Ó Springer 2008

Journal of Business Ethics (2009) 86:363–378 DOI 10.1007/s10551-008-9852-7

How Leadership Characteristics Affect Organizational Decline and Downsizing

ABSTRACT. While studies have investigated the moral issue associated with downsizing, little research attention has been directed to leaders’ behaviors that result in organizational decline and eventually lead them to make a downsizing decision. This study tests a sequence-based model to assess (1) the impact of leaders’ risk-aversion and self-centeredness on organizational decline and downsizing and (2) the impact of organizational and industry decline on organizational downsizing. We address a gap in the decline literature that has only implicitly alluded to leadership characteristics as forerunners of decline. Data collected from 85 firms indicate that both leadership riskaversion and self-centeredness are significantly related to organizational decline. This results in intensified organizational downsizing. However, industry decline affects downsizing more significantly. KEY WORDS: organizational decline, industry decline, organizational downsizing, leadership

Introduction Much research in organization and management science, and strategic management in particular has been devoted to the antecedents of competitive advantages and organizational success. This has been the basis for theories of organizational growth. By contrast, organizational decline, which also reflects the dynamics of the organizational life cycle, has received considerably less attention. Consequently, organization scholars have attempted to delineate a conceptual framework of organizational decline (e.g., Cameron et al., 1988; Ford, 1980; Hedberg et al., 1976; Weitzel and Jonsson, 1989). Although this research on various aspects of decline is important and noteworthy (Barker and Duhaime, 1997; Boeker, 1997; Ferrier et al., 1999) some of the proposed frameworks and claims are still in need of further theoretical development and

Abraham Carmeli Zachary Sheaffer

empirical support. Lacking in this stream of research is an attempt to link empirically decline and downsizing with such leadership traits as risk-aversion and self-centeredness as key, if not exclusive precursors of both decline and downsizing thereof. Cameron et al. (1987, p. 126) bemoaned some 20 years ago the absence of studies involving largescale studies of multiple organizations experiencing decline. Since then this exhortation has yielded mixed results with respect to large-scale empirical work that explores causes and consequences of organizational decline. Indeed, most works addressing corporate decline appeared in the 1980s with fewer empirical studies in the early to mid-1990s. Scholarly penchant to favor success rather than failure as a theme worthy of research is also noticeable in the wider domain of leadership. Generally leadership scholars have tend to focus on the positive impact of leader behaviors on organizational effectiveness. The various leadership theories, including charismatic leadership theories (e.g., Shamir et al., 1998) and transformational leadership theories (e.g., Bass, 1985) that emphasize the role of enhancing effectiveness at the individual, group, and organization levels are valuable and of merit. However, this line of research has only fleetingly attended to leadership effects on organizational decline and it is mostly used to describe or predict corporate success and growth patterns (Baron and Hannan, 2002; Peterson et al., 2003). Aside from a few attempts (Carmeli and Schaubreock, 2006; Cameron et al., 1987; Messinger, 1955), little research effort has been directed toward investigating the role of leadership orientations in organizational decline, despite the accumulating body of evidence, albeit anecdotal, suggesting that leaders’ personal qualities could be potentially detrimental rather than beneficial to firms (Finkelstein and Hambrick, 1996). As Finkelstein

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aptly commented, ‘‘We’re talking about people whose failures were breathtakingly gigantic, who have taken huge, world-renowned business operations and made them almost worthless’’ (2003, p. 213). A review of pertinent literature points to two psychological leadership issues, namely risk-aversion and self-centeredness, which may be regarded as precursors of organizational decline. For instance, Richardson et al. (1994) describe the ‘bullfrog’ managerial type as a selfish executive, ‘milking’ the organization and typified by needs for instantaneous self-gratification and expressions of preferred selfidentity. These, according to Richardson (1995) lead to a managerial mindset that is closely linked to a selfish and introverted view of ‘safe’ organizational life while the reality is that of failure-proneness amplified by a risky interaction of complexity and pressure. Managerial resistance to change, including riskaversion and selfishness is thought to be intertwined in their potential to cause decline. Referring to Heirs and Farrell (1987), Thompson (1998) indirectly suggests that these managerial attitudes can trigger organizational downturn because they impede efforts to embark upon requisite organizational changes. Both theory and research suggest that the decision to downsize is often, but not exclusively an outcome of organizational decline (Barker and Mone, 1993) and becomes a preferred strategy for coping with economic stress (Hoskisson et al., 1994). However, firms also downsize owing to a host of institutional triggers (Goins, 2000; Lamertz and Baum, 1998) or managerial ideologies (Rust and McKinley, 2002) unrelated to either organizational or environmental decline. DeWitt (1993) noted, downsizing that is often a reaction to both organizational and industry decline, where the intensity of the latter determines the appropriate strategy (i.e., domain or structural retrenchment or reorientation). The literature on organizational downsizing suggests that organizations adapt various types of downsizing strategies (workforce reduction, work redesign, and systematic) (Cameron, 1994) and that managers’ responses vary according to the nature of the decline (Cameron and Zammuto, 1983). However, research has only recently queried whether leaders’ characteristics and behaviors might influence the extent to which organizational decline affects downsizing. For instance, Budros (1999) suggested that downsizing rates

are likely to be higher among firms with CEOs with financial backgrounds than among ones with CEOs with other backgrounds. The socio-cognitive view of downsizing argues that managers’ decisions to downsize are based on shared mental models that define downsizing as effective; these decisions are often taken in reaction to difficulties (McKinley et al., 2000). This, however, may only be a shortterm or haphazard response to various exigencies, notably during recessions (Cameron et al., 1987). Furthermore, research has investigated the ethical aspects of downsizing decisions indicating that organization’s leaders are accountable and have moral obligations to both the best interest of the firm and employee rights (Hopkins and Hopkins, 1999). However, little is known about leaders’ behaviors that result in organizational decline and eventually lead them to make a downsizing decision. In this study, we introduce a fresh perspective arguing that risk-aversion and self-centeredness leadership narrow managerial viewpoints, thus engendering myopia and potentially violate the moral obligations to both the firm and its employees. Leaders with this type of mindset are more likely to have short-term preferences with respect to corporate strategy and these attitudes are likely result in reactive downsizing.

Theory and hypotheses Definitions of organizational decline and downsizing Organizational decline has been described in terms of difficulties in adapting to the environment (Weitzel and Jonsson, 1989), stagnated organizational processes (Whetten, 1988), a phase preceding crisis (Weitzel and Jonsson, 1989), and a substantial, absolute decrease in the organizational resource base, which occurs over a specified period of time (Cameron et al., 1987, 1988; D’Aveni, 1989). Drawing on the burgeoning literature on organizational decline, notably Weitzel and Jonsson (1989), Whetten (1988), Witteloostuijn, (1998), and as in Carmeli and Schaubroeck’s (2006) study, we define organizational decline as an organizational state of poor adaptability, consistently depleting resources, reduced legitimacy, and high vulnerability. Organizational decline and downsizing are concepts that are often discussed or referred to interchangeably. This is because both terms essentially connote

Leadership, Organizational Decline, and Downsizing corporate downturns. However, these are theoretically distinct concepts (Weitzel and Jonsson, 1989). Decline is an environmental or organizational phenomenon that occurs involuntarily and results in the erosion of an organization’s resource base (Freeman and Cameron, 1993), whereas downsizing is an intentional, proactive, and often reactive managerial strategy aimed at generating sustainable fit and adequate responses to external-environmental turbulence and uncertainty (Weitzel and Jonsson, 1989).

Leadership characteristics and organizational decline While the literature has put forward a variety of explanations for organizational decline these forerunners or triggers are almost invariably intertwined with managerial traits, inclinations, and behaviors (Boin et al., 2005). Based on a review of the pertinent literature, this study addresses the need to investigate two psychological leadership failings as precursors of organizational decline, and thus considers these key leadership characteristics as potentially detrimental to organizational viability. These leadership characteristics are (1) leadership risk-aversion, defined as the disinclination of a person to agree to an outcome with a vague payoff rather than another outcome with a more obvious but potentially lower expected payoff (Denrell and March, 2001) and (2) leadership self-centeredness referred to as (a) ethical egoism – the belief that individuals should to do what is in their own self-interest (Lindenberg, 2001), and (b) rational egoism – the belief that it is rational to act in one’s self-interest (Miller, 1999; Shaw and Post, 1993). We discuss the relationship between these types of leadership orientations and organizational decline below.

Leadership risk-aversion and organizational decline The literature often provides implicit indications as to the impact on organizational decline of managerial resistance or aversion to change. For instance, Kets de Vries and Miller (1984) contended that decline in organizations is frequently related to the CEO’s rigidity. These authors used Kitron’s Adaptation-Innovation Theory (1976) and report that while an adaptive managerial style is conducive to

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smooth organizational functioning it may result in stagnation (Kitron, 1984). This is largely because adaptive executives tend to be more cautious if not apprehensive with respect to embark on (radical) organizational change. Consistent with this argument, the only study that empirically tested for a linkage between risk-aversion and organizational decline (Neumann and Finaly-Neumann, 1994), found that CEOs characterized as adaptors (viewing change reactively rather than proactively) were more prone to organizational decline. In this vein, we attempt to complement previous studies (e.g., Neumann et al., 1994) by positing managerial risk-aversion as a direct precursor of organizational decline. Resistance to change and particularly risk-aversion on the part of managers is a process of refusal by decision makers to be affected by the views, concerns, or evidence presented to them by those who advocate change in established practices, routines, strategies, goals, or norms within the organization (Agocs, 1997; Dent and Goldberg, 1999). Resistance involves a range of behaviors including refusal to seek common ground and refusal to engage in joint problem solving, along with muzzling of proponents of change, sabotage, the use of sanctions, and other suppressive acts (Mento et al., 2001; Symon, 2005). Managerial risk-aversion which is referred as a human trait that taps into a different aspect of resistance to change or in fact predicts it (Oreg, 2003, p. 691), has been addressed from various perspectives and disciplinary pursuits (Bovey and Hede, 2001; Reger et al., 1994). However, despite anecdotal references in the fields of organizational behavior, economics, organizational change, and crisis management (Bridges, 1992; Clarke, 1994; Smith, 2006a, b; Williams et al., 2002), its impact on the evolution of organizational decline is not widely researched. Witteloostuijn (1998), for example, argues that escalating commitment, structural inertia, and threat-rigidity effects constitute internal causes for decline. While leadership risk-aversion is evidently associated with inertia there has been a little explicit mention of it in the literature. We argue that the dysfunctionality of managerial risk-aversion is commensurate with organizational inertia. Furthermore, organizational inertia typically constitutes a breeding ground for risk-aversion because core organizational

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contexts, which managers shape and affect and within which they function, tend to be changeresistant or at best, change slower than the environment (Baum and Amburgey, 2005, p. 309). However, organizational ecology’s relative inertia theory (Ruef, 1997) might point to circumstances under which risk-aversion might be negatively associated with organizational decline in nondeclining industries (see D’Aveni, 1989). The prevailing view regarding the evolution of or deterioration to a state of organizational decline has centered on reduced risk-taking or cautious conservatism (Ranft and O’Neill, 2001) as a contributor to further decline (Wiseman and Bromiley, 1996, p. 524). In the current study, we do not attempt to assess the events that preceded risk. However, it is important to mention that managers are not only unable to take essential risks because of fear of breaking their firm’s established value chain, but also managerial risk-aversion orientation often follows recurrent successes (Bateman and Zeithaml, 1989; Christensen, 1997). As an organization enters the mature stage, often referred to as pre-decline phase, managers often perceive their firms and themselves as successful and strategically ‘invincible.’ Although the pace of growth abates, this stage is often characterized by overconfidence derived from repeated successes, and apparent absence of critical needs, all of which impede managerial innovativeness, creativity, and even calculated risk-taking (Jawahar and McLaughlin, 2001). Thus, situations are framed positively regardless of the fast-changing circumstances and results in reduced tolerance for risk and change. Positive framing is triggered by what Dutton (1993) calls automatic decision processes that may prevent effective diagnosis of strategic issues owing to other factors, among riskaversion. In his influential work, Whetten (1980, p. 355) argued that a major trigger for organizational decline is the fact that organizations, which habitually employ policies predicated on their ‘previous utility’, tend to become insensitive to task-environmental changes. In other words, escalating commitment (Brockner, 1992; Kirby and Davis, 1998; Staw et al., 1981) to previously successful strategies, cultures, or structures hinders managers’ perceptions of the reality and they develop risk-aversion.

One manifestation of leadership risk-aversion is the emergence of ‘groupthink’ (Esser, 1998; Janis, 1982) that brings to therefore the innate desire for acceptance and conformity that typifies risk-averse managers (Irving, 1971). Moreover, a sense of invulnerability and self-inflicted myopia is often a breeding ground for excessive conformity to the dominant paradigm (Anderson, 1998). This is also reflected in the tendency to achieve a compromise aimed at thwarting criticism that discourages efforts to explore rethinking or bold alternative strategies. Peterson et al. (1998), following Janis (1982), posit that a groupthink mentality can lead to a host of organizational ills including a poor search for alternatives and self-censorship about misgivings managers may have. These liabilities breed risk-aversion and hence the need to undertake radical changes in light of changing environmental circumstances is collectively suppressed. In many ways, the above array of managerial weaknesses (Kisfalvi, 2000; Wilkinson and Mellahi, 2005) results in a tendency to institutionalize bureaucracy that further obscures the need to adapt to environmental volatility and uncertainty (Miller, 1994). This perilous situation is described by Greenhalgh (1983) as organizational atrophy. Thus, an organization typified by change-resistant executives is more likely to generate circumstances that facilitate a state of decline. Hence, we propose the following hypothesis: There is a positive relationship between managerial risk-aversion and organizational decline.

Hypothesis 1:

Leadership self-centeredness and organizational decline Richardson (1993) describes a crisis-prone leader as being selfish and narcissistic, one who views the environment and organizational stakeholders as objects to be subjugated for the benefit of personal aspirations and interests. A selfish individual neither intends to promote the public interest, nor knows how much she or he is in fact promoting it; personal gain is the only intention. This view is conceptualized in the Agency Theory that claims that people – notably managers – are rational, self-interested, and risk-averse (Eisenhardt, 1988, 1989). The common view has it that when shareholders, or those acting

Leadership, Organizational Decline, and Downsizing on their behalf, are devoid of the motivation or aptitude to substantiate the interests of those they serve, they are inclined to favor their own interests over those of the shareholders (Eisenhardt, 1989; Pfeffer, 1981). However, little is known about this type of behavior as a trigger capable of sparking off a decline. For instance, Starbuck et al., in a study of a company beset by difficulties comment that ‘‘managers launch propaganda campaigns that deny the existence of crises’’ (1978, p. 118). This is done in order to deflect external stakeholders’ attention, which is liable to harm managers on a personal level when the causes for the difficulties are later investigated. Agency theory may account for managerial opportunism and tendencies that favor self-interest. Disciplines like social psychology attribute the pursuit of self-centeredness to narcissism. Narcissism is a phenomenon that often characterizes leaders and implies high self-esteem regulated through egodefense mechanisms, such as denial, rationalization, attributional egotism, sense of entitlement, and ego aggrandizement (Brown, 1997; Fine, 1986; Kroll et al., 2000). More acute forms of self-aggrandizement may result in faulty strategies, such as senseless acquisitions (Probst and Raisch, 2005) as described in Janis’s (1989) analysis of egocentric executives and in Lamb’s (1987) account of cases from the 1980s, which he explains in terms of chief executives’ needs for ego enhancement. While the linkage between self-centeredness from the agency theory vantage point and the above-mentioned plethora of leadership liabilities remains to be corroborated, it seems logical to postulate that a few truly altruistic managers will be afflicted by the latter. Researchers addressing myopia and overemphasis on short-term decisional effects (Laverty, 1996) ascribe managerial selfishness or self-serving attributions (Schwenk, 1993) to ‘poor organizational health’ (Schlenker, 1980; Suutari, 1996) or poor decisionmaking that may be detrimental in the long term. Probst and Raisch (2005) associate autocratic leadership (including egotism) with what they describe as the burnout syndrome, which often precedes decline. Corporate decline may be attributed to such exogenous triggers as diminishing environmental carrying capacity (Castrogiovanni, 1991) or faulty or insufficient boundary spanning (Greening and Johnson, 1996). We argue, however, that intraorganizational

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flaws typified by self-centered and risk-averse managerial tendencies are liable to enhance myopia and increase short-term approach that scuttles genuine strategic perception and hence comprehensive evaluation of intra and external organizational circumstances. On the basis of this logic, the following hypothesis is suggested: There is a positive relationship between managerial self-centeredness and organizational decline.

Hypothesis 2:

Organizational decline effects on downsizing Part of our research model explores evidence for a causal link between organizational decline and downsizing. As noted above, organizational downsizing has become a common practice aimed to improve organizational outcomes. It is referred to as ‘‘the planned elimination of positions or jobs’’ (Cascio, 1993, p. 96) and may incorporate workforce reduction, work redesign, and systematic change (Iverson and Pullman, 2000). Both Barker and Mone’s (1993) and Ocasio (1995) suggest that decline and periods of difficulties induce changes such as the decision to downsize. Barker and Mone (1993) refer solely to declining performance as an impetus to downsize. We take the view that decline sparked off by any form of economic downturn, often but not always induces retrenchment strategies aimed at extricating the declining firm. Thus, downsizing may be a preferred strategy to cope with economic stress (Hoskisson et al., 1994). Downsizing is a typical and often essential strategic choice aimed at bringing the firm’s output in line with demand through a permanent decrease in human and physical resources that do not contract the firm’s boundaries by altering market scope and product lines (De Witt, 1998, p. 60). This definition draws primarily on studies addressing longerterm downsizing issues in declining organizations (Cameron et al., 1987; Mone et al., 1998; Smart and Vertinsky, 1984). The literature that addresses antecedents to business turnaround (Pearce and Robbins, 1993, 1994) focuses on associations between firm performance and short-term decisions, including cutbacks in personnel and assets (Cascio and Wynn, 2004; Nixon et al., 2004). Firms tend to adopt downsizing as an early solution to economic

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pressures, but institutional causes govern later adoption of this strategy (Budros, 2004). The economic perspective on downsizing rests upon the assumption that managerial actions and their outcomes are tightly coupled. This perspective assumes that firms are calculatedly rational and seek efficiency (Donaldson, 1995), and that executives appreciate the interrelatedness between their actions and organizational outcomes to the extent that they can opt for strategies with a reasonable probability of yielding valued outcomes (Cascio et al., 1997). Managers tend to embark on proactive or reactive downsizing when decline occurs to obtain these anticipated and valued outcomes (Ferraro et al., 2005; McKinley et al., 2000). Hence, There is a positive relationship between organizational decline and organizational downsizing.

Hypothesis 3:

Effects of industry decline on downsizing Although studies have not differentiated between general environmental effects and those attributed to the specific industry within which the firm operates (Filatotchev et al., 2000), it is important to investigate how a given industry or task environment impacts on downsizing. Generally, industry effects on downsizing are addressed by research focusing on external influences. These include contraction of the firm’s industry niche (Cameron et al., 1987; Hambrick and D’Aveni, 1989), environmental instability (Blackwell et al., 1990; Kang and Shivdasani, 1995), and industry-specific impact on the mindsets of downsizing decision-makers (Barker and Duhaime, 1997; De Witt, 1998). Firms in turbulent, volatile, and uncertain task environments are strongly inclined to mimic the behavior of other firms in the same industry (Hau-siu, 2004; O’Neill et al., 1998) a phenomenon Haines (2000) calls strategic cloning. Some industrial organization studies have shown that performance and strategy are chiefly affected by industry membership (King and Lenox, 2000). Structure and performance studies suggest that both divestment and downsizing are likely to be affected by such exit barriers as strategic production and distribution networks, capital intensity, and specific assets (DeWitt, 1998; Filatotchev and Toms, 2006; Harrigan, 1981).

Declining industries tend to have a bandwagon impact (Abrahamson, 1991; Abrahamson and Rosenkopf, 1990) on managers’ decisions to engage in downsizing. This can be explained by enactment theory in that managers pay attention to certain stimuli that guide subsequent action (Weick, 1988, 1995). This leads to Hypothesis 4: There is a positive relationship between industry decline and organizational downsizing.

Hypothesis 4:

The effects of industry decline on organizational decline Weitzel and Jonsson (1989), and Meyer (1988), following Cameron and Zammuto (1983), discuss organizations that stagnate in their environments, and show that a particular niche gradually wears away with foreseeable changes in the niche’s shape and size. More recent discussions of decline (Mone et al., 1998) allude to a ‘declining industry’ or ‘impoverished niche’ as critical external causes leading to organizational decline. Industry decline is a phenomenon addressed by various theoretical points of departure. A key factor is environmental munificence (Jogaratnam et al., 1999) which directly affects specific industries: whenever munificence decreases in a certain task environment, it negatively impacts those industries that have a critical reliance on these resources (Castergiovanni, 2002). When resources are plentiful, firms find it easier not only to survive, but also to pursue additional strategic goals as well (Brittain and Freeman, 1980; Castergiovani, 1991). However, when environmental munificence decreases, competition intensifies (Dess and Beard, 1984; Singh et al., 1986), inducing resources to abate and firms with the least slack often decline. Barker and Patterson (1996) investigated top managers’ causal attributions of their firms’ decline. They report that managers of declining firms usually ascribe their problems to causes that are external, beyond their control, and temporary in nature (see also Nystrom and Starbuck, 1984; Starbuck et al., 1978). This is because top managers develop beliefs about their firms and environments that are often biased (Ford and Baucus, 1987; Kiesler and Sproull, 1982). Studies in social psychology (Zuckerman, 1979) and management (Lovallo and Kahneman,

Leadership, Organizational Decline, and Downsizing 2003) indicate that people tend to take credit for positive results of events involving themselves but are inclined to attribute negative outcomes to external factors. Hence, we hypothesize: There is a positive relationship between industry decline and organizational decline.

Hypothesis 5:

Method Sample and data collection The data used in this study come from a comprehensive research project that evaluated organizational decline of 230 firms operating in a wide variety of industries and listed in DandB and BDI business databases. The sampled firms are described as labor and capital intensive (e.g., agriculture, food, textile, steel, and plastics) (about 60%) and hi-tech (e.g., biotechnology, electronics, and pharmaceutical). Two questionnaires were mailed to two members of the top management team: the CEO and a senior executive with the return to a university address, using a self-addressed reply envelope. We surveyed the organization’s CEO and one senior executive, which the CEO specified as one with whom she or he consults with on a regular basis about strategic and other matters of substance. These senior executives held positions such as CFO, HR vice president, and chief operations officer. In order to encourage the participants to take part in this study, we made two commitments. First, a cover letter guaranteed the anonymity of the respondents. Second, the authors promised to deliver the results and conclusions of the current study to all participants. Two series of mailings were conducted in order to increase the response rate. A total of 85 matched questionnaires (two TMT members per firm) were returned, yielding a response rate of approximately 37%. The average age of the organization was 24 years (s.d. 23.89). The average number of employees was 220 (s.d. 451.50). The average age of the respondents was 41 years (s.d. 6.75), and their mean tenure in the organization was 7.3 years (s.d. 6.20). The majority of the respondents (88%) held at least a BA-level degree. The other 12% had 14 or less years of education.

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Measures We conducted a pilot study by distributing a structured questionnaire to 30 executives and 10 research students to control for clarity and construct validity. Next, structured questionnaires were sent to the two members of the organizations’ top management team (TMT). Although there are various definitions about who, in fact, constitutes an organization’s TMT, we followed previous research (Carpenter et al., 2004; Castanias and Helfat, 1991, 2001; Hambrick and Mason, 1984) that advocates surveying ‘‘direct reports’’, namely senior executives with whom the CEO shares the strategic decisionmaking process. Organizational downsizing This measure refers to the ratio between the number of employees at the end of 2002 and the number of employees at the end of 2000. Organizational decline We used a nine-item measure to operationalize the concept of organizational decline. Five items were adopted from Carmeli and Schaubreock’s (2006) study and an additional four items were constructed to more comprehensively capture the essence of this concept. Respondents were asked to indicate the extent to which (1) the company’s responses to changes in environmental conditions were inadequate, (2) the company’s responses to changes in environmental conditions were on the whole untimely, (3) the organization was vulnerable in the sense that it lacked the capabilities required to build competitiveness, (4) the organization’s behavior was perceived as illegitimate, (5) the company’s ability to predict or detect internal or external changes that could threaten its survival was perceived as limited [items from Carmeli and Schaubreock’s (2006) study], (6) this organization was characterized by complacency, (7) this organization failed to adequately evaluate changes in its task environment, (8) the firm’s strategic orientation did not fit taskenvironmental conditions, and (9) the organization was typified by low employee satisfaction. Responses were anchored on five-point Likert scales (1 = strongly disagree, 2 = disagree, 3 = neutral, 4 = agree, and 5 = strongly agree). Cronbach’s alpha for this measure is 0.85.

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Industry decline Drawing on Harrigan’s work (Harrigan, 1980; Harrigan and Porter, 1983), we assessed conditions of industrial decline that threaten organizational viability. We used four items from the measure developed and applied by Carmeli and Schaubreock (2006). The respondents ticked a five-point Likert scale concerning industry conditions with regard to (1) demand decline or growth, (2) the changing intensity in industry demand, (3) the demand prospects for the coming 3 years, and (4) pockets of demand that enable sustainable profitability. Cronbach’s alpha for this measure is 0.85. Leader self-centeredness This measure refers to leadership behaviors and actions characterized by ethical egoism (Lindenberg, 2001) and rational egoism (Shaw and Post, 1993). This type of leadership behavior concentrates on what is in the leader’s best interest rather than that of the organizational system as a whole. We used two items to measure leadership self-centeredness: (1) leaders in this organization seek to enhance their own self until it harms the system and (2) the leaders in this organization did not endeavor to establish an effective system. Cronbach’s alpha for this measure is 0.78. Leader risk-aversion In order to assess risk-aversion, we followed Slovic’s (1972) work on risk-taking behavior and refer to leadership risk-aversion as the extent to which the organizational leaders preserve the status quo and seek consensus at the expense of necessary decisions that entail risks even when confronting exigencies. We used two items to measure leadership riskaversion: (1) leaders in this organization preserve the status quo and (2) leaders in this organization seek consensus rather than attempting to reach solutions that might ‘rock the boat.’ Cronbach’s alpha for this measure is 0.89.

Level of analysis Relying on multiple informants was found to be more reliable and less liable to superficiality than relying on a single respondent in strategy research (Bowman and Ambrosini, 1997). Having multiple

informants requires the assessment of the consistency of responses within a team. Following previous research (cf. James, 1982; Smith et al., 1994), a one-way analysis of variance was performed on all research variables. Results showed that there was a greater variability in the ratings between teams than within teams (p < 0.01). We also calculated intraclass correlations (ICCs) to assess group member agreement. ICC(1) indicates the extent of agreement among ratings of members from the same group. ICC(2) indicates whether groups can be differentiated based on the variables of interest. The ICC(1) and ICC(2) values for organizational decline were 0.35 and 0.83, industry decline values were 0.47 and 0.78, leader’s risk-aversion values were 0.52 and 0.83, and leader’s self-centeredness values were 0.45 and 0.76, respectively. These values exceed conventional standards for aggregating individual questionnaire responses about team level in field research (Bliese and Castro, 2000).

Results The means, standard deviations, and correlations among the research variables are presented in Table I. Organizational downsizing was significantly associated with both industry (r = 0.41, p < 0.001) and organizational decline (r = 0.25, p < 0.001). Organizational decline was significantly related to both leadership risk-aversion (r = 0.66, p < 0.001) and leadership self-centeredness (r = 0.55, p < 0.001). Leadership risk-aversion was significantly correlated with leadership self-centeredness (r = 0.42, p < 0.001).

Path analysis and model assessment We used path analysis to estimate the research model. Figure 1 displays the model’s results. The overall fit of the model is good. A chi-square of 5.3 on 4 degrees of freedom, and other goodness-of-fit statistics (CFI = 0.98; NFI = 0.95; IFI = 0.98; RFI = 0.82; TLI = 0.95; RMSEA = 0.06) indicate that the model fits the data well. We tested the research model and hypotheses using path analysis and following the procedures for testing mediation outlined by Baron and Kenny

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TABLE I Means, standard deviations (s.d.), and correlations

Downsizing scope Industry decline Organizational decline Leadership change aversion Leadership self-centeredness

Mean

s.d.

1

2

3

4

5

0.01 3.01 2.49 2.63 2.27

0.37 0.62 0.56 0.82 0.75

1.00 0.41*** 0.25*** 0.15 0.11

1.00 0.30** 0.24* 0.03

1.00 0.66*** 0.55***

1.00 0.42***

1.00

N = 85, two-tailed test. *p < 0.05, **p < 0.01, ***p < 0.001.

Industry decline

Leadership change aversion

.42

.19** .36**

.48***

*

Organizational decline

***

Leadership selfcenteredness

.15*

Organizational downsizing

.38***

Figure 1. Path analysis results. Note: Standardized parameter estimates. N = 85. *p < 0.05; **p < 0.01; ***p < 0.001.

(1986) followed by Kenny et al. (1998) elaboration. We used observed, rather than latent variables because of the modest sample size (a ratio of 10 respondents per parameter was not obtained [Hair et al., 1998]). We also tested the mediating effect of organizational decline on the relationship between both leadership risk-aversion and leadership self-centeredness and organizational downsizing. In order to establish a mediation model, three basic conditions should be met: (1) establishing a significant relationship between the dependent variables and the independent variables; (2) establishing a significant relationship between the mediator and independent variables; and (3) showing that the significant relationship between the dependent variables and the independent variables becomes non-significant when the mediator is specified in the model. According to Kenny et al. (1998), a variable (M) mediates the relationship between an antecedent variable (X) and an outcome variable (Y) if (a) X is significantly related to Y; (b) X is significantly related

to M; (c) after X is controlled for, M remains significantly related to Y; and (d) after M is controlled for, the X–Y relationship is zero. Kenny et al. (1998, p. 260) described these steps as ‘‘the essential steps in establishing mediation.’’ The first step, they commented, ‘‘is not required, but a path from the initial variable to the outcome is implied if [the two middle steps] are met.’’ Furthermore, the last step is necessary only to prove a complete mediation effect. Accordingly, we tested successive segments of our model by evaluating whether the four steps were met. The findings presented in Figure 1 indicate that leadership risk-aversion was positively associated with organizational decline (0.48), in support of Hypothesis 1. The findings also provide support for Hypothesis 2, which predicted a positive relationship between leadership self-centeredness and organizational decline (0.38). The results also corroborate Hypothesis 3, which posited a positive relationship between organizational decline and organizational

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downsizing (0.15). We found that the path between both leadership risk-aversion and leadership selfcenteredness and organizational downsizing are not significant when the organizational decline is specified in the model as a mediator.

Discussion In the present study, we examined the way in which leadership self-centeredness and risk-aversion affect organizational decline and downsizing. In addition, we examined how industry decline influences personnel downsizing and how industry decline affects organizational decline. The results corroborate our model and lend weight to the underlying theories and hypothesized sequential linkages. The study of organizational decline of all types of corporate downturns has gained substantial momentum in recent years (e.g., Smith, 2006a, b). However, only a handful of empirical studies have investigated how these archetypal managerial ills affect both the way top executives perceive their respective organization’s state of decline and actual downsizing behavior. The positive association between self-centeredness or egotism, and risk-aversion seems crucial in the attempt to establish what precedes organizational decline in terms of executives’ personal traits – particularly those that may lead to future corporate predicaments such as decline. This study attempted to fill a gap in the decline literature concerning managers’ personalities as triggers to or forerunners of decline and downsizing. Managers mediate and indeed often plan, determine, and orchestrate all organizational goals and tasks in most contexts, and hence are pivotal in terms of the evolution, prevention, or managing of organizational decline. Such writers as Whetten (1980) and Cameron et al. (1987, 1988) all alluded to potentially harmful managerial traits as harbingers of decline; however, this has not been followed up by actual research incorporating these forerunners with the consequences of decline. Internal causes of organizational decline are central to organization science literature (cf. Witteloostuijn, 1998), but aside from the avowedly important escalation to a failing course of action, blind perception, structural rigidity, and inertia as encompassing phenomena, no empirical research

exists that actually posits that poor leadership traits could be forerunners of these occurrences. It is important to note that this line of reasoning suggests that failing organizations encounter inertia from top management such that their responses to environmental threats are ill-timed and inadequate, typified by errors of judgment, misperceptions, and myopia. Our study pointed to moral obligations of the firm’s top management to act in a way that assure the viability of the organization. For example, in firms such as Nucor, a steel maker company, the TMT has been successful to grow the company without a layoff of employees because of lack of work. We are not suggesting that organization cannot fall into a period of decline but rather argue that often this situation is caused by leaders’ behaviors and actions that violate the moral obligation they have for both the firm and its employees. Hence, the moral aspect of downsizing really has to be studied early on by assessing what caused organizational decline and by implication led the TMT to decide on downsizing. Why does industry decline affect downsizing more significantly than organizational decline? There are two possible answers to this question. Within the wider domain of the institutional theory, the fad phenomenon (Abrahamson and Rosenkopf, 1990) suggests that managers often jump on the downsizing bandwagon regardless of a real and pressing need to endorse this strategy, simply because they implicitly or explicitly wish to conform to the prevailing managerial norms or fads (Abrahamson, 1991). In other words, organizations do not always endorse downsizing strategies through genuine individual objective assessment, but rather due to the sheer number of managers who have already implemented downsizing (McKinley et al., 2000). Much like other ill-conceived and haphazardly executed strategies, this strategy is liable to prove more detrimental than helpful. Therefore, it appears plausible that exogenous institutional forces affect the decision to downsize more forcefully than actual decline in the organization. The Hysteresis Theory of Decline (Ford, 1980) further explicates the procrastinating effect that occurs prior to downsize. This theory suggests that upon realizing the existence of decline, organizations tend to bolster their structures by adding supplementary and often superfluous administrative positions. According to Ford’s (1980) theory, the Law of

Leadership, Organizational Decline, and Downsizing Hysteresis explains why during decline, instead of shedding structural layers, organizations tend to enhance the administrative head count rather than engage in requisite cutbacks. Excessive internal orientation on the part of managers of crises that beset organizations (D’Aveni and McMillan, 1990) is liable to further exacerbate this tendency. In conclusion, two major reasons appear to be plausible explanations for the greater impact of industry decline on downsizing. The first are institutional forces that seem to be powerful enough to surpass endogenous pressures to engage in cutbacks with the view of shedding superfluous structural layers. Second and compounding these relatively more powerful external forces is the issue of organizational hysteresis, which instinctively increases rather than decreases personnel as a random response to early signs of decline.

Limitations and implications for further study While the current study is evidently a fresh empirical attempt to address a lacuna in the decline and leadership literature, we are aware of the limitations associated with our study. Essentially, our sample, while large enough to make cautious inferences, could be larger so as to enable enhanced deductions. In addition, it would be advisable to employ data taken from different points in time so that leadership traits could be measured prior to the estimated properties. Ideally, decline ought to be measured at t, and downsizing at t - 1. This holds true for industry decline, which should also be measured at t - 1. Future research would also benefit by exploring the implications of past downsizing patterns and rates at both the organizational and industry levels in conjunction with leadership syndromes similar to those examined in the present study. In addition, we are aware of the potentially problematic embodiment of decline as a perceived rather than observed phenomenon. Perceived organizational downturns are liable to be interpreted subjectively by the respondents owing to a variety of confounding and extraneous factors. Hence a more solid assessment tool is called for, such as actual declining sales, revenues, profit margins or personnel. This observation also holds true for industry decline that can be measured fairly straightforwardly

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using concrete monetary or demographic measures. Indeed, Weick (1995) noted the importance of enactment and perception in that senior managers make decisions and act based on perceptions and subjective realities. Thus, although objective assessment of decline might be helpful desirable, perceptions and subjective realities are critical to study because they cultivate managerial decision-making and actions. One should also realize that other leadership orientations and behaviors might result in organizational decline and the adoption of downsizing. Our focus on leadership self-centeredness and risk-aversion provides theoretical and empirical explanations for the onset of organizational decline. However, unobserved variables at the leadership, organization and individual levels may provide a rich and more comprehensive understanding of this important organizational phenomenon. A potentially useful addition would be a cross-cultural study that explores negative leadership traits across different cultures. Whereas decline and downsizing patterns may not differ substantially across different cultures, we have a little knowledge of these and other leadership failings as initiators of decline. In addition, research recently showed that there are differences between different types of firms (e.g., family versus non-family firms, see Stavrou et al., 2007). Thus, future research should investigate leaders’ behaviors with regard to decline and downsizing across different types of firms. Because decline has the potential to result in a crisis situation (Weitzel and Jonsson, 1989), research attention should be directed to study leaders’ characteristics and behaviors and crisis prone-organizations, as well as crisis-preparedness (Carmeli and Schaubroeck, 2008). Finally, while we adopted a teleological theory in assuming that manager purposes determine decision-making and direction of change in organizations, it is important that future studies would consider alternative explanations of theories of change such as life cycle theory and evolutionary theory that attribute limited power to managers in provoking critical changes (Van de Ven and Poole, 1995).

Conclusions This article makes a step forward in incorporating critical precursors of organizational decline by stressing psychological leadership failings as the first

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phase in the evolution of decline. Even though additional reasons and the actual evolution of decline have not been fully explored, we cannot ignore the human factor embodied in managers and their individual traits. It is important to note the interplay between external and internal forces that shapes managerial decisions concerning downsizing is crucial in understanding what affects the decision to undertake personnel cutbacks. The tendency, on the part of decline-ridden managements, to be more attuned to exogenous forces than to actual intraorganizational needs may sacrifice sustainability in favor of mimicking the seemingly more fashionable fads. Our findings also emphasize the varied and multi-facetted nature of an ever-important phase in the organizational life cycle that has yet to be fully explored, despite growing exhortations on the part of scholars and practitioners alike for whom organizational downturns are just as important and worthy of further empirical investigation as success.

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Abraham Carmeli Graduate School of Business Administration, Bar-Ilan University, Ramat-Gan, Israel E-mail: [email protected] Zachary Sheaffer Department of Economics and Management, The Open University of Israel, P. O. Box 808, 108 Ravutski Street, Raanana 43107, Israel