Evaluating the impact of 'top management team' focus on large company corporate entrepreneurship

The field of corporate entrepreneurship has evolved in response to increasing competitive pressure on companies to innovate and regenerate in order to survive. Corporate entrepreneurship research has focused on the processes involved and in particular how the behaviours of independent entrepreneurs can be adapted to the corporate environment. The role of the top management team, which we define as the board/senior management team, in corporate entrepreneurship has largely been ignored. We are exploring how the focus of the board/senior management team influences a company’s corporate entrepreneurship. This paper summarizes theoretical underpinnings for our work and the observations made over the course of a series of pilot interviews involving non-executive directors at two large banks. We observed that the bank with a board that saw itself as entrepreneurial and innovative and comprised a majority former CEOs, followed an entrepreneurial strategy and enjoyed high but volatile long-term growth. In contrast, a second bank with a board that saw itself as operationally focused and was comprised primarily of functional experts, followed a strategy where it sought operational excellence and risk minimisation. The second bank’s performance was not as volatile as the first banks and produced lower returns over the long term. The next stage of the project will seek to confirm and expand on these findings by increasing the size of the sample. It will also seek to expand the validity of the study by including companies from other industry sectors in the sample. introDuction Around 1730, Richard Cantillon (1959 p.74) was the first to describe the “entrepreneur,” as someone who accepts the risk associated with starting a new venture in anticipation of future returns. Since that time, other authors have broadened the role of the entrepreneur to include the innovation, securing of resources and execution required to start a new business and have recognised entrepreneurship as one of the main drivers of economic growth (Say 1855; Schumpeter 2000). c O R p O R at E E n t R E p R E n E u R S h i p 781 The need for business organizations, commonly described as firms, developed during the industrial revolution as the scale of production facilities grew beyond what individuals could finance via direct ownership (Mokyr 1999). Since that time, firms have grown in complexity and size, and have come to be dominant vehicle for large business ownership. Large firms commonly rely on the capital markets to provide the funds required to finance their growth. These markets provide funds on expectation that their investments will generate income and capital gains. The cost of such funding reflects the risk associated with the proposed investment. Over time, it has become clear that if firms do not innovate and regenerate, competitors will invade their markets, their revenues will shrink, and the returns to their shareholders will fall and possibly disappear (Foster and Kaplan 2001b). As a result, many firms are searching for ways to promote innovation and regeneration within a corporate environment. This search has led firms to explore how the tools and techniques used by start-up entrepreneurs can be applied to the corporate environment. The term Corporate Entrepreneurship (CE) is used in various ways to describe the adaptation of these tools and techniques for use in the corporate environment (Sharma and Chrisman 1999). However, although it is recognised that innovation and regeneration is required for longterm survival, the reality is that while there are examples of religious and educational institutions that have survived for multiple centuries, there are very few examples of corporate institutions that have done so (Konz and Katz 1996). The success of efforts by firms to innovate and regenerate has been mixed. While we can identify examples of firms that have enjoyed long-term corporate entrepreneurial success, we can also identify a large number of firms that have been unsuccessful in their efforts. O’Reilly and Tushman observed “Most successful enterprises are adept at refining their current offerings, but they falter when it comes to pioneering radically new products and services. Kodak and Boeing are just two of the more recent examples of companies that failed to adapt to market changes” (O’Reilly III and Tushman 2004 p.74). There is not a clear reason why corporate entrepreneurship is successful at some firms and unsuccessful at others. Many researchers have suggested the conditions required for CE to be successful. While they have established links between a range of conditions and success, their prescriptions are insufficient to ensure a high probability of such success. The absence of widespread corporate entrepreneurial success indicates that their understanding of the drivers of success is incomplete. One area that has received little attention is how the actions of the top management team impacts CE. Whereas many authors have tended to limit its role (for example, to deciding who to trust as front-line corporate entrepreneurs (Pinchot 1985)), we are exploring whether their role may be more significant. This paper reports on the early progress of research that is exploring the role and impact of the top management team in corporate entrepreneurship. 782 R E G i O n a l F R O n t i E R S O F E n t R E p R E n E u R S h i p R E S E a R c h 2 0 0 6 Section 1 – entrePeneurShiP Richard Cantillon first described the concept of the entrepreneur in 1730 (Cantillon 1959). Cantillon referred to entrepreneurs as those who would undertake ventures with uncertain returns. He wrote as an economist and as such his focus was on how markets worked and the role of the entrepreneur within those markets. Cantillon’s entrepreneur is essentially an individual who works for uncertain returns. Jean-Baptise Say (1855) described a broader role for the entrepreneur as someone would source the funds required to establish a new venture, and then manage and administer its establishment. Joseph Schumpeter (2000) added that the entrepreneur has to innovate, and that this innovation was an essential part of a venture’s success. He wrote from the perspective an economist, that is, he recognised that the exploitation of new opportunities by entrepreneurs was a key driver of economic growth. Academic interest in has grown over the past 25 years in part driven by change in the ruling economic-political ideology that took place with the coming to power in 1979-80 of Thatcher and Reagan – from Keynesianism to a radical pro-market ideology, and the combination of the deep concern with unemployment and the general insight that only the creation of new business can provide jobs on a sufficient scale in a society with a shrinking industrial labour force (Swedberg 2000). Bruyat and Julien (2001) suggest this interest has led to an expansion of research that can be described as aiming to understand or forecast the entrepreneurial act and its success or failure, and to define more accurately the environmental conditions favourable to that act. Section 2 – the firm anD itS management While organizations have existed for thousands of years, the modern firm is a consequence of the scale of funds required for the large production facilities that became economically and technically viable with the advances of the industrial revolution (Mokyr 1999). Up until the industrial revolution, organizations were formed, to allow groups of like-minded individuals (governments, trade guilds, religious orders) to formalise the basis of their common relationship. Individuals generally carried on business. They owned the assets required for production, and used profits to repay any loans they required to establish the business, and to fund any expansion of the business. If the scale of a business was too large for an individual to fund, it could generally still be funded by a partnership of individuals who could do so collectively. English law did provide for the establishment of companies to raise equity funds at the start of the eighteenth century. While the most famous of these, the South Sea Company was successful at raising funds to pay for government concessions, the subsequent boom and crash in its share value led to laws being made that meant that an act of parliament was required before similar companies could be established (Mokyr 1999). c O R p O R at E E n t R E p R E n E u R S h i p 783 The development of powered machinery and the resulting advantages provided by large factories meant that a business’s need for capital often exceeded that which could be provided by a single or group of individuals. This demand for capital led to new laws for the establishment of companies and the birth of the modern firm. The key to the success of the early firm appears to have been execution. Firms were unlikely to be competing with a comparable business for the same customers. Hence, their challenge was to meet unmet demand as opposed to raising capital The development of capital markets led to increased availability of funding for new opportunities, provided returns are promised that reflect the risk of the proposed investment. Management is then judged and rewarded by its ability to grow profits. If profits decline, shareholders suffer and management is likely to penalised. Over time these pressures have led to an increased pace of change and increased competitive pressure on the management of companies. Research published by Foster and Kaplan (2001a) observed that whereas companies that were on the Standard and Poor’s index of major US companies in the 1920s stayed there for an average of 65 years, by 1998, the average anticipated tenure of a company on the expanded S&P 500 was 10 years. Their research suggested that a majority of companies will under-perform the financial markets and less than a third are likely to survive 25 years in an economically important way. Foster and Kaplan ob