The Role of Power and Politics in the Repricing of Executive Options

[Timothy G. Pollock, Harald M. Fischer and  James B. Wade, (2002) The Role of Power and Politics in the Repricing of Executive Options, The Academy of Management Journal, 45 (6), 1172-1182]

This paper aims at developing a framework explaining why certain firms reprice options while others do not. The focus of the paper is to explore the moderating role of CEO’s power, the power of external stakeholders and the visibility of the firm and it’s CEO on the primary relationship between negative spread (difference between strike price of stock options and the market price) and the likelihood to reprice options.

Ownership sources of power resulting from concentration of stocks in the hands of both the institutional investors as well as the CEO results in reduced likelihood to reprice options. Institutional investors can mitigate the power of executives either directly or indirectly by virtue of their large shareholding and hence can keep a check on the self-serving behaviour of management. CEO who also owns shares of his company might not undertake activities that have the potential to raise organisational risk of a negative backlash from the shareholders subsequent to options repricing even when such acts may reduce individual risks.

However, the structural source of power enhances the ability of the CEO to engage in option repricing and hence mitigate their losses. CEO who is also the chairman of the company enjoys much greater power to reprice options. When there are barriers to hostile takeovers such that the market loses its effective corporate control and the management has no fear of being ousted, then its ability to engage in unpopular activities rises. His ability to nominate people on the board who are either his loyalist or are dependent on him for board seats can significantly enhance his ability to make these directors function in the interest of the CEO.

But, when the board of directors perceive that their actions to reprice options will be visible and discussed publically then their incentive to reprice options goes down. They are more concerned about impression management rather than serving the interests of the CEO so that they do not lose out on their credibility and legitimacy regarding other claims.

The paper has articulated how the struggle of power, whether its ownership power or structural power between the shareholders and management gets reflected in the decision of the company to reprice options. The party having more power tends to make a decision that is in its own self-interest. The study gives suggestions to use restricted stock awards in place of stock options that gives ownership to the CEO but at the same time preventing him from selling the stock for a stipulated period of time.

[submitted by Anisha, M Phil Scholar, 2017]

The roles of departmental and position power in job evaluation

[Welbourne, T. M., & Trevor, C. O. (2000). The Roles of Departmental and Position Power in Job    Evaluation. The Academy of Management Journal, Vol. 43, No. 4 , pp. 761-771]

Power may be defined as an ability to influence the decisions or outrightly control the behaviour of people. In organisations, it is nowadays used as a tool which can lead to positive or negative outcomes depending on how it is used. Such use of power to attain desirable outcomes gives rise to another term i.e. ‘politics’. Studies have shown that almost all the departments and processes are under the huge influence of organisational power and politics, and job evaluation process is no exception to that. Job evaluation may be defined as a process of systematic comparison between jobs to access their relative worth for the purpose of establishing a rational pay structure. The researcher, in this paper has attempted to test whether the job evaluation outcomes are affected by the departmental power in a university setting.

The researcher has successfully proposed a political perspective on job evaluation wherein it is believed that the job evaluation is based on the worth of a position and not on the worth of its incumbent, due to which the position holders use influence tactics in the job evaluation committees. This has made the researchers suggest that job evaluation procedures are not accurate and reliable because power and politics come in between and influence the job evaluation outcomes.

Further, the coalitional view or the political view of the organisation suggest that firms can be characterised as groups of subunits, each with its own agenda, which might or might not be consistent with organisational goals and thus this gives rise to the ‘departmental power’ which becomes an important determinant for resource allocation decisions. The literature suggests that more powerful departments are better at acquiring what they want and thus they have positive effect on favourable job evaluation outcomes. However, the researcher proposes that such positive effect will be greater when the position power of the jobs being evaluated or upgraded is high. Thus, the researcher posits that it is not only the departmental power but also the position power within the department that influence the job evaluation outcomes. Also, a clear distinction has been made between the position power and personal power wherein the position power signifies the incumbent’s ability to influence others through position held in an organisation’s hierarchy rather than through personal characteristics.

The results suggest that departmental power definitely affects resource allocation, however such effects become more substantial when the power associated with resource recipients is high. Also, the effects of departmental power on the number of new positions and position upgrades are greater when the position power associated with the jobs being evaluated is high. Thus, both departmental power and position power strongly influence the job evaluation outcomes. However with regard to politics in job evaluation, the researchers hold mixed views. While some researchers view this politics positively since it ultimately improves the department’s and firm’s performance, others contend that such job evaluation (under the influence of power and politics), does not accurately access the worth of the job.

[submitted by Mansi Babbar, Ph D Scholar, 2017]

Individual Power and Political Behaviors in Organizations

[Schein, Virginia E. (1977), Individual Power and Political Behaviors in Organizations: An Inadequately Explored Reality. Academy of Management Review, Vol. 2, No. 1 (Jan), pp. 64-72]

In organizations, we have different perpetually ongoing and pervasive functions like planning, organizing, directing and controlling. All these functions deal with the usage of available resources in the organization like men and machinery. Employees (men) are an important asset of any organization. But as each individual is unique and they carry their unique personal goals along, the difference between their personal goal and organizational goal creates a conflict between the individual and organization. To avoid that open conflict, individuals try to acquire certain power or favor. That’s why individuals get involved in struggle for power. That’s how struggle for power and its practice become much a part and parcel of the above mentioned functions performed in organizations. By this one could conclude that power and political behavior will also be all pervasive function of the organizational environment.

The paper which is reviewed here narrates this reality and develops arguments.  Power is always acquired on the basis of certain tangible or intangible set of resources which forms the bases of power. Now when one is in possession of some power then one can use it (via means) in order to get our personal goals achieved (intent) using some tactics. In this paper, Schein describes intent of the power holder as the mediating variable between the powers available to them and means to be used. Intent of the power holder is a function of personal needs or goals of individual and the contingency of situational factors. Intent of the power holder will be the deciding variable for the means to be used for getting the needs fulfilled or goals accomplished. There is a strong link between intent and means of using power by individuals in the organization. He put forwarded that whether one’s personal goals are congruent to the organizational goal or not has a strong relation with what type of means one would be using to accomplish that goal. The literature had founded that when individual’s goal was congruent to organizational goal, then that individual had used overt means and when his goal was incongruent to organizational goal then that individual had used covert means. 

Now this is not true that at one time individuals use only one type of means as they are found to be using both overt and covert types of means simultaneously. For example, when an individual’s personal goal is incongruent to the organizational goal, then although he is using covert means to reach to his goal but he will be expressly showing certain overt means which are congruent to the organizational goal. Now in this way the individuals use their powers in order to get their incongruent personal goals achieved without openly going in contradiction with the organization. So in nutshell on the basis of paper one could conclude that the individual intent plays a very important role in evaluation of his political behavior in organization.

[submitted by Kirti Saroha, M.Phil Batch XLI (2017)]

Gender Differences in the Perceptions of Organizational Influence Tactics

[Drory, Amos and David Beaty (1991) Gender Differences in the Perceptions of Organizational Influence Tactics, Journal of Organizational Behavior, Vol. 12, No. 3 (May, 1991), pp. 249-258]

Organization politics is referred to as attempts to informally influence others to enhance or protect one’s share of organizational resources or benefits - often through use of power – and is generally associated with conflict. This paper explores extant literature on organization politics, and then tests some of the stereotypical beliefs about gender vis-à-vis organization politics.

Past studies indicate that attitude towards organization politics is affected by cultural and organizational variables, as well as supervisory position, in addition to characteristics of the behavior. This study explores attitudes and perceptions towards organization politics based on another variable – gender. It is commonly perceived that men and women behave differently when it comes to using power. The general perception is that women exploit less, have less need for dominance, do not understand organizational power as well as men do, are less skilled compared to men in handling informal networks, and are not as direct as men in using influence tactics. The study concerns itself with a two-fold purpose – first, to assess if men and women have different attitudes towards political behavior, and second, if gender affects judgment of organization politics.

An experiential instrument – a short critical situation in which one person (manipulator) tries to influence another (target of influence) - is used to test the hypotheses derived from questions above. The sample of male and female respondents to the given situation are differently grouped to assess responses based on four influencing combinations - (1) Male influencing male, (2) male influencing female, (3) female influencing male, and (4) female influencing female. Respondents are asked to describe their attitude towards the manipulator (friendly-unfriendly, pleasant-unpleasant,considerate-inconsiderate, and cunning-straight), and towards the behavior (aspect of morality, negative effect to the organization, and willingness to behave in a similar way).

Contrary to popular belief, the experiment shows that men and women are guided similarly in matters of power and politics based on the perceived effect of situations on their gender group. Thus both males and females perceive manipulators of their own gender more favorably, consider manipulating a person of the opposite gender less immoral compared to manipulating a person of the same gender, feel manipulating a person of the other gender less detrimental to the organization, and prefer to exert political influence over the opposite gender. These findings also indicate that both males and females consider gender to be a meaningful affiliation group.

The paper proposes that similar studies be undertaken to test attitudes towards organization politics among other affiliation groups such as work units, or professional groups.

We feel that certain aspects of the paper can be improved. The paper cites some issues about organization politics in relation to women during formulation of hypotheses, raising expectations that these issues will be addressed subsequently; these are not followed through. For example, the authors’ suggestion that this study challenges the stereotypical view that women accept male superiority at work, or that they are discriminated against, is unsupported by the experiment design. Similarly, the citation that males indulge more in organization politics as compared to women is not assessed by the instrument design. It is suggested that future research explore these assertions as well.

[submitted by Nidhi Sharma, Ph D Scholar, 2017]

The Ethics of Organizational Politics

[Gerald F. Cavanagh, Dennis J. Moberg and Manuel Velasquez (1981), The Ethics of Organizational Politics, AMR, 6(3) (Jul) 363-374]

The objective of the paper is to develop a normative model of ethical analysis that can be helpful in determining the ethical quality of political use of power within organizations. Power in organization is described in the paper as the ability to mobilize resources, energy, and information on behalf of a preferred goal or strategy [Tushman, 1977] and power is assumed to exist only when there is conflict over means or ends [Drake, 1979; Pfeffer, 1977].

The paper has also drawn distinction between political and non-political use of power. Non-political uses of power are those that involve approved means are used to achieve approved end. Political uses involve when unapproved means, or approved means are used to achieve unapproved or unjustified ends. Paper also highlights the difference between management theory and normative ethics. Management theory tends to focus on 'end justifies the mean'. What a manager should do is determined by the desirability of the consequences of the activity and not on the activities, processes and quality of the behaviors used to achieve that outcome. Normative ethics help to reduce the ethical uncertainty surrounding the political use of power. 

The proposed model in this paper integrated three kinds of ethical theories: Utilitarianism, Theories of moral rights and Theories of justice. Utilitarianism requires a decision maker to select decision which results in the greatest good for the greatest numbers. There are two types of PBAs (Political behavior alternatives) that are typically judged unethical:

(1) when personal goals are preferred at the expense of the societal goals, and

(2) when comparatively inefficient means are used to achieve the desired ends. 

Theories of moral rights assert that fundamental rights of the human beings should be respected in all decisions. Moral rights are like the right of free consent, right to privacy, right to freedom of conscience, right of free speech, and right to due process. One only needs to avoid interfering with the rights of others who might be affected by the decision. Theories of justice require decision of the decision makers to be guided by equity, fairness, and impartiality. Three types of moral prescriptions:

(1) Distributive rules: Individuals who are at equal or similar position should be treated similarly, and individuals who differ in some respect should be treated differently.

(2) Principles of administering rules: Rules should be clearly stated and declared publicly.

(3) Compensation norms: First, individuals should not be held responsible for matters over which they have no control. Second, individuals should be compensated for the cost of their injuries by the party responsible for those injuries. 

All the decisions of the organization taken under the political use of power should be examined under these three ethical criteria. Any ethical criterion is overridden if any significant factor exists to justify that. These factors are called overwhelming factors or situational factors. These overwhelming factors are (1) Conflicts between criteria and Principle of double effect: The good effect is important enough to permit the bad effect. (2) Conflicts within criteria and (3) Lack of capacity to employ the criteria: First, when Decision maker is in partial control of a certain decision and thus unable to employ a specific ethical criterion. Second, when decision maker fail to employ a certain ethical criterion due to a lack of adequate information. Third, when decision maker has strong and reasonable doubts about the legitimacy of an ethical criterion. 

In these cases, decision can legitimately be excused from adhering to that criterion.

[submitted by Anjali Sain, M.Phil Batch XLI (2017)]

IN SEARCH OF EXCELLENCE by Tom Peters & Waterman

Various organizations continuously strive for getting best results in the market but even after following hardcore strategies only few company emerges as real winners. What factors make these few companies to get an edge over others, is very aptly described in this book. One of the classic work of Tom peters and Robert H. Waterman “IN SEARCH OF EXCELLENCE” is a widely quoted book on organizational effectiveness. 62 American companies were analyzed and their findings were reported with great insights. From the research of these companies an intelligent approach to organizing was developed known as Mckinsey 7-S framework. Companies which got qualified as excellent companies shared some very basic traits like best efforts for customer satisfaction, employees were treated as assets, organizational culture was flexible enough to account for required changes and at the same time was very strictly controlled. Eight such traits or principles were followed by these excellent companies and the same are very nicely described in this book. The findings of this book suggests that companies which were stamped as excellent prioritized simplicity over complexity in various organizational processes. This book is a must read to understand how these excellent companies performed simpler task in most effective way to turn them into their competitive strengths.

[Reviewed by Gautam Kumar who is a student of M Com at the Department of Commerce, Delhi School of Economics]

The Secret of joy in work is contained in one word – EXCELLENCE. To know how to do something well is to enjoy it. A Company can survive in the long run only when it is unique in whatever activities it performs. What sets great businesses apart? To answer this question Tom Peters & Robert H. Waterman, undertook a research project into the best run companies in the US. This was their search of excellence.

Their results provide a model of eight core principles for excellence that are narrated in a very simple and convincing way with tons of examples. Principles discussed in the book like ‘close to the customer’, productivity through people, benefitting from the management that is hands on and driven by values, considering employees as a source of quality make the book a good study of successful businesses as they continue to be very important even today. The authors are successful in proving  how crucial people are to business success. The model of excellence provides only the general framework but not the benchmark that will apply forever. Still it is one of the all-time classics of business management and a must read to get useful insights into the management theories and evolution.

 

 

[Reviewed by Kamaldeep Kaur Sarna who is a student of M Com at the Department of Commerce, Delhi School of Economics]

A REVIEW JIM COLLINS' GOOD TO GREAT BY ABHISHEK JANGRA

We don’t have great schools, principally because we have good schools. We don’t have great government, principally because we have good government. Few people attain great lives, in large part because it is just so easy to settle for a good life.

All the above scenario give rise to a daunting curiosity that we don’t have great schools, great nations, great people, great governments and so on. This books explains beautifully what it takes a company or a person to become great. Obviously it is not one time game, you need to keep putting serious and disciplined efforts. Now, let’s discuss that what it takes to a company to transform itself in a great company

LEVEL 5 LEADERS

Once Harry S. Truman said that “you can accomplish anything in life, provided that you do not mind who gets the credit”. True because it perfectly defines the level 5 leadership i.e. a great mix of Humility and Modesty. Level 5 leaders channel their ego needs away from themselves and into the larger goal of building a great company. It’s not that level 5 leaders have no ego or self- interest. Indeed, they are incredibly ambitious- but their ambition is first and foremost for the institution, not themselves.

Level 5 Leader looks out the window to apportion credit to factors outside themselves when things go well (and if they cannot find a specific person or event to give credit to, they credit good luck). At the same time, they look in the mirror to apportion responsibility, never blaming bad luck when things go poorly. Level 5 leaders comes with great set of skills, like they demonstrates a compelling modesty, acts with quiet, calm determination; relied principally on inspired standards, not inspired charisma, to motivate. Also, they channel ambition into the company, not the self; sets up successors for even greater success in next generation.

Level 5 leaders never hesitated to take big decisions when it comes to company’s performance. For instance, even when Walgreen 3D was beating general market by 15 times, its CEO Charles S. Clark decided to sell the restaurant business in 5 years. Also, after joining Kimberley Clark, Darwin smith decided to sell all the paper mills and put all the proceedings In Consumer products.

FIRST WHO… THEN WHAT

There are going to be times when you can’t wait for somebody. Now you are either on the bus or off the bus. Here the main point is to first get the right people on the bus and wrong people off the bus before you figure out where to drive it. The second key point is the degree of sheer rigor needed in people decisions in order to take a company from good to great.

Level 5 leaders first get right people on the bus and build a superior executive team. After that, once they have right people in the right place, they figure out best path to greatness. Also, compensation and incentives are important, but for very different reasons in good to great companies. The purpose of a compensation system should not be to get the right behaviour from the wrong people, but to get the right people on the bus in the first place and also keep them there.

Those who build great companies understand that the ultimate throttle on growth for any great company is not markets, or technology, or competition, or products. It is one thing above all others: the ability to get and keep enough of the right people. There is an important corollary to this discipline: when you decide to sell off your problems, don’t sell off your best people. For instance, when Kimberley Clark s sold the mills, Darwin smith made it clear: The company might be getting rid of its paper business, but it would keep its best people.

CONFRONT THE BRUTAL FACTS (YET NEVER LOSE FAITH)

Once Winston S. Churchill said, “There is no worse mistake in public leadership than to hold out false hopes soon to be swept away. There is nothing wrong with pursuing a vision for greatness. After all, the good-to-great companies also set out to create greatness. But, unlike the comparison companies, the good-to-great companies continually redefined the path to greatness with the brutal facts of reality.

Leadership is about vision. But leadership is equally about creating a climate where the truth is heard and the brutal facts confronted. There is a huge difference between the opportunity to “have your say” and the opportunity to be heard. Leading to good-to-great does not mean coming up with the answers and then motivating everyone to follow your messianic vision. It means having the humility to grasp the fact that you do not yet understand enough to have the answers and then to ask the questions that will lead to best possible insights.

THE STOCKDALE PARADOX

The name refers to Admiral Jim Stockdale, who was the highest ranking United States military officer in the “Hanoi Hilton” prisoner-of-war camp during the height of the Vietnam war. Tortured over twenty times during his eight-year imprisonment from 1965 to 1973, Stockdale live out war without any prisoner’s rights, no set release date, and no certainty as to whether he would even survive to see his family again. In an interview with Jim Collins he Said, “I never lost faith in the end of the story, he said when Jim asked him, “I never doubted not only that I would get out, but also that I would prevail in the end and turn the experience into the defining event of my life, which, in retrospect, I would not trade.”

HEDGEHOG CONCEPT (SIMPLICITY WITHIN THREE CIRCLES)

A Hedgehog concept is not the goal to be the best, a strategy to be the best, an intention to be the best, a plan to be the best. It is an understanding of what you can be the best at. There is difference between “Core business” and “Hedgehog Concept”. Just because something is your core business-just because you’ve been doing it for years or perhaps even decades- does not necessarily mean that you can be the best in the world at it. And if you can’t be the best in the world at your core business, then your core business cannot be the basis for Hedgehog concept.

Each good-to-great company built a fabulous economic engine, regardless of the industry. They were able to do this because they attained profound insights into their economics. Think about it in terms of following question: If you could pick one and only one ratio let’s say profit per employee, - to systematically increase over time, what employee would have the greatest and most sustainable on your economic engine?

Good-to –great companies did not say, “okay, folks, let’s get passionate about what we do.” Sensibly, they went the other way entirely: We should only do those things that we can get passionate about. Kimberley-Clark executives made the shift to paper-based consumer products in large part because they could get more passionate about them. As one Executive put it, the traditional paper products are okay, “but they just don’t have the charisma to a diaper.”

GETTING THE HEDGEHOG CONCEPT AN ITERATIVE PROCESS

A CULTURE OF DISCIPLINE

The Good to Great companies built a consistent system with clear constraints, but they also gave people freedom and responsibility within the framework of that system. They hired self-Discilined people who didn’t need to be managed, and then managed the system, not the people.

Whereas the good-to-great companies had level 5 leaders who built an enduring Culture of Discipline, the unsustained comparisons had level 4 leaders who personally disciplined the organization through sheer force.

Culture of discipline should not only be limited to people i.e. it takes discipline to say “No, thank you” to big oppourtunities. The fact that something is a “once-in-a-lifetime opportunity” is irrelevant if it doesn’t fit within the three circles. Also, in a good-to-great transformation , budgeting is a discipline to decide which arenas should be fully funded and which should not be funded at all. In other words, the budget process is not about figuring how much each activity gets, but about determining which activities best support the Hedgehog concept and should be fully strengthened and which should be eliminated fully.

TECHNOLOGY ACCELERATORS

On july 28,1999, Drugstore.com- one of the first internet pharmacies- sold shares of its stock to the public. Within seconds of opening bell, the stock multiplied nearly threefold to $65 per share. Four weeks later, the stock closed ashigh as $69, creating a market valuation of over $3.5 billion. Yet technology-induced change is nothing new. The real question is not, What is the role of the technology? Rather, the real Question is, how how do Good-to-Great organizations think differently about technology?

Those who turn good into great are motivated be a deep creative urge and an inner compulsion for sheer unadulterated excellence for its own sake. Those who build and perpetuate mediocrity, in contrast, are motivated more by the fear of being left behind.

THE FLYWHEEL AND THE DOM LOOP

Here’s what important. We have allowed the way transitions look from the outside to drive our perception of what they must feel like to those going through them on the inside. From the Outside, they look like dramatic, almost revolutionary breakthroughs. But from the inside, they feel completely different, more like an oraganic development process. The good-to-great companies had no name for their tarnsforamtions. There was no launch event, no tag line, no programmatic feel whatsoever.

Clearly, the good-to-great companies did get incredible commitment and alignment they artfully managed change- but they never really spent much time thinking about it. When you let the flywheel do the talking, you don’t need to fervently communicate your goals

THE DOOM LOOP

Why companies found themselves in Doom loop? Because instead of a quiet, deliberate process of figuring out what needed to be done and then simply doing it, the comparison companies frequently launched new programs- often with great fanfare and Hoopla aimed at “motivating the troops”_ only to see the programs fail to produce the sustained results.

Other reasons for Doom Loop are Misguided use of acquisitions, leaders who stop the flywheel etc.

SUGGESTIONS

• Jim Collins and his team started his research with 1500 companies and slowly narrowed it down to 11 Good-to-Great transformations but there is only one company i.e. Walgreens that satisfy the whole Good-to-great Transformation process. So saying that he founded 11 Good-to-Great companies is Questionable.
• Only quantitative Measures are used to define Good-to-Great companies i.e. a Good-to-Great must outperform the general market by several times in order to be great and less focus is put on the other subjective behavioural aspects of business.

[Abhishek Jangra is a student of M Com at the University of Delhi]