Extending Upper Echelons Theory: How Evaluators Influence Signal Interpretation and Evaluation
ISBN: 978-1-83797-317-0, eISBN: 978-1-83797-316-3
ISSN: 2397-5210
Publication date: 30 October 2023
Abstract
As one of the most influential theories in strategic management, Hambrick and Mason’s Upper Echelons Theory has yielded significant conceptual and empirical advancements linking executive characteristics and perceptions to decision-making. Specifically, work on this theory consistently shows that CEOs’ decisions are biased by personal characteristics to the benefit and detriment of firms. While this stream of research links executive decision processes to outcomes such as executive dismissals, analyst evaluations, and press coverage, surprisingly little is understood about if and whether the information CEOs convey is subject to the same filtering process by a firm’s key evaluators. Thus, in this chapter, we aim to extend Upper Echelons Theory by positing that a double filtering process occurs whereby the cognitive aids CEOs use can be informed by not only their cognitive base and values but also the characteristics and priorities of those who evaluate the nonverbal and verbal signals they send. To do so, we build on recent conceptual and empirical advancements to make a case for the decision-making biases and tendencies that influence signal interpretation by three key evaluator groups internal and external to the firm: boards of directors, financial analysts, and the media. We conclude by considering the implications of evaluators’ information filtering and how this more holistic view of Upper Echelons decision-making can enable executive teams to be strategic with the cognitive aids they use to influence evaluations.
Keywords
Citation
Short, C.E. and Hubbard, T.D. (2023), "Extending Upper Echelons Theory: How Evaluators Influence Signal Interpretation and Evaluation", Sund, K.J., Galavan, R.J. and Gustafsson, R. (Ed.) Cognitive Aids in Strategy (New Horizons in Managerial and Organizational Cognition, Vol. 6), Emerald Publishing Limited, Leeds, pp. 47-64. https://doi.org/10.1108/S2397-521020230000006004
Publisher
:Emerald Publishing Limited
Copyright © 2023 Emerald Publishing Limited
Theoretical Underpinnings: Upper Echelons Theory and Verbal and Nonverbal Signals
Scholarly work linking executive characteristics to strategic decision-making continues to flourish ever since the introduction of the Upper Echelons Theory by Hambrick and Mason (1984). Research in this domain overwhelmingly focuses on the link between executive characteristics and firm strategic actions and performance outcomes (Hambrick & Wowak, 2021; for recent reviews, see Neely, Lovelace, Cowen, & Hiller, 2020, and Wang, Holmes, Oh, & Zhu, 2016). Indeed, “virtually all” of Upper Echelons research focuses on executive characteristics as independent variables (Hambrick & Wowak, 2021, p. 338).
While this substantial body of research demonstrates the link between executive characteristics, strategic actions, and company-level outcomes, an increasing focus in recent years involves linking chief executive officer (CEO) characteristics to the verbal and nonverbal signals they use to influence external evaluations (e.g., Graf-Vlachy, Oliver, Banfield, König, & Bundy, 2020; Knight, Paroutis, & Heracleous, 2018; König, Mammen, Luger, Fehn, & Enders, 2018; Kolbe, Mansouri, & Momtaz, 2022; Lovelace, Bundy, Pollock, & Hambrick, 2022; Short & Hubbard, 2023; Whittington, Yakis-Douglas, & Ahn, 2016). We believe there are two key reasons for this recent extension of Upper Echelons-based research.
First, practical and scientific evidence summarily underscores how external perceptions continue to grow in importance, making it a strategic necessity to discern how the verbal and nonverbal signals top managers send – and those of the CEO, in particular – influence perceptions among various evaluators. For instance, with the emergence of the “Social Media Era,” signals conveyed by executive teams travel faster and have a notable, yet heterogeneous effect on a firm’s evaluators (Wang, Reger, & Pfarrer, 2021). Such evaluators’ social media activities can have a reciprocal influence on executive communications (e.g., Zohrehvand, 2022). Notably, Wang et al. (2021) argued that company-led actions and communications are faster at reaching a larger number of observers (velocity), company evaluators are more proactive in setting an emotional tone (emotionality), and modern communications are more prone to an “us against them” framing that impacts firms (communality).
Second, for decades, organizational researchers lacked sufficiently sophisticated tools to rigorously evaluate the verbal and nonverbal signals sent by CEOs and other top executives. This has changed with the democratization of more techniques relating to advanced textual analysis, videometric analysis, and natural language processing (e.g., Petrenko, Aime, Ridge, & Hill, 2016; Short & Hubbard, 2023; Short & Short, 2023; Yang, UY, & Huang, 2020). Such techniques are now used in isolation or combination to unobtrusively measure personality, motivation, and other self-concept attributes that shine through in textual and visual data (e.g., CEOs’ or other executives’ responses to analyst questions on quarterly earnings calls and visuals included in annual reports or presentations at industry associations). These methodological advancements enable scholars to not only assess characteristics such as tone of speech (e.g., such as through a word frequency approach that counts the frequency of certain terms that correspond with previously validated dictionaries; e.g., Gamache, Neville, Bundy, & Short, 2020), but also model contextual elements of speech through word embeddings – numerical representations of words that retain semantic information – that facilitate state-of-the-art deep learning techniques (e.g., Devlin, Chang, Lee, & Toutanova, 2019; Grootendorst, 2022). These methods, further advanced by the availability of tools such as ChatGPT, now allow scholars to generate content and assess nuances of data such as affective tone or semantic similarity with increased precision and further evaluate or generate data based on visual information (Short & Short, 2023).
As a result, researchers who leverage these methods are capable of analyzing the evaluative consequences of CEOs’ verbal and nonverbal techniques on a significant scale with unprecedented precision. Without a doubt, the appropriate use of such methods presents “rich opportunities for scholars to examine what new CEOs say and what they (plan to) do, as well as how analysts, shareholders, and employees react to what the CEOs say and what they do” (Zhang, 2021, p. 381). Our view is that there is great promise in assessing the impact of CEOs’ verbal and nonverbal communications on evaluator perceptions and, in particular, in extending the Upper Echelons process to account for the influence of evaluators’ cognitive base and values on their reactions to such signals.
CEOs’ verbal and nonverbal signals. CEOs are careful about the signals – observed strategic actions and communications – they broadcast outside the firm. Such signals can be nonverbal or verbal, including signals such as content included in press releases (e.g., Quigley, Hubbard, Ward, & Graffin, 2020), alliance announcements (Park & Mezias, 2005), and visual presentations that frame an executive team’s strategic plans or current performance (Salvado & Vermeulen, 2018; Whittington et al., 2016). These verbal and nonverbal signals provide useful strategic information and serve as cognitive aids to key evaluators who are charged with observing and evaluating organizations and their key executives. And, while not everyone is attentive to the visual or spoken signals firms send, information infomediaries – parties that distill and disseminate key information about firms and their leaders – are watching on our behalf (e.g., Bednar, 2012).
We know from Upper Echelons Theory that not all CEOs make the same decisions given the same stimuli. Instead, CEOs’ decisions are shaped by their personal characteristics (Hambrick & Mason, 1984). Thus, regardless of the effort made by CEOs to accurately represent elements of their strategic context, we cannot expect this information they relay to be perfectly aligned with the strategic realities they face. And, paradoxically, we also cannot expect every observer of CEO communications – such as analysts, board members, or journalists following the firm – to form evaluations in the exact same way nor without bias, much like the strategic leaders they cover. This realization is the basis for the conceptual extension of Upper Echelons Theory which we intend to advance in this chapter: Namely, we posit that each party – CEOs and those who observe CEOs’ verbal and nonverbal signals – filters the information they receive their own cognitive base, values, and priorities and that this motivates their evaluations of a firm and its CEO. In turn, an executive’s awareness of evaluators’ filtering can inform how they strategically communicate through verbal and nonverbal means.
We briefly outline the key components of the Upper Echelons information filtering process before extending this model to also include those who evaluate CEOs’ verbal and nonverbal communications. Specifically, building on Hambrick and Mason (1984) and Hambrick (2007), the Upper Echelons perceptual process is characterized by six key stages. This process is used to describe how an executive’s cognitive base and values affect their perception of external information and their subsequent strategic decisions. Fig. 1 offers a visual representation of this process.
Information Filtering: An Overview of the Upper Echelons Process
Step 1: Situational stimuli. This represents all environmental stimuli available for interpretation by a CEO or top manager. Due to limitations in the search, it is not possible for all situational stimuli to be assessed. Thus, this first step aligns with the premise of bounded rationality – that while it is possible to interpret a situation, it is impossible to objectively understand it fully due to its complexity (Cyert & March, 1963; Hambrick, 2007).
Step 2: Cognitive base and values. A CEO’s cognitive base refers to their “knowledge or assumptions about future events, knowledge of alternatives, and knowledge of consequences attached to alternatives,” and values refer to “principles for ordering consequences or alternatives according to preference” (Hambrick & Mason, 1984, p. 195).
Step 3: Limited field of vision. This describes “those areas to which attention is directed” (Hambrick & Mason, 1984, p. 195). This represents the subset of situational stimuli that are subject to interpretation based on how a CEO scans the environment.
Step 4: Selective perception. In addition to a CEO’s field of vision representing a subset of the overall stimuli representing a situation, CEOs also selectively perceive “only some of the phenomena included in the field of vision” (Hambrick & Mason, 1984, p. 195).
Step 5: Interpretation. Once a subset of situational stimuli is recognized, a CEO then filters this information through their cognitive base and values. According to Hambrick and Mason (1984, p. 195), “the manager’s eventual perception of the situation combines with his/her values to provide the basis for strategic choice.”
Step 6: Construed reality. The final outcome of the process is a construed reality. In this step, a CEO arrives at a specific conclusion – or perception – based on the prior filters and interpretations. This construed reality then serves as the basis for the CEO’s strategic choices.
Double Filtering: Extending Upper Echelons Theory to Explain Differences in Interpretations of CEO Actions
Based on the perceptual process outlined above, scholars now have better answers to the question of why organizations and their leaders act as they do. What remains less known, however, is why evaluators – those who observe and respond to information issued by CEOs and their firms – evaluate CEO actions and communications in the manner that they do. Indeed, it is our view that the same deficiencies that initially motivated Upper Echelons Theory still exist for firm evaluators. Namely, just as the strategy process was once viewed “as flows of information and decisions, detached from the people involved” (Hambrick & Mason, 1984, p. 193), in many respects evaluator responses are viewed similarly today.
And yet, it is reasonable to assume that CEOs or other top managers are not the only parties that filter information through their own cognitive base and values. Stated simply, if a CEO acts on the basis of personal interpretation – as some function of their experience, values, and personality – is it possible that the evaluators who observe these verbal and nonverbal signals also filter these communications in a similar, boundedly-rational way? Indeed, scholars have yet to carefully consider the manner by which evaluators’ characteristics inform their evaluations and how CEOs can strategically leverage this information. At its core, Upper Echelons Theory is a psychological theory that can be applied to anyone.
To address this point, we propose that the filtering process established through Upper Echelons Theory also applies to the wide range of evaluators who are attentive to the verbal and nonverbal signals CEOs send. Indeed, while a large body of work lends evidence to support the information filtering process posited by Upper Echelons Theory (Neely et al., 2020; Wang et al., 2016), organizational research has yet to formally consider the role evaluators’ information processing has on the subsequent evaluations CEOs and their firms receive. While we believe the Upper Echelons perceptual process is relevant for any observer of a CEO’s or firm’s (non)verbal signals, for parsimony – and to illustrate the relevance of this kind of double filtering that occurs – we focus on three key evaluators of the firm: boards of directors, financial analysts, and the media.
This double filtering process – whereby the strategic signals CEOs send are warped by both the executive and the information infomediary – undergirds our consideration of how the signals executives send can trigger key evaluators’ attention and reactions in different ways. Thus, we consider how boards of directors, financial analysts, and the media will gravitate toward and be more responsive to different kinds of cognitive aids CEOs use to influence evaluator perceptions and understanding.1
In advancing a double filtering perspective, we first propose that boards of directors – given their responsibility to serve as fiduciaries who guard the interests of shareholders by monitoring CEOs (e.g., Mitnick, 2021; Walsh & Seward, 1990) – will more carefully scrutinize information that offers evidence for CEO competence and their individual impact on firm performance (Quigley, Wowak, & Crossland, 2020; Short & Hubbard, 2023). Second, we propose that financial analysts – given their motivation to form accurate predictions of firm performance (Busenbark, Lange, & Certo, 2017) – will be attentive to and react more favorably to verbal and nonverbal signals that enhance their estimation of a firm’s future performance (e.g., quantitative information and visualizations that convey information about a firm’s present or future financial standing) (Salvado & Vermeulen, 2018). Third, we propose that members of the media – given their motivation to publish attention-grabbing articles that pique public interest – will pay greater attention and have more demonstrable reactions to nonconforming signals (e.g., unusual visuals, deviations in emotional tone on earnings calls) (Gamson, 1994; Lovelace, Bundy, Pollock, & Hambrick, 2022; Shoemaker & Reese, 2013).
In order to apply the Upper Echelons information filtering process to incorporate a CEO or firm’s evaluators, we first outline key components of this extended Upper Echelons process. As such, we illustrate how a combined view of perceptions internal and external to the CEO can provide us with a more holistic understanding of how verbal and nonverbal signals sent by CEOs are formed, enacted, and evaluated. To do so, we extend each of the six key stages of the Upper Echelons perceptual process in turn. Fig. 2 offers a visual representation of this “double filtering” process whereby evaluators selectively perceive and interpret verbal and nonverbal signals originally shaped by a CEO’s cognitive base and values.
Step 1: Situational stimuli. This represents all verbal and nonverbal signals conveyed by a CEO that are available to be interpreted by key evaluators. Due to limitations in search, it is not possible for all verbal and nonverbal signals to be scrutinized equally. Thus, this first step underscores how it is impossible for any single evaluator to objectively understand the totality of a CEO’s strategic signals due to their breadth and complexity (Cyert & March, 1963; Hambrick, 2007).
Step 2: Cognitive base and values. This represents an evaluator’s assumptions concerning the CEO’s or their firm’s past, present, and/or future performance. It further signifies the range of possibilities and contingencies that shape how an evaluator ultimately perceives the verbal and nonverbal signals conveyed by the CEO and the larger body of information these signals are embedded within. An evaluator’s cognitive base and values are a function of their background and preferences that jointly define (and limit) their field of vision and interpretations.
Step 3: Limited field of vision. This represents which signals sent by the CEO evaluators are attentive to and subsequently interpret. While increasing the number of evaluators may improve their collective field of vision, their rationality is still bounded and further influenced by their cognitive base, values, and social connectedness.
Step 4: Selective perception. Evaluators, like CEOs, selectively perceive a proportion of all information included in their field of vision. While increasing the number of evaluators within a single group may enhance their depth of understanding of such signals, their individual characteristics and professional incentives still guide them to prioritize certain information.
Step 5: Interpretation. Evaluators interpret the information they selectively perceive through their cognitive base and values, leveraging such interpretations to form the basis of their evaluations of the CEO, the firm, or other related factors.
Step 6: Construed reality. The preceding steps produce a construed reality that is an outcome of evaluators’ prior filters and interpretations. This construed reality serves as the basis for evaluators’ decision-making (e.g., compensation decisions, CEO dismissals, strong buy or sell recommendations, and positive or negative press coverage).
Extending the Upper Echelons process to directors. According to agency theory, corporate directors are tasked with monitoring CEOs to ensure that they act in the best interests of their firm’s shareholders and are therefore capable of increasing the long-term value of the firms they lead. Another key function of the board involves hiring, firing, or retaining a CEO who is deemed (un)fit to generate sufficient value for the firm (Hubbard, Christensen, & Graffin, 2017). In forming such evaluations, a board must not only rely on the evidence available to them – such as, but not limited to, a CEO’s strategic actions and communications and the board members’ private interactions with the executive – but also filter this external evidence through their own experience and expectations (Moyo, 2020). Indeed, foundational work such as Hillman and Dalziel’s (2003) insights into board resources point to how board experience can be an essential part of monitoring success.
Boards’ professional reputations and livelihoods, combined with their fiduciary obligation to the firm’s shareholders, motivates them to diligently attend to CEOs’ actions and communications (Short & Hubbard, 2023). While board effectiveness is a subject of great interest and debate in organizational research (e.g., Boivie, Andrus, Bednar, & Aguilera, 2016; Boivie, Withers, Graffin, & Corley, 2021; Brickley, Coles, & Terry, 1994; Short & Hubbard, 2023; Singh & Harianto, 1989), whether boards are motivated to pay attention to CEOs is less controversial. Indeed, recent work has pointed out the role conflicts of interest may play in hindering effective board evaluations. Further, factors such as the size of a CEO’s rolodex (e.g., Engelberg, Gao, & Parsons, 2013) may influence whether board members judge CEO decisions with accuracy or are biased by their social ties. While the degree of influence social connectedness has is worthy of study in its own right, we can still expect evaluators with social ties to a CEO to attend to the verbal and nonverbal signals they send.
With the above ideas in mind, we know that – whether ineffective monitors or not – board members have a professional obligation to assess CEOs with an aim to holistically assess their quality in context and ability to successfully generate firm value. We believe this evaluative frame, and professional obligation, in particular, leads directors to be more attentive to certain verbal and nonverbal signals CEOs send over others. Contextualizing this professional motivation within the Upper Echelons perceptual process is valuable, as it is one way for us to understand where directors’ limited field of vision is likely to be directed when CEOs send certain signals. Given their mandate to focus on certain behaviors through an evaluative lens, we believe this incentive leads boards of directors down an interpretative path that is distinct from other observers of CEOs’ verbal and nonverbal signals.
In light of the cognitive base, values, and professional motivations of boards to focus on these dimensions, CEOs can tailor the signals they send accordingly. For instance, with an awareness of board members’ focus on evaluation and assessing their competence, CEOs can keep their expectations in mind as they craft communications. Visually, they can ensure that their presentations are well put-together and reflect their intended and realized strategies – both visually and verbally when presenting these materials. Further, they can ensure the accuracy of their remarks and statements and that they have considered viable contingencies that may impact their decisions. A CEO may also choose to rehearse language that conveys their strategic thinking or process and vision for their organization, given that such statements are more likely to be scrutinized carefully by the board.
Extending the Upper Echelons process to analysts. Financial analysts serve as important information intermediaries who are tasked with assessing the firm and its financial health (Westphal & Clement, 2008). Investors, who are often less familiar with the details relating to and implications of a firm’s strategic decisions, rely on the expert opinions of analysts to inform their financial positions. Analysts, therefore, work to reduce information asymmetries between firm insiders – such as top managers – and outsiders. Analysts’ opinions can “influence the investment decisions of their clients and … the reactions of the firm’s other investors and stakeholders” (Benner & Ranganathan, 2012; Busenbark et al., 2017, p. 2486).
Thus, the reputation and professional livelihood of financial analysts are tied to their ability to accurately diagnose and forecast the financial health of the firm. This motivates analysts to focus on and be influenced by specific verbal and nonverbal signals that they think will contribute to the accuracy of their forecasts. And yet, in their search for accuracy, analysts – like CEOs – have limited attention and processing power to inform their evaluations of a firm’s future prospects. Their rationality is bounded. Indeed, empirical evidence suggests this as analysts’ and investors’ perceptions of information can vary “even when the information content of the alternative formats is identical”, and a large volume of evidence shows “that both naïve and sophisticated investors and professional analysts are systematically biased in their interpretation of accounting data, and that these biases affect market prices” (Hirshleifer & Teoh, 2003, p. 3). Here we see that double filtering not only occurs, but also has financial and perceptual consequences.
Evidencing this point, scholarly work points to how CEOs may be aware of analysts’ priorities and at times even go so far as to predict future earnings with a high level of precision – even when such certainty is objectively unknowable – as a form of impression management via “pseudo precision” (Hayward & Fitza, 2017). On the evaluator side, evidence also shows how analysts react more positively to acquisition announcements and future strategic decisions when CEOs preemptively disclose their intentions to engage in such activities because it allows them to anticipate and forecast the effects of actions ahead of their occurrence (Busenbark et al., 2017; Whittington et al., 2016). This evidence underscores how analysts value information that enhances the accuracy of their estimates, and that CEOs try to appease this key evaluator group by providing this information.
Taken together, we theorize that financial analysts who observe CEOs’ verbal and nonverbal signals will selectively perceive and interpret these signals through the lens of their professional priorities, cognitive base, and values. Specifically, we expect that analysts, based on their motivation to form accurate forecasts, will selectively perceive and interpret information that reflects a firm’s financial health with greater attention than other information that is tangential to this goal. Further, we expect that analysts with a track record of success – just as CEOs with greater tenures (Hambrick & Mason, 1984) – will be more rigid in their assessments and less willing to incorporate other potentially relevant, qualitative information into their assessments. We further predict that financial analysts will pay greater attention to numerical information that can inform their forecasts as they scan CEO communications, potentially missing weak signals that could otherwise speak to a firm’s financial health or reveal key information about its CEO or top management team (Govindarajan, 2016; Schoemaker & Day, 2009). While we simply introduce these ideas here, each is empirically testable.
Extending the Upper Echelons Process to the Media. Like financial analysts, members of the press also serve as information intermediaries whose job is to translate technical information about a firm to other audiences who are less familiar with the inner workings of the firm or the particular industry in which it is situated. While members of the media – like analysts – are rewarded for their accuracy, their professional livelihood is more directly influenced by their publication’s readership and the ability of their stories to garner public attention. Thus, while accuracy is rewarded, it is rewarded less among members of the press than it is among financial analysts who are pressured to generate precise forecasts.
In particular, members of the media are tasked with searching for and identifying content that is ‘newsworthy’ in nature, that can reflect well on the publication and generate public interest and future readership (Gamson, 1994; Lang, 2000; Shoemaker & Reese, 2013). As such, we predict that members of the press are more likely to pay attention to distinct signals that individuate firms or their CEOs or broader executive teams. Given that members of the press typically cover several firms or even entire industry sectors simultaneously, journalists must decide which verbal and nonverbal signals to pay attention to. This imposes “significant time constraints” under which members of the press must operate to explain “complex and uncertain phenomena like firm action” (Hayward, Rindova, & Pollock, 2004, p. 639).
Much like boards of directors and analysts, we expect that members of the press who observe CEOs’ verbal and nonverbal signals will selectively perceive and interpret these signals through the lens of their professional priorities, cognitive base, and values. Specifically, we expect that members of the media, based on their motivation to disseminate newsworthy content, will selectively perceive and interpret information that is nonconforming in nature, challenges the status-quo, or evokes an emotional response (Gamson, 1994; Lovelace et al., 2022; Shoemaker & Reese, 2013; Zavyalova, Pfarrer, & Reger, 2017). Given this focus on newsworthy content, we further expect that journalists risk overlooking mundane information that could be valuable to convey as an information intermediary of the firm (e.g., a weak signal that might be strategically relevant, yet not newsworthy; Govindarajan, 2016; Schoemaker & Day, 2009). We further expect that members of the press will pay greater attention to emotional language, eye-grabbing visuals, exceptional failures or successes, unusual dress, and other nonconforming cues – spoken and unspoken – to holistically inform their assessments through the filter of their own cognitive base and values. Business as usual, while informative, is unlikely to pique the public’s interest.
Applying The Model
The process above, described for three key evaluators of the firm and its CEO – boards of directors, financial analysts, and the media – extends the Upper Echelons perceptual process to also consider how the characteristics and priorities of evaluators likewise inform their evaluations. Given the likelihood that the same decision-making biases and tendencies that influence CEOs’ decisions are present among their evaluators, we now offer a handful of strategic recommendations and invite others to consider what the implications of evaluators’ information filtering may be on the firm. In doing so, we have a few goals in mind: (1) For managers: to promote a more holistic view of Upper Echelons decision-making that can enable executive teams to be strategic with the verbal and nonverbal signals they send, (2) for firm evaluators: to gain an increasing awareness of limitations in their own information processing and how who they are shaping their evaluations of firms and their CEOs, and (3) for scholars who study these phenomena: to consider the interactive influence of bounded rationality among CEOs and the evaluators who assess them. To do so, we briefly discuss verbal and nonverbal signal development before highlighting key implications and strategic considerations for each of the three evaluators previously mentioned using this double filtering perspective.
Signal development. Typically, in large public firms, press releases, investor presentations, and other public-facing communications are jointly crafted by a firm’s CEO, other top managers, and the firm’s investor relations team. Together, these individuals develop the core of a firm’s communication efforts. Specifically, members of investor relations teams work collaboratively with members of the executive team to develop effective verbal and nonverbal communications that are then relayed to the public through a variety of channels.
It is evident that the verbal and nonverbal signals CEOs and other executives use not only reflect their personalities (e.g., Gamache et al., 2020; Harrison, Boivie, Thurgood, & Pfarrer, 2019) but also influence external evaluations as well (e.g., Graf-Vlachy et al., 2020; Knight et al., 2018; König et al., 2018). For instance, recent work describes how the structure and content of presentation slides influence the way this content is subsequently discussed in a manner that provokes sense-making and generates new strategic actions (Knight et al., 2018). Even in the highly structured context of a quarterly earnings call, where CEOs and other top managers typically present slides (nonverbal signals) alongside prepared remarks (verbal signals), this research suggests that the visual configuration of this structured information influences not only executives’ prepared remarks, but also analysts’ reactions to it and top managers’ subsequent strategizing.
Extending these ideas, it is worthwhile for a CEO – as the firm’s chief strategist – to evaluate how much of the design process they should delegate to others versus directly craft themselves. If such information directly impacts the perceptions of key evaluators and can guide subsequent strategic decision-making as Knight et al. (2018) suggest, then CEOs will likely do well to have a more direct influence over the creation of these nonverbal signals. Further, with recent advancements in generative artificial intelligence affecting the entrepreneurial communication process – including the potential for the automated generation of visual and verbal information – we are likely to witness novel shifts in how these tasks are delegated (Short & Short, 2023).
Strategic considerations. To demonstrate the practical insights that readily emerge from accounting for this double filtering process, we now introduce three practices CEOs can engage in as they interact with board members, financial analysts, and members of the media. Each practice can be followed once the broader decision-making tendencies – rooted in each evaluator’s known professional obligations and incentives, cognitive base, and values – are identified and augmented by any personal knowledge a CEO may have based on prior interactions with each evaluator.
Calibrate. This first practice refers to a CEO’s intentional crafting of a verbal or nonverbal signal to increase its chance of grabbing the attention of one or more key evaluators. Specifically, to calibrate means to craft signals such that they will be noticed by one or more evaluators (based on perceptions of their field of vision and professional priorities), and also convey the meaning a CEO intends to send. In a negative sense, this might mean that a CEO should be wary of offhandedly including quantitative figures in reports or verbal statements without sufficient foresight into how such information may be closely scrutinized by analysts or evaluators of a firm’s ESG performance (who are typically focused on a subset of financial metrics and company decisions to inform their assessments). More positively, a CEO can intentionally ground key messages (e.g., content in a slide presentation) with concrete evidence that analysts will be more likely to attend to or prioritize the placement of certain information to increase desired attention toward it (a practice common in how companies’ annual reports are structured). In short, CEOs may do well to carefully convey information that is likely to garner evaluator attention, and to intentionally craft cues such that important information lies squarely within an evaluator’s typical, limited field of vision. In doing so, CEOs should maintain an awareness of their tendency to fixate on certain information as a function of their individual characteristics and adjust accordingly (e.g., a CEO’s temporal focus may inspire their tendency to focus on past versus present circumstances (Nadkarni & Chen, 2014), and a CEO’s promotion or prevention focus may lead them to interact with certain stakeholders more readily over others (Gamache et al., 2020)). Criteria such as stakeholder salience remain relevant and can guide which strategic issues and evaluator concerns CEOs attend to at a given point in time as they calibrate the signals they convey (Mitchell, Agle, & Wood, 1997).
Combine. In addition to calibrating signals that evaluators are most likely to attend to, CEOs can intentionally combine attention-grabbing information with additional verbal or nonverbal information they wish to convey. If a CEO seeks to have a certain evaluator group perceive the firm in a specific way, they can bundle this perceptual language alongside attention-grabbing information they think that specific evaluator will care about.
Consider analysts as a first example of this. In this case, CEOs can combine any information they wish analysts to perceive alongside quantitative figures or hints of the future so that analysts are more attentive to these remarks (Busenbark et al., 2017). This can, in turn, increase external attention toward the remarks CEOs want these evaluators to focus on. For instance, consider this hypothetical quote: “We plan to launch a new flagship product in the personal communications device space, in the $500–$800 price range with superior features to existing products from competitors X and Y, within the next six months. We want to be known as a design-forward company that is willing to take risks and puts the consumer first.” The first part of the quote relays concrete information that analysts can use to inform their reports, whereas the latter is a specific vision the CEO wants these analysts – and investors who read the reports they will write – to internalize. In this case, part one is used to substantiate the claim that comes after it, the CEO’s primary signal. Preceding and following – that is, sandwiching – this information with attention-grabbing information is another way to combine that may also be viable. At a sociocognitive level, joining multiple pieces of information together prompts evaluators to search for meaning – in an effort to discern the individual impact of each piece of information – and typically heightens the attention they pay to each piece of verbal and nonverbal information they observe (Fiske & Taylor, 2017).
Contain. A third tactic CEOs can use to manage evaluator relationships in light of their cognitive base, values, and finite focus is to limit the verbal and nonverbal signals they send. This tactic refers to a CEO’s intentional avoidance of language or visual representations that heighten scrutiny from one or more evaluators – jointly informed by the CEO’s projection of their individual characteristics and professional priorities – when such scrutiny could inspire negative perceptions of the CEO or their firm. Thus, a CEO employing a contain strategy would avoid publicly disclosing any information – when legally permissible to do so – until an opportune time or not at all (e.g., alongside other information that might soften its impact, if negative). This strategy can reflect the intentions of multiple firm executives – such as through the use of confounding ambiguous events such as an executive succession with multiple additional pieces of positive, negative, or neutral information (e.g., Graffin, Carpenter, & Boivie, 2011) – or the intention of the CEO alone, such as by side-stepping an evaluator’s question by avoiding to comment on specific numbers or figures.
More practically, when an executive is faced with heightened evaluator pressure to respond – such as during a crisis such as an oil spill or widespread product recall – a contain strategy may no longer be feasible. Despite this difficulty, we believe CEOs’ natural tendencies – such as that to convey competence, evidenced in their tendency to estimate earnings with excessive precision (Hayward & Fitza, 2017), or present their firm in a positive light (Elsbach, Sutton, & Principe, 1998) – can impede their ability to effectively foster evaluator relationships in the long-run (e.g., by providing inaccurate figures that reduce the accuracy of financial analysts’ estimates downstream). There is a great promise, yet limited inquiry into the rationale or potential impact of intentional negativity by leaders of firms. The cognitive base, values, and professional motivations of CEOs and their evaluators are not always congruent and are, in fact, often at-odds. Despite this, CEOs’ and evaluators’ goals can also align – it is often true that both parties wish to see a given firm succeed. By recognizing the decision tendencies and biases of evaluators, compared against their own limitations and motivations, CEOs can move toward formulating and implementing actionable strategies that benefit their firms and the evaluators who assess them. The impact of calibrating, combining, and containing on evaluator perceptions, while empirically testable, remains unknown.
Ethical considerations. While we have illustrated three strategies CEOs can leverage based on their knowledge of their evaluators’ bounded rationality and limited field of vision, these tactics – and the double filtering process more generally – raise a number of ethical considerations. We believe this is a ripe area for future work and will point out important ways we see ethics interacting with these tactics and the double filtering process.
First, by nature, a CEO’s values are not perfectly congruent with those of the firm’s evaluators. A CEO faces distinct professional pressures that may motivate them – or at least produce an incentive – to manipulate the manner by which they convey information to position themselves or their firms in the best possible light. “Packaging,” a term in the academic literature that has referred to the editing of information to enhance others’ views of oneself, must be bound by a commitment to act honestly and in the best interest of the firm (thus fulfilling their fiduciary responsibilities). An ethical imperative is that the process of enhancing others’ views and presenting the best version of oneself or the firm must avoid becoming disingenuous.
Second, a CEO must navigate their knowledge of their evaluators’ bounded rationality carefully. Evaluators’ limitations in information processing – regardless of the influences that bind their rational decision-making – should not be intentionally exploited to produce a false or misrepresentative view of the CEO or their firm. This ethical point may be especially challenging for a narcissistic CEO who has an inflated self-view that they are tempted to routinely reinforce (Campbell, Goodie, & Foster, 2004; Chatterjee & Hambrick, 2007). In contrast, a CEO with an increased drive for affiliation (McClelland, 1985; Short & Hubbard, 2023) may prioritize relaying information in a transparent manner even when sending such signals does not enhance their public perception. From each of these, it is clear that a promising area of work is to assess the conflicting priorities CEOs and evaluators face and, more specifically, how these values interact when assessing various combinations of top managers and firm evaluators (e.g., configurations of specific board directors, reporters, analysts, and CEOs).
Conclusion
Taken together, our chapter augments a rich theoretical framework – the Upper Echelons perceptual process – by connecting CEO and evaluator characteristics to the information received by the general public, shareholders, and other stakeholders. Ultimately, we believe doing so can enrich organizational research incorporating Upper Echelons Theory and also help practitioners discern the implications of various verbal and nonverbal signals CEOs use that trigger influential and, at times, conflicting evaluations by key evaluators.
Our approach is complementary to research assessing cognitive frames and framing contests (e.g., Kaplan, 2008; Raffaelli, Glynn, & Tushman, 2019) which underscores how individuals at times engage in “political framing practices'” to gain buy-in from others and inspire organizational action. And yet, our framework is also distinct in that it is CEO-centric, crosses the boundary of the firm to account for internal and external stakeholders, and focuses primarily on attention mechanisms in strategic signaling.
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- Prelims
- What are Cognitive Aids in Strategy?
- Opening Up Alternatives for Managers Stuck with Complexity
- Testing the Tool and not the Theory
- Extending Upper Echelons Theory: How Evaluators Influence Signal Interpretation and Evaluation
- Scenarios as Cognitive Aids: The Necessary Role of Emotional Labor in the Cognition Management of Clients
- Music as a Metaphorical Aid for Strategic Development
- A Neuroscience Approach to Entrepreneur Pitch Outcomes
- Strategy Work with Artifacts: Neurocognitive Advantages of Visual Sense-building
- The Relevance of Social Dynamics and Dispositions on Non-Traditional Aids to the Strategic Process
- Index