Easing Faultlines at the Top

The interactions and dynamics that influence how top management teams make strategic decisions have an enormous impact on any organization’s performance and success.

To meet the multiple complex challenges companies face it is common for top management teams to develop around distinct diverse subgroups based on specialist knowledge and expertise. On the one hand, this knowledge-based diversity can stimulate innovation and learning, but on the other hand it can result in factions between team members, generating knowledge fragmentation that impairs team functioning and results in low performance.

Recent research, by Winfried Ruigrok and Dimitrios Georgakakis of the University of St. Gallen, Research Institute for International Management, and Peder Greve from Henley Business School, analyses the effect of faultlines that occur between knowledge-based sub-groups on performance, and introduces the idea that the positive or negative effects of faultlines can be moderated by the CEO/interface.

Analysing data from 347 large international firms over 4 years, the researchers found that on balance management teams with knowledge-based subgroups performed less well than those without. However, they contend that it would be unrealistic in an increasingly complex business world to avoid these subgroups, and there has to be a trade-off between information and knowledge availability that can promote innovation and learning, and the risk of knowledge fragmentation between subgroups that may lead to weak performance.

One of the key recommendations from the research is that to avoid the negative effects of fragmentation and benefit from the positive effects on creativity caused by the presence of strong knowledge-based subgroups, companies need to ensure that sufficient bridge-building capacity is in place at the team-leader level. They need the CEO to foster knowledge exchange and integration through an effective and supportive interface with the team. The underlying behavioural processes at CEO/top management team interface can be critical and organizations should take account of this when composing their strategic leadership teams.

In practical terms, this can mean taking account of the relational, informational, and socialization processes which characterise the interactions between the CEO and the rest of the top management team. This can be by ensuring a good fit due to a similarity of outlook and experience between the CEO and the team: the CEO should (a) socio-demographically resembles incumbent team members, (b) possesses a diverse career background, and (c) shares common socialization experience with other team members.

The length of time the CEO of and other team members work together can also play an important role in allowing the CEO to learn about the knowledge and information residing in the team and thus to positively influence the effects of knowledge-based faultlines on firm performance. Ideally leaders should be given time to learn and effectively manage teams with strong knowledge-based subgroups, but where time is not available it may be necessary to give a new CEO the mandate to compose the executive group with members he or she has worked with in the past.

Previous research has looked at the impact the diversity of top management teams can have on organizations. This new research identifies how the dynamics between the CEO and the top management team can moderate the negative and positive effects of inevitable subgroups. Overall it shows that when considering how company outcomes are determined by the top management, rather than focusing on individual performance – the CEO or individual team members – organizations should look at the composition of the executive team and the fit or misfit between it and the CEO.  

Read the full research paper: Top Management Team Faultlines and Firm Performance: Examining the CEO-TMT Interface, Dimitrios Georgakakis, Peder Greve, Winfried Ruigrok, The Leadership Quarterly, 2017, ISSN 1048-9843

Photo by Wynand van Poortvliet