Openness to Experience in Managers and Company Performance

Contents

1. Introduction

2. Theoretical framework

2.1 Personality; the Big Five

2.2 Personality as performance indicator

2.3 Company success

2.4 Hypothesis:

3. Data and Methodology

3.1 Research design

3.2 Data collection

3.3 Analysis techniques

3.4 Sample strategy

3.5 Quality indicators

3.5.1 Validity

4. Results

4.1 Differences in average Openness to Experience

4.2 Multiple regression analysis

4.3 Regression estimates Revenues

4.3.1 Model 1

4.3.2 Model 2

4.3.3 Model 3

4.3.4 Model 4

4.3.5 Model 5

4.3.6 Model 6

4.3.7 Model 7

4.3.8 Model 8

5. Conclusion

6. Discussion & limitations

7. References

8. Appendices

8.1 Appendix 1: survey in Dutch (as distributed to the respondents)

8.2 Appendix 2: survey translated to English

8.3 Excluded regression models

1. Introduction

Hiring the right people for the right job is something that has gotten quite some attention over the years. Since there are a lot of aspects to this process, I will focus on one aspect: employee personality. In a simple Web of Science™ search for the words "personality" and "job performance" in the title resulted in 101 scientific publications.

Financial performance as a stand-alone topic is a widely discussed topic as well, as is mentioned by Capon et al. (1990), who reviewed 320 empirical studies in their meta-analysis of financial performance.

However, a search for personality and company/business/financial performance in the title resulted in only four publications, two of which two addressed company performance, the other two both addressed job performance. Moreover, a search for papers which addressed manager's job performance and a search for personality and company/business/financial performance resulted in only one paper for the former and only two for the latter, both not relevant for the research I am proposing. In this research, I will take on a different perspective on hiring and company performance. I will investigate whether the personality of the manager has an influence on financial performance.

For the measurement of the managers' personalities, I will make use of the Big Five construct (IPIP). This is a fifty-item questionnaire which addresses the five key personality traits: Openness to experience, Extraversion, Emotional Stability, Agreeableness and Conscientiousness. This is in accordance with Chiavarella et al. (2004), who argued that the Big Five model "has been found to be a robust indicator of an individual's personality".

The other aspect of this research is company performance. Since performance has a lot of different measurements, I opted for the simplest measure, revenues. The choice was made because revenues are the number of sales times the price of that what is sold. This is universal and makes sure that the values for both companies comprehend the exact same things.

Two organizations have been approached for this study, one in the carpentry industry and one in the logistics industry. More information is not disclosed, because they requested to stay anonymous. Besides the different industries, the most important distinction is the fact that the carpentry company is in bad financial shape, whereas the logistics company is performing well.

This leads to the research question: "Does Openness to Experience (as part of a manager's personality) have an influence on the financial performance of the company?"

In this paper, I will examine this linkage in a (non-random) sample of managers from both a successful and an unsuccessful company. A simple comparison of average scores for the Big Five traits will show whether or not this difference is apparent. I suspect there will be a difference for the factor openness to experience and possibly in conscientiousness. If this does occur, I will try to investigate the causality of this difference. By estimating a regression where financial performance of a company is regressed on the manager's score on each of the Big Five characteristics (either per company or department). If the coefficient of the openness factor is significant from zero, there might be an effect of the personality of the managers on the company performance.

From a company perspective, this research is an interesting subject when companies are faced with deteriorating financial health, provided that the causality leads from the personality traits to the company performance. For the investigated companies especially, this information could lead to better financial performance when the hiring processes are adapted to take personality into account (if an effect of personality on company financial performance is found).

Furthermore, this research contributes to the current literature by examining managers' personalities as a variable which might influence company performance. Moreover, this is a link that has not been studied before and might provide a useful insight in the realization of financial goals. This research aims to provide a helpful notion for those examining the determinants of financial performance. Future research can either replicate or evaluate this research, or use it as a starting point for new studies.

I will proceed with the theoretical framework on which this research is based, followed by a description of the data, the methodology and the results. The conclusion will relate these results to the research question and the before mentioned theories. Finally, the implications of the findings, as well as limitations of this research are discussed.

2. Theoretical framework

2.1 Personality; the Big Five

The Big Five personality dimensions addressed a need in the field of personality research, by integrating the numerous and divergent ways of studying and/or describing personality in one framework (John, 2001). The starting point of the Big Five lies with the lexical approach of personality research, which posits that “most of the socially relevant and salient personality characteristics have become encoded in the natural language” (John, 2001). Over the course of the 20th century, all the words that could be used to describe any human’s behavior as differing from the behavior of another. The amount of categories of words differed per researcher, as well as the vision of the boundaries used (mutually exclusive an clear, or overlapping and fuzzy). Over time, the amount of describing terms was reduced more and more, from almost 18.000 terms (Allport, 1936) of which Cattell picked 4.500 to reduce further to only 35 in 1943 and 1945 researches to arrive at 12 personality factors, which were eventually included in his 16 Personality Factors survey. The work of Cattell (both the outcomes and the reduction of the amount of variables used) inspired other researchers to investigate personality. (Fiske, 1949) simplified 22 of the 35 variables of Cattell and constructed a 5-factor structure which came close to the Big Five. When reanalyzing the correlation matrices from eight samples (which ranged from people with no more than high school education to graduate students), they found that the five factors emerged clearly and frequent, across self-ratings, peer, supervisor, teacher and clinician ratings (John, 2001).

In accordance with Norman (1963), the factors were initially named Extraversion (or Surgency), Agreeableness, Conscientiousness, Emotional Stability versus Neuroticism and Culture. The name Big Five came to be because of the broad scope of the factors (Goldberg, 1981). However, the Big Five does not suggest that that personality differences can be captured in just five traits, but rather that personality can be represented by five dimensions at the highest level of abstraction.

An important note to be made, is that an individual's personality obtains its final form between the ages of 21 and 30, changes in personality traits after the age of 30 are therefore rare (Costa & McCrae, 1994). Since the average age of the respondents is higher than 30, reverse causality seems highly unlikely.

2.2 Personality as performance indicator

The link between personality and company success has been investigated by Chiavarella et al. (2004), who found that the personality of the entrepreneur had an effect on venture survival. They characterized the personality through the Big Five (Openness to experience, Extraversion, Emotional Stability, Agreeableness and Conscientiousness) and venture survival. They defined entrepreneurs as "those that have decided to launch a small business by forgoing all other career alternatives and without the safety net of a professional license in case of failure". For these entrepreneurs, extraversion, emotional stability and agreeableness had no effect. Survival of a company was defined as the company still existing after 8 years. Conscientiousness had a significant and positive effect on the life span of the venture (p<.01), whereas openness to experience was expected to have a positive effect, it had a significant negative effect (p<.10). They reason that openness to experience might be a factor in starting a business, but over time, the job may require a shift from creative and broad-mindedness to a managerial approach.

A paper by Barrick & Mount (1991) found that conscientiousness had a positive effect on the job performance of managers as well, However, they found that openness to experience had a weak and positive effect on managerial performance, contrasting the above reasoning. A logical conclusion of this latter result would be that higher openness to experience in managers leads to better company performance through better job performance.

The personality of managers will be assessed through the Big Five personality factors. Ciavarella et al. (2003) have constructed the following overview of the Big Five based on the descriptions in Barrick & Mount's 1991 paper, in their attempt to uncover the relationship between an entrepreneurs personality and venture survival:

Table 1: The Big Five Factors, Traits and Components (Ciavarella et al., 2003)

Despite the fact that openness to experience the interesting factor is in this case, all factors are assessed in the survey, providing data for both control and interaction variables.

2.3 Company success

The dependent variable in my research question is company performance. However, this term is very broad (and broadly used as well). Moreover, the ways to measure it are numerous and ranging from extremely simple to complicated formulas. In this research, I will focus on the simplest measure of company success: revenues. The choice for this measure comes down to the fact that calculating revenues is straightforward and there is only one way to do it, which makes sure that the measures are performed (and thus are measuring) exactly the same in both companies (in accordance with Dutch tax policies).

2.4 Hypothesis:

Reasoning from the arguments posited in the previous paragraphs, I pose the following hypothesis, which is the research question of this paper:

Average managers' openness to experience will have a positive influence on company revenues.

The following chapter will elaborate on the methodology of this research, as well as information concerning the data.

3. Data and Methodology

In this section, the data collection and the methodology of this paper is explained. This research aims to uncover the relationship between the Openness to Experience of managers and the consecutive financial performance of their company.

3.1 Research design

As mentioned, I will focus on managers from both successful and unsuccessful companies, and I will define a company as unsuccessful when the bank has declared that the company is under "Bijzonder Beheer" or, in English: Special Asset Management (SAM). This means that the bank has serious doubts whether or not the company is able to keep paying its bills and thus decides that the company needs help in becoming financially healthy again or help concerning termination, to ensure that the loss is kept to a minimum (Rabobank, n.d.). Unfortunately, I was not allowed to get more information about which criteria are used to determine whether or not a company should be under SAM. However, the binary division of successful and unsuccessful is sufficient for this research, for it is only used to determine the type of company that is studied.

The factor Openness to Experience is part of the Big Five Factor model, which is the reason I chose the standard IPIP 50-item questionnaire to use in my survey. To study the outcomes appropriately, the survey responses will be aggregated per company.

3.2 Data collection

The data are obtained from two companies. The company under SAM is a manufacturer of wooden window frames (carpentry industry). The company that is financially sound, is a provider of value-added logistics and warehousing (transportation and storage industry). The survey was distributed to the managers of the two companies, which amounted to 11 managers of the company under SAM and five managers of the financially healthy company. All subjects responded, totaling 16 surveys in total. Personality was assessed by the 50-item set of IPIP Big Five Factor Markers (IPIP). The answers to the questions concerning the Big Five consisted of a five-point Likert scale, which makes it easier to fill in the questionnaire and will reduce possible errors due to inattentiveness. The questionnaire can be found in appendix 2 (this is the translated version, the version that was send out was in Dutch and can be found in appendix 1). The answers ranged from "strongly disagree" to "strongly agree", expressing neutrality towards the question was possible as well.

Financial performance will be measured by the revenues of the year 2013. Control variables will consist of: the remaining four of the Big Five personality factors, which have been found to be predictors of job performance in managers (Rothmann, 2003). Logical reasoning leads me to think that good job performance should lead to better financial results. However, as I mentioned before, this relationship has not yet been investigated. Continuing on this view, I accounted for job tenure, which was found to have a positive (but diminishing over time) effect on job performance (Hg, 2010). These variables were reported in the survey.

In accordance with the papers by Ciavarella et al (2004) and Barrick & Mount (1991), I control for the other determinants of personality as well. In both papers, it was found that Conscientiousness had a favorable influence on venture survival and on job performance. I expect that this factor will have the most dominant effect on company performance.

The industries of the company under SAM and the financially healthy company are respectively the carpentry industry and the transport & storage industry.

Table 2: Average Big Five values for both companies

I have taken into account that there might be a social-desirability bias (despite the fact that the answers were anonymous) and the fact that selection bias is very likely, due to the small sample size and the different natures of the companies.

The last important note concerns the fact that all respondents were employed for the organization in their current position in the year of interest, 2013.

3.3 Analysis techniques

After the collection of data was completed, an independent t-test was run to see if the mean values of Openness to Experience differed between the two groups. The choice for an independent t-test was made because of the small sample size and the fact that the samples were drawn from two different groups. This is an important step, because in order to prove a causal relationship between the Openness to Experience factor and company performance, there must be a difference in Openness to Experience, as well as in company performance.

After this comparison, a normal quantile plot was constructed, to check if Openness to Experience is distributed normally.

Finally, several multiple regression models were estimated. I have disclosed eight models, the first five adding the Big Five factors step-by-step, starting with Openness to Experience, then Conscientiousness, followed by Extraversion, Agreeableness and Neuroticism (forming OCEAN). In the sixth model, the variable job tenure was added, and in the seventh, the interaction between Openness to Experience and Agreeableness. In the final model, the variable Extraversion is deleted, to arrive at the model with both the highest explanatory value (as depicted by the Adjusted R-square) and the most significant estimates of the coefficients of the included variables. For some models, residual plots are provided, to see if the assumption of homoscedasticy of the errors is satisfied.

3.4 Sample strategy

The sample was purposely created, which means that only managers of the companies were asked to fill in a survey. The choice for managers was made because the results of Barrick & Mount (1991) indicated that Openness to Experience was a significant indicator of manager’s job performance. In the carpentry company, the managers belonged to either one of tree management groups: Owner-managers, Management Team and Operations Management. In the transport & storage company, all managers were partial owners, resulting in only one group. Convenience sampling was only the case in the carpentry company, because two managers were on holiday during the time the survey was available. Because this information was available prior to the sending out of the survey, they have not been approached.