Top Team Deterioration As Part of the Downward Spiral of Large Corporate Bankruptcies
Author(s): Donald C. Hambrick and Richard A. D'Aveni
Reviewed work(s):
Source: Management Science, Vol. 38, No. 10 (Oct., 1992), pp. 1445-1466
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MANAGEMENT SCIENCE
Vol. 38, No. 10, October 1992
Pr'intied in U.S.A.
TOP TEAM DETERIORATION AS PART OF THE
DOWNWARD SPIRAL OF LARGE
CORPORATE BANKRUPTCIES *
DONALD C. HAMBRICK AND RICHARD A. D'AVENI
Graduate School of Buisiness, 711 UsrisHall, Columbia University, New York, New York 10027
Amos TutckSchool of BuisinessAdnministration,DartmoutthCollege,
Hanover, New Hampshire 03755
This exploratory study of 57 large bankruptcies and 57 matched survivors examined the top
management team (TMT) characteristicsassociated with major corporate failure. Prior research
was used to guide selection of specific team characteristicsfor study. Not only did the failing firms
show significant annual, or cross-sectional, divergence from survivors on several indicators of
TMT composition, but also those divergences became more pronounced, even accelerating, over
the last five years of the bankrupts' lives. The results thus suggest that deterioration of the top
management team is a central element of the downward spiral of large corporate failures. Based
upon a limited test of causality, the authors propose that a two-way process is at work: ( 1 ) team
deficiencies bring about or aggravate corporate deterioration, either through strategic errors or
stakeholder uneasiness with the flawed team; and (2) corporate deterioration brings about team
deterioration,through a combination of voluntary departures,scapegoating,and limited resources
for attracting new executive talent.
(TOP MANAGEMENT TEAMS; EXECUTIVE LEADERSHIP; ORGANIZATIONAL DECLINE; BANKRUPTCY)
Research on organizational failure generally supports the portrayal of collapse as a
downward spiral. Once a weakness develops there is a tendency for additional debilitating
problems to occur: stress-induced decision processes, defection of allies, too few resources
to innovate, and so on (Starbuck, Greve, and Hedberg 1978; Staw, Sandelands, and
Dutton 1981; Whetten 1980). A recent synthesis of the "downward spiral"view of failure
was set forth by Hambrick and D'Aveni (1988) who found that a sample of large bankruptcies showed signs of financial weakness (relative to a matched sample of survivors)
as many as ten years before failing. During their protracted declines, the failing firms
then engaged in extreme and vacillating strategic behaviors which the authors concluded
only aggravatedtheir conditions.
A central element of the downward spiral view of failure is that managers misperceive
events and behave erratically when under stress-failure induces more failure (Whetten
1980). The typical portrayal is of a once-capable management team falling victim to
stress and then engaging in flawed perceptions, constriction of information flows, and
erratic choices (Staw et al. 1981; Rodekohr 1974; Jonssen and Lundin 1977; Starbuck,
Greve, and Hedberg 1978; Weitzel and Jonssen 1989).
However, an alternative element of the downward spiral needs to be considered. It is
plausible that organizational failures occur under the direction of top management teams
(TMTs) that differ, or diverge, systematically in their composition from top teams of
successful, healthy organizations.Such "divergence"may reflectimbalanced or inadequate
expertise, inferior talent, or disadvantageous social structure within the failing teams.
Moreover, to the extent that organizational decline is a lengthy process, we can expect
that TMT compositional divergence becomes more pronounced, as during the downward
spiral the most mobile executives depart, scapegoating occurs, and resources shrink. That
is, already divergent teams may become even more so during decline. This paper em* Accepted by Richard M. Burton; received March 5, 1990. This paper has been with the authors 6 months
for 2 revisions.
1445
0025- 1909/92/38 10/ 1445$0 1.25
Copyright ? 1992, The Institute of Management Sciences
1446
DONALD C. HAMBRICK AND RICHARD A. D'AVENI
pirically explores these ideas, which, if borne out, will provide an important complement
to prior views that decline occurs because able executives falter under stress.
Conceptual Basis for the Study
Performance Implications of TMT Divergence
Considerable evidence suggests that strategic errorsand miscalculations are important
influences on organizational decline and failure (e.g., Starbuck et al. 1978; Hermann
1963; Argenti 1976). Less established is the possibility that such strategic errors stem
from the composition of the TMT. However, researchfrom multiple perspectivessupports
this premise.
Research has indicated that managerial characteristicsaffect strategic choices and performance, notwithstanding some researchto the contrary (e.g., Lieberson and O'Connor
1972). Support for the "upper echelons perspective" (Hambrick and Mason 1984) has
been observed in numerous studies, with executive characteristics found to correspond
with (for example): definitions of complex business problems (Dearborn and Simon
1958), organizationalinnovation (Hage and Dewar 1973), structure(Miller and Toulouse
1986), strategy (Boeker 1989), subsequent company growth (Eisenhardt and Schoonhoven 1990), and effectiveness in implementing specific types of strategies (Gupta and
Govindarajan 1984).
An important refinement of recent theory over early executive leadership theory is its
focus on the top management team (TMT) (roughly comparable to Cyert and March's
1963 concept of a dominant coalition), rather than only on the singular leader or CEO,
as the appropriate unit of analysis. The limited evidence as to whether the top person or
the entire top team is a better predictor of organizational outcomes clearly supports the
conclusion that the team has greater effects (Hage and Dewar 1973; Tushman, Virany,
and Romanelli 1985; Finkelstein 1988). In accord with this evidence, our focus in on
the top team rather than only on the CEO. As such, a substantial stream of research on
small groups supports the general contention that strategic errors can be traced in part
to team composition deficiencies. (See exhaustive reviews by Goodman, Ravlin and
Schminke 1987 and Gist, Locke, and Taylor 1987 for discussion of the influence of group
composition on performance.)
Additional evidence of a link between top team characteristics and strategic error
comes from the limited literature that has examined executive characteristicsspecifically
in a context of decline or failure. While this research has not established causality, the
implied view is that managerial deficiencies bring on or exacerbate decline/ failure. In a
study of British bankruptcies, Argenti (1976) found anecdotal evidence of several top
management deficiencies: one-man rule (autocracy), uninvolved board of directors, and
weak finance expertise. In a large-sampleanalysis, Miller and Friesen (1977) used business
cases and articles to study the characteristicsof successful and unsuccessful firms. Among
the four types of unsuccessful firms, two were characterized in part by power-hoarding
CEOs, and one by very weak CEOs.
Prior research on decline has not explicated the actual mechanism(s) by which team
composition affects performance. Generally implied, however, is that team deficiencies
give rise to information processing deficiencies, which in turn cause strategic errors.
Information processing deficiencies of various types could be expected: the quantity,
quality (e.g., richness, currency, accuracy), range of information processed (which environmental sectors are scanned, which functional areas are informationally mastered),
and exchange/dissemination of information within the team. TMTs that are compositionally flawed will experience such deficiencies in their information processing which
will cause strategic errors:failure to identify or gauge the seriousness of problems, failure
to identify opportunities on a timely basis, failure to monitor the implementation of
1447
TOP TEAM DETERIORATION & CORPORATE BANKRUPTCIES
Divergent TMT
Composition
Voluntary
Departures
For Better
Rewards
Voluntary
Departures
to Avoid
Stigma
Purposive
Aftempts
to Modify
Team
Information
Processing
goating
IcI
Strategic
Errors
Outward
Appearance
of Team
Deficiency
Stakeholder
Withdrawal
Poor Organizational
Performance
FIGURE1. The "Vicious Circle" of Top Team Divergence and Poor Performance.
plans, and so on (Rodekohr 1974; Aguilar 1967; Starbuck et al. 1978; Thomas and
McDaniel 1990).
However, a compositionally deficient TMT may affect performance in yet another
way. Namely, it is possible that TMT divergence, or deviance, will become visible to
critical external stakeholders, causing them to restrict their support for the organization
(Meyer and Rowan 1977). External exchange partners-e.g., suppliers, customers, creditors-may detect team inferiorities through first-hand experience. For example, as a
result of a deficient team, a firm'sexecutives may appearunknowledgeableor unimpressive
at meetings with security analysts or bankers. Even general impressions can create skepticism in key stakeholders. Such parties set or expect norms of appearance that the firm
must follow. When the firm violates those norms-say, by having a top team that does
not resemble a "normal" top team-stakeholders become unsettled and may search for
more conventional partners (Ashforth and Gibbs 1990).
In sum, support exists for the premise that TMT characteristics affect organizational
performance. If a firm's TMT diverges in its composition from that of a healthy firm,
two forces may bring on poor organizational performance, as shown on the right-hand
side of Figure 1: (1) information processing deficiencies will cause strategic errors, and
(2) the team's outward appearance of deficiency will cause stakeholders to withdraw.
TMT Implications of Organizational Decline
Not only is there a basis to believe that TMT divergence brings about or exacerbates
decline, but there is also a basis for expecting the opposite as well. That is, performance
decline may cause TMTs to diverge from the profiles of healthy firms. There are several
reasons for expecting such an effect.
Declining firms have limited resources for attracting and retaining executives (Altman
1983; Hambrick and D'Aveni 1988). They may have difficulty matching competitive
pay norms, which, due to extensive public reports, are well known to executives. At the
same time that resources are scarce, a set of forces cause considerable executive turnover. This turnover, known to occur in poorly performing firms (Wagner, Pfeffer, and
O'Reilly 1984), heightens the likelihood of compositional deterioration of the troubled
company's team.
1448
DONALD C. HAMBRICK AND RICHARD A. D'AVENI
Some of the expected turnover is due to voluntary departures.The most mobile, hence
often the most talented, executives will leave for jobs with better pay and more discretionary resources (Hirschman 1970; Finkelstein and Hambrick 1988). Some can be
expected to leave to avoid the stigma of potential failure (Sutton and Callahan 1987).
Some turnover will be induced by the firm itself. Attempts will be made to alter the
profile of the team to cope with the decline, possibly by hiring executives who have costcutting and financial expertise, but little operational or marketing expertise (e.g., Whitney
1987). Scapegoating will occur, with executives dismissed as a cleansing ritual, not necessarily because of their abilities (Gamson and Scotch 1964). In sum, it can be expected
that poor organizational performance may cause a firm's TMT to diverge from the profile
of a healthy firm's TMT, as shown on the left-hand side of Figure 1.
Multi-Period Downward Spiral of Large Bankruptcies
We have set forth two logics for expecting that declining firms will have TMTs that
differ from the TMTs of healthy firms. On the one hand, team divergence-flaws, peculiarities, deficiencies-can cause or aggravatedecline. On the other hand, organizational
decline can cause team divergence.
One need not pick one causal scenario over the other. They are not mutually exclusive.
And, herein lies the basis for our examination of TMT deterioration during decline. Not
only do we expect the TMTs of failing firms to differ from the TMTs of healthy firms,
but we expect those differences to become more pronounced as the firms approach bankruptcy. If, as Hambrick and D'Aveni (1988) found, failure is a long, protracted process
for large firms,then several "loops" in the downward spiralcould occur:poor performance,
TMT divergence, worse performance, greater TMT divergence, and so on.
An early snapshot of a failing firm's top team will reveal a profile different from that
of a healthy team, and a time-lapsed series of snapshots will reveal greater and greater
differences. This is not because the healthy team changes in any significant way but
because the troubled firm's team deteriorates: the initial divergence creates problems
(right-hand side of Figure 1) which lead to an even more divergent team (left-hand side
of Figure 1), and so on. Divergence indicates a difference, albeit an important, telling
difference, between failing teams and healthy teams; but the downward spiral, or "vicious
circle" (Masuch 1985) aptly describes the dynamics thought to occur: divergence is expected to increase over time (deterioration occurs), probably at an accelerating rate as
the end draws near for the bankrupts, and this team deterioration is both cause and effect
of organizational deterioration. These logics can be stated as propositions:
TMT DIVERGENCE. In the years before large firms fail, the composition of their
TMTs differsfrom the TMTs of matched survivors.
TMT DETERIORATION. TMT divergenceincreasesas thefailures approachbankruptcy.
ACCELERATING TMT DIVERGENCE.
TMT divergence increases at an increasing rate
as the failures approach bankruptcy.
TWO-WAY CAUSALITY. TMT deterioration
bothprecedesandfollowsorganizational
performance deterioration.
Selection of Team Characteristics to Study
While a general case can be made for expecting compositional differences in the TMTs
of failing and healthy organizations, it is not clear which specific team dimensions ought
to be studied for such diffierences.Prior research provides only limited guidance, since,
on the one hand, inquiries on small groups have focused on operational-level task
TOP TEAM DETERIORATION & CORPORATE BANKRUPTCIES
1449
teams, and, on the other hand, studies of top managers of failing organizations typically
have used qualitative data. Thus, while some hypotheses regardingspecific team attributes
might now be generated, our limited understanding of the phenomena suggests that an
exploratory approach is appropriate.
Available literature (discussed below) guides our attention to two major classes of top
team attributes as well as to specific dimensions under each:
(a) team resources-team size, outside directors, functional expertise, team compensation.
(b) team social structure-average tenure, tenure heterogeneity, CEO dominance.
We will now justify the TMT dimensions chosen for study, and review the (often
conflicting) findings about how they are associated with failure and decline. For the sake
of space, our discussion will highlight equivocalities only about the effects of the TMT
characteristics on decline. Equivocalities about the effects of decline on team characteristics, which will not be discussed, would add to the justification for an exploratory
approach.
Team Resources
The potential of a management team to make and implement adaptive decisions is in
part a function of the collective abilities of the individuals comprising the team. Although
no well-established gauges of executive resources exist, the literature suggests several
dimensions on which top teams of failing firms might usefully be examined.
Team Size. At a basic level, the resources available on a team result from how many
people are on it. Just as a sports team is at some disadvantage if it has fewer than the
allowed number of players on the field, so may an organization be at a disadvantage if
it has a smaller top management team than other firms in the same industry. However,
the evidence regarding group size and effectiveness is equivocal. Steiner (1972) argued
that group size is positively associated with effectiveness when the task is divisible and
additive, an apt characterization of top management work. Another review (Goodman,
Ravlin, and Argote 1986) indicates an inverted U-shaped relationship between group
size and effectiveness, with very small and very large groups having disadvantages. In the
context of failure, Daughen and Binzen (1971) considered the bloated top ranks of the
Penn CentralCorporationto be a major factor in its failure.Thus, team size is an important
feature of failing firms to examine, although an expected pattern cannot be set forth.
Outside Directors. In the publicly held firm, the team of senior officersis supplemented
by a set of external directors. Although not team members per se, outside directors
provide supplements to the team's knowledge base (Pfeffer and Salancik 1978). They
potentially provide additional inputs and perspectives, as well as linkages to external
parties that control the firm's access to resources (Pfeffer 1972; Vance 1983; Goodstein
and Boeker 1991). It is possible that failing firms have relatively few outside directors.
Conversely, outside directorswith divergent perspectivesmay politicize the governance
process (Mace 1971), thus diluting the effective leadership of the firm (Barnard 1938).
Or it may be that outside directors are ritualistic rubberstamps with no influence over
the firm's fate (Mace 1971; Whisler 1984). Overall, outside director representation
is a well-established dimension to study, but its association to corporate failure is not
yet clear.
FzunctionalExpertise. The mix of functional expertise represented on a management
team is an additional way of describingits capabilities.While differentstrategies(Hrebiniak
and Snow 1980) and environments (Pfeffer and Salancik 1978) may give rise to different
functional emphases in the upper ranks of organizations, one view is that the adequate
representation of core functional areas-those involving the actual design, production,
and marketing of the firm's goods or services-is of critical importance to firm health.
Hayes and Abernathy (1980) argued that experience in these areas ensures executives
1450
DONALD C. HAMBRICK AND RICHARD A. D'AVENI
with "hands-on" competences that such staff fields as accounting, finance, law, and personnel do not confer.
A different expectation about functional deficiencies of failing firms stems from the
qualitative research of Argenti (1976) and Ross and Kami (1973). They concluded that
a shortage of financial expertise characterized the top teams of the bankruptcies they
studied. They argued that this deficiency led to an inability to gauge the firm's difficulties,
excessive risk-taking, and an inability to deal with financial institutions. As with other
team dimensions, competing expectations can be set forth regardingthe role of functional
emphases in organizational failure.
Team Compensation. A final way of indirectly assessing the quality of a team is
through its compensation. Although the market for executive talent may not be perfectly
efficient, it is reasonable to expect that, after controlling for industry and firm size, there
is a correspondence between perceived executive caliber and pay (Marshall 1947; Becker
1964; Frank 1984). Executives may not switch firms over small differences in pay, but
those with superior demonstrated performance will experience a bidding-up for their
services; lesser executives will experience a lack of mobility and a bidding-down for their
services. We might expect failing firms to have low compensation levels which can be
taken as a rough indicator of inferior executive talent.
Here, again, a contrary case can be made. It could be argued that failing firms are
led by executives who bestow abusively high rewards upon themselves, siphoning resources from other uses and alienating employees and other stakeholders in the process
(Sorge 1984).
Team Social Strtuctulre
The ability of a team depends not only on the capabilities of its members but also on
its internal social structure(Gladstein 1984; Goodman et al. 1987). The speed and clarity
of information flows, the efficient division of complex responsibilities, and the motivation of members to contribute depend on the relational properties of the team. Failing
firms might be expected to have TMTs with social structures that diverge from those of
healthy firms.
Average Tenutre. The TMT's average tenure in the firm may indicate cohesion. Long
tenures reflect a self-selection by which only those who embrace certain norms and perspectives are willing or allowed to stay (Pfeffer 1983). Tenure in the firm confers socialization, shared experiences (Katz 1982), and minimizes interaction costs (Williamson
1975). Thus one line of reasoning would expect short tenures to be associated with
eventual failure. Alternatively, long tenures may induce a complacency and rigidifying
effect on team interaction (Katz 1982). Such was a conclusion of Daughen and Binzen
(1971) in their analysis of the Penn Central's collapse. Tenure is an important team
dimension to examine, but its association to corporate failure has not been established.
TenuireHeterogeneity. In addition to average tenure, the dispersion of tenures, particularly within the team itself, contributes to the social process. Members of a common
tenure cohort are likely to have similar outlooks (Wagner, Pfeffer and O'Reilly 1984).
Homogeneous teams have a single frame of reference, may be prone to "groupthink,"
and seal themselves off from portions of the environment (Janis 1972; Gladstein 1984).
In contrast, very heterogeneous groups may lack the necessary linkages and shared values
to function as an effective problem solving unit (Wagner et al. 1984). Team tenure
heterogeneity is thus an important dimension to examine in a study of corporate failure.
CEO Dom?inance. Possibly the most widely observed characteristic of failing top
management teams is the presence of dominant CEOs, or autocrats. Argenti (1976),
Miller and Friesen (1977), and Ross and Kami (1973) all found evidence of strongwilled, dominating, often egomaniacal chief executives at the helms of unsuccessful firms.
Such leaders may be wedded to the wisdom of their own views, may greatly discount or
TOP TEAM DETERIORATION & CORPORATE BANKRUPTCIES
1451
blunt the potential contributions of subordinate team members, and drive able subordinates away in frustration.
However, Miller and Friesen (1977) found that some of the unsuccessful firms they
studied were headed by very weak CEOs; and the literature on turnarounds certainly
seems to praise strong "take-charge"leadership of troubled organizations (e.g., Whitney
1987). Thus, as with all the dimensions to be examined, CEO dominance appears to be
pertinent to the study of organizational failure, but its role is not yet understood.
In sum, prior literature allows us to identify several dimensions of TMT resources and
social structure which may have links to organizational decline. In most cases, however,
the directions of those links are unclear or disputable. Certainly, the sequence in which
these team dimensions may influence decline, or be influenced by decline, is unknown.
Methodology
Sample
Drawing from the population of all publicly-traded manufacturing, retail, and transportation firms filing either Chapter X or XI bankruptcy petitions during 1972-1982
(identified through stock exchange delistingsand SEC records), the sample of bankruptcies
was restricted to all such firms listed in the Dun and Bradstreet Directory of Corporate
Managements-the major source of team data. We further excluded any companies
filing for bankruptcy to escape contractual obligations or to avoid takeover.
For each bankrupt, a matched survivor was identified, according to similarity in size
and product/ markets five years before the failure (t -5 ). The matching process involved
three judges in a three-stage process. First, a researchassistant identified a comprehensive
set (ranging between 5 and 20) of potential matches for each bankruptcy. The three
judges then worked independently from archival data to select their first and second
choices for closest match, with a high level of agreement on 53 of the cases. The judges
then reached a consensus on four of the disputed cases but concluded that the other five
bankrupts had no satisfactory matches. Thus, the final number of matched pairs was 57,
from the following sectors: 33 in manufacturing, 16 in retailing, and 8 in transportation.
The mean sales figures for the 114 firms in t - 5 was $404 million and their mean age
56 years, indicating that these generally were well-established firms.
Data Sources and Measures
All data were gathered from secondary sources-the Dun and Bradstreet Directory of
Corporate Managements and corporate proxy statements. Treating t as the year of a
firm's bankruptcy, data were gathered for the years t - 5 through t - 1. Data on the
bankrupt firms for year t were often unavailable, and the Dun and Bradstreet directory
was not published prior to 1967 to allow earlier examination. Proxy availability was a
problem as well. Despite the use of both regional and national SEC collections, a significant
number of proxies (particularly for the bankrupt firms) were not available, thus reducing
the sample size for two of the measures derived from proxies. This will be discussed later
in the context of analysis.
Team Size. The number of officers (vice presidents and above) of the firm provides
the measure of top management team size. While titles and ranks only imprecisely define
team boundaries, they are all that are available in a retrospective study such as this. More
restrictive team definitions-such as officers above vice president or inside board members-often yielded only two- or three-personteams for this sample, too small to construct
reliable, stable team indicators. As defined, average team size in t - 5 was ten people.
Outside Board Members. The number of outside board members was defined as the
total number of board members who were not officers of the firm. No attempt was made
to examine other characteristics of outside members or to treat former officers on the
1452
DONALD C. HAMBRICK AND RICHARD A. D'AVENI
board as insiders, although these are useful refinements for some studies. Our intent was
to capture broadly the quantity of informational and boundary spanning resources that
formally supplemented the officer team.
FutnctionalExpertise. In line with Hayes and Abernathy (1980) the percentage of
the team whose dominant functional tracks were in "core" functions-marketing/ sales,
operations/production, researchand development-was calculated. A person's dominant
functional track was judged as the one in which he/she had spent more career time than
any other. The relatively few individuals whose titles for major time periods were not
clearly suggestive, or whose careers involved only short periods in several functions were
coded as "no dominant functional track." Generally, though, the Dun and Bradstreet
biographical entries made the coding process straightforward.Using the same data source
and coding criteria, Barbosa ( 1985 ) found in a mail survey that 82%of a random sample
of corporate officers identified their own dominant functional track (from among eight
categories) as the same one he had identified.
Team Compensation. Compensation data were drawn from proxies. Unfortunately,
over the period of interest, SEC requirements for reporting compensation data changed
several times, making some preferredindices impossible to obtain. The chosen approach
was based on the only indicator of the team's compensation pool available in every year
of interest: total cash compensation paid to all officers and outside directors.I
To develop an average (per person) compensation figure, we made two refinements.
First, we excluded the chief executive (from the denominator) and his pay (from the
numerator) in calculating the per person average, on the grounds that CEOs often coopt
boards and essentially set their own pay (e.g., Mace 1971). The inclusion of CEO pay
thus could rule out any possible interpretations about market values and capabilities of
the teams. (As will be seen with a measure described below, we do not ignore entirely
CEO pay in this study.) The second refinement was to adjust the data for inflation, using
the Consumer Price Index, to allow inter-year comparability. In sum, the measure is
average (inflation-adjusted) cash compensation for officersand directorsexcept the CEO.
Tenure in the Firm. This was calculated as the mean number of years in the firm for
all officers.
TenureHeterogeneity. Tenure heterogeneitywas calculated as the variance of member
tenures in the firm, divided by the mean tenure in the firm. This measure captures the
degree of diversity in members' exposure to the firm's values, history, and socialization
process;it basically reflectswhether team members belong to the same or differentcohorts
in the firm.
CEO Dominance. To our knowledge, archivally-derived quantitative indicators of
CEO dominance have not been attempted in prior research. Our measure is the ratio of
the CEO's cash compensation to that of the average compensation for other members
of the team (as defined earlier). Assuming that CEOs have substantial influence over
their own pay and nearly total influence over their subordinates' pay (Mace 1971; Williamson 1963), this measure reflects the gap between the CEO's assessment of his own
worth to the firm and his assessment of others' worth. As a replicable measure, we believe
' The chief problem with this total is that officersand outside directorsare paid in entirelydifferentmagnitudes,
often a ratio of five or ten to one, respectively. Taking an average compensation figure for all these individuals
results in a number far higher than an outside director's pay and far lower than an officer's pay. This would
clearly be a problem in our study if bankrupts and survivors had different ratios of officers to outside directors.
Fortunately, the ratios for the two groups are essentially identical for each year of the study and, interestingly,
do not vary over the five years. Also helping the interpretabilityof this composite measure is that outside director
pay, while varying somewhat across firms, is relatively much more standardizedthan officer pay; and each firm
has far more officers than outside directors. Therefore, any differences between bankrupts and survivors on our
measure can be attributed primarily, albeit not exclusively, to pay for officers-our definition of top team
members.
TOP TEAM DETERIORATION & CORPORATE BANKRUPTCIES
1453
this pay ratio may be a telling indicator of social/psychological distance between the
CEO and others on the team, and hence an appropriate measure of CEO dominance.
Data Analysis
Since a main interest was in how the bankrupts and survivors differed on team dimensions, we examined t-tests for differences in yearly means, and MANOVA statistics
for overall differences. We conducted logistical regression (LOGIT) for each year to
assess the independent and combined associations of the variableswith eventual corporate
failure. We also calculated 5-year least-squares slopes for each variable for each firm and
then examined the differencesin the slopes of bankruptsand survivors,in order to obseive
any systematic differences in deterioration rates of team attributes. We also conducted
a test for accelerating deterioration of team attributes, as well as a limited test of causal
direction by examining cross-lagged correlations between annual changes in team composition and changes in profitability. These latter two analyses will be discussed in detail below.
Results
Annual TMT Differences
UnivariateFindings. Table 1 reportsthe characteristicsof the bankrupts'and survivors'
top teams over the last five years of the bankrupts' existence, including indications of
significant differences. By MANOVA, the overall set of variables reveal comprehensive
team differences between the bankrupts and survivors for the years t - 4, t - 3, t - 2,
and t - 1. (When the two variables derived from proxy statements are excluded to allow
examination of a larger sample, the MANOVA statistic is significant for t - 3, t - 2,
and t- 1.)
The earliest differences occurred among the social structure variables, so it may be
reasonable to note them first. The bankrupts scored significantly higher on CEO Dominance for t - 5, t - 4, and t - 3, in line with prior observations about the role of
autocracy in corporatefailure. The bankrupts'TMTs had significantlyshorterfirm tenures
for every year examined, no doubt reflecting the high turnover that occurs in troubled
firms. There were no differences in the means for tenure heterogeneity. However, bankrupts had significantlygreaterstandarddeviations in t - 5 and t - 4 than did the survivors,
indicating that they tended to have extreme degrees of tenure similarity-some very
homogeneous and some very heterogeneous.
Among the TMT resourcevariables,the earliestsignificantdifferencebetween bankrupts
and surviviors was found for team compensation. From t - 4 on, team compensation
in the failing firms was substantially (almost one-third) lower than in the survivor firms.
The percentage of the team with core function expertise (in marketing/sales, operations/
production, and R&D) was lower for bankruptsin every year examined, and significantly
so in t - 3, t - 2, and t - 1. Finally, there was a persistent tendency for the failing firms
to have smaller teams and fewer outside directors than the survivor firms, but these
differences were only significant in t - 1, when both of these indicators of team resources
showed sharp drops for the failing firms.
AMultivariate
Findings. The LOGIT analysis generally reaffirmedthe univariate tests;
however, some differences existed, as shown in Table 2.
Before reporting these results, it is important to make some analytic clarifications.
First, the LOGIT results reported in Table 2 include the two proxy-derived variablesTeam Compensation and CEO Dominance-with accordingly smaller samples because
of unavailable proxy statements (discussed earlier). When the LOGITs were run without
those two variables-on the full sample of 114 firms-the results for all the other variables
were highly consistent with those reported here for the reduced sample. Second, to test
1454
DONALD C. HAMBRICK AND RICHARD A. D'AVENI
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TOP TEAM DETERIORATION & CORPORATE BANKRUPTCIES
1455
TABLE 2
LOGITAnalysis on AnnutalTMT Data, with Suirvival(0) vs. Bankruptcy(1) as Dependent Variable?
t- 5
Variable
Intercept
t- 4
t- 3
t- 2
t- 1
5.49***
(1.62)
5.15***
(1.83)
1.20
(1.69)
2.30
(1.61)
3.82**
(1.61)
0.01
(0.07)
-0.17
(0.1I1)
-0.01
(0.02)
-0.02
(0.03)
0.05
(0.07)
-0.23***
(0.1I1)
-0.01
0.02
-0.05*
0.03
-0.01
0.06
-0.29***
(0.1I1)
-0.01
(0.02)
-0.04*
(0.02)
-0.07
(0.06)
-0.29***
(0.1I1)
-0.02*
(0.01)
-0.07**
(0.03)
-0.19***
(0.10)
-0.63***
(0.20)
-0.04**
(0.02)
-0.08**
(0.03)
-0.04
(0.05)
0.13
(0.23)
0.27
(0.20)
0.00
66
-0. 10**
(0.05)
0.28
(0.25)
0.32*
(0.19)
0.24**
78
-0.09*
(0.05)
-0.14
(0.23)
0.38*
(0.25)
0.29***
86
-0.1 3**
(0.06)
0.08
(0.21)
-0.07
(0.07)
0.35***
80
-0.02
(0.07)
-0.04
(0.30)
0.03
(0.12)
0.39***
59
TMT Resolirces
Team Size
Outside Directors
Core Function Expertise
Team Compensation
TMT Social Structulre
Average Firm Tenure
Firm Tenure Heterogeneity
CEO Dominance
R
n
o
Betas reported, with standard errors in parentheses.
* p -
0. 10.
**p - 0.05.
*** p
0.01.
for the extreme degrees of tenure heterogeneity observed in the univariate results, we
added a squared term of this measure in some runs, none with any effect. For the sake
of parsimony, Table 2 only includes tenure heterogeneity, but not its squared term.
The overall strength and significance of the LOGIT model parallels the MANOVA
results in Table 1. In t - 5, the team variables showed essentially no correspondence
with the eventual fates of the firms. However, the set of team variablesdifferedsignificantly
for bankrupts and survivors for the years t - 4 through t - 1, with explained variance
increasing steadily year by year.
Turning to the individual variables, CEO Dominance showed essentially the same
evidence of autocracy as was seen from the univariates: a significant positive association
with eventual bankruptcy in t - 4 and t - 3. Also in line with univariate results, team
tenures were consistently shorter in failing than in surviving firms, significantly so in
t
-
4, t
-
3, and t
-
2.
As with the univariate analysis, the bankrupts showed significantly lower team compensation levels from t - 4 on, possibly indicating inferior managerial talent. They also
had lower levels of core function expertise on their teams in their final years (t - 2 and
t - 1). Consistent with the earlier t-tests, team size of the failing firms was abruptly
smaller than the survivors' firms in t - 1, suggesting a restriction in the sheer quality of
managerial resources available. Finally, compared to the univariate tests, the LOGIT
analysis revealed fewer outside directors-potential boundary spanning and legitimating
resources-in the bankrupts than in the survivors, from t - 4 on. Overall, then, the
profiles of the bankrupt teams clearly diverged from the survivor teams.
1456
DONALD C. HAMBRICK AND RICHARD A. D'AVENI
Slopes (t - 5 to t-
TABLE 3
1) of TMT Characteristics,Bankrulptsand Survivors
5-Year Slope
TMT Resources
Team Size
Outside Directors
Core Function Expertise
Team Compensation
Mean
s.d.
S
B
S
B
S
B
S
B
0.27
-0.06*
0.17
-0. 14***
1.36
-0.66**
-0.80
-0.41
1.13
1.03
0.45
0.60
4.37
5.78
3.42
4.33
S
B
S
B
S
B
-0.03
-0.48*
-0.04
-0.06
0.21
-0.03
1.09
1.61
0.88
0.79
0.96
0.99
Team Social Structure
Average Firm Tenure
Firm Tenure Heterogeneity
CEO Dominance
*
P
0. 10.
** p
0. 05.
*** p - 0.01 (by t-test).
Team Deterioration
The rise in explanatory power of the team variables between t - 5 and t - 1 can be
seen in the increases of the annual MANOVA Wilks' criterion (Table 1) and the LOGIT
R statistic (Table 2). At a general level, then, we have evidence that the differences
between bankrupts' and survivors' top team characteristicsbecame more pronounced as
the failing firms approached their ends-that team "deterioration" occurred.
However, a more pointed analysis of team deterioration was conducted. Specifically,
using the five years of available data for each firm, we calculated that firm's 5-year leastsquared slope for each variable. We then examined the differences in the average slopes
for bankrupts and survivors. As Table 3 indicates, the five-year slopes for four of the
team variables-team size, outside directors, core function expertise, and average firm
tenure-were significantly more negative for bankrupts than for survivors. The failing
firms experienced a general relative shrinkage or diminution in these top team characteristics over the final years of their existence. Therefore, the data strongly suggest that
the TMTs of bankrupts and survivors not only differ during the last several years of the
bankrupts' lives, but also that those differences become substantially greater as the end
draws near. That is, corporate degeneration is accompanied by top team degeneration.
Accelerating Team Deterioration
We also explored the proposition that failing firms experience top team deterioration
at an accelerating rate during their final years. This idea follows the premise that the
downward spiralgains momentum, as poor performancebegets team deterioration,which
in turn causes even worse performance, and so on. If so, then deterioration in the failing
firm is nonlinear.
To conduct the acceleration test, we used pooled regression analysis of the bankruptcy
sample, in which the dependent variable was the annual change in the variable of interest
1457
TOP TEAM DETERIORATION & CORPORATE BANKRUPTCIES
TABLE 4
and ROAcas CaFutnctioniof Time Prior to Bankrulwvtc?i?
Multiple Regrcessio;i:Cliange in TAIT ChatacicrtesistUccs
Independent Variables
Start-of-Period
Value
t-4
To t-3
Dummy
t-3
To t-2
Dummy
t-2Tot-
Dummy
1
R2
Del)endc't V'1ariables
Annual Change in:
ROA
Team Size
Outside Directors
Core Function Expertise
Team Compensation
(n = 132)
Average Team Tenure
Firm Tenure
Heterogeneity
CEO Dominance
(n= 132)
-2.16
(2.26)
0.40
(0.49)
-0.10
(0.26)
1.38
(1.65)
0.14
(1.54)
-0.09
(0.60)
-7.02
(4.82)
-0.43
(0.47)
-0.75**
(0.10)
-0.1 1***
(0.03)
-0.13***
(0.03)
-0.03
(0.03)
-0.199***
(0.06)
-0.08***
(0.03)
-0.11 ***
(0.03)
-0.44***
(0.09)
-8.53***
(2.26)
0.19
(0.49)
-0.28
(0.26)
0.13
(1.65)
0.15
(1.57)
0.49
(0.61)
0.88
(4.81)
-0.72
(0.48)
-14.07***
(2.37)
-1.14***
(0.49)
-0.40*
(0.24)
1.32
(1.65)
-1.23
(1.82)
0.39
(0.61)
0.68
(4.83)
-0.15
(0.55)
0.26***
0.1 1***
0.07***
0.01
0.08**
0.04**
0.07***
0.20***
n = 228 (except where noted).
o
Beta coefficients reported; standard errors in parentheses.
* p < 0.10.
** p < 0.05.
*** p < 0.01.
(say, Team Size) and the independent variables were three dummies for the changeperiods t -4
to t
-
3, t
-
3 to t
-
2, and t
-
2 to t -
1, as well as the value of the
variable of interest at the beginning of each change-period (to control for regression to
the mean). Since the change-period t - 5 to t - 4 represents the base case, significant
coefficients for any of the dummy variables indicate that the changes in those subsequent
years were significantly different from the changes between t - 5 and t - 4. Attempts to
examine differences strictly between adjacent years' changes did not yield significant
results. Table 4 reports the results of the analysis.
For the sake of reference, change in return on assets (ROA) was included in the
analysis, and a pattern of its greatly accelerating deterioration was observed. In addition,
accelerating deterioration of two TMT variables-Team Size and Outside Directorswas observed for the final change-period studied (t
-
2 to t -
1). As bankruptcy ap-
proached, the sheer quantity of managerial resources available to the failing firms-both
on their teams and as adjuncts on their boards-dropped at a rate exceeding earlier
declines.
Although the acceleration of team deteriorationdid not occur for a wide set of variables,
it did occur for two of central importance. Thus, there is some evidence that deterioration
"snowballs," as economic shortcomings and team shortcomings aggravate each other
in turn.
A Limited Test of Causality
Our analysis so far allows no conclusions about causal direction. Does a deteriorating
team cause performance to decline, or does declining performance lead to team deteri-
1458
DONALD C. HAMBRICK AND RICHARD A. D'AVENI
oration? Available literature supports both possibilities. In order to conduct a limited
test of causality, we examined cross-laggedcorrelations between annual changes in team
composition of the bankrupts (relative to the matched survivors) and changes in their
profitability (return on assets; also relative to matched survivors).
For example, to test for the possibility that TMT change leads to performance change,
we examined the correlation between (a) the bankrupts' relative changes in team composition from the prior year to the focal year and (b) the bankrupts' relative changes in
profitability from the focal year to the subsequent year. Say, for instance, a company
had a TMT with Core Function Expertise of 40 in t - 3; and dropped to 30 in t - 2;
while its matched survivor had Core Function Expertise of 45 for both t - 3 and t - 2.
The bankrupt had a net relative change of -10 in this TMT characteristic between
t - 3 and t - 2. If the company also had a decline in its profitability (relative to its
matched survivor) between t - 2 and t - 1, we would have data contributing to a positive
correlation coefficient (TMT changes and subsequent performance changes covary in
the same direction), in support of the conclusion that TMT change leads to (or at least
precedes) performance change. This lagged correlational analysis was conducted for each
annual change on which we had data.
Conversely, to examine the possibility that performance changes bring about (or precede) TMT changes, the lagging structurewas reversed. Changes in relative performance
(say from t - 4 to t - 3) were examined for their correlation with subsequent change in
TMT composition (from t - 3 to t - 2).
This analysis is relatively stringent. For statistical significance to be observed, a change
in one variable must be associated with a change in another variable exactly one year
later. More instantaneous effects, as well as delayed effects, will be masked by such an
analysis. More elaborate multi-period lagging was precluded because of the relatively few
years for which we had data. Because of the turbulence of the bankrupts in their final
years, inter-period relationships were too unstable to allow pooling data over multiple
years. As a result, methods requiring larger samples, such as LISREL, were not possible.
Overall, then, these results must be taken only as suggestive.
As presented in Table 5, ten of the lagged correlation coefficients were significant at
least at the 0.10 level (seven at the 0.05 level), twice as many as would be expected by
chance. Of the ten indications of significance, four suggest that "performance change
precedes team change." These include selective indications that drops in relative profitability (to take the negative view befitting the sample) are followed a year later by
decreases in the number of outside directors, declines in team compensation, declines in
tenure, and increases in tenure heterogeneity. As will be discussed below, these results
are fully in line with the phenomena thought to occur on the left-hand side of the "Vicious
Circle" portrayal in Figure 1.
As well, however, six indications of significance in Table 5 suggest that "team change
precedes performance change." Specifically, there are selective indications that drops in
relative performance tend to follow these team changes: decreases in compensation, decreases in team size, decreases in the number of outside directors, increases in team
heterogeneity, and, in one (early) case, decreases in core function expertise, while in
another (later) case, increases in core function expertise. These results, while only partial
and suggestive, shed light on some of the specific forces that propel the right-hand side
of Figure 1 (to be discussed below).
Because of the limitations expressed above, it is inappropriate to belabor the results
from this analysis. Rather, our overall interpretation is that a general model of two-way
causality is most promising: To some extent, team deterioration causes performance
deterioration; and, to some extent, performance deterioration affects team composition.
The view of large bankruptcies as "downward spirals" (Hambrick and D'Aveni 1988)
or as "vicious circles" (Masuch 1985) is a potentially fruitful avenue of theory devel-
1459
TOP TEAM DETERIORATION & CORPORATE BANKRUPTCIES
TABLE 5
BetwveenRelaitiveAnnital Changes in TA'ITChlracteristics and Profitabilit) of Failing Firms,
LaiggedCorrelacitions
Correlations Between Relative Change in ROA
(from Prior Year to Focal Year) and Relative
Change in Subsequent TMT Characteristics
(from Focal to SuLbsequentYear)
Correlations BetweeniRelative Clhangein TMT
Clharacteristics(fiom Prior Year to Focal Year)
and Relative Chanigeill SuLbsequLent
ROA
(from Focal to SubsequLenit
Year)
("ProfitabilityChanges Precede Team Chaniges")
("Team Changes Precede ProfitabilityChaniges")
Focal Year
Focal Year
TMT Characteristics
I- 5
1- 4
Team Size
Outside Directors
Core Function Expertise
Team Compensation
Average Firm Tenure
Firm Tenure Heterogeneity
CEO Dominance
0.08
-0.01
0.01
0.22
0.09
-0.30***
0.14
0.08
0.22*
0.03
0.34*
0.05
-0.13
0.09
- 3
0.05
-0.05
-0.16
0.19
0.38***
0.18
0.15
i- 2
0.07
-0.04
0.15
0.24
-0.02
-0.06
0.29
-5'
-
1- 4
0.08
-0.06
0.31**
0.51**
-0.07
-0.28**
0.04
- 3
0.12
0.07
-0.20
0.24
0.15
0.07
-0.06
-2
0.22* 2
0.4 1***
-0.32**
0.12
-0.06
-0.13
-0.18
n = 144, except for Team Composition and CEO Dominance (same as shown oniTable 1).
' TMT data were iiot collected for I - 6, so correlations with I - 5 performance were inotavailable.
2
Ilustrative Interpretation:Change in Team Size of bankrupts (relative to change in Team Size of matched survivors) between I - 3 and
t - 2 was positively correlated with change in ROA (relative to matched survivors) between t - 2 and 1 - 1. Increases in relative Team Size
were associated with subsequently higher ROA; decreases in team size were associated with subsequently lower ROA.
opment. Our evidence suggests that both causal directions need elaboration and exploration.
Discussion
The results strongly suggest that deterioration of the top management team is a central
part of the downward spiral of large corporate failures. Not only did the failing firms
show significant annual, or cross-sectional, divergences (relative to survivors) on several
indicators of TMT composition, but those divergences also became more pronounced,
showing deterioration, over the last five years of the bankrupts' lives. On a limited basis,
the divergences grew at an increasing rate, suggesting that the failing firms deteriorated
at a nonlinear, accelerating rate.
These findings provide an important complement to prior research which has emphasized the social and psychological debilitation of a given group of managers when
put under great stress. While it is likely that able managers lose some of their powers of
judgment in situations of decline, it now appears that the basic composition of the management team must come into question as well.
Timing and Sequence of Team Deterioration
Our results not only support a general conclusion about TMT divergence, but they
also allow some preliminary observations about the timing and sequence of characteristics
comprising the downward spiral, as summarized in Figure 2. The earliest role for team
characteristics in the downward spiral seems to be as effects of decline rather than as
causes. We say this because the economic performance of our sample of bankrupts was
significantly below the performance of the survivors as early as t - 10 (as reported in
Hambrick and D'Aveni 1988); yet, as seen here, the top teams of bankruptsand survivors
did not differ systematically until t - 4 on the dimensions examined.
However, even in t - 5, preliminary signs of team divergence, particularly in their
social structures, were emerging for the bankrupts. In the univariate results, they scored
high on CEO dominance, in line with prior research on autocrats as causal figures in
1460
DONALD C. HAMBRICK AND RICHARD A. D'AVENI
Deficient
Organizational
Performance
Divergent TMT Social Structure
* CEO Autocrat
team
* Short-tenure
* Extreme tenure homogeneity
or heterogeneityI
|Accelerating
Deterioration
Marginal
Existence
(t-5 to t-3)
of Performance|
Deterioration
of TMT Resources
Accelerating
* Shrinking team size
* Fewer outside directors
* Less core function expertise
levels
* Lower compensation
Death
Struggle
(t-2 to t)
Organizational
Failure
FIGURE2. Prevailing Sequence of TMT Deterioration in Large Bankruptcies.
corporate failure. The teams of the bankrupts also had low average tenure, reflecting
turnover due to their poor performances. They were extreme in their amounts of tenure
heterogeneity-some very homogeneous and some very heterogeneous-possibly revealing some instances of recent wholesale team replacement (homogeneous), some very
long-standing teams (homogeneous), and some teams that were schismatic combinations
of very long-tenured and very short-tenured members (heterogeneous). Thus, while the
bankrupts did not have fundamentally different teams than the survivors in t - 5, they
did show early signs of diverging from the profile of healthy firms' teams.
In the years t - 4 and t - 3, a period of economic breakeven or "marginal existence"
for the failing firms (Hambrick and D'Aveni 1988), their top teams differedsystematically
from those of the survivors.The specific differenceswere as follows (from LOGIT results):
fewer outside directors, lower team compensation, shorter tenures, and greater CEO
dominance. Some signs of extreme tenure homogeneity and heterogeneity continued to
exist. In the years t - 4 and t - 3 it is clear that the deterioration of the failing teams is
underway. An autocratic CEO, limited resources for rewards, and the possible stigma of
failure may combine to drive out the most marketable executives (who, since TMT size
is not shrinking at this stage, are probably replaced by less able executives); similarly,
outside directors (who can be sources of expertise, external resources, and legitimacy)
depart and tend not to be replaced.
Finally, in the "death struggle"phase of the downward spiral, from t - 2 on (Hambrick
and D'Aveni 1988), team deficiencies of the failing firms become more pronounced. At
this stage, however, the deficiencies tend to be predominantly in the characteristics of
the team resources rather than in team social structure. Specifically, the bankrupt teams
were smaller, supported by fewer outside directors, had less core function expertise, and
greatly lower compensation than the survivor teams. The stigma of failure is imminent,
and resourcesfor securingmanagerialtalent are very limited. Executiveswith core function
TOP TEAM DETERIORATION & CORPORATE BANKRUPTCIES
1461
expertise are departing and not being replaced; instead, the team consists disproportionately of executives from "noncore" areas, such as law and finance, who probably are
expected to help cope with the most glaring exigencies of failure but who may not be
equipped to correct the firm as an operating system of inputs, throughputs, and outputs.
By this point, the CEO autocrats are no longer evident, possibly having been forced out
or throttled, either by the board or by internal revolt.
In this final stage, the tendency is toward complete disintegration of the team. There
are accelerating declines in the size of the team and the number of outsiders on the
board. Unless the disintegration can be arrested, there may be little hope for the firm. In
fact, it may be that creditors throw the firm into bankruptcy precisely because its top
team is so visibly depleted and deviant from the profile of a healthy team. That is,
bankruptcy may be thought of as a sanction imposed to remove control of a firm from
a management team which itself has lost all appearance of survivability.
Organization Decline as Cause of Team Deterioration
Our results indicate that failing firms not only had divergent top teams in their last
years, but that the divergences became more pronounced as the failingfirms approached
bankruptcy. Four major areas of team deterioration were observed: shorter tenures,
dwindling core function expertise, shrinking team size, and fewer outside directors.
Moreover, the latter two forms of deterioration occurred at an accelerating rate. From
prior theory and research, we were able earlier to posit the mechanisms that would bring
about such deterioration in the top teams of declining firms: voluntary departures for
better rewards, voluntary departures to avoid stigma, purposive attempts to modify the
team, and scapegoating. These forces were shown on the left-hand side of Figure 1,
representingone-half of the vicious circle that occurs between divergentteam composition
and organizational decline. We will now discuss how .these forces may lie behind the
particular forms of team deterioration observed.
The average tenure of the bankrupt teams, already shorter than the survivors in
t - 5, declined monotonically from t - 5 to t - 1. This drop primarily signals a high,
and accelerating,turnover rate in the declining firms. The full range of causal mechanisms
can be drawn upon to explain this well-known tendency in troubled organizations. First,
voluntary departures for better rewards and to avoid the possible stigma of failure occur
(Rosen 1981; Sutton and Callahan 1987). Unfortunately for the troubled firm, two
factors work in tandem to cause the highest quality executives to be the ones most likely
to leave: (1) the firm is in such poor condition that the best executives are not being
rewarded as well as they might elsewhere (moreover, since pay for senior officers of
publicly held firms is widely reported, executives have relatively precise gauges of rewards
available elsewhere); (2) the best executives have the greatest appeal to other employers
and hence are most likely to have attractive alternatives elsewhere. These two factors
coincide with Hirschman's (1970) argument about who will exit most promptly from a
declining organization: those who are alert and discerning, and who have the best options
elsewhere.
The corporation may instigate executive turnover, too. The board or the CEO may
undertake purposive attempts to alter the profile of the team, in line with new strategic
thrusts, or to deal with the financial or operational complications of decline. In fact, the
widely vacillating strategies of declining firms (as reported in Hambrick and D'Aveni
1988) may help to propel executive turnover, as these companies continually try to
reconfigure their top teams to fit their ever-shifting directions. Boards and CEOs also
cause turnover by engaging in ritualistic scapegoating as a way to distance themselves
from the supposed sources of decline and to signal that they are taking actions to deal
with the organization's troubles (Gamson and Scotch 1964).
The second form of team deterioration-dwindling core function expertise-is a rel-
1462
DONALD C. HAMBRICK AND RICHARD A. D'AVENI
atively new finding in the study of decline, and therefore our explanation is particularly
speculative. However, we believe that, under conditions of decline, executives with expertise in core functions tend to be replaced by executives whose backgrounds seem to
better allow them to deal with the most pressingproblems of decline-often legal, financial,
and control/accounting problems (Pfeffer and Salancik 1978). Particularlyto the extent
that troubled firms engage in a threat-rigidity response of tighter control (Staw et al.
1981), we can expect that they would add team members with accounting/ control backgrounds and remove members who prefer decentralization and loose control (perhaps
marketing and R&D). Additionally, executives in core areas-particularly production
and sales-are vulnerableto scapegoatingbecause their outputs are relativelyquantifiable.
When their "numbers" look bad, they are likely to be dismissed, regardless of the real
source of the company's problems (Thompson 1967).
The third form of team deterioration observed was a decline in the number of outside
directors. Since many outsiders serve on boards primarily to establish business contacts
and to achieve status, it is reasonable to expect that they will be particularly sensitive to
the stigma associated with decline and will readily depart as conditions worsen (Mace
1971; Whisler 1984). In addition, under conditions of stress, boards and management
have been found to develop schisms (often over the CEO's performance), and a common
result is for board members to be asked to resign-qualifying either as a purposive attempt
to modify the board or as scapegoating (Mace 1971) .
The final form of deterioration we found was in the shrinkage of executive teams as
failing firms traversed their final years. Even though the five-year slope for team size was
more negative for bankrupt firms than for survivor firms (Table 3), it was only in t - 1
that the actual size of the bankrupt teams shrank appreciably (Table 1 and Table 4).
This suggests that up until t - 1, departing executives were generally replaced (probably
by more and more inferior executives); but finally the resources of the firm were so
depleted that it could not afford to sustain its customary team size, and the firm's reputation was so tarnished that it could not attract even nominally qualified talent.
Overall, then, we have a portrayal of top management teams unraveling during corporate decline. Voluntary departures, often of the best people, occur. Scapegoating and
purposive replacements occur, adding to the "revolving door" syndrome. Since resources
are limited and the company's reputation is blemished, it is completely to be expected
that replacements will be relatively low caliber. Moreover, one could expect that such
compositional changes would bring about a severely strained social structure in ways
that were not measured in this study.
How Team Divergence May Aggravate Decline: Two Perspectives
Earlierwe reviewed prior researchpositing performance implications of top team composition, arguing that there are two major ways in which such divergences may impair
the firm's health: (1) information processing deficiencies which cause strategic error, and
(2) the team's outward appearance of deficiency. These are portrayed on the right-hand
side of the "vicious circle" portrayed in Figure 1.
We do not have any direct data on the internal or external processes at work in these
firms, so any views of the two major effects of team divergence must be taken as speculative. As Pfeffer (1983) points out, it is useful to theorize how demographic variables
may influence outcome variables, even if the intervening process ("how") factors are
not directly discernible.
Some illustrative information processing deficiencies may be expected to arise from
the team composition deficiencies observed in the failing firms. For example, the presence
of an autocratic CEO can be expected to impair the quality of information processed,
since other team members tend to be weak "yes men"; exchange of information is hampered by the social distance between the CEO and the rest of the team, as well as by the
TOP TEAM DETERIORATION & CORPORATE BANKRUPTCIES
1463
penalties for reporting information or ideas that run counter to those preferred by the
autocrat (Miller and Friesen 1977). A short-tenured team may be limited in its quality
of information about internal matters (Kotter 1982), and it may have poor information
exchange capabilities since it may not be a well-established social unit (Katz 1982).
Limited core function expertise signifies an imbalance of the range of information processed, away from those areas that deal with the tangible value-creating system of the
organization: marketing/sales, operations, research and development (Hayes and Abernathy 1980). A small team size negatively affects the amount of information processed
(Steiner 1972) (although it may positively affect information exchange). Finally, a team
supported by few outside directors is at a relative disadvantage in the overall amount of
information it has access to, particularlyabout external matters-resources, opportunities,
threats, and stakeholder expectations (Pfeffer and Salancik 1978; Mace 1971; Pearce and
Zahra 1991). Overall, then, team deficiencies can be expected to lead to information
processing deficiencies, in turn to strategic errors, and, in turn, to poor performance.
Beyond the harmful effects team divergences may have on strategic decisions is the
likelihood that the divergence, or deviance, will become visible to critical external stakeholders, causing them to withdraw or restrict their support for the organization.
External exchange partnersmay detect team inferioritiesthrough first-handexperience.
For example, as a result of the team divergences we have documented, the failing firm's
executives may appear unimpressive in dealings with external parties. Because of rampant
executive turnover, and even a decline in the number of executives, critical suppliers
and customers may feel that they are not being adequately courted or attended to. Major
trade shows may go unattended, as new or unknowledgeable executives struggle to get
their bearings. In short, a divergent team may tend to engage in relatively inept or inadequate exchanges with external parties.
However, even general impressions can create skepticism in key stakeholders. Such
parties set or expect norms of appearance that the firm must follow. When the firm
violates those norms-say, by having very few officers in core functional areas or paying
executives well below the competition-stakeholders become unsettled and search for
more conventional partners.In great part, the stakeholdersare interestedin an appearance
of normality from the firm. As Meyer and Rowan (1977) argued, the failure to appear
rational can have grave consequences: "Organizations that incorporate societally legitimated rationalized elements into their structures maximize their legitimacy and increase
their resources and survival capabilities." (p. 352)
Unfortunately for declining firms, stakeholders do not rely only on static assessments
of managerial suitability. They are also swayed by changes and trajectories in the focal
firm. As we have documented, for struggling firms the trends in top team composition
are not favorable and may clearly signal to external parties that the firm is in trouble.
News of executive departures, pay cuts, strife within a management team, and board
resignations can have an alarming effect on stakeholders.
If a firm is managed by a team of divergent or deteriorating composition, the team
may be seen as incompetent or ill-suited, and powerful stakeholdersmay withhold support
(Salancik and Meindl 1984). Managers may attempt to mold the impressions of key
outsiders through their communications; however, words may not hide deviant team
characteristicsfrom involved and interested outsiders. Bankruptcy,and the accompanying
replacement of management, may therefore be thought of as a social process that enforces
conformity with norms of appearance.
To reiterate, we do not have data about whether these deficiencies in information
processing or outward appearance existed in the failing firms we studied, or that they
were a direct result of divergent team compositions. However, the related research cited,
as well as face validity make the proposed linkages very plausible. If future researchcould
verify the suppositions set forth here, we would have important new information about
DONALD C. HAMBRICK AND RICHARD A. D'AVENI
1464
how declining organizations come, on the one hand, to make a disproportionate number
of strategic errors, and, on the other hand, to lose the support of key stakeholders.
Summary
This study sheds new light on the dynamics of failure of large firms. Not only do
failing firms tend to show significant divergence (relative to survivors) in the composition
of their top management teams, but those divergences become more pronounced (i.e.,
team deterioration occurs) and to some degree even accelerate, over the last five years
of the bankrupts'lives. Our limited test of causal direction suggeststhat a two-way process
is at work: ( 1) team deterioration brings about or aggravates corporate decline, either
through strategic errors or stakeholders' dissatisfaction with the visibly diminished team;
and (2) corporate decline brings about team deterioration, through a combination of
voluntary departures, scapegoating, and limited resources for attracting executive talent.
In short, divergent and deteriorating team composition can be considered a critical
element in the downward spiral of large corporate failures. Since large companies tend
to take a long time to die (Hambrick and D'Aveni 1988), the likelihood that their top
teams become substantively weaker and weaker during decline should be included in
any complete model of the decline process. This conclusion is complementary to, not in
conflict with, the emphasis prior researchers have placed on the perceptual and social
deterioration of a given group of managers when under stress. That is, the strugglingfirm
may suffer from two types of pathologies within its top management team: (1) the team
is under great stress and makes errors as a result, and (2) the team is compositionally
flawed. As decline continues, these two perils worsen.
Since our sample does not include declining firms that turned around and survived,
we cannot respond to the obvious and important questions, "Is there no escape from
the downward spiral? Once started, is its conclusion inexorable?" Today's existence of
numerous once-struggling firms provides the answers. There are escapes from the downward spiral, and they need to be examined in future studies. We expect that matters of
top team composition will figure prominently in eventual explanations of escapes from
the downward spiral. However, at this point, in light of our conclusion that the downward
spiral has a compelling momentum, we have a new appreciation for the difficulty of the
corporate turnaround.2
2
We gratefully acknowledge helpful suggestions from the following individuals: Warren Boeker, Ming-Jer
Chen, James Fredrickson, Michael Tushman. This research was supported by the Management Institute of
Columbia University's Graduate School of Business.
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