshaw, 2004, p. 209), which in turn largely influenced by the CEO’s individual attributes such as regulatory focus. Thus, we argue that the CEO’s regulatory focus can influence exploration-exploitation engagement in firms.
2.4.1 CEO promotion focus and exploration-exploitation
The individual promotion focus is motivated by the presence of gains through rewards and achievement from the activities they engaged (Brockner et al., 2004), while in the case of the CEO, it can also have several implications on how they undertake exploitation and exploration activities. As promotion focus CEO, they will usually drive to obtain the maximum goal such as having a high market share and improving their firm competitiveness (Idson et al., 2000). This type of achievement can be done through both exploratory and exploitative activities.
Exploration is associated with high-risk activities (March, 1991). This can include but is not limited to, for example, an active pursuit for new business opportunities such as expansion to the new customer group and the introduction of a new line of product (Raisch & Birkinshaw, 2008; Shepherd et al., 2009). Such activities can be perceived as ‘gains’ as these actions can lead to an increased market position and make the CEO with a high promotion focus likely to participate in exploration. Additionally, these high-risk activities require individuals to be more creative, not afraid to try new things and be able to create more novel ideas which also aligned with the characteristics of promotion focus (Crowe & Higgins, 1997; Herzenstein et al., 2007). This is further supported by prior research that found promotion focus will lead individuals to deviate from the conventional approach (Liberman et al., 1999) and will most likely be risk-taking (Crowe & Higgins, 1997). Therefore:
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Based on the assumption that both types of activities are complementary to each other, we also hypothesize that CEO-level promotion focus can induce not only exploratory actions but also exploitation. As mentioned before, exploratory activities are rather risky and oftentimes the future payoff is uncertain. These projects typically have higher tendencies to fail (Anderson & Tushman, 1990). Since the exploration objectives are mostly for long-term goals (Tushman & O’Reilly, 1996), the promotion focus will not have ‘gains/rewards’ for an extended period time. Such an absence of ‘gains’ thus induces the CEO’s promotion focus to simultaneously engage in exploitation that are usually associated with a shorter-term goal (Tushman & O’Reilly, 1996) and serve as continuous gains to reach CEO maximum goals. For example, as promotion focus CEO, they strive to make their firm a market leader, as a result, they also engage in exploitation activities such as improving the quality of products, perfecting customer services, increasing process reliability (Gibson & Birkinshaw, 2004; He & Wong, 2004) that gives them more continuous and probable short-term rewards in the form of increased efficiency, higher customer satisfaction, and decreased production cost which consequently higher profit. Therefore:
Hypothesis 1b: A CEO’s level of promotion focus is positively correlated with exploitation
2.4.2 CEO prevention focus and exploration-exploitation
Prevention focus strives on security and stability where they motivate to pursue a non-loss condition (Brockner et al., 2004). Thus, they tend to be correlated with risk-averse attitudes (Crowe & Higgins, 1997) and content with satisfying only minimum goals (Idson et al., 2000). Therefore, several attributes of prevention focus therefore are contrary to the nature of exploration activities that include a higher risk and a higher probability to fail (March, 1991; Anderson & Tushman, 1990). As Idson et al. (2000) explained due to the uncertainty and probable negative outcome or ‘losses’ of exploratory activities, CEO prevention focus who participates in these activities will bring about negative emotions such as agitation and tension among them. On the other hand, avoiding potentially adverse outcomes in exploration will satisfy the basic need for safety and security in prevention focus and give a positive emotion such as calmness (Idson et al., 2000). Thus, this study hypothesized that CEOs with a high level of prevention focus would reduce their willingness in engaging in exploratory activities.
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On the other hand, a CEO's prevention focus can motivate the CEO to involve in more exploitation activities. Because prevention focus wants to satisfy the minimum goals from their stakeholders (e.g., improved product, satisfied customer and increased profit). Prevention focus will tend to engage in exploitation activities such as optimization processes and automation, where they can fulfill those obligations or the minimum goals while also maintaining their need for safety and stability. Exploitation activities such as improving products and services can increase firm’s profit and market share while at the same time pose relatively lower risk compared to exploration, hence suitable for prevention-focused CEOs who tend to be risk-averse (Crowe & Higgins, 1997). Further, Lewin et al. (1999) acknowledge that exploitation mostly provides stability in the organization, which is in line with prevention focus that preferred to keep the status quo (Liberman et al., 1989). Therefore:
Hypothesis 2b: A CEO’s level of prevention focus is positively correlated with exploitation
2.5 Board Skills Diversity as a moderating effect
This paper also contributes to the topic of corporate governance, where we try to examine the moderating effect of the board of directors’ attributes, namely skill diversity among its members, on the relationship of CEO regulatory focus and the exploration-exploitation. In corporate governance, the board of directors is an underlying element where they act as representatives of shareholders interested and exercise control over the executives. The Board of directors also becomes a crucial role, especially in shaping the long-term objective of the firm, as they can transfer different knowledge and expertise to guide the organization’s strategic position. They add insights about “opportunities and threats residing in blind, assist in identifying weak signals in the environment, act as early-warning system for imminent changes, and provide assessments and judgments of best practices.” (Heyden, et al., 2015, p. 156)
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influence the organizational legitimacy, innovation effectiveness, and monitoring (Adams & Ferreira, 2009; Chen et al., 2016; Terjesen al., 2009). However, many empirical studies concerning board diversity often center on independence, gender, or ethnicity. The selection of diverse compositions nevertheless goes beyond those categories. As argued by Leszczyńska (2017), a selection of directors should include the varied perspectives of its members in order to produce well-judged decision making and discussions. Therefore, board composition should consider the diversity in ‘skills, experiences, expertise, and a range of tenures’ (Hakovirta et al., 2020, p.3).
Hence, this study builds on the view that the role of board diversity becomes more significant in explaining the strategic position of firms including its CEO’s investment in exploration-exploitation that firms engage in. Several studies have attempted to explain the link between key decision-maker to OA (Burgess et al., 2015; Chang & Hughes, 2015; Yitzhack Halevi et al., 2015). However, literature that focuses on the influence of board knowledge heterogeneity on exploration-exploitation is still very limited to three studies that the author could found (Heyden et al., 2015; Walrave et al., 2011; Oehmichen et al., 2016). Thus, this study seeks to fill the gap in this literature stream by incorporating board level attributes influencing explore-exploitation strategic actions.
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Hypothesis 3: Board skill diversity (a) enhances can the positive effect of a CEO’s level promotion
focus on exploration and (b) attenuates the negative effect of a CEO’s level prevention focus on exploration
Compared to the exploratory actions, empirical evidence towards exploitation is still scarce. However, Berraies & Rejeb (2019) have found a positive effect of the board of directors’ strategy role with exploitative innovation. It supports the idea that board members’s diverse skill can help the executives in their strategy implementation towards exploitation. In addition, the board of directors has two orientations based on their previous experience or expertise, ‘output’ and ‘throughput’ functions (Hambrick & Mason, 1984). The output function focuses on development and searches for new opportunities (exploration) and the throughput function focuses on improving production and processes (exploitation). Therefore, this study also believes that board skill heterogeneity can induce both regulatory foci to execute exploitation actions.
Hypothesis 4: Board skill diversity (a) enhances the positive effect of a CEO’s level promotion
focus on exploitation and (b) enhances the positive effect of a CEO’s level prevention focus on exploitation
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3. METHODOLOGY
This chapter will briefly explain the methodology used to conduct this study. It comprises three sections: a description of the sample and data collection, the measurement for each variable, and the method of analysis for hypothesis testing.
3.1 Sample and data collection
To test the hypotheses, this study uses data on the information of firms that are listed in the Standard & Poor (S&P) 500 Index. The data covered several dimensions such as CEO characteristics, companies’ financial data, and board-level data. The data from the stock market index like S&P 500 is suitable for the research as all the publicly traded firms have to disclose information about their companies. Hence, many of the company documents such as annual reports are widely available, which made the analysis on this study possible. Several data sources that are used in this study are the transcript of earning calls, board-level data from BoardEx, and other archival databases for annual reports and proxy statements. In order to obtain the independent and dependent variable data, this research also utilizes the Computer-Aided Text Analysis (CATA) to count specific word occurrences that represent the variables. Moreover, the data collection of this study itself is already provided by the thesis supervisor and not done by the author alone, this is due to the thesis supervisor and other members of the faculty having researched the same topic and allowing the author to utilize it.
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for control variables such as financial and board control resulting in a final regression sample of 1,662 observations of 375 firms from 2012-2017.
3.2 Measurements
The dependent and independent variables are measured through Linguistic Inquiry and Word Counter (LIWC), a Computer-Aided Text Analysis (CATA) software. By using CATA, it is possible to examine the organizations' discussion and reports by counting the occurrence of a specified word that represents a certain theoretical construct within a text (Short et al., 2010). Through computer-assisted content analysis, comparison of large data sets and text analysis is much more economical and reliable than human coders (Bligh et al., 2004). In measuring independent and dependent variables, this study uses the transcript of earning calls that have been collected previously by other students in the faculty. The analysis further used only the question-and-answer section since this study specifically focused on the CEO’s individual attributes and strategic decision contributions. Because during the questions and answers section in earning calls, the CEO’s answers tended to be more spontaneous and not structured and would provide a more precise representation of CEO regulatory focus and exploration-exploitation orientation.
3.2.1 Dependent variable
The two dependent variables in this study are exploration and exploitation. A set of validated dictionaries by Moss et al. (2013) is used to contextualize the CEO’s orientation on exploration-exploitation activities. Moss et al. (2013) followed the search terms of March (1991) as applied in Uotila et al. (2009) and expanded the dictionaries that they developed inductively based on their study in the high-tech industry. A full list of the words used in text analysis is listed in Appendix A. Since the word count data of the earning call’s transcript already provided by the supervisor, the author uses the available data that counted the occurrence of all search terms for exploration or exploitation per 500 words spoken.
3.2.2 Independent variable
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A full list of the words used in text analysis is available in Appendix B. The provided data that the author used is also in the form of occurrence of all search terms for promotion or prevention focus per 500 words spoken.
3.2.3 Moderator
Following the dependent and independent variables, the board skill diversity as moderating effect is also obtained through word count analysis of proxy statements in which companies are obliged to disclose their considerations for nominating directors, including their experience, qualifications, and skills. The director skills are classified based on Adams et al. (2018) that categorized director skill into academic, company business, compensation, entrepreneurial, finance and accounting, governance, government and policy, international, leadership, legal, management, manufacturing, marketing, outside board, outside executive, risk management, scientific, strategy planning, sustainability, and technology. A full list of words used for indicating each skill is listed in Appendix C. The thesis supervisor has provided the data on whether the board members possess a specific skill in the form of a dummy variable where the value ‘1’ indicates the director has the skill and ‘0’ otherwise. However, the provided data only accounted for 17 out of 20 skills in Adams et al. (2018), omitting three skills: government and policy, leadership, and manufacturing.
As the paper focuses on diversity or variety in directors' skills, Blau’s index is adopted to aggregate the individual’s skill into the firm's level (Harrison & Klein, 2007). Blau Index computational formula is 1 − 𝛴pk2, where p is the proportion of directors in the kth category of
skill. However, since the board size is different between firms, the maximum value of Blau’s index ((K- 1)/K) can increase with board size where there is more variety in the larger board size. Therefore, to standardized Blau’s index of board skill, the Index of Quality Variation (IQV) will be used in testing the hypothesis (Harrison & Klein, 2007), where it takes Blau’s index and divides it with its maxima ((K- 1)/K).
3.2.4 Control Variables
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individual psychological tendencies such as risk-averse (Hambrick & Mason, 1984). CEO tenure is also included in the model as experience in the organization may affect the CEO’s level of exploration-exploitation engagement (March, 1991). Second, firm-level control, such as firm size and firm performance is included. The natural logarithm of total assets measures the firm size and firm performance is measured through return on assets based on net income (ROA). Third, the model will incorporate the board-level control effect, the natural logarithm of board size, and independent director’s share. Last, the year and the industry will be controlled by taking the two digits SIC code classification (Feng & Malik, 2020).
3.3 Analytical Method
This study makes use of a statistical software Stata/MP 16.0 in analyzing the model. After creating the final sample, the first step is measuring the descriptive statistics and followed by the model testing selection. Two commonly used panel data analysis are the fixed-effect model and random effect model (Cameron & Trivedi, 2005). To decide which model was most fitting to test the hypotheses in this study, a Hausman test was performed (Zhang & Shaw, 2012). The Hausman test shows non-significant results and thus confirmed that the random effect was the most appropriate in the analysis.
Another important test for any multiple regression was performed to test multicollinearity in the data. In Appendix D the result of the variance inflation factor (VIF) is shown. All values of VIF are smaller than the threshold of 10 with the highest value of 1.69 for firm size, thus indicating there is no multicollinearity problem in the model, allowing all the variables to be included.
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4. RESULTS
4.1 Descriptive Statistics and Correlations
The descriptive statistics and the pairwise correlations of all variables are presented in Table 1, excluding the year and industry dummies. The highest correlation among the control variables is between board size and firm size at 0.46. Since the strong correlation threshold is 0.7 (Ratner, 2009), this value is still considered a low correlation. Some correlations are noteworthy. The high correlation between prevention and exploration at 0.62, exceeds the correlation between promotion and exploration at 0.20. In line with prior research, there was also a positive correlation between promotion and prevention focus (Tuncdogan et al., 2017; Wallace et al., 2009). Exploration and exploitation also positively correlated (Torres et al., 2015; Tuncdogan et al., 2017). In general, the potential of multicollinearity is low, as described in the previous chapter, where VIF values were well below the suggested threshold.
4.2 Regression Results and Hypothesis Testing
The result of the multiple regression analyses for hypothesis testing is presented in Table 2. Model 1 includes only the control variables. Model 2 adds the independent variable of CEO regulatory focus and board skill diversity to test hypotheses 1 and 2. Model 3 then adds the interaction effect between CEO regulatory focus and its tendency to exploratory-exploitation activities, in order to test H2.
Model 1 and 4 is the base model to test the control variables effects on the exploitation-exploration tendency. The control model’s overall R-squared is 0.1124 and 0.1166, respectively, meaning that the regression model’s control variables explained about 11% of the variance in exploration-exploitation tendency. In model 1, one control variable that has a significant and positive effect on exploration is firm performance (β = 2.357, p = 0.03). This positive effect also remained significant at the 5% level in models 2 (β = 2.507, p = 0.01) and model 3 (β = 2.523, p = 0.01).
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that both promotion and prevention focus would positively correlate with the exploration orientation. In line with this hypothesis, the regression result shows that promotion focus (β = 0.148, p ≤ 0.01) and prevention focus (β = 0.0.352, p ≤ 0.01) has a significant positive impact on exploratory activities. Therefore, the results provide support for Hypothesis 1a but not 2a. Model 3 then shows the interaction term between CEO regulatory focus and the board skill diversity on the exploratory tendency. In hypotheses 3a and 3b, board skill diversity is predicted to enhance the relationship between CEO regulatory foci and exploratory orientation. However, no significant effect can be drawn from the analysis and thus, hypothesis 3a and 3b is not supported. Furthermore, compared to Model 2, the overall R-squared in Model 3 did not increase. Hence it concludes that these interaction terms cannot explain the variance within dependent variables.
Model 5 shows the relationship between the CEO regulatory focus on exploitation orientation to test Hypothesis 1b and 2b. Hypothesis 1b predicts that the CEO’s promotion focus will have a positive relationship with its exploration tendency. The regression result support the hypothesis (β = 0.258, p ≤ 0.01). Support also found for Hypothesis 2b, where prevention focus showed a significant positive influence on exploitation (β = 0.218, p ≤ 0.01). Model 5 also found a negative effect at 1% for firm performance (β = -3.597). The significant and negative effect of ROA towards exploitation tendency remained in Model 6 (β = -3.606). Furthermore, the interaction effect tested in Model 6 showed no empirical support for the moderating effect of board skill diversity towards exploitation orientation; thus, Hypothesis 4a and 4b are rejected. Furthermore, similar to the previous model, the interaction term in Model 6 resulted in the same overall R-squared compared to Model 5. Thus, it can be concluded that the moderating effect does not explain the variance of the dependent variables.
4.3 Robustness Checks
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influence of regulatory focus and the interaction term with board diversity skill on exploitation remained with differences in CEO gender, showing a significant positive effect (β = 1.25, p ≤ 0.1).
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Table 1. Descriptive statistics and correlations
Note: significance levels ***p < 0.001, **p < 0.01. *p < 0.05
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Table 2. Estimation result of CEO regulatory focus on exploration-exploitation
Dependent Variable
Exploration Exploitation
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
Constant 0.921 0.732 -0.269 1.614 1.943 1.894 1.33 1.99 -2.82 1.46 2.2 3.24 Promotion Focus 0.148*** 0.308 0.258*** 0.448 0.01 0.34 0.02 0.39 Prevention Focus 0.352*** 0.312 0.218*** -0.67 0.03 0.69 0.04 0.81 IQV 0.44 1.483 -0.528 -0.466 1.71 2.69 1.91 3.12
Promotion Focus x IQV -0.172 -0.204
-0.36 0.42
Prevention Focus x IQV 0.043 0.949
-0.74 0.86 CEO Age 0.01 -0.01 -0.01 0.024 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 CEO Gender 1.391 1.29 1.291 1.292 1.255 1.258 1.24 1.14 1.14 1.5 1.34 1.34 CEO Tenure -0.002 0.002 0.002 0.005 0.006 0.006 0.02 0.01 0.01 0.02 0.02 0.02 Firm Size 0.107 0.095 0.097 0.011 0.027 0.028 0.08 0.07 0.07 0.08 0.08 0.08 Firm Performance 2.357* 2.507* 2.523* -2.161 -3.597** -3.606** 1.06 1.02 1.02 1.22 1.16 1.16 Board Size 0.647 0.722 0.729 0.386 0.613 0.602 0.38 0.37 0.37 0.43 0.41 0.41
Share of Independent Director -0.273 -1.081 -1.075 1.179 -0.197 -0.213
0.88 0.86 0.86 0.98 0.95 0.95
Overall R-square 0.1124 0.2247 0.2245 0.1166 0.2598 0.2597
Prob > chi2 0.000 0.000 0.000 0.000 0.000 0.000
Observations 1764 1662 1662 1764 1662 1662
23 5. DISCUSSION
Following the upper echelon literature, this study aimed to analyze the link between CEO characteristics and firm strategic decisions, specifically the relationship between the CEO regulatory focus and exploration-exploitation orientation. As discussed previously, engagement in exploration and exploitation activities often competing and contradicting, but these two orientations can also form a synergy in which necessary to increase firms’ performance and survival (He & Wong, 2004; Jansen et al., 2006; March, 1991). The findings of this study suggest that both CEOs’ regulatory foci are associated with their orientation towards exploration and exploitation, in which they positively influence both orientations. This is in line with the prior study, where promotion focus was found to increase the CEO’s tendency to engage in both types of activities (Kammerlander et al., 2015; Tuncdogan & Dogan, 2019).
On the other hand, contrary to the finding of the prior study (Kammerlander et al., 2015), the level of CEO prevention focus was found to positively influence the exploratory orientation. It is also worth noting in the analysis results that the effect on exploration activities of prevention focus is even higher than in promotion focus in contrast with the result in Tuncdogan & Dogan (2019). Some explanation for this result can be because that high levels of prevention focus CEOs seek for security and needs to fulfill their responsibility Hence, they are then motivated to engage more in exploration to secure their place in the market. Previous studies also found that in the condition where basic needs are unfulfilled, creativity will be triggered and encourage them to undertake divergent thinking (Baas et al., 2011). The negative feelings arise from unsatisfied basic need of security here outrank the risk avoidance in engaging in explorations activities. The perceived threat of loss or failure in maintaining their position if they do not engage in exploration may further induce prevention focus to increase their exploratory orientation. However, given the inconsistent result, further studies are necessary to analyze contextual boundaries of goal hierarchies in prevention focus that can induce them to perform exploration.
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CEO power also found higher especially in the case of CEO duality and CEO appointed directors and further lowering the board functions as an active provision of knowledge through their skills and expertise toward the CEO and lowers performance variability (Pearce & Patel, 2018) that can be obtained through high diversity skill in board of directors.
Moreover, contrary to the hypothesis, robustness checks with different skill measurements resulted in significant interaction effects between board skill and promotion focus on exploitation activities. The moderating effect showed a small negative interaction on exploitation, meaning that an increase in the number of different skills among the board of directors will attenuate the positive effect of promotion focus on its exploitation tendency. The result may showcase the downside of board knowledge heterogeneity. As it can trigger miscommunication and conflicts between directors (Ali et al., 2011) and further prevent them from making timely strategic decisions on exploitation that are likely to include shorter-term objectives and thus require faster decision making. The mixed results in this research findings thus call for a further assessment of board functions and their involvement in strategy decisions through knowledge and information provisions. The last section of this chapter will further elaborate on the suggestions for future research.
5.1 Theoretical Implications
First, this study aimed to extend the theoretical understanding of how the CEO’s regulatory focus may affect its tendency to undertake strategic actions, specifically in exploration or exploitation. The two orientations have been empirically shown to be positively correlated with firm performance (He & Wong, 2004). It thus contributes to the growing body of literature in upper echelon theory that studied the influence of the CEO’s personality attributes. The research in regulatory focus also extended the research stream on the antecedents of organizational ambidexterity (Lavie et al., 2010; Raisch & Birkinshaw, 2008), where the analysis result highlighted the CEO’s promotion and prevention focus as a determinant of not only exploration but also exploitation activities. Prior research also found that the prevention focus negatively affects the firms’ level of exploration (Kammerlander et al., 2015) Yet, our findings show that prevention foci in CEOs can also induce explorative actions.
exploration-25
exploitation. Prior research has pointed out that diversity, especially in directors’ skills and expertise is important (Leszczyńska, 2018). In this research hypothesis, such diversity provides knowledge and information resources and acts as incentives for executives to perform exploration and exploitation. Although only partial evidence can be found for the board skill effect in robustness analysis, this factor should remain considered in future research. Moreover, by adding board skill heterogeneity, this research also extends the literature on antecedents of organizational ambidexterity by introducing the interacting effect between two-level CEOs and the board of directors.
Moreover, empirical research between regulatory focus and exploration-exploitation orientation at the CEO level is still lacking. One study that explained the CEO regulatory foci influence toward both orientations is Kammerlander et al. (2015). Nevertheless, their work is based on small or medium-sized enterprise (SME) data. Many studies also tend to focus on relative exploration and omit exploitation in their analysis (e.g., Ahmadi et al., 2017; Wang & Dass, 2017) despite emphasized by the prior study that both activities are important in maintaining firm performance and survival (He & Wong, 2004; Jansen et al., 2006; March, 1991).
Finally, this research uses CATA to analyze the transcript of the question-and-answer sections in firms’ earning calls. Content analysis was done based on Gamache et al. (2015)’s dictionaries to measure CEO’s regulatory focus. Since the regulatory focus is a concept built from the psychological framework, studies focused on this theory used experiments and survey data. Hence, this study complemented that research by using content analysis through CATA to measure CEO’s personality traits. In addition, CATA is useful, especially for analyzing large-scale longitudinal data.
5.2 Managerial Implications
26
managers compared to prevention-focused (Tuncdogan & Dogan, 2019). As described in Brockner et al. (2004) study, entrepreneurs with high promotion and high prevention focus also tend to be more successful than people who score high on promotion but low on prevention focus. Thus, prevention focus is also essential in explaining the CEO’s engagement in exploratory activities. Nonetheless, given these inconsistent results, future research is necessary to study in what condition prevention focus can lead a CEO to undertake exploration.
Next, although the interaction effect of directors’ skills and CEO cannot be supported in the main model, robustness checks indicate that greater board skill diversity can reduce the positive effect of CEO promotion focus on exploitation. Hence organizations need to understand the level of collective skills that their board has and understand that directors’ heterogeneity can sometimes restrict exploitation activities. The selection of new directors should then also consider the varying skills that the director may possess and how it contributes to the board overall dynamics.
5.3 Limitations and Future Research
27
Second, there are some limitations regarding the dictionaries used in this study. Adams et al. (2018) dictionaries classified directors’ skills into twenty different categories. However, the data that is provided to the author only analyzed seventeen types of skills, thus excluding three other skills that may be insightful to the study analysis. Adding to that, there is potentially more variety in director skills outside mentioned in the paper that may contribute to the board skill heterogeneity. Thus, future research should use the full dictionary of Adams et al. (2018) and could even extend the dictionary by including other types of skills (e.g., digital, industrial, and marketing skills). Similarly, future studies could expand Moss et al. (2014) word constructs that have been adjusted to identify exploration and exploitation activities used specifically in high-tech firms. Since this study includes all firms in different industries, these keywords may not be transferable to measure other CEOs’ orientation in different industries.
Third, the analysis only focuses only on the CEO level of regulatory focus. Although CEOs' role is said to be a primary driver in strategic actions (Busenbark, 2016), the level of engagement in exploitation and exploration can also be influenced by other executives in the company (García-Granero et al., 2018; Sinha, 2015). Therefore, it might be an interesting avenue for future studies to look at the collective effect of regulatory focus in TMT and how it interacts with the CEO regulatory focus.
Fourth, the discussion briefly explained the potential reason why the positive influence of prevention focus on exploratory is higher compared to promotion focus, wherein specific conditions prevention focus may be driven to carry out exploratory actions. Future researchers can examine this phenomenon by introducing specific contextual conditions (e.g., environmental dynamic, competitive intensity, and specific industry) that may increase prevention focus engagement in exploratory activities. Moreover, this study takes only the absolute value of the CEO’s promotion and prevention focus, whereas individuals may inhibit different combinations of both regulatory foci (Lanaj et al., 2012). In which people can have a high level of both regulatory foci, or high in one end or indifferent where they have relatively low levels in both regulatory foci. Therefore, future research could also incorporate these different combinations in measuring the effect of regulatory focus.
28
Incorporating control variables that measured the CEO power (e.g., CEO duality and CEO appointed directors) may be insightful in studying board of directors influences for future research.
6. CONCLUSION
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APPENDIX
Appendix A. Exploration and exploitation orientation dictionaries. Adapted from Moss, Payne & Moore (2014)
Orientation Dictionary
Exploration Adapt, Adapting, Adaptive, Adaptors, Create, Created, Creates, Creating,
Creation, Creative, Creator, Develop, Developed, Developer, Developers, Developing, Development, Developmental, Develops, Discover,
Discoverability, Discoverable, Discoverably, Discovered, Discoverer, Discoverers, Discoveries, Discovering, Discoverist, Discoverists, Discoverment, Discoverments, Discovers, Discovery, Experiment, Experimental, Experimentalism, Experimentalist, Experimentalists, Experimentalize, Experimentally, Experimentarian, Experimentarians, Experimentation, Experimentations, Experimentative, Experimentator, Experimented, Experimenter, Experimenters, Experimenting, Experimentist, Experimentists, Experimentor, Experimentors, Experiments, Explorability, Explorable, Explorable, Explorate, Explorates, Exploration, Explorationist, Explorationists, Explorations, Explorative, Exploratively, Explorator, Explorators, Exploratory, Explore, Explored, Explorement, Explorer, Explorers, Explores, Exploring, Exploringly, Flexibility, Flexible, Flexibleness, Flexibly, Innovate, Innovated, Innovates, Innovating, Innovation, Innovational, Innovationist, Innovationists, Innovations,
Innovative, Innovatively, Innovativeness, Innovator, Innovators, Innovatory, Inventions, Laboratories, Laboratory, Labs, Patent, Patented, Patents,
Pioneer, Pioneered, Play, Played, Player, Players, Playful, Playing, Playingly, Playlike, Plays, Prospect, Prospecting, Prospective,
Prospectively, Prospects, Research, Researcher, Researchers, Researching, Risk, Risked, Risker, Riskers, Riskful, Riskier, Riskiest, Riskily, Riskiness, Risks, Risky, Scientist, Scientists, Search, Searchable, Searchableness, Searched, Searcher, Searchers, Searches, Searching, Searchingly, Variation, Variational, Variationally, Variations, Variative, Variatively
Exploitation Accountant, Accountants, Administering, Administration, Administrative,
Advertise, Advertised, Advertisement, Advertisements, Advertiser, Advertisers, Advertising, Assemble, Assembled, Assembler, Assemblers, Assemblies, Assembly, Audited, Auditing, Auditors, Audits, Automate, Automated, Automatic, Automatically, Automating, Automation, Choice, Choicer, Choices, Choicest, Commercialization, Commercialize,
Commercialized, Commercializing, Commercials, Commoditized,
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Executions, Executions, Executively, Executiveness, Executor, Executorial, Executors, Executorship, Executory, Exploit, Exploitability, Exploitable, Exploitation, Exploitational, Exploitationally, Exploitations, Exploitative, Exploitatively, Exploitatory, Exploited, Exploiter, Exploiters, Exploiting, Exploitive, Exploitively, Exploits, Exploiture, Implement, Implementable, Implemental, Implementation, Implemented, Implementer, Implementers, Implementing, Implementor, Implementors, Implements, Increment, Incremental, Incrementally, Increments, Launch, Launched, Launches, Maintain, Maintained, Maintaining, Maintains, Manufacture, Manufactured, Manufacturer, Manufacturers, Manufacturing, Marketed, Marketer,
Marketers, Marketing, Optimization, Optimize, Optimizer, Optimizing, Optimum, Procured, Procurement, Production, Productional, Productions, Productivity, Promotion, Promotional, Promotions, Refine, Refined,
Refinedly, Refinedness, Refinement, Refiner, Refineries, Refiners, Refinery, Refines, Refining, Replicated, Replication, Replicators, Routine, Routinely, Salesforce, Salespeople, Salespersons, Select, Selectability, Selectable, Selected, Selectedly, Selecting, Selection, Selectional, Selectionalism, Selectionist, Selectionists, Selections, Selective, Selectively, Selectiveness, Selectivities, Selectivity, Selectly, Selectness, Selector, Selector, Selectors, Selectors, Selects, Standardized, Throughput
Appendix B. Regulatory focus dictionaries. Adapted from Gamache, Mcnamara, Mannor & Johnson (2015). The analysis also used alternative tenses of the words mentioned below.
Regulatory Focus Dictionary
Promotion Focus Accomplish, Achieve, Advancement, Aspiration, Aspire, Attain, Desire, Earn, Expand, Gain, Grow, Hope, Hoping, Ideal, Improve, Increase, Momentum, Obtain, Optimistic, Progress, Promoting, Promotion, Speed, Swift, Toward, Velocity, Wish
Prevention Focus Accuracy, Afraid, Careful, Anxious, Avoid, Conservative, Defend, Duty, Escape, Escaping, Evade, Fail, Fear, Loss, Obligation, Ought, Pain, Prevent Protect, Responsible, Risk, Safety, Security, Threat, Vigilance
Appendix C. Director skill dictionaries. Adapted from Adams, Akyol, Verwijmeren (2018) Director Skill Dictionary
Academic Academia, Academic, Dean, Doctorate, Education, Faculty, Graduate,
Masters, Ph.D., Ph.D., Professor, School environment
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officer of the company, Company’s business, Executive of our, Executive of the company, Experience with the company, Historical insight, Historical knowledge, History of the operation, History with our company, In-depth knowledge of, Industry-specific perspective, Industry experience, Industry knowledge, Inner workings, Insider’s perspective, Internal operation, Knowledge of all aspects of the company, Knowledge of the, Knowledge of the history, Officer of our, Officer of the company, President of our,
president of the company, The company’s chief, Understanding of our business, Working with the company
Compensation Compensation
Entrepreneurial Entrepreneur, Entrepreneurial, Entrepreneurship, Evaluating business, Innovative idea
Finance and Accounting
Accountant, Accounting and, Accounting experience, Accounting principles, And accounting, Auditing, Banking, Capital markets, Capital structure, Corporate finance, Experience in accounting, Experience in finance, Expertise in finance, Finance experience, Finance industry, Finance matters, Financial accounting, Financial acumen, Financial background, Financial experience, Financial expert, Financial expertise, Financial field, Financial foundation, Financial management, Financial matters, Financial reporting, Financial services, Investment, Securities, Understanding of finance
Governance Governance
Government and policy
Government, Policy, Politics, Regulatory
International Global, International, Multinational, Worldwide
Leadership Leadership
Legal Attorney, lawyer, legal
Management Experience in leading, experience in managing, management
Manufacturing Industrial, manufactured, manufacturing
Marketing Marketing
Outside Board Board experience, Board of other, Board practices of other, Boards of companies, Boards of other, Boards of several other, Boards of various, Director of other, Director of several other, Member of the board of,
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Outside Executive As the chairman of a, Business career, Chief executive officer of, Executive experience, Experience as a chief, Experience as an executive officer of, Experience as a senior, Former executive of a, Officer of a public, Officer of other, Officer of several companies, Officer of numerous companies,
President of a, Senior-level executive, Senior executive, Senior management positions, Serving as the CEO of a
Risk Management Risk
Scientific Research and development, Scientific expertise
Strategic Planning Business planning, Decision-making, Problem-solving, Strategic, Strategies Sustainability Environmental, Safety, Sustainability, Sustainable
Technology Technological, Technology
Appendix D. VIF test for multicollinearity.
Variable VIF 1/VIF
