MANAGING HUMAN RESOURCES TO ACHIEVE NEW FIRM GROWTH: A STEWARDSHIP PERSPECTIVE

This study examines the relationship between managerial philosophy and firm performance in a sample of young ventures. We draw from a diverse body of literature linking stewardship theory and the resource based view to submit that management based on trust, reciprocity, and identification (commitment) will enhance firm performance. Utilizing a sample of small high-tech new ventures this study tests the hypothesized relationships between stewardship, human and social capital, sales growth and voluntary turnover. Study findings indicate that a managerial philosophy governed by stewardship is related to higher levels of firm sales-growth, human and social capital and less voluntary turnover. Neither human nor social capital was found to mediate the relationship between partnership and sales growth. INTRODUCTION & LITERATURE REVIEW Many entrepreneurs note that one of their greatest struggles is in the implementation of effective management practices that help to select quality employees and motivate their work force to achieve superior performance (Rutherford, Buller, & McMullen, 2003). As firms begin to grow and develop, the addition of new human resources becomes an important part of the management challenge (Hambrick & Crozier, 1985). As these new members are added to the organization the entrepreneur must meet the challenge by retaining his or her visionary role as leader of the firm, while simultaneously letting go of some of the tactical day-to-day operations of the firm. Many entrepreneurs struggle with this transition and find difficulty in defining and implementing a successful managerial philosophy (Terpstra and Olson,1993). This paper postulates that the most effective form of management for growth-oriented new ventures may be based upon a stewardship-philosophy, where the owner seeks to promote ownership and mutuality within his or her employment base. While there have been a number of studies examining the connection between a stewardship managerial philosophy and firm performance (e.g. Eddleston and Kellermans, 2007), none have examined this explicitly in the young firm. Indeed the study of human resource management practices in small and young firms, in general, remains an under researched area (Cardon and Stevens, 2004; Hornsby and Kuratko, 1990; Tocher and Rutherford, 2009; Way, 2002). This study endeavors, in part, to remedy this situation by addressing the relationship between management philosophy and performance, as well as by investigating potential mediators of this relationship. Stewardship Theory as Managerial Philosophy Stewardship theory arose in the sociology and psychology literatures as an alternative form of management than those based upon agency theory (Davis, Schoorman, & Donaldson, 1997). 1 Messersmith and Rutherford: MANAGING HUMAN RESOURCES TO ACHIEVE NEW FIRM GROWTH Frontiers of Entrepreneurship Research 2010 Agency theory rests on the core economic belief that human behavior is motivated by self-interest, opportunism, and utility-maximization (Jensen & Meckling, 1976). As such, agency theory prescribes that organizations must work to align the interests of agents with those of the organization’s principles via control and incentive systems. Though generally conceptualized as a framework for the relationship between shareholders and top managers, the basic principles have also been applied to the employment relationship between the small business owner and the organization’s employees (Breton-Miller and Miller, 2009; Corbetta and Salvatto, 2004). Under agency theory the owner is offered the choice of seeking to monitor and control the behavior of his or her employees (and thus incur agency costs) or, alternatively, to create incentive systems that align individual utility seeking behaviors with organizational objectives (thereby reducing agency costs). Stewardship theory challenges the basic supposition that all human behavior results from selfinterest and claims that utility can be maximized in other, more intrinsic, forms (Davis et. al., 1997; Donaldson & Davis, 1991; Zahra et al., 2008). Under stewardship theory, utility may be maximized through both financial and nonfinancial rewards. For instance, research indicates that firm founders are willing to accept lower levels of financial rewards from their firm, because they are achieving other non-pecuniary needs through firm formation and ownership (Wasserman, 2006). In the same vein, employees working for an entrepreneurial firm might be rewarded in forms other than strict financial benefits (Appelbaum & Kamal, 2000; Appelbaum & Shapiro, 1991). The opportunity to work with innovative products or services, or to help build a young organization, or to work in a less firmly established organizational culture may all provide utility to the employees working in a new venture (Appelbaum & Kamal, 2000). As a result, stewardship theory suggests more open forms of management that help to build trust and collaboration between the owner-manager and the firm’s employees in order to establish a culture of proorganizational rather than pro-self values (Davis et al., 1997). A managerial philosophy based upon stewardship may be able to enhance firm performance and ultimately lead to competitive advantage by increasing the level of human and social capital within the young firm. As such, a stewardship philosophy to managing human resources may serve as a firm level competency or dynamic capability. The strategic management literature has defined such capabilities as a “subset of the competences/capabilities which allow the firm to create new products and processes and respond to changing market circumstances” (Teece and Pisano, 1994: 541). Several processes have been noted as potential dynamic capabilities such as those connected to knowledge acquisition mechanisms, strategic decision-making processes, new product development, supply chain management, inventory management capabilities, organizational reputation, and organizational culture (Carmeli & Tishler, 2004; Eisenhardt & Martin, 2000; Lee, Lee, & Pennings, 2001; Yli-Renko, Autio, & Sapienza, 2001; Zollo & Winter, 2002). These processes allow for the successful deployment and reconstruction of resources such as human and social capital, which represent the stock of factors available to, or under the control of the firm (Amit & Schoemaker, 1993; Helfat & Lieberman, 2002). Stewardship forms of management have the ability to affect firm performance by serving as a dynamic capability that unlocks the potential of the firm’s employment base. While the empirical research on the link between stewardship and firm performance is light, it is extant and growing. For example, Vallejo (2009) studied the affect that a managerial philosophy based on stewardship had on firm performance in 90 auto dealers in the Spanish Federation of Automobile Dealers Association. Findings indicate that managers who create an environment based on stewardship (trust, reciprocity, and commitment) among employees are able to achieve significantly higher performance for their firms. Vallejo (2009) measured stewardship as commitment among 2 Frontiers of Entrepreneurship Research, Vol. 30 [2010], Iss. 17, Art. 1 Posted at Digital Knowledge at Babson http://digitalknowledge.babson. edu/fer/vol30/iss17/1 employees to the firm along three dimensions (identification, involvement, and loyalty). While involvement and loyalty were not significant, identification commitment was; explaining 10% of the variance in profitability and 16% of the variance in survival. This is an important finding, because identification is seen as a particularly important aspect of stewardship theory (Davis, et al, 1997). Identification results when individual employees have their values closely aligned with values of the organization (Deckop, Mangel, & Cirka, 1999). When identification is high, organizational members view the firm as an extension of themselves. Stewardship theory suggests that taking a collaborative approach is one such way to build increased levels of identification, which will serve to promote organizationalrather than selfinterest (Davis et al., 1997; Wasserman, 2006). In addition, Zahra, et al. (2008) conducted a study on 248 firms in the food processing industry to ascertain the impact of a stewardship culture on strategic flexibility; essentially submitting that firms with such a culture would have greater flexibility and therefore possible competitive advantage. In this study, items were created to measure a stewardship culture by tapping the manager-employee dyad. Their results generally support the notion that a stewardship culture leads to enhanced strategic flexibility. Stewardship Theory and Emerging Organizations Stewardship approaches to management may be particularly powerful in young firms. New enterprises are often smaller and rely more heavily on individual contributions than do their larger counterparts. Each individual within the smaller firm contributes to the firm’s bottom line in more direct ways than in larger organizations. Moreover, new ventures often lack the financial capital to be able to pay above market wages (Appelbaum & Kamal, 2000; Hornsby and Kuratko, 1990), which means that these enterprises must find new ways to attract and retain valuable contributors. Offering an environment characterized by trust, communication, and reciprocity may be one such way of attracting talent. In addition, new ventures benefit from having fewer constrains imposed by past management practices, philosophies or cultural artifacts. Many have the opportunity to shape and create organizational culture that larger and more established firms lack. While established firms often fall into the self-fulfilling prophecy of monitoring and controlling employees via traditional agency relationships (Argyis, 1973; Ferraro, Pfeffer, & Sutton, 2005), newer firms are afforded the opportunity of establishing norms and routines based upon a st