THE IMPACT OF CEO AND BOARD
CHARACTERISTICS ON STRATEGIC
ALLIANCES
Author: Karim Kamel
1
stSupervisor: Dr. Florian Noseleit
2
ndSupervisor: Dr. Isabel Estrada Vaquero
University of Groningen Faculty of Economics and Business Msc BA Strategic Innovation Management
2
ABSTRACT
In this study, we examine the impact of CEO and board characteristics on strategic alliances and explorative-oriented alliances in particular. Using a merged dataset of CEO and board characteristics and information on strategic alliances. This dataset ranges from 2002 to 2010 and consists of 2273 firms across a wide variety of industries. We found empirical evidence that indicates that a long tenured CEO is more effective with regard to strategic alliances and explorative-oriented alliances. Nevertheless a CEO with long tenure within the specific firm before turning CEO can become too inwardly focused and
therefore detrimental for the alliance strategy. The composition (inside or outside directors) and the size of a board are also of great influence for strategic alliances. The results demonstrate that increasing the amount of outside directors and increasing the size of the board can be beneficial for strategic alliances and in particular explorative-oriented alliances. Thus CEO and board characteristics influence the strategic decision to form an alliance.
Keywords
Board composition, CEO characteristics, Upper Echelon, Strategic alliance formation, Exploration, Exploitation
INTRODUCTION
Competition has been shown to be useful up to a certain point but no further; cooperation is the thing we must strive for today, begins where competition leaves off.
Franklin Roosevelt Nowadays firms collaborate extensively to be successful in a turbulent environment (Sampson, 2007). Collaboration takes place in several governance structures. In intermediate situations firms decide to apply the middle way ‘strategic alliances’ instead of mergers or market exchange (Villalonga and McGahan, 2005; Hagedoorn and Duysters, 2002). A strategic alliance is a purposive initiated agreement which consists of two or more firms that involves the
3 strategic alliances are taken into account (Gulati, 1995). These various forms range from
informal non-equity agreements to more formal contracts with equity ownership (Chan, Kensinger, Keown and Martin, 1997).
Firms engage in strategic alliances for plenty of reasons. Primarily strategic alliances enable a firm to focus on its own core qualities instead of activities outside of their expertise (Chan, Kensinger, Keown and Martin, 1997). While working together with other firms skills or resources are gained and developed more rapidly than internally. Firms can benefit from knowledge of other firms. It can facilitate creation and transfer of knowledge between collaborating firms (Mowery, Oxley, Silverman, 1998). Another important determinant that enables a firm to work on sophisticated projects is of course the possibility of sharing the risks and the costs (Hagedoorn, Link, & Vonortas, 2000; Hitt, Levitas, Arregle and Borza, 2000). These benefits are reasons to collaborate with other firms and engage in strategic alliances. Although there are substantial benefits and advantages, firms are often dissatisfied with the actual outcomes of the alliances (Hitt et al, 2000). Once a firm decides to engage in an alliance the next phase is critical; understanding and selecting an appropriate partner to collaborate with (Hitt, Hardee, Tyler and Park, 1995). Hitt et al (2000) corroborate the importance of the partner selection process; partners are selected for various reasons based on the need for resources or organizational learning. These critical decisions are influenced by the CEO, the board of directors and top managers which execute and determine large parts of these decisions. The board of directors including CEO is involved in several crucial activities with regard to strategic alliances. First, scanning the environment for relevant information and strengthening the link with the environment. Second, implementing and assessing strategic measures for strategic decisions and finally providing the proper business contacts (Pearce, Shaker and Zahra, 1991; Ong and Lee, 2000). Prior research investigated the importance of the composition of a board of directors and top management teams. These studies investigate board composition, but mostly emphasize the effect on (financial) performance and the conflicting relationships within the firm (i.e. Dalton, Daily, Ellstrand and Johnson 1998; Ahmed, Hussian and Adams, 2006; Lappalainen and Niskanen, 2012). Some researchers investigate strategic decisions; Hambrick and Mason (1984) argue that the background, experiences and values of executives partially influence and justify the decisions that are executed within a firm. Deutsch (2005) investigates if the
4 on the type of membership (insider or outsider) and the conflict of interest between managers and shareholders. While these streams of literature investigate important issues with regard to board composition and CEO characteristics, there is no clear link with strategic alliances yet. Additionally there is a gap in the literature that demands further investigation. In this study we investigate whether the CEO and composition of the board impacts the pattern of strategic alliances. Our research makes several important theoretical and managerial contributions.
First, this paper combines two literature streams which are not combined yet and opens a new literature stream to investigate. Second, this study provides more clarity in the alliance selection process and the relevance of the CEO board composition within this process. Third, it provides new insights and an extension of the upper echelon theory of Hambrick and Mason (1984) with a focus on strategic alliances as a strategic choice. Finally, this research will extend our understanding of the CEO and board characteristics and its influence on decision making, subsequently boards can be adapted accordingly to the pursued alliance strategy, to create a more effective fit and ability to engage in desired alliances.
The research question that will be investigated in this study is: What is the impact of
CEO and board characteristics on strategic alliances? This will be answered by investigating a
5
LITERATURE REVIEW
In this section the most important concepts are described and prior research will be discussed. First, a theoretical background of strategic alliance formation is developed. Second, CEO characteristics and board composition are discussed by using prior research on CEOs and boards.
Strategic Alliance Formation
The first literature stream that will be reviewed is the formation of strategic alliances. Strategic alliances pass through various stages in its life cycle (Gulati, 1998), such as the formation of alliances, the governance structure and the post formation management phase (Prashant and Harbir, 2009). In this paper the aim will be to investigate the primer phase. In this phase the firm decides whether or not to form an alliance and with whom (Schreiner, Kale and Corsten, 2009). Engaging in alliance is complex and not without risks (Das and Bing-Sheng, 1999). Despite the fact the amount of strategic alliances is increasing many collaborations fail or perform poorly. A very common cause for these results is poor partner selection (Holmberg and Cummings, 2009). Another study that discussed the importance of the selection process with as research aim; which competencies, resources and assets are important for evaluating a potential partner. Failing this step would be detrimental for further continuation of the collaboration (Hitt, Dacin, Levitas, Arregle and Borza (2000).
6 because these resources are valuable and often scarce, imperfectly imitable and
non-substitutable. In sum the resource-based view considers collaboration as strategies to acquire resources from other organizations to develop a competitive advantage and create value (Das and Teng, 2000). Other researchers extend the resource-based view and focus solely on strategic alliances suggesting that the underlying logic of alliance formation are strategic needs and social opportunities (Eisenhardt and Schoonhoven, 1996). Another underlying theory for the formation of collaboration in this case alliances is the ‘resource dependence theory’ of Pfeffer and Salancik (1978). Wherein they state that organizations depend on other actors within their environment to acquire and maintain resources. Which is paramount for organizational survival. In line with this perspective lots of other researchers emphasized the importance of collaboration and dependence on other firms within the environment. Chan et al (1997) provides evidence that participation in strategic alliances create value for a firm. As discussed in the introduction strategic alliances take place for several reasons and can provide benefits for both firms in collaboration. The overall goal of a strategic alliance is to benefit from the partner firm’s resources whilst managing to keep the firm’s own resources intact. According to the social theorists these abovementioned theories did not considered the factors that could lead to potential alliance opportunities. The social network perspective generally argue that economic activities are effected by the social context in which the firm is embedded (Gulati, 1998). A network entails a firm’s relationships with other organizations (Gulati, Nohria and Zaheer, 2000). This network embeddedness can influence the alliance decision through the information availability of potential partners (Gulati, 1998). Overall, prior research and theory address alliance formation from various perspectives, but neglect the important actors that execute these decisions and decide which strategies are developed. In this study this gap will be investigated; how the CEO and board characteristics can have impact on strategic alliances.
To investigate this impact a distinction is made between two types of alliances. First, explorative-oriented collaborations which includes search, risk taking, experimentation, variation and developing new knowledge, technologies and products (collaborating with firms from
7 2005; Lavie and Rosenkopf, 2006). In the next section board composition characteristics will be discussed in depth.
CEO characteristics and Board composition
The board of directors and the CEO can directly influence strategic decisions and to be an effective organization a powerful board is needed (Pearce et al, 1991). Board composition is an important aspect that impacts organizational performance and strategic choices (Baysinger and Hoskisson, 1991).
An underlying principle is the ‘upper echelon perspective’. According to Hambrick and Mason (1984) the upper echelons perspective states that managerial background characteristics influence strategic choices. Important upper echelon characteristics (i.e. age and career
experiences) and their impact on strategic choices were proposed. In their view age is an
important characteristic and they state that firms with youthful managers have a greater tendency to pursue risky strategies compared with firms with older managers. Another proposition is based on career experience; years of service within the company will be negatively related to strategic choices involving new terrain (Hambrick and Mason, 1984). These risky strategies could be product innovation or for instance collaboration with unrelated partners. Other research extends these findings and investigated tenure. The results showed that long-tenure teams are less attracted towards strategic experimentation and change. Whereas short-tenure teams tend to pursue new strategies that are unrelated to regular patterns (Finkelstein and Hambrick, 1990). In line with these findings the study of Miller & Shamsie, (2001) suggest that over the course of executives experimentation decreases and risks are avoided. Risk aversion originate for long tenured CEOs, due to the fact that they invested heavily in the firm on a tangible and
psychological basis. CEOs become committed to the existing pattern and ignore information that is not in line with this pattern. Subsequently this can result in an averted view towards reasons for strategic change (Simsek, 2007).
8 Put differently corporate boards can be seen as instruments to deal with the external environment (Pfeffer, 1972). Findings on diversity based on the type of membership vary and are mostly inconsistent. Pfeffer (1992) argued that diverse boards facilitate better acquisition of critical resources for the organization. Kosnik (1990) argued that to reduce narrow-mindedness and to develop openness for different perspectives is coupled with diversity among board membership. On the other hand Goodstein et al (1994) argues that diversity within a group may constrain decisiveness to initiate change. Subsequently leading to conflict and ineffectiveness. Pearce (1991) states that a distinction between four kinds of boards can be made: statutory, caretaker, participative and proactive. The primer two types are low powered and can be seen as a legal necessity. The latter two types are more influential, due to the fact that these kinds of boards are composed with an higher amount of outside directors and therefore are independent. A proactive board has higher formal power than the other boards of the typology. A powerful board which is composed with a higher amount of outside directors has a network, a large amount of useful business contacts and possess expertise to sustain and develop a link with their environment (Pearce, 1991).
These abovementioned findings are important with regard to strategic alliance formation and can play a role in the collaboration pattern of firms. In the next section these findings of both streams are matched and hypotheses are developed.
HYPOTHESES DEVELOPMENT
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CEO tenure in role
Tenure within a company or within a specific role can be of great significance for the accumulation of knowledge and the openness for novel strategies. Early on, when new
executives are getting up to speed, they seek information in diverse ways, turning to both internal and external company sources. But as CEOs accumulate knowledge and become entrenched, they rely more on their internal networks for information (Hambrick and Fukotomi, 1991). These findings are in line with research Finkelstein and Hambrick (1990) wherein they investigate tenure in top management teams. When tenure increases risks are avoided and perceptions become limited. This leads to strategies that are not novel, contain minor information and risk aversion. On the other hand teams with short tenure are more open to risks and able to process diverse and new information. As Katz (1982) demonstrates that longevity is accompanied by a substantial decrease of communication with the external environment. An argument for this statement is that tenure may develop habits and establishment of ‘customary’ information sources this leads to limited information processing, lowers the incentive to utilize new stimuli and dependence on past experience. Long tenured executives tend to engage in low levels of external communication. Members may believe that they have possessed sufficient expertise and knowledge in their specialization and therefore think it is no longer necessary to pay a great deal of attention to outside sources or new ideas and information (Hambrick and Fukotomi, 1991). Thus a board directed by a CEO with long tenure is less attracted to obtaining knowledge from external partners.
H1a) A long tenured CEO tends to become inwardly focused and therefore has a negative effect on the number of alliances.
10 Levinthal, 1993; Faems, van Looy and Debackere, 2005; Lavie and Rosenkopf, 2006). Further experimentation and risk-taking is not required. These arguments lead to the following
hypothesis.
H1b) A long tenured CEO tends to become inwardly focused and therefore will influence the number of explorative-oriented alliances negatively and this effect is stronger than for exploitative-oriented alliances.
CEO tenure within the firm
As a follow-up on these hypotheses the time within a specific company before becoming CEO can also lead to restricted perspectives and withdrawal of external stimuli. According to Hambrick and Mason (1984) executives that spend their entire career within an organization are restricted to ‘limited search’. Which is negatively related to strategic choices involving new terrain. We can assume that long tenure within a company will show a similar effect on strategic alliances as the time in role. Thus a board composed with a CEO with long tenure in the same firm is less attracted to external stimuli (alliances). Therefore we developed this hypothesis.
H2a) A CEO with long tenure within the company before turning CEO tends to become inwardly focused and therefore has a negative effect on the number of alliances.
11
H2b) A CEO with long tenure within the company before turning CEO tends to become inwardly focused and therefore will influence the number of explorative-oriented
alliances negatively and this effect is stronger than for exploitative-oriented alliances.
CEO age
Older executives may be less inclined to pursue risky strategies. According to Hambrick and Mason (1984) older executives may be less able to obtain novel ideas and less open to learn from other firms. Another argument is that older executives are more committed to the existing strategies. Child (1974) argues that the behaviour of older executives may be influenced by a decrease of mental and physical stamina, this may lead aversion toward risks. Another explanation for the risk aversion may be that older CEOs are in a period in their career where financial and career security are important factors. Risky alliances might be avoided and internal knowledge will be utilized instead. These findings lead to the following hypothesis:
H3a) Older CEOs tend to become inwardly focused and therefore has a negative effect on the number of alliances.
Thus a board composed with an older CEO is less attracted to collaboration with other firms. Specially explorative-oriented strategic alliances. These alliances are risky and demand experimentation (March and Levinthal, 1993; Faems, van Looy and Debackere, 2005). Older CEOs are less attracted to novel ideas and less open to learn (Hambrick and Mason, 1984). Tyler and Steensma (1998) found that older executives are less attracted to technological alliances, because they contain high risks and are unstable. On the other hand youthful managers are more likely to challenge the formal systems and are generally more motivated to change and innovate (Child, 1974; Hitt and Tyler, 1991). Leading to the following hypothesis:
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Board membership (Inside and outside directors)
A board that is composed with a large amount of outside directors (typology pro-active). Boards with a high amount of outside directors contain a good network, a large amount of useful business contacts and external expertise to sustain and develop a link with the environment (Pearce, 1991). That are composed with more outside directors are better able to obtain resources from the environment and open for new and different perspectives (Kosnik, 1990). This is of great significance for the of selection of a partner to collaborate with. This enables a firm to select a partner that is not operating in the same industry.
Firms that collaborate must trust each other and accept the norms of the relationship. Firms that engage in strategic alliances have a highly intense connection and involve contracts that must be honoured (Daboub, 2002). Firms that are already in the network of a director (business contact) already accepted the norms of the relationship subsequently more trust is created. By increasing the amount of outside directors on a board the link with the environment will improve and subsequently the ability to obtain critical resources (Goodstein et al, 1994). On the other hand Baysinger and Hoskisson (1990) highlighted the benefits associated with having a high representation of inside directors. Their argument is based on the notion that inside directors possess superior information of the firm. In sum outside directors may have a larger network and are better able to provide the link with the external environment. There we state the following hypothesis:
H4a) By increasing the amount of outside directors a board is better able to benefit from the environment and is more externally oriented. Therefore increasing the amount of outside directors has a positive impact on the number of alliances.
13 H4b) By increasing the amount of outside directors a board is better able to benefit from
the environment and is more externally oriented. Therefore increasing the amount of outside directors has a positive impact on the number of explorative-oriented alliances and this effect is stronger than for exploitative-oriented alliances.
Board size
Researchers that support the resource dependency theory argue that increasing the size of the board can enhance the link with the environment and be the mechanism that ascertain the external critical resources (Goodstein et al, 1994; Pfeffer, 1972). While increasing the board the amount of useful external business contacts also increases. Increasing the number of board members leads to higher probability of social relations with external partners. Therefore we can develop the following hypothesis:
H5a) A larger board is better able to benefit from the external environment. Therefore increasing the amount of board members has a positive impact on the number of alliances.
As mentioned before an increase in the size of the board assumable leads to a larger network. Consequently this larger network can result in useful business contacts from unrelated industries. Often alliances are realized by collaborating with existing relationships (Gulati, 1998). While increasing the board, the diversity between the board members may increase. Subsequently leading to higher possibility of risk taking strategies and experimentation (Barkema and Shvyrkov, 2007) such as explorative-oriented alliances. Therefore the following hypothesis is developed:
H5b A larger board is better able to benefit from the external environment. Therefore increasing the amount of board members has a positive impact on the number of
14 In Figure 1 a visual representation of the relationships is displayed. In the following section the applied methodology will be described.
Figure 1. Conceptual framework of this Study
METHODOLOGY
Empirical design
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Data collection and sample
The data that is collected is large scale data from ‘BoardEx’. The data contains biographical information on a large amount of CEOs, additional board members and senior executives around the world (BoardEx, 2014). The second database which will be used to complete the study is the SDC platinum database. Which is the industry standard on collaboration of firms (SDC Platinum, 2014). After the data collection both datasets were merged in to one dataset. This was executed with statistical software Stata through matching the GVkey (firm specific) of both sets. This resulted in an alliance level sample with 59.808
observations which range between 2002 and 2010. The data is aggregated from alliance level to firm level and all the missing values were excluded from the analyses. This resulted in a final dataset with 6760 observations of 2273 firms. To achieve high generalizability I choose to conduct the analysis within various industries and across several countries with USA as dominating country in the dataset.
Dependent variable: Strategic alliances
To test whether a firm engages in strategic alliances, the total number of alliances is utilized as dependent variable. To calculate the number of alliances a specific variable is created. This variable counts the alliance announcements by firm after the data is aggregated to firm level. To indicate whether an alliance is explorative-oriented or exploitative oriented. We tested the industry type of the partner. A distinction can be made between related industry
(exploitative) or unrelated industry (explorative). To investigate this the ‘Standard Industrial Classification Code’ (SIC) is utilized (Chan et al, 1997). This code consists of four digits if all four of these digits are similar the partner operates in the same industry. If there is a match between the first two digits the industry can be similar, thus an alliance with a firm from a
16
Independent variables
The independent variables are characteristics of the CEO and the board that determine the board composition and assumable impact the dependent variables. Tenure within the role is measured by the time in role in the specific firm as CEO; this means that at the start of career as CEO the counting starts until the present or until the end of the operating period. Tenure within
the company is the time a CEO is operating within the company before achieving a CEO
position. Both tenure variables are measured in full years. Age is the age in years of the CEO. In transition periods this variable is often missing. We assume that in this period the influence of the former CEO is still visible. Therefore we computed age +1 for these gaps in transition periods. The same computing strategy is applied for both tenure variables. Type of membership; a distinction can be made between two types: outside directors and inside directors. Board outside representation is computed by dividing the number of outside directors by the total number of board members. This will create the ratio of outside representation (Goodstein et al, 1994; Geddes and Vinod, 2002). Board size is determined by the total number of board
members.
Control variables
In this study we control for several variables that may influence the alliance pattern with regard to number of alliances and alliance type. These variables are mentioned in most strategic management literature and the alliance stream in particular. Firm size is used as an control variable within alliance literature for various reasons; the fact that firm size influence the ability to dominate partners within an alliance due to market power. (Hitt et al, 2000; Lahiri and
Narayanan, 2013; Katila, Rosenberger and Eisenhardt, 2008; Goodstein et al, 2000; Eisenhardt & Schoonhoven, 1996). Controlling for firm size in this study is important for the fact that larger firms are able to manage larger numbers of alliance with regard to alliance portfolio
17 of the code. Another variable that is taken into account is time. In this study we controlled for variation in time effects.
Data Analysis
In this study the measured independent variables; the total number of alliances and number of alliances in (un)related industry are count outcomes. The data that is utilized is panel data, due to the fact that the data consists of different levels of analysis, in this dataset year and firm ID. Furthermore the mean largely differs from the variance suggesting that over-dispersion is present. These three factors are important determinants for selecting the statistical analysis and leading to one test that will be used: negative binomial regression. Within this test there are three models: random-effects over dispersion models, conditional fixed-effects over dispersion models and population-averaged negative binomial models. These are the conducted statistical tests in this study that will be executed. The results of the fixed effects model is utilized to determine if the proposed hypotheses are supported.
RESULTS
Table 1 provides the descriptive statistics of the independent variables used in the
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TABLE 1
Descriptive statistics of dependent variables
(1) (2) (3) (4) (5)
Variables N mean sd min max
Total number of alliances 6760 1.302 2.678 0 63
Number of explorative-oriented alliances 6760 0.877 1.930 0 33 Number of exploitative-oriented alliances 6760 1.039 1.526 0 39
TABLE 2
Descriptive statistics and Correlations of independent variables
Variable Mean s.d. 1 2 3 4 5 6
1. Age in years 53.69 7.472 1.0000
2. Time in role 7.181 6.643 0.2764 1.0000
3. Ratio of NEDs 0.705 0.152 0.0430 -0.0405 1.0000
4. Total amount of directors 9.024 2.745 0.1459 -0.0657 0.0726 1.0000
5. Firm size 19.95 65.35 0.0796 -0.0333 0.0493 0.3198 1.0000
19 Table 3, 4 and 5 present the results of the models that analyze the impact of the board and CEO characteristics on the total number of alliances, the number of explorative-oriented alliances and the number of exploitative alliances, respectively. In table 3, 4 and 5 model 1 displays the results of the variable time in role, with the ratio of outside directors, board size, controls for firm size and takes into account time effects and industry type. Model 2 provides the results of the time in the company instead of the time in role. Model 3 excludes both variables but includes Age in years. Model 4 provides a full model of all variables. Now we will summarize the results of the negative binomial regression for both total number of alliances and number of alliances with unrelated industries (explorative-oriented alliances) and compare these results with alliances in related industries (exploitative-oriented alliances).
First, we hypothesized that the time in role as CEO (long tenure) has a negative effect on both the number of alliances and the number of explorative-oriented alliances and this effect is stronger than for exploitative-oriented alliances (H1a and b, respectively). We found no support for the negative relationship of time in role on the number of alliances (Table 3, Model 4). We found evidence for a significant positive relationship (p<0,05). For H1b we found a similar positive significant relationship (Table 4, Model 4). The results in table 5 indicate that time in role has a negative significant effect on exploitative-oriented alliances (p<0,01). Thus both hypotheses are not supported, these conflicting results will be discussed in further detail in the discussion section.
Second, we hypothesized that the time in the company (before CEO) has a negative effect on both the number of alliances and the number of explorative-oriented alliances and this effect is stronger than for exploitative-oriented alliances (H2a and b, respectively).We found a
significant negative relationship (p<0,05) for both total number of alliances and explorative-oriented alliances and for exploitative-explorative-oriented alliances this relationship is non-significant, thus both H2a (Table 3, Model 4) and H2b (Table 4 and 5, Model 4) are supported.
20
TABLE 3
Results of Negative Binomial Regression for the total number of alliances
(model 1) (model 2) (model 3) (model 4)
Variables Total number of
alliances Total number of alliances Total number of alliances Total number of alliances Time in role 0.00324 0.00655** (0.00272) (0.00315)
Time in company (more than four years) -0.0611* -0.101**
(0.0355) (0.0398)
Age in years 0.000190 -0.000648
(0.00265) (0.00287)
Ratio of NEDs 0.367*** 0.369*** 0.365*** 0.381***
(0.125) (0.124) (0.125) (0.125)
Total amount of directors on the board 0.100*** 0.0989*** 0.0997*** 0.0998***
(0.00814) (0.00809) (0.00813) (0.00819)
Firm Size (number of employees) 0.00274*** 0.00276*** 0.00275*** 0.00272*** (0.000455) (0.000455) (0.000456) (0.000455)
Year fixed effects Yes Yes Yes Yes
Industry dummies (1 digit) Yes Yes Yes Yes
Log likelihood -8022.7383 -8111.7401 -8023.4413 -8019.434
AIC 16093.48 16271.48 16094.88 16090.87
Observations 6,760 6,852 6,760 6,760
Number of id 2,273 2,281 2,273 2,273
Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1
21
TABLE 4
Results of Negative Binomial Regression of the number of explorative-oriented alliances
(model 1) (model 2) (model 3) (model 4)
Variables Unrelated industry alliances Unrelated industry alliances Unrelated industry alliances Unrelated industry alliances Time in role 0.00656** 0.0108*** (0.00325) (0.00377)
Time in company (more than four years) -0.0635 -0.125**
(0.0435) (0.0485)
Age in years 0.000674 -0.00170
(0.00317) (0.00346)
Ratio of NEDs 0.248* 0.251* 0.242 0.265*
(0.149) (0.148) (0.149) (0.149)
Total amount of directors on the board 0.104*** 0.102*** 0.103*** 0.104***
(0.00968) (0.00964) (0.00968) (0.00975)
Firm Size (number of employees) 0.00423*** 0.00419*** 0.00420*** 0.00424*** (0.000546) (0.000544) (0.000546) (0.000546)
Year fixed effects Yes Yes Yes Yes
Industry dummies (1 digit) Yes Yes Yes Yes
Log likelihood -6508.244 -6585.285 -6510.265 -6504.734
AIC 13064.49 13218.57 13068.53 13061.47
Observations 6,760 6,852 6,760 6,760
Number of id 2,273 2,281 2,273 2,273
Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1
22
TABLE 5
Results of Negative Binomial Regression of the number of exploitative-oriented alliances
(model 1) (model 2) (model 3) (model 4)
Variables Related industry
alliances Related industry alliances Related industry alliances Related industry alliances Time in role -0.00972*** -0.0113*** (0.00233) (0.00274)
Time in company (more than four years) -0.0343 0.0406
(0.0314) (0.0364)
Age in years -0.00214 0.000458
(0.00209) (0.00220)
Ratio of NEDs -0.0348 -0.0358 -0.0286 -0.0420
(0.0998) (0.0994) (0.1000) (0.1000)
Total amount of directors on the board -0.000427 0.000292 0.000980 -2.81e-05
(0.00640) (0.00638) (0.00645) (0.00648)
Firm Size (number of employees) -7.92e-05 -9.23e-05 -9.42e-05 -7.39e-05 (0.000303) (0.000303) (0.000304) (0.000302)
Year fixed effects Yes Yes Yes Yes
Industry dummies (1 digit) Yes Yes Yes Yes
Log likelihood -8151.383 -8263.203 -8159.714 -8150.723
AIC 16350.77 16574.41 16367.43 16353.45
Observations 6,760 6,852 6,760 6,760
Number of id 2,273 2,281 2,273 2,273
Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1
23 Fourth, we hypothesized that if the ratio of non-executive directors (outside directors) increases both the number of alliances and the number of explorative-oriented alliances are positively influenced and this effect is stronger than for exploitative-oriented alliances (H4a and b, respectively). Our results indicate that a strong positive significant effect is found the number of alliances (See Table 3, Model 4), supporting hypothesis H4a. With regard to explorative oriented alliances the effect is positive significant (See table 4, model 4), but this relationship is rather weak (p<0,1). For exploitative-oriented alliances there is no significant relationship (See table 5, model 4), resulting in weak support for H4b.
Finally, hypotheses 5a and 5b suggested a positive association between board size and both the number of alliances and the number of explorative-oriented alliances and this
relationship is stronger than for exploitative-oriented alliances, respectively. The results indicate a positive and strongly significant relationship (p<0,01) in all four models for both the number of alliances and the number of explorative-oriented alliances and this effect is stronger than for exploitative-oriented alliances, supporting H5a and b (Table 3, 4 and 5).
DISCUSSION
In this section the most relevant theoretical and managerial implications of the findings will be discussed. In Table 6 a summary of the support for the hypotheses is provided.
TABLE 6
Overview of support for hypotheses
Hypotheses Support
1a Time in role as CEO impacts number of alliances negatively No, opposite 1b Time in role as CEO impacts number of explorative-oriented alliances negatively No, opposite 2a Time in company before CEO impacts number of alliances negatively Yes
2b Time in company before CEO impacts number of explorative-oriented alliances negatively Yes
3a Older CEOs impact number of alliances negatively No,
3b Older CEOs impact number of explorative-oriented alliances negatively No, 4a Outside director dominated boards influence number of alliances positively Yes 4b Outside director dominated boards influence number of explorative-oriented alliances positively Yes, weak
5a Larger boards influence number of alliances positively Yes
24 Whereas prior research assess alliance formation from various perspectives, it misses out on the actors that execute the important strategic decisions. In this study CEO and board
characteristics are taken into account and in depth theoretical insights substantiated by empirical evidence for several characteristics are provided. In sum the model links strategic alliances with the executives considering these strategic decisions and investigates if these executives have an impact on the strategic alliances.
First, we found how CEO characteristics; tenure as CEO influence the total number of alliances and the alliances within unrelated industries (explorative-oriented alliances). The tenure within the role of CEO is an important aspect to determine whether a firm decides to utilize external sources. Our results are conflicting with the proposed hypotheses. These findings demonstrate that a CEO with long tenure positively influence the total number of alliances and the explorative-oriented alliances. A possible argument could be that short tenured CEOs are more attracted to acquisition strategies compared to alliances strategies, due to the large
25 developing innovative strategies it is important to consider the tenure of the CEO. A long tenured CEO might be more experienced in risk-taking strategies and might has a stronger social network available. Resulting in the proper skills and assets to engage in strategic alliances. Managers with CEO voting ability should take this into account, to find a suitable fit with the firm’s strategy.
Second, we examined another CEO characteristic; tenure within the company (before turning CEO). We found that tenure within the firm is an important indicator to determine the alliance strategy. The results indicate a negative relationship between tenure and both strategic alliances and explorative-oriented alliances and this effect is stronger than for exploitative-oriented alliances. Long tenure within the firm before turning CEO influences the focus and the decision-making concerning strategic alliances and explorative-oriented alliances. Long tenured executives may think that they have possessed sufficient expertise and knowledge and therefore believe outside sources are less important (Hambrick and Fukotomi, 1991). These findings extend the upper echelons theory of Hambrick and Mason (1984) by adding a complementary strategic choice; strategic alliances and explorative-oriented alliances, while testing career experiences of executives (tenure). The results of the present study confirm the upper echelons proposition that ‘years of inside service will negatively influence strategic choices which involve new terrain’ (Hambrick and Mason, 1984, p200). Furthermore these results confirm that long tenure within the firm is accompanied by a sharp reduction in communications with external parties (Katz, 1982). Our present findings implicate that if a firm is dependent on the
environment to survive or depends on experimenting and exploration; long tenure within the role of CEO and short firm tenure before achieving a CEO position are more effective. Managers with the voting right should take this present finding into consideration, if the alliance strategy is paramount for survival. Acquiring a CEO from the external environment with experience as a CEO is beneficial with respect to the relevance of alliances.
Third, we examined another CEO characteristic and investigated if age influences
strategic alliances. Our results indicate a negative relationship, but not significant. These findings demonstrate that older CEOs negatively influence the total number of alliances and the
26 CEOs may require certain strategic risk-taking experience that unexperienced youthful CEOs may lack (Simsek, 2007). Another plausible explanation for the opposing force may be the building of social capital, which may occurs over time. Consequently these insignificant results implicate that the age of a CEO is not of great significance for this strategic decision due to these opposing forces and voting for a particular CEO based on age for the alliance strategy is not required.
Fourth, our analysis assumed that a board that is dominated by outside directors positively influence the total number of alliances and the number of explorative-oriented alliances. The results that were found were positively significant. These findings demonstrate that a board that is dominated by outside directors engages more in strategic alliances and exploration-oriented alliances in particular. This corroborates that a powerful board (dominated by outside directors) with a strong network is required (Pearce, 1991) with respect to strategic alliances. The social connections within this network create opportunities to enter into new alliances and alliances with existing partners (Gulati, 1998). The board can be modified with an increased number of outside directors. Subsequently this will strengthen the link with the external environment. These findings implicate that the ratio of outside directors is of great significance for this strategic decision and adapting the board according to an alliance strategy is recommended.
27 managers should take the size of the board into consideration, if alliances are important for the firm.
In general this study reveals the importance of CEO and board characteristics in the initial formation of strategic alliances. The results demonstrate the impact of CEO tenure (before CEO and as CEO), type of membership, board size on strategic alliances and therefore can be seen as complementary to the traditional theories such as; Transaction cost theory, Resource based view, Social network perspective, which lack to incorporate the actors that determine if strategic alliances take place, which evidently play a role in this process. Furthermore the present findings that entail tenure before turning CEO is in line and complementary to the upper echelon theory of Hambrick and Mason (1984). With regard to board characteristics the ratio of outside
directors and the size of the board play an important role in the engagement of alliances, this is in line with resource dependence theorists (Goodstein et al, 1994).
Limitations and directions for further research
Future research could address some of the limitations of this study, these particular limitations will be discussed in this section.
First, while investigating the role of executives within a strategic decision we did not extend to the characteristics of the individual board members (average age, tenure). This may lead to results in similar direction as this study and take the board more thoroughly into account. Unfortunately this data was not available in the dataset that is utilized for this study. Future research could study this aspect with board data, to see whether these results are in line with the present findings of CEOs.
Second, we restricted our research on the most important executives, but these are often instructed and influenced by top managers. Top managers are regularly important initiators of potential alliances, therefore top managers are relevant actors in strategic alliance formation (Eisenhardt and Schoonhoven, 1997; Finkelstein and Hambrick, 1990). Future research could investigate characteristics of the top management team to analyse the strategic alliance formation pattern.
Third, this study mainly focused on experience related variables with regard to CEO characteristics, due to the fact that these characteristics are closely related to each other
28 the alliance strategy as well. Future research could investigate these CEO characteristics to develop a more substantial and extensive insight of board characteristics.
A fourth limitation concerns the type of alliances. While we focused on the total number of alliance and alliances with firms from unrelated industries. Another possible and also relevant selection could be a focus on technology alliances. Future research could investigate this in more detail, with more specific analyses and a larger sample.
Finally, there remains a trade-off between increasing generalizability or focusing on specific industries and decrease generalizability. In this study we preferred to increase
generalizability by analysing these streams across a large amount of industries. Nevertheless we controlled for variation between industries during the regressions, future research could focus on high-technology industries, where the speed of development is fast and innovating is more critical (Sampson, 2007). To keep up with the pace firms need to obtain knowledge from their environment and collaborate with a variety of partners on an explorative basis.
Concluding remarks
To conclude, this study takes an important step in combining two literature streams and indicates the impact of executives on strategic alliances. The results demonstrate that certain CEO (tenure as CEO and before CEO) and board characteristics (size and type of membership) influence strategic alliances and the type of alliances with respect to exploration and exploitation. This paper extends prior research and theories about strategic alliance formation. Whereas
previous research left out the decisive actors (executives), we show the importance and their influence on strategic alliances. Furthermore we found evidence confirming the upper echelon theory of Hambrick and Mason (1984). The upper echelon perspective provides a model with several strategic choices such as; acquisition, diversification, product innovation. We extend this theory by investigating an additional strategic choice (strategic alliances). The results
29 The composition (inside and outside) and the size of a board are also of great influence for strategic alliances. The results demonstrate that increasing the amount of outside directors and increasing the size of the board can be beneficial for the alliance strategy. With respect the present findings firms can adapt and anticipate by selecting an appropriate CEO and adjust the board to create fit with the alliance strategy. This study provides empirical evidence of the importance of CEOs and the composition of the board with regard to strategic alliances and developed a foundation for further research on this subject.
ACKNOWLEDGEMENTS
30
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