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SUMMER 2010 » Paying it forward » Increased religiosity, decreased fraud » Competitive advantage: in spite of, or thanks to, weakness? » More options, less fraud » Beyond Tinseltown »
Paying it
Supervisor work-life enrichment improves employee performance
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HEN SUPERVISORS WANT better performance from employees, there is an easy thing they can do: spend more time away from their own desks. There is a direct link between supervisor work-family enrichment and subordinate performance, says new research from Dwayne Whitten, clinical assistant professor of information and operations management at Mays, and colleagues. It works like this: when a supervisor has a healthy balance between work and life, it creates and promotes a more familyfriendly work environment. This in turn leads to improved employee performance. For some corporations, telling managers to spend less time in the office and more time at home seems counterintuitive. As one climbs the ranks of a company, increasing responsibility can mean less time for personal endeavors. But, says Whitten, in this case, time away from the office can actually lead to measurable gain for the whole team. Whitten and colleagues surveyed 161 employees and 48 immediate supervisors from a broad range of organizations including manufacturing, professional services, education, and health services. Key in the research is that it did not look at CEOs, but rather middle managers. Immediate supervisors are frequently gatekeepers in setting the standards for acceptable behavior in a work group. If employees see their immediate boss flex her schedule to attend a child’s soccer game or a long lunch with a spouse, employees will feel more comfortable in modifying their schedules to be more harmonious with outside-of-work life. In the study, nearly 90 percent of the supervisors were married and 77 percent had at least one child living at home;
for subordinates, 71 percent were married and 59 percent had at least one child at home. The survey asked participants to rate statements such as, “My involvement in my work helps me acquire skills and this helps me be a better family member,” and “My involvement in my family puts me in a good mood and this helps me to be a better worker.” Other elements of the survey asked supervisors to rate employee performance, and employees to rate how family supportive the organization is, what degree of schedule control they have, and a performance self-evaluation. Researchers found that when subordinates feel they have greater schedule control, it has an impact on their job performance as evaluated by their supervisor and themselves. Researchers theorize that supervisors with high levels of workfamily enrichment may become more tuned in to the workfamily needs of their subordinates and may therefore respond by improving workplace family friendliness. The environment may occur through formal or informal policies that allow workers to take control over their work schedule (including location) or simply a management style that connotes a sense of family friendliness or concern about workers’ lives outside the office— such as showing concern for subordinate home-life situations, providing help during a personal emergency, or showing sympathy about family issues. When supervisors have a well-balanced work and family life, they pay it forward to their employees. Then, supervisors more readily empathize with subordinates and provide support that leads to enrichment; this enrichment leads to greater engagement in the workplace on the part of the employees, as well as improved performance. For more information contact Dwayne Whitten at dwhitten@mays.tamu.edu His paper, “Pay it forward: The positive crossover effects of supervisor work-family enrichment,” created with colleagues D.S. Carlson, M. Ferguson, K.M. Kacmar, and J. Grzywacz, is forthcoming in Journal of Management.
Firm’s location can predict the likelihood of fraud
Increased religiosity, decreased fraud
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HEN YOU'RE EVALUATING the risks associated with investing in a company, one item you may not have thought to consider is its location relative to the Bible Belt. However, that may be a salient detail, if you’re worried about fraud. New research from Mays accounting faculty members Sean McGuire, Thomas Omer, and Nathan Sharp suggests that firms headquartered in counties where residents report that religion is important in their daily lives exhibit less aggressive financial reporting. This is especially true in small-tomedium sized firms that have less external monitoring from financial analysts. For such companies, religion can act as a substitute for other monitoring. There is a significant association between the measure of a county’s religiosity and measures of aggressive reporting, including shareholder litigation related to accounting malfeasance. In fact, after controlling for other firm and county characteristics, they find that an approximate 10 percent increase in the population that indicate religion is important to their daily lives results in a 48.8 percent decrease in the odds that a firm headquartered in that county is sued for accounting malfeasance. Which states overall reported the highest numbers of residents claiming religion was important in their daily lives? The top ten are all Bible Belt states, with Mississippi (86 percent), Alabama (84 percent), and Tennessee (79 percent) in the first three spots. At the bottom of the list by this measure are Alaska (48 percent), Vermont (46 percent), and New York (44 percent). Texas is number 13 on the list, with 71.9 percent of residents reporting
religion is important in their daily life. The religion data were collected by Gallup, Inc. Another finding of note is that firms located in more religious counties scored lower on measures of corporate social responsibility, including support for the community and diversity initiatives. On the surface, this seems surprising: shouldn’t firms where religion has an impact show higher levels of corporate social responsibility? The researchers hypothesize that this finding may be easily explained: in more religious counties, there is likely less need for corporate involvement in providing for needs within the community, as those activities are already being addressed by religious groups. Also, if a company’s CEO or other managers are already involved in community efforts personally through a religious group, they may not see the need to involve the corporation. While the religiosity of the county where a firm is headquartered is significantly related to fraud risk in a large sample of firms, Sharp notes that it is only one of many factors potential investors must examine. It is significant, he says, but one shouldn’t invest solely on this criteria.
For more information contact Sean McGuire, smcguire@mays.tamu.edu; Thomas Omer, tomer@mays.tamu.edu; or Nathan Sharp, nsharp@mays.tamu.edu. “The Influence of Religion on Aggressive Financial Reporting and Corporate Social Responsibility” is a working paper. In the first few months it was hosted on the Social Science Resource Network website, it was downloaded more than 100 times.
Competitive advantage: in spite of, or thanks to, weakness?
Weakness isn’t negative, if it can create an advantage
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FOOTBALL TEAM WITH A phenomenal scoring offense can win plenty of games, even with a poor defense. Similarly, a company that has a great product but poor service may perform very well in certain markets, depending on the competition. All firms possess some capabilities that represent strengths and others that represent weaknesses. However, the majority of research focuses only on building strengths, rather than understanding how strengths and weaknesses interact. New research on competitive advantage and capability sets from David Sirmon and Michael Hitt suggests that weaknesses may be leveraged instead of eradicated, as it’s not necessarily the firms with the lowest amount of weakness that will perform best—at least, in the short term. Sirmon, assistant professor of management and Pamela M. and Barent W. Cater ’77 Faculty Research Fellow; Hitt, A&M Distinguished Professor and Joe B. Foster ’56 Chair in Business Leadership; and colleagues investigated how durable competitive advantage is. Their findings suggest that as rivals improve areas of weakness, any one firm's strengths become vulnerable, leading to modifications in strategic capabilities. As expected, they found that in low strength/high weakness firms, performance suffered. In low strength/ low weakness firms, performance was average. The surprising finding was that in firms characterized by high strength/ low weakness, performance is high, but in high strength/high weakness firms, performance can be higher. The research indicates that if a high strength/high weakness firm is leveraging
one area (such as product development) to boost another area (such as marketing), the strategy may be rewarded with stellar success—or failure. It’s a risky combination, but can lead to reward, if it yields a competitive advantage. Sirmon says that such firms’ outcomes are more volatile than firms with other strength/ weakness sets. “They can, for a time, achieve high performance but that is not always going to last. It depends on how they invest to maintain strengths and mitigate weaknesses,” he says. The high strength/high weakness capability set is frequently seen in new or newly restructured businesses, where there aren’t enough resources to reduce weaknesses. If weaknesses can be isolated from strengths, this combination can work, but if these capabilities are interdependent, the weaknesses can pull down the strengths. It all comes down to the competitive marketplace. Strength and weakness sets change significantly over time in competitive markets as firms adjust
their strategies to compete. If a high strength/high weakness firm had been outperforming the competition in price, but not service, it presents an opportunity for another firm to offer both price and service, thus eliminating the first firm’s competitive advantage. In a shifting marketplace, it is challenging for a high strength/high weakness firm to sustain a competitive advantage. Over time, high strength/high weakness firms will likely invest assets to bring their capabilities to parity, suggests Sirmon. However, if there is no direct competitor to threaten their marketplace advantage by attacking that weakness, firms have no incentive to address it. In some situations, then, it makes sense to ignore weaknesses, as it might be costly to improve. Take away for managers: take a hard look at the company’s capability portfolio to create an effective strategy. “Human nature makes us often underestimate weaknesses and overestimate strengths,” says Sirmon. But, he warns, if you ignore weaknesses, you’re missing out on opportunity to improve the overall strategy and long-term performance of your business. “We see that weaknesses matter. They have a direct effect that can hurt the firm. They also interact with strengths to influence the firm’s performance.” For more information contact David Sirmon, dsirmon@tamu.edu; or Michael Hitt, mahitt@tamu.edu. “Capability strengths and weaknesses in dynamic markets: Investigating the bases of temporary competitive advantage” is forthcoming in Strategic Management Journal, written by David Sirmon, Michael Hitt, J-L Arregle and J.T. Campbell.
Managers less likely to cook the books when given options
More options, less fraud “The greater the level of corporate governance, the lower the likelihood of fraud.”
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HEN THE ENRON DEBACLE AND SIMILAR cases filled headlines in the early 2000s and the Bush administration announced an “aggressive agenda” against corporate fraud, many analysts decried the longstanding practice of providing managers with stock options, blaming it for increasing the likelihood of fraud. This was a judgment error, says Shane Johnson, Wells Fargo/ Peters/Nelson/Heep Foundation Professor of Finance. When he recently compared a set of fraud firms to control firms during the 1991-2002 period, he found the opposite of analysts’ opinion was true: firms under the leadership of managers with greater stock holdings rather than options were more likely to experience fraud. Johnson and colleagues looked at 87 sets of firms over the 12-year period, matching by industry and size. They found that, contrary to stereotype, the firms that experienced accounting fraud generally weren’t causing their stock prices to soar; rather, they held prices steady when similar stocks were falling. This is significant as stock option values fall at a slower rate than stock holdings. Managers in that instance have a greater incentive to cheat when they have stock holdings, not options; they lose money faster on stock holdings if they accurately report earnings. Another finding is that, as one might expect, the greater the level of corporate governance, the lower the likelihood of fraud. Johnson says these findings are consistent with the economics of crime: criminals act when the benefits outweigh the risks. When looking at the pairs of fraud and control firms in the study, Johnson says it was obvious that in fraud firms there was a greater
incentive to cheat, as there was less governance and managers faced losses of personal wealth in the form of stock holdings. Simply put, Johnson says that firms that commit fraud have a greater incentive to do so. While popular media has encouraged companies to limit stock options in compensation packages in favor of holdings, the research shows this is counterproductive to limiting fraud. The takeaway for shareholders is realizing that it creates incentive for fraud while providing stock holdings and options as part of a compensation package to align managers’ interests with that of the shareholders. Based on other research he is conducting, Johnson recommends that one way to limit fraud risk would be to increase the vesting period for managers’ stock holdings. This forces them to commit fraud over a longer period before seeing rewards, which is harder to accomplish without detection. When managers face short vesting horizons, they are more likely to manage earnings in that period. He also noted that insiders in a firm where fraud has been committed tended to sell much more stock during the fraud period than their counterparts at a nonfraud firm. For more information contact Shane Johnson at shaneajohnson@tamu.edu. His paper, “Managerial Incentives and Corporate Fraud: The Sources of the Incentives Matter,” created with colleagues Harley Ryan and Yisong Tian, was published in Review of Finance in 2009.
Beyond
Tinseltown
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OR MOST LARGE FIRMS, MORE THAN HALF OF revenues are generated outside their home country. In this flattening world, formulating the right strategies about when and how to release a new product in multiple countries can have a significant impact on success. Firms follow one of two strategies: waterfall (a cascade of releases) and sprinkler (simultaneous release) across multiple markets. To study international market entry strategies, Reo Song, marketing doctoral candidate and Venkatesh Shankar, Brandon C. Coleman, Jr. ’78 Chair in Marketing examined the Hollywood motion picture industry, identifying which factors influence success on a global playing field. Their findings are valid for many types of products beyond movies. The researchers used data from the motion picture industry to test their hypotheses for important reasons: unlike other industries, each movie is a unique product, and movie marketing and performance data are closely tracked. In deciding the time window between launch in the home country and in a foreign market, time is money, says Shankar. If you wait too long to enter a market, you may miss a vital window of opportunity created by strong advertising. However, if you enter too soon, you may not benefit from the spread of positive word-of-mouth (WOM). This is especially true in the film industry, as movies have short life cycles and carry huge investments. Appropriately timed releases can transform a so-so movie into a hit and a good movie into a super hit in theaters. Analyzing more than 200 films released in the U.S. and abroad, Shankar and Song have created a model that accounts for several variables and offers strategic insights that could improve a new movie’s revenues in each country. As the film cascades to other countries, Shankar says marketers should plan on a strategy that involves releasing first to countries where there is a high demand for entertainment and a close cultural fit with the themes of the movie. In those environments, it will be easier for the film to succeed, boosting the WOM. Traditionally, waterfall U.S. film releases go like this: domestic, U.K., other European countries, Asia, the rest of the world. Shankar says this is not always the best strategy. If a movie has a closer culture fit to another country, it should launch there sooner. For example, the film Dirty Dancing: Havana Nights, which was about Latin dance. After its U.S. release, it became a big hit in large Latin American markets such as Argentina and Brazil, where it generated enough positive WOM to be successful in other markets around the world.
The motion picture industry provides insights into multicountry release strategy
Piracy may also be a factor in the country sequence decision. It’s a double-edged sword, says Shankar. On the one hand, releasing early in countries such as China and Russia means bootlegged copies of the film will be available for consumers immediately—which may diminish box office sales. On the other hand, pirated copies can provide fast WOM and improve box office revenues. Movies that are not likely to generate much additional positive WOM should consider the sprinkler method, which involves greater pre-launch advertising. Much anticipated sequels, such as Iron Man 2, do better with a sprinkler release, as the demand for them is already high and is less likely to be helped by new WOM. However, if another strong film is opening at the same time in a foreign country, then it may hurt the Hollywood movie’s ticket sales in that market. While the model is complex, one thing is clear, says Shankar: many in Hollywood are ignoring these factors—and missing out on millions of dollars. For more information contact Reo Song, msong@mays.tamu.edu, or Venkatesh Shankar, vshankar@tamu.edu.
S ong is a fourth-year PhD candidate. The research on this topic is part of Song’s dissertation and has resulted in two working papers, with plans for several more.
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