Top Management Teams & Upper Echelons Theory

As the name implies, the top management team (‘TMT’) in an organization is the ‘upper echelon’ in an hierarchical structure of management. The key decisions of the TMT discussed in extant literature involve formulating strategy and the quality of strategic decisions impacts enterprise performance.

A balanced composition of TMTs in mature, established operating entities typically comprises a chief executive officer (‘CEO’) and senior executives responsible for each of the several functions that most businesses must manage to achieve and sustain success in their industry and situation. This functional mix typically include sales & marketing, operations (such as production, service, distribution), finance & accounting, human resources management, and research & development (including innovation and engineering). But some of these managers may not be present in growth-oriented entrepreneurial ventures (‘GOEVs’), depending on their stage-of-development and usually, as some VCims in my dissertation study assert, affordability. For example, a CFO is likely absent during early-stage innovation and other exploration activities led by ‘founding teams’, but are frequently added as the enterprise shifts into commercialization mode and exploitation activities directed by ‘entrepreneurial management teams’ (article #3T4).

The essence of Upper Echelons Theory (‘UET’) is that the members of an organization’s top management team view their situations through personal lenses such that their individual characteristics (experiences, values, personalities, cognitive processes, and biases) significantly influence their perception of possibilities, their decision-making, and contribution to an enterprise’s strategic choices. This is known as executive orientation filtering. Finally, the theory suggests that the greater team heterogeneity (diversity), the more and better alternatives will be generated and the collective rationale should result in better quality strategic decisions and better enterprise performance.

But, years of subsequent testing of the theory generated three key refinements for the theory to work in practice: (1) individual managers must have discretion to act (which favours democratic over domineering leadership); (2) the collective characteristics of the TMTs will only impact enterprise outcomes to the extent they actually achieve behavioural integration – i.e. “act as a team” (see ‘Teamliness’ in article #3T1); and, (3) if executive job demands are not distributed (e.g. an entrepreneur-leader retaining capital-raising activities instead of transferring them to a CFO), their concentration can result in taking mental shortcuts based on what has worked in the past. The developers of UET determined that teamliness was not prevalent in TMTs. Because of the extreme uncertainties and risks in entrepreneurial venturing, a lack of teamliness in eMTs can act to prevent or delay GOEVs from achieving their goals.

A key concept that evolves from years of TMT research is similar to an issuing plaguing society worldwide today: the notion that diversity is good (in this case, for business). In business, we mean functional diversity (see management mix above). But, diversity’s multiple perspectives come at a cost and that is the potential for various types of conflict. The significance is that unless conflicts can be prevented or resolved so that teams can work together effectively, organizations are prevented from realizing diversity’s benefits. Therefore, the conscious management of social integration processes is a crucial requirement for team ‘norming’ and ‘performing’ (article #3T2).

So, in the end, management decision quality depends on collective cognitive capability incorporating diverse perspectives that are effectively managed socially. Article #3T2 provides some suggestions for doing so. Of course, the quality of the decision is the first step. To actually achieve enhanced performance requires implementation/execution in the various functional areas in ways that are consistent with the decision. According to another author (Amason, 1994), the predicate for this to occur is “engaged consensus” which derives from the active participation of all team members in the TMT in making the decision … including the requisite cognitive debates. Only by achieving engaged consensus will “understandings & commitments” be acquired by all members enabling them to implement the strategy and make consistent subsidiary decisions.