Almandoz (2014). Founding Teams as Carriers of Competing Logics: When Institutional Forces Predict Banks’ Risk Exposure

Juan Almandoz – IESE Business School

Wooseok Jung – Northwestern University
Stephen Hwang – Northwestern University

Article link:

Question 1. We find this paper fascinating that you emphasized founding teams as a carrier of particular institutional logics. It seems that you have developed a novel mechanism that explains how institutional logics influence firm-level outcomes. (a) Did you have any specific experience or motivation to focus on founding teams? (b) More generally, what would be the advantages that institutional logic scholars could earn by studying the composition of top management teams and their decision-making process?

Thank you very much for your kind words.

a) I should say that even before I discovered the theoretical framework of institutional logics I was already intrigued by the notion of meaning at work: how the same work could acquire a very different meaning depending on the motivations, assumptions, values, and goals of those working. I focused on founding teams because I had a strong intuition that the founders’ decision-making premises, values and cognitions, which are to a large extent unconscious, would end up shaping the culture of the organizations they founded. Through my business and non-profit work before my academic career I have come in contact with a broad range of motivations at work and, among entrepreneurs and people at the top of organizations, I have experienced how they affect organizational cultures and practices. Well-known examples of exceptional leaders shaping exceptional cultures are Bill George at Medtronics, Dennis Bakke at AES Corporation and Cristobal Colon (I am not making this name up) at La Fageda in Spain.

b) Viewing founders as carriers of institutional logics based on their occupational backgrounds and life experiences could be a good perspective to shed light onto the decision-making premises of top management teams and founding teams. At the time of founding and in the years prior to establishing an organization, a founding team is particularly vulnerable to economic and institutional pressures from the environment. The founding period is an especially interesting time to explore the interplay between external, institutional forces and the internal representation of institutional logics and to explore how organizations respond to institutional forces.

Question 2. In developing the first hypothesis, you suggested that “socialization” is a key process that members of founding teams learn a particular organizing principle. Thus, it is logical to argue that those founders with a financial (community) career tend to take greater (lesser) risks in their decision-making. However, we’d be curious about a possibility that certain types of individuals select themselves into a particular career according to their own characteristics. For instance, those who are risk-takers may be more prone to work in the financial sector in the first place. How would this focus on founder predisposition expand your theoretical arguments? Could you provide us with some insights on this point?

That is absolutely correct. People with financial careers can be argued to be carriers of a financial logic not only because of socialization during their careers but also, perhaps, because of their self-selection into those careers. To what extent that self-selection is the result of a prior cultural imprinting or a genetic predisposition; I suppose we cannot know for sure. Some studies have gone one step behind career experience to explore the impact of studying economics on self-serving attitudes, but even before entering a certain track of studies there is a choice, and therefore an exercise of self-selection. In any case, the interplay between agent predispositions and motivations on one hand and broader societal institutional logics on the other could be potentially a fruitful course for research.

Question 3. The third question is about H3 and H4. Both hypotheses suggest that as the size of founding teams becomes larger, they tend to reinforce the logic to which members of the teams are proportionally exposed. Extending your idea, we could imagine alternative situations like when the small number of members having finance (community) logic convincingly push their risk-taking (risk-averse) strategy vis-à-vis majority members who subscribe to the different logic. In such cases, those minority members might take the lead of the founding team despite a smaller share of representation in the team. In essence, group dynamics might be more complex, because of power structure, political conflicts, or communication channels among team members, than what’s originally suggested. What do you think about these possibilities?

Yes, that is certainly true. The weight of the impact of the internal representation of competing institutional logics (financial vs. community) is not likely to depend simply on the proportion of founding team members belonging to one group or the other. The power of the various members (measured perhaps by the importance of the resources that they bring to a team) and the hierarchy distribution within the founding team are likely to make a difference as well. Similarly, there may be order effects as first comers into a decision-making group may have higher status and thus be more influential than other members coming later. Indeed, other scholars have pointed out that not only internal representation of institutional logics but also its distribution within an organization is likely to matter, for the same reasons that you suggest, in the response of organizations to institutional pressures (Besharov & Smith, 2014).

Question 4. We felt that some scholars would like to extend your research by stretching your observation window. Were you able to find any dynamics in the composition of founding teams over time? For instance, those founders who are exposed more to community logic might want to leave the team if other members embedded with finance logic are able to implement risk-taking strategies. How would this strategic choice of a firm (at time t) influence composition of the founding team (at time t+1)? We’d speculate to find a sort of “homogenization” among members of the founding team as time goes by. Have you observed any of anecdotes related to this point?

That is a very interesting question. Certainly, stretching the observation window could allow you to explore whether the same effects endure years after founding. It is an empirical question. Unfortunately, the data collected for this project did not include time-variant board composition and longitudinal data on organizational risk-taking.

However, if you collect such data I suspect you may find that the more that you stretch the observation window, the more noise is introduced in the dependent variable. Intervening influences could obscure the impact of the initial founders. Later on in an organization’s life, the board of directors will change from the original board, and the board itself may be less active and more distant from the day to day operations of the bank. Some boards may also be better than others in establishing effective governance mechanisms to ensure that managers focus on the goals of founders, directors and shareholders. All those factors suggest that the relationship between founding team composition and organizational strategies over time may be less evident.

You raise an important point when you say that decisions of a firm at time t may also affect the composition of top management at time t+1. In addition to those firm choices at time t, you could also factor in regulatory, economic and institutional changes that may alter the external landscape in favor of community or financial logics at time t+1. Internal choices and external shocks could alter the attractiveness of the bank for some of the founding members. A financial crisis, for example, may limit the bank’s potential for growth and this could in turn cause some financially-oriented founding members to leave. By contrast, a surprising acceleration of economic growth in an area could give rise to commercial opportunities, leading bankers to focus their attention on growth and making community-oriented founders uncomfortable. Indeed, the relationship between the composition of a strategic decision-making body and the ongoing strategy of the bank is likely to flow in both directions, and exploring such interplay could lead to interesting insights about hybrid organizations.

I would not necessarily agree that there will be a homogenization among members of the founding team, at least not one that would draw founding teams to the extremes of a purely financial or purely community-oriented logic. Banks in this setting are expected to be legitimate both from financial and community perspectives and, therefore, both logics are expected. But it may be true that over time, as a result of past decisions, some degree of shared culture more aligned with one institutional logic is developed and becomes normative.

Question 5. What was the biggest challenge of your paper during the review process? Also, could you share us with any surprising results that differed markedly from your initial predictions and perhaps did not make their way into the published report?

The biggest challenge that I faced came from one of the reviewers. He did not find anything novel in the first two hypotheses: “I’m not sure we need your rather long theoretical build-up to tell us this. It is sort of like saying that hockey players are likely to play hockey, and baseball players are likely to play baseball. Or am I missing something?” He had a point. The original version of the paper especially emphasized H1 and H2: a team with more community players behaves in a more communitarian fashion, and one with more financial players in a financial fashion. My initial response and the second version of the paper was apparently not entirely satisfactory to him because that same reviewer returned with the same concern, “The most significant carry-over from my previous set of comments is my concern about (what I consider to be) the self-evident nature of H1 and H2.”

However, sometimes you find that the beginning of the answer is hidden in the question itself. A few lines later he said, “Your hypotheses / results about the size moderator are less obvious, so you have a stronger claim for novelty here. In fact, if I am reading your results correctly, these results may show H1 to be not so obvious after all.” He was right for small boards the effect predicted in H1 and H2 was non-existent. So in the end the paper downplayed H1 and H2 and emphasized H3 and H4, the interaction hypotheses.

With regards to surprising results in the data analysis, I was expecting that board functional diversity would be a more significant part of the story but in the end nothing turned up about that in the data nor in the paper. The more interesting results lined up with an institutional logics story rather than a diversity story.

Thanks for this opportunity to talk about my research.

Other Sources Cited

Besharov, M. L., & Smith, W. K. (2014). Multiple institutional logics in organizations: Explaining their varied nature and implications. Academy of Management Review, 39(3), 364-381.

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