Trickling Down: How the Upper Echelon Effect Diversity Within an Organization

Trickling Down: How the upper echelon effect diversity within an organization

ABSTRACT

This paper integrated concepts from upper echelons, diversity, and signaling theories to examine how the attitude of top management team (TMT) on diversity influences organizational reputation and performance. Drawing from signaling theory, this conceptual paper explains how organizations’ efforts on diversity signal the quality of the organization to the public. Then, the signal can give rise to promoting organizational reputation, which is a mediator for organizational performance.

INTRODUCTION

The ongoing globalization process has changed the sociological landscape in our society. On a daily basis, people socialize,encounter, and execute their work with people from differentethnicity and nationality. As a result, the workforce is also becoming increasingly varied and diverse (Cunningham, 2007; Richard, Fubara, & Castillo, 2000; Tayeb, 2005). Therefore, the trend towards greater diversity in the workplace has drawn significant attention among researchers and practitioners in the United States over the past few decades (Earley & Gibson, 2002). Moreover, companies and organizations are acknowledging the necessity to leverage their diversity in the context of globalization in order to maintain their competitiveness in the marketplace (Roberson, 2006). However, researchers have not been able to establish a definitive empirical link between diversity and performance in groups (Milliken & Martins, 1996), because investigations into the direct relationship between the two have produced variable results. Some existing studies have shown that diversity can produce negative effects on performance (e.g., Ancona & Caldwell, 1992), while other studies have demonstrated that diverse groups can outperform homogenous groups (e.g., Cunningham & Sagas, 2004; Cox, Lobel, & McLeod, 1991). Despite these mixed results in studies of diversity and performance, a number of management and diversity scholars have attempted to shed light on the importance of diversity in the workplace since the advantages of diversity far outweigh the disadvantages. The field of sport management is no exception (Cunningham, 2011). In fact, the benefits of diversity are now considered to be one of the most important and influential factors for the success of a sport organization. This belief is primarily due to the evidence that it is related to increases in team performance (Cunningham & Sagas, 2004), enhanced creativity (McLeod, Lobel, & Cox, 1996), and a deep satisfaction found among diverse individuals (Jayne & Dipboye, 2004). With the clear potential for such positive effects, many sport organizations have begun to actively recruit diverse members to their organization and to create an atmosphere that celebrates diversity.

The conceptual framework for this study is based on Upper Echelon Theory, proposed by Hambrick and Mason (1984). The underlying premise of this theory is that the top managers of an organization, also known at the top management team (TMT), are a reflection of the organization itself. According to Hambrick and Mason (1984), managerial decisions are strongly influenced by behavioral aspects and characteristics of strong upper echelons and organization systems. Given that if the top managers of organizations put extensive effort on including and promoting diversity in the organization, the employees of the organization will value diversity as well.

Furthermore, by focusing on diversity to a greater extent, the organizations or companies can signal the quality of the organization to the public. Signaling theory, as proposed by Spence (1973), posits that organizations use visible signals to gain reputation and status among the public. An organization makes these signals, which are comprised of bits of information, available to the general public to influence the views and feelings of fans, investors, employees, and other stakeholders in regard to the organization and, in turn, are then used by the public to evaluate the originator's capabilities (Ferrier, 1997; FombrunShanley, 1990; Mahon, 2002). More specifically, research has shown that, because of information asymmetries, the public often processes both actions and symbols internally to create an opinion of an organization’s reputation and quality (Ferrier, 1997; FombrunShanley, 1990; Spence, 1973). The amount of diversity is also considered a signal and previous studies have shown that an organization’s quality can be judged by how solidly that organization is committed to diversity (Albinger & Freeman, 2000). Given this fact, the author proposes that it can be an effective tool to signal the quality of organizations to the public if the TMT and organizations focus more on diversity. By doing so, the organizations’ reputation will be influenced by the signal.

An organization’s reputation is now crucial for the organization given the evidence linking a favorable reputation with a considerable number of intangible and tangible benefits (BalmerGreyser, 2003). There are two broad outcomes of an organization having a favorable reputation. First is that the employer benefits employees and the public loves the organization (Kumar, Peterson, Leone, 2007), and the second is reputational capital – the organization differentiates itself from others and develops legitimacy. Both of these benefits contribute to an increase in short and long term performance. Taking all of this into consideration, the author aims to make connections between the Upper Echelon Theory, diversity, Signal Theory, organizational reputation, and organizational performance.

THEORY DEVELOPMENT

Diversity and Sport

Over the past few decades, the topic of diversity has managed to attract a significant amount of attention. This may be due to the fact that the changes in the demographic composition of the USA have created further need to fully comprehend diverse people, both ethnically and culturally (Azevedo, Von Glinow, & Paul, 2001). Diversity has been defined as ‘the presence of differences among members of a social unit that leads to perceptions of such differences and that impact work outcomes’ (Cunningham, 2011, p.6). It has not merely been diversity scholars interested in studying the impact of diversity. A wide variety of academic disciplines have taken an active interest in researching how diversity can impact people in various social arenas and organizational fields. This interest in diversity is especially keen within the United States. Several factors may be responsible for this situation including, but limited to, the changing demographic makeup of society and the workforce, legal mandates (e.g. Title VII of the Civil Rights Act of 1964), social pressures, the potential negative effects of diversity and the value-in-diversity perspective (Cunningham, 2011). With the importance placed on diversity and the perceived benefits which outweigh potential negative effects, organizations which put time and effort into understanding and focusing on diversity are considered by society as ‘good’ organizations.

The perceived benefits associated with diversity include enhanced creativity, improved decision making and an increase in the performance of the organization. While these are desirable for any organization, scholars working in the field of sport recognize the advantages and focus on diversity and the effective management of it (see DeSensi, 1995; Doherty & Chelladurai, 1999; Fink & Pastore, 1999; Cunningham & Fink, 2006; Cunningham, 2007). Therefore, we argue that having a top management team, henceforth abbreviated as TMT, who has a high level of commitment to diversity issues within an organization is very important. Managers who value diversity play a pivotal role in promoting diversity in the organization as a whole. Thus, by linking the Upper Echelon Theory with diversity, the field of diversity will be significantly extended.

Upper Echelon Theory

The understanding behind the early Upper Echelon Theory is that the characteristics of senior management, or the upper echelon of an organization, have a strong impact on the decisions made and policies adopted by an organization (Hambrick & Mason, 1984). The authors of the theory, Hambrick and Mason, proposed that the decisions made by a manager or managers of an organization and, in turn, will be adopted by the organization they helm. They claimed that this occurs because demographic characteristics are associated with the many cognitive bases, values, and perceptions that subconsciously influence decision making. Subsequent research has supported the relationship between upper echelon characteristics and organizational strategies and performance. For example, there is evidence that the global nature of modern business is directly related to diversity among TMT (Lee & Park, 2006). As far as we know, there has a little research examining the influence of upper echelon attitudes on diversity issues within organizations. Therefore, it could be possible that if the top managers of an organization focus more on diversity issues, the attitude of employees toward diversity issues will be positively affected. Moreover, I expect that organizations that adopt diversity practices which have been identified in past research as being vital for the effective management of diverse workforces, to outperform those that do not. In addition, by putting more effort on diversity issues and initiatives, the organization can signal their effort to the public and this in turn will increase the organizations’ reputation.

Signaling Theory

Signaling Theory is concerned with increasing information symmetry between two parties (Spence, 2002). For example, Spence’s (1973) definitive work on labor markets demonstrated how a job applicant might engage in behaviors to reduce information asymmetry that hinder the selection ability of prospective employers. In it, Spence illustrated how high-quality prospective employees distinguish themselves from low-quality prospects via the costly signal of rigorous higher education. Inspired by this work, researchers from a plethora of academic fields picked up on the signaling theory and the result was an enormous volume of literature (Bird & Smith, 2005). Management scholars have also applied signaling theory to help explain the influence of information asymmetry in a wide array of research contexts. A recent study of corporate governance, for example, shows how top managers signal the unobservable quality of their firms to potential investors via the observable quality of their financial statements (Zhang & Wiersema, 2009). Diversity researchers use signaling theory to explain how firms use heterogeneous boards to communicate adherence to social values to a range of organizational stakeholders (Miller & Triana, 2009). Furthermore signaling theory is frequently used in the entrepreneurship literature, where scholars have examined the signaling value of board characteristics (Certo, 2003), top management team (TMT) characteristics (Lester, Certo, Dalton, Dalton, & Cannella, 2006), venture capitalist and angel investor presence (ElitzurGavius, 2003), and founder involvement (Busenitz, Fiet, & Moesel, 2005). Signaling theory is also important to human resource management, where a number of studies have examined signaling that occurs during the recruitment process (Suazo, Martínez, & Sandoval, 2009). The use of signaling theory has gained momentum in the management literature in recent years as scholars have expanded the range of potential signals and the contexts in which signaling occurs. Despite the emergence of signaling theory in management research, as of yet there exists no concise review in the management literature. As a result, management scholars almost universally refer to either Spence’s (1973) examination of signaling in job markets or Ross’s (1977) study of managerial incentives as signals to describe the theory’s central tenets. Over time, however, the key concepts underlying signaling theory have become blurred (Highhouse, Thornbury, & Little, 2007), causing some to argue that signaling theory is ill defined (EhrhartZiegert, 2005).

Although a number of studies integrate signaling concepts with related management theories (e.g., Deephouse, 2000; Ryan, Sacco, McFarland, & Kriska, 2000; Sanders & Boivie, 2004), connecting upper echelon theory and signaling theory is new and flesh idea. Also, many signaling research have found that having positive signals can have a positive effect on the organizations’ reputation( Coff, 2002; Deephouse, 2000; Fischer & Reuber, 2007).

Organizational Reputation

The concept of organizational reputation appears at first glance to be deceptively simple yet it plays a central role in a number of studies in management literature. Basically, the concept states that, over time, an organization can become well-known, and a generalized understanding of the organization sprouts within the minds of observers. This allows thee observers to make favorable or unfavorable judgments about the organization.The reputation of an organization is formed from what observers know of its past actions. However, the organization’s reputation can change quite suddenly if new information about the organization’s historyis uncovered or if the organization’s latest behavior or associations are condemned by, or alternately resonate with, observers (Roberts & Dowling, 2002). It is a fact that reputation helps distinguish organizations from competitors (Peteraf, 1993), reduces information asymmetry and consumer uncertainty (WeigeltCamerer, 1988), and substitutes for expensive governance mechanisms (Kogut, 1988). Moreover, reputation has been linked to organizational performance (FombrunShanley, 1990; Roberts & Dowling, 2002; Shamsie, 2003). As such, reputation appears to be a key to the effort to understand why some organizations outperform others (Hitt, Boyd, & Li, 2004; Rumelt, Schendel, & Teece, 1994). A study conducted by Rindova et al. (2005) contributed to the knowledge of the reputation-performance relationship by suggesting that reputation is made up of separate dimensions that have independent value-adding effects. They characterize the reputation literature as having two streams, one that reflects an economic-signaling, perceived quality aspect and another that resembles an institutional stream centered on prominence.

Organizational Performance in Sport

Effectiveness and efficiency are desirable for any organization and when they are combined, they make up the concept behind organizational performance. When use in regards to an organization, effectiveness can be defined as the capacity to achieve goals. This differs from efficiency which is used when comparing the ratio between the resources used and the results obtained by an organization. Neither of these definitions takes into account user satisfaction. Organizational performance is a social construction (Quinn Rohrbaugh, 1983; Cameron, 1986) and, as such is related to the nature of organizations and their actors, not those outside of the organization.

However, it is difficult to measure performance for sport organizations since a significant number of sport organizations are non-profit. A number of researchers (Drucker, 1990; Stone, Bigelow &Crittenden, 1999) have identified specific characteristics of not-for-profit organizations (NPOs). The characteristics that they identified have an impact on the definition of their organizational performance. First, the missions of NPOs are often intangible creating problems in measuring them. Second, they need to meet their stakeholders’ expectations and needs which influence their objectives. It has been found that public authorities are often among these stakeholders and they play a crucial role. Third, finances are limited and annual revenue from public authorities is often relied upon. Finally, the work force of NPOs often includes both paid staff and volunteers who have to work in tandem to manage the processes of their organization and this disparity of positions sometimes causes tensions between them (Shilbury and Moore, 2006). As a result, their internal functioning is often less clear than that in private organizations. However, guaranteeing the performance of employees is a significant role in any organizations whether profit or non-profit. Therefore in this current conceptual paper, the main purpose is to examine how the attitudes of top managers toward diversity affect organizational performance. In fact, in this conceptual model, I have touched on upper echelon theory, diversity, signaling theory, organizational reputation, and organizational performance. Linking these concepts and theories would help us understand better how top mangers’ characteristics and attitudes influence the organization, employees, and the public.

CONCEPTUAL MODEL

This conceptual paper draws upon three main research streams: upper echelon theory from the strategy field, organizational diversity literature from the organization behavior field and signaling theory from the management field. In so doing, the paper bridges management with social psychology disciplines in the context of organizational diversity. The link between top manager’s effort and attitudes on promoting diversity and inclusion and employees’ reaction to the top managers’ work has not been investigated, to the best of my knowledge.

Therefore, in this conceptual paper, I argue that combining the upper echelon theory with diversity can be an effective tool to signal the quality of the organization to the public. The signal that the organization sends to the public will result in promoting organizational reputation. This promotion will also positively influence the organizational performance. Therefore, top managers who pay more attention to diversity in the organization can influence the organizational performance using organizational reputation as a moderator (see Exhibit 1).

Bridging disciplines is an enriching yet challenging task that involves understanding the history of the field, the major theoretical streams and the applied methodological approaches. This conceptual paper is not limited to the tradition of a single research stream and as such draws upon not only theories but also analytical techniques and methodologies from a number of disciplines. Yet, the focus remains on the upper echelon theory as the main research stream to which this conceptual paper attempts to contribute

Exhibit 1: Integrated Conceptual Model