Upper Echelon Theory
Upper echelon theory is based on the idea that to better understand organizations, one must understand the decision makers who lead those organizations. In other words, firms are a reflection of their top managers. Upper echelon theory was first articulated in 1984 as a response to theory and research at the time that focused on the environmental forces that shaped firm actions but tended to minimize the importance of individuals in organizations. Upper echelon theory clearly put the strategist back into the forefront of the discipline of strategic management. Since that time, a large body of research based on upper echelon theory has clearly shown that by examining the observable characteristics of executives, we can better understand their strategic decisions and, ultimately, important firm outcomes. This entry discusses the major tenets of upper echelon theory and its linkages to corporate reputation.
Major Tenets of the Theory
Upper echelon theory starts with the assumption that managers are boundedly rational in their decision making. As a result, decisions are largely shaped by executive personalities and their cognitions, values, and perceptions. These characteristics affect where executives direct their attention to gain information, the cues they are likely to attend to, and the way they process and interpret those cues.
However, personality, cognitions, values, and perceptions are difficult to observe and hard to measure. The problems of measurement are made worse by the fact that it is especially difficult to obtain traditional measures of these constructs from top executives. As a result, upper echelon theory suggests that observable proxies such as educational background, affiliations, age, tenure, or prior work experience can represent the underlying cognitive frames through which executives view the world. Much of the research from an upper echelon perspective has been aimed at showing that these measureable characteristics of top managers have significant effects on relevant firm outcomes.
Upper echelon theory also points out that focusing on the team of top decision makers, often referred to as the top management team, will yield greater insights than focusing solely on the characteristics of a single decision maker, such as the CEO. So, in addition to generating interest in the direct effects of executive characteristics on firm outcomes, upper echelon research has focused on the heterogeneity of various executive characteristics within the top management team as well as the interactions among executives.
Later refinements of upper echelon theory have pointed out that the extent to which executives matter for strategic decisions and firm outcomes depends largely on the amount of managerial discretion afforded to a group of executives. Some executives are inherently constrained by individual, firm, and industry factors, and in such cases, managerial characteristics based on upper echelon theory tend to have very little effect. However, in high-discretion situations, upper echelon theory becomes a particularly valuable lens through which to view strategic action.
Links to Reputation
Upper echelon theory has important implications for better understanding corporate reputation. To the extent that a firm is truly a reflection of its leaders, the characteristics of the CEO and other top managers should influence how various stakeholders perceive the firm as a whole. Furthermore, because top managers influence strategic decisions and other important firm outcomes such as performance or innovation, their actions also affect the reputation of the firms that they lead. The individual reputations of a firm’s top managers also constitute an important part of the overall corporate reputation.
Carpenter, M. A., Geletkanycz, M. A., & Sanders, Wm. G. (2004). Upper echelons research revisited: Antecedents, elements, and consequences of top management team composition. Journal of Management, 30(6), 749–778.
Hambrick, D. C. (2007). Upper echelons theory: An update. Academy of Management Review, 32(2), 334–343.
Hambrick, D. C., & Mason, P. A. (1984). Upper echelons: The organization as a reflection of its top managers. Academy of Management Review, 9(2), 193–206.