Academy of Management Journal 2010, Vol. 53, No. 5, 10501073.

CEO PERSONALITY, STRATEGIC FLEXIBILITY, AND FIRM PERFORMANCE: THE CASE OF THE INDIAN BUSINESS PROCESS OUTSOURCING INDUSTRY
SUCHETA NADKARNI Drexel University POL HERRMANN Iowa State University
We examine the relationships between CEO personality, strategic flexibility (ability to adapt quickly to environmental changes), and firm performance, using a sample of 195 small and medium-sized firms from the Indian business process outsourcing industry. We hypothesize that strategic flexibility mediates the relationships between CEO personality and firm performance. Our results extend previous research by not only highlighting the importance of CEO personality in driving strategic flexibility, but also indicating how each facet of CEO personality either enhances or inhibits strategic flexibility.

With increasingly intense competition, shrinking product cycles, accelerated technological breakthroughs, and progressively greater globalization, the business arena may best be described as being in a chronic state of flux, with continual variation in its external environment. Given such everchanging environmental conditions, a firms ability to change direction quickly and to reconfigure strategically is crucial to its success in achieving sustainable competitive advantage (Hitt, Keats, & DeMarie, 1998). In other words, firms need to embrace strategic flexibility (Hitt et al., 1998; Johnson, Lee, Saini, & Grohmann, 2003). Ample empirical evidence supports the contention that strategic flexibility drives firm performance (Grewal & Tansuhaj, 2001; Nadkarni & Narayanan, 2007; Worren, Moore, Cardona, 2002). It is therefore not surprising that the academic and practitioner literature in strategic management is increasingly recognizing strategic flexibility as an important research area. Nevertheless, several gaps remain in scholars understanding of how firms embrace strategic flexibility. One particularly prominent gap relates to the role of CEOs in fostering strategic flexibility. A great deal of the research that has examined the influence of resource, product, and alliance network structures on strategic flexibility

We would like to thank professors Deepak Datta and Mary Uhl-Bien for their helpful comments on earlier versions of this article. We especially thank Associate Editor Gerard Sanders and the three anonymous reviewers for their excellent and developmental feedback, which helped us immensely in improving the paper.
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(Sanchez, 1995; Worren et al., 2002; Young-Ybarra & Wiersema, 1999) has ignored the role of CEOs in developing strategic flexibility. This gap is especially notable because the strategic choice (Child, 1972) and upper echelons (Hambrick & Mason, 1984) perspectives have highlighted the importance of top managers, especially CEOs, in driving strategic changes in firms (Rajagopalan & Spreitzer, 1997). The CEO has been characterized as a firms chief cognizer and decision maker (Calori, Johnson, & Sarnin, 1994). Hambrick and Mason (1984) argued that firm strategies reflect the characteristics of its powerful actors, among whom the CEO is prominent. Moreover, empirical evidence has suggested that characteristics of CEOs affect strategic decision processes (Peterson, Smith, Martorana, & Owens, 2003) and strategic actions (Carpenter, Sanders, & Gregersen, 2001; Miller & Toulouse, 1986; Nadkarni & Narayanan, 2007) that have implications for firm performance. However, these studies have examined the influence of CEO personality on firm performance without paying adequate attention to the mechanisms that underlie this relationship (Peterson et al., 2003). The bounded rationality (Simon, 1991) and managerial cognition (Weick, 1995) literatures have suggested cognitive filtering mechanisms that may explain how attributes of CEOs dispose them toward specific strategic behaviors with implications for firm performance. Examining these underlying mechanisms by integrating insights from the literatures on strategic flexibility, managerial cognition, and CEO attributes provided the primary motivation for the current study.

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We address this theoretical gap by examining the relationships among CEO personality, strategic flexibility, and firm performance. Drawing on the upper echelons (Finkelstein & Hambrick, 1996; Hambrick & Mason, 1984) and CEO psychology (Chatterjee & Hambrick, 2007; Hiller & Hambrick, 2005) literatures, we theorize that psychological attributes of CEOs serve as lenses through which CEOs subjectively view strategic situations and decide on appropriate responses, by shaping their fields of vision (how CEOs acquire and disseminate information), their selective perception (which information cues from their fields of vision CEOs attend to and which cues they choose to ignore), and their interpretation of perceived cues (how CEOs attach meaning to noticed cues and how they evaluate strategic options). These filtering mechanisms that form the basis for a CEOs strategic choices either enhance or inhibit strategic flexibility in a dynamic industry context. We further theorize that strategic flexibility influences firm performance by promoting creativity, innovation, and improved competitive capability (Hitt et al., 1998; Johnson et al., 2003). Specifically, we propose that strategic flexibility mediates the relationship between CEOs personality attributes and firm performance. We theorize and empirically test these relationships for a dynamic industry context because research has suggested that the influence of strategic flexibility on firm performance is likely to be stronger in dynamic industries than in stable ones (Hitt et al., 1998; Johnson et al., 2003; Nadkarni & Narayanan, 2007). We tested our model in data on the CEOs of small and medium-sized enterprises (SMEs) from the offshore business process outsourcing industry in India. Offshore business process outsourcing is the transfer of the operational ownership of one or more of a firms processes to an external provider from another country that then manages the processes according to predetermined metrics (Ghosh & Scott, 2005). It is becoming a widespread strategy, and India is a dominant service provider in this field, accounting for 75 percent of offshore delivery value (Neale, 2004). Indian business process outsourcing is a fast growing and dynamic industry characterized by low barriers to entry, rapidly changing and unpredictable process technologies, ever-changing client demands, shifting global competition, and constant client pressure to improve value and delivery speed (Ramachandran & Voleti, 2004; Tapper, 2004). Anecdotal evidence suggests that strategic flexibility is essential for success in this industry (Mehta, Armenakis, Mehta, & Irani, 2006). Our results extend previous research by highlighting the role of CEO personality in de-

veloping strategic flexibility and by demonstrating how specific facets of CEO personality influence firm performance by either enhancing or inhibiting strategic flexibility in a fast-changing and dynamic industry context. THEORETICAL BACKGROUND Strategic Flexibility Strategy scholars have defined strategic flexibility as a firms ability to precipitate strategic changes (Evans, 1991; Harrigan, 1985). Aaker and Mascarenhas (1984) defined it as the ability to adapt to substantial, uncertain, and rapidly occurring environmental changes that meaningfully impact firm performance. Thus, strategic flexibility reflects a firms ability to respond continuously to unanticipated changes and to adjust to unexpected consequences of predictable changes (Lei, Hitt, & Goldhar, 1996). Most studies of strategic flexibility have focused on technology (Evans, 1991; Sanchez, 1995; Worren et al., 2002), resources (Harrigan, 1985; YoungYbarra & Wiersema, 1999), and network structures (Young-Ybarra & Wiersema, 1999) as antecedents. For example, Sanchez (1995) found that product and process platform architectures drove strategic flexibility, whereas Evans (1991) focused on the effects of technological maneuvers. Asset specificity (Young-Ybarra & Wiersema, 1999) and immobility of resources (Harrigan, 1985) have also been identified as antecedents of strategic flexibility. These studies have ignored the influence of CEOs on strategic flexibility. We propose that personality attributes of CEOs influence strategic flexibility. Overview of the Literature on CEO Psychology Strategy research has suggested that a firms CEO, as an important member of the firms dominant coalition, has a profound impact on the strategic direction and performance of the firm (Hambrick & Mason, 1984; Peterson et al., 2003). Hambrick (1994) criticized studies that treat a CEO as just another member of a top management team (TMT), noting that everyday observation and empirical evidence indicate that the CEO has a disproportionate, sometimes dominating, influence on his or her firm. Finkelstein and Hambrick (1996) asserted that not only does the CEO have the overall responsibility for the firms management but also that the CEOs characteristics are of serious consequence to the firm. Researchers studying CEOs have often used demographic characteristics as proxies for deeper

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psychological constructs (Carpenter, Geletkanycz, & Sanders, 2004). Demographic variables such as age, education, and experience allow researchers to effectively capture characteristics such as background and expertise, which are relevant to how CEOs make decisions (Hambrick & Mason, 1984). However, the use of demographic characteristics as proxies for CEOs psychological traits leaves researchers at a loss as to the real psychological attributes that drive CEO behavior (Carpenter et al., 2004), undermines the robustness of theories regarding the links between psychological characteristics of CEOs and firm outcomes, and increases the likelihood of incorrect interpretation of results (Lawrence, 1997). Lawrence (1997) referred to these limitations as a black box. To overcome them, recent studies have focused on CEO psychology, describing how CEOs broadly evaluate themselves and their relationships to their environments across situations (Hiller & Hambrick, 2005). The underlying premise of this research is that CEOs confront so many stimuli, laden with so much ambiguity, complexity, and contradiction, that their personalities greatly enter into how they distill and process this information. Psychological attributes of CEOs, by filtering how CEOs construe the reality of strategic situations and evaluate strategic response options, dispose the CEOs toward certain choices (Finkelstein & Hambrick, 1996). There is empirical support for the contention that CEO personality attributes influence their strategic choices, which in turn influence firm performance. Miller and Toulouse (1986) found that CEOs with internal loci of control deployed product innovation strategies, whereas CEOs with high needs for achievement chose broad market strategies. Hayward and Hambrick (1997) found that CEO hubris, manifested as exaggerated pride or self-confidence, was positively related to paying acquisition premiums and negatively related to firm performance. Chatterjee and Hambrick (2007) suggested that narcissistic CEOs chose bold strategies (e.g., large acquisitions) that attract attention, resulting in big wins or big losses. A Five-Factor Model of CEO Personality We focus on the effect of personality variables as captured by the five-factor model (McCrae & Costa, 1987). Our choice of this model was based on recent calls to use comprehensive and valid psychological frameworks to investigate the relationships between CEOs personality attributes and firm performance (Cannella & Monroe, 1997; Hiller & Hambrick, 2005). The five-factor model, which represents current orthodoxy in personality assess-

ment, provides a robust, comprehensive way of understanding fundamental personality differences (Peterson et al., 2003). Although opinion is not yet unanimous, there is increasing consensus among researchers that the traits identified in the fivefactor model encapsulate many important aspects of personality (Judge, Bono, Ilies, & Gehardt, 2002; McCrae & Costa, 1997). Strategy researchers have also underscored the importance of this model in explaining behaviors of top managers such as CEOs (Cannella & Monroe, 1997), and recent empirical evidence has underscored its relevance to strategic decision making as well (Peterson et al., 2003). The five factors are broad personality constructs, each capturing a unique set of psychological traits (Boudreau, Boswell, Judge, & Bretz, 2001). Conscientiousness indicates achievement and dependability. Emotional stability is the ability to adapt to diverse situations and to cope with stress. Agreeableness is the tendency to be altruistic and compliant. Extraversion represents sociability and expressiveness. Openness to experience represents the tendency to be creative, imaginative, perceptive, and thoughtful.

THEORY DEVELOPMENT AND HYPOTHESES CEO Personality, Strategic Flexibility, and Firm Performance The upper echelons (Finkelstein & Hambrick, 1996; Hambrick & Mason, 1984) and CEO psychology (Hiller & Hambrick, 2005) literatures suggest that psychological attributes of CEOs influence their strategic choices through a three-stage filtering process defining a field of vision, selective perception, and interpretation. This filtering process is considered to be central to developing strategic flexibility (Johnson et al., 2003; Nadkarni & Narayanan, 2007; Shimizu & Hitt, 2004). Psychological attributes determine how intensely CEOs search for information, how much information they scan, how they learn about external environmental and internal organizational events or trends, and which sources they rely on to obtain and disseminate information (Hambrick, 1982; Miller & Toulouse, 1986). These activities define a CEOs focus of attention or field of vision, which serves as a filter between an objective strategic situation and the subjective reality of the situation construed by the CEO, wrote Finkelstein and Hambrick (1996). They proposed, for example, that a CEO with an internal locus of control will devote more effort to environmental scanning by using a wider array of sources than an executive with an external locus of control will use. Conse-

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quently, internally focused CEOs develop broader fields of vision than externally focused CEOs. Nadkarni and Narayanan (2007) proposed that such a broad field of vision fosters strategic flexibility by enabling a firm to develop a comprehensive awareness of new opportunities and new resources and also helps the firm to change its competitive posture quickly, by promoting better understanding of continuously shifting competitor moves. Johnson et al. (2003) also stressed that the panoramic surveillance made possible by a broad field of vision improves the market-sensing capability that is central to strategic flexibility. Second, research has suggested that top managers selectively perceive only a small fraction of the stimuli within their fields of vision (Starbuck & Milliken, 1988). Which stimuli CEOs attend to and which they ignore is tied to their psychological attributes (Finkelstein & Hambrick, 1996), such as openness to change (Datta, Rajagopalan, & Zhang, 2003) and need for achievement (Miller & Droge, 1986). Shimizu and Hitt (2004) stressed that a strong selective perception bias is a major barrier to developing strategic flexibility because it prevents strategic decision makers from being sensitive to important new information and makes them complacent. Johnson et al. (2003) also proposed that selective perception bias can filter out important market events and inhibit the responsive capability of a firm, which is also central to strategic flexibility. Interpreting or attaching meaning to perceived stimuli is the final step in the filtering process. It consists of understanding, explaining, extrapolating, and predicting the effect of strategic stimuli (Starbuck & Milliken, 1988). Such interpretation forms the basis for the evaluation and choice of strategic options. Psychological attributes such as risk propensity and need for control may influence whether CEOs interpret specific environmental changes as threats or as opportunities and which strategic responses they prefer (Finkelstein & Hambrick, 1996). Shimizu and Hitt (2004) underscored the importance of timely and effective interpretation in developing strategic flexibility. For example, strategic decision makers may interpret early negative results of a strategy to be a sign of incorrect implementation or insufficient time rather than a sign of the ineffectiveness of the strategy. Such misinterpretation prompts firms to invest more resources in outdated and obsolete strategies rather than recognize the need to abandon them. Inertia and barriers to strategic flexibility thus arise (Shimizu & Hitt, 2004). We integrated the literatures on upper echelons and strategic flexibility to develop hypotheses for

each facet of the five-factor model. We outline how each facet is likely to influence the filtering via field of vision, selective perception, and interpretation that is central to developing strategic flexibility. CEO Personality and Strategic Flexibility Conscientiousness. Conscientiousness reflects the degree to which someone shows dependability and an achievement orientation (Judge et al., 2002; McCrae & Costa, 1997). Dependability is a concern for legalism or commitment to established rules (Peterson et al., 2003). Individuals with high dependability avoid taking actions that deviate significantly from their past experience. An achievement orientation represents a need for control and a need to receive concrete feedback on actions (Miller & Droge, 1986). High achievers feel a strong need to take responsibility for doing things immediately. Because of their concern for legalism, conscientious CEOs are likely to rely strongly on dependable, tried-and-true strategies. Over time, as CEOs rely almost exclusively on known strategies and selectively ignore new and unique strategies that challenge their existing assumptions, they are likely to develop narrow fields of vision and a selective perception bias that predisposes them to ignore environmental stimuli that do not match existing assumptions (Bogner & Barr, 2000; Kiesler & Sproull, 1982). Such a narrowed field of vision and strong selective perception bias create strong barriers to strategic flexibility by inhibiting the market-sensing capability (Johnson et al., 2003). When CEOs fail to see important environmental stimuli that do not fit their narrow visions, they will be unable to respond to critical environmental changes. This will inhibit their ability to quickly initiate strategic responses (Nadkarni & Narayanan, 2007). Achievement-oriented CEOs also feel the need to personally take control and assume responsibility for strategic activities. Miller and Toulouse (1986) and Miller and Droge (1986) found that CEOs with high needs for achievement tend to hold most of the power in their own hands and to closely monitor and control employee activities in their firms. Such closely controlled and highly structured decision making is likely to deny creative employees the autonomy and freedom to question existing assumptions, create new interpretations, and share information freely in a firm, resulting in a narrow field of vision (Choo, 1998). Lack of rigorous debate and discussion of strategic issues among employees with varied backgrounds also creates the potential for selective perception and interpretation biases

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(Lant, Milliken, & Batra, 1992), which inhibit strategic flexibility by undermining ability to sense new and unfamiliar information in a timely manner (Johnson et al., 2003; Shimizu & Hitt, 2004) as well as ability to initiate responsive actions quickly through efficient resource deployment (Hitt et al., 1998; Nadkarni & Narayanan, 2007). Conscientious individuals have a strong need to reduce uncertainty and to receive specific feedback on their performance (Judge et al., 2002). For conscientious CEOs, performance feedback and longrange planning are central to making strategic choices (Miller & Droge, 1986; Miller & Toulouse, 1986). Researchers have described such a performance-driven approach to strategy formulation as a competence trap, because it creates a strong selective perception bias by disposing strategic decision makers to ignore new and different environmental information unless significant performance declines occur (Bogner & Barr, 2000; Brown & Eisenhardt, 1997; Johnson et al., 2003). Thus, conscientious CEOs may not attend to ambiguous and uncertain cues until performance declines alert them to the need for strategic change. Waiting for performance declines to signal the need for developing new strategic thinking can create delays in strategic decision making and impede responsive capability (Eisenhardt & Martin, 2000; Shimizu & Hitt, 2004). To develop efficient responsive capability, strategic decision makers need to engage in interpretation and search activities that are intuitive and exploratory rather than feedback-oriented (Bogner & Barr, 2000; Daft & Weick, 1984). Recent evidence from organizational behavior supports this negative relationship between conscientiousness and the ability to adapt to changing contexts. In their experimental study, Lepine, Colquitt, and Erez (2001) found that participants with low conscientiousness adapted better to changing task contexts. Hypothesis 1. CEO conscientiousness is negatively related to strategic flexibility. Emotional stability. Emotional stability reflects a capacity for emotional adjustment and self-confidence. Emotional adjustment is the ability of individuals to adjust their emotional states to varied situational demands and to remain calm and balanced in stressful situations (McCrae & Costa, 1997). Emotional stability is considered a strong predictor of a persons adaptability to unpredictable and changing situations (Peterson et al., 1993). Research suggests that the emotional stability of a leader is more relevant to decision making in changing and unpredictable situations than in stable ones. For example, De Hoogh, Den Hartog, and

Koopman (2005) found that emotional stability predicted leader effectiveness for dynamic but not for stable tasks. Studies have shown that emotional stability is also strongly associated with internal locus of control and leader attributes associated with this construct (Judge et al., 2002). Given the salience of emotional stability in decisions in dynamic situations, we hypothesize that CEOs emotional stability promotes strategic flexibility. Emotionally stable managers remain calm and provide focus in dynamic situations, shift focus to initiate appropriate actions to deal with unpredictable situations, and act decisively in crises (Peterson et al., 2003). Emotionally stable leaders create a safe atmosphere for employees by reducing their anxiety in difficult situations and by providing encouragement in cases of failure (Edmondson, 1999). This outline suggests that emotionally stable CEOs feel less threatened by new and unpredictable stimuli and encourage employees to experiment with new interpretations of these stimuli. The adaptability of emotionally stable CEOs reduces their hesitance to change strategies and enables them to quickly generate appropriate responses to these changes. Such a balanced and adaptive approach allows a CEO to process adverse and ambiguous information objectively and rationally, and this manner of responding is likely to evoke a broad field of vision and to reduce selective perception and interpretation biases. Consequently, emotionally stable CEOs are likely to improve their sensing and responsive capabilities, which are central to developing strategic flexibility (Johnson et al., 2003; Shimizu & Hitt, 2004). Studies have shown that because emotionally stable leaders have high self-confidence, they are not afraid to challenge the status quo. Overcoming organizational inertia, an important barrier to strategic flexibility (Shimizu & Hitt, 2004), requires challenging the status quo and taking risks, both of which require the high degree of self-confidence typical of emotionally stable leaders (House & Howell, 1992; Kirkpatrick & Locke, 1991). Thus, the confidence and decisiveness of an emotionally stable CEO may promote strategic flexibility by removing barriers such as organizational inertia and filtering biases. Hypothesis 2. CEO emotional stability is positively related to strategic flexibility. Agreeableness. Agreeableness represents the tendency to be altruistic (empathetic, kind, cooperative, trusting, and gentle) and compliant (modest, having a values affiliation, and conflict avoiding) (Bono & Judge, 2004). The relationship between leader agreeableness and the ability to bring about

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change is ambiguous because of two underlying, opposing mechanisms. On the one hand, agreeableness (altruism and compliance) fosters a culture of creativity and risk taking based on cooperative, open, and trust-based relationships with employees (Judge & Bono, 2000). On the other hand, excessive agreeableness can also give rise to passivity, in which leaders act modest, focus more on what employees think of them than on accomplishments, and avoid conflicts at all costs. These two sets of mechanisms evoke leader behaviors (Langan-Fox, Cooper, & Klimoski, 2007) that may either enable or inhibit adaptability and innovation (LePine & Van Dyne, 2001). We propose that medium levels of agreeableness allow CEOs to optimally balance these opposing mechanisms so as to maximize strategic flexibility, whereas very high levels of agreeableness induce passivity and compliance and very low levels undermine employee creativity and risk taking, inhibiting strategic flexibility. Disagreeable CEOs promote a climate of competition and fear (Peterson et al., 2003) that is likely to promote compliance rather than independent thinking. Intimidated by disagreeable CEOs, employees are hesitant to bring to their attention information that may challenge the CEOs personal beliefs (Peterson et al., 2003), and this hesitancy narrows the CEOs fields of vision. Moreover, disagreeable CEOs may be skeptical of and ignore the strategic alternatives suggested by other managers and employees. This behavior may create strong perceptual and interpretation biases (Lant et al., 1992), which inhibit strategic flexibility (Nadkarni & Narayanan, 2007; Shimizu & Hitt, 2004). Highly agreeable leaders pay special attention to neglected groups in their firms, treat each employee as an individual, and focus on employee empowerment, which fosters free and comprehensive exchange of information between diverse employees (Bono & Judge, 2004). Such comprehensive information exchange is likely to broaden a CEOs field of vision (Lant et al., 1992). However, the strongly altruistic tendency of highly agreeable leaders can promote passivity and compliance and shift focus away from achievement of important task goals. For example, Langan-Fox et al. (2007) contended that because highly agreeable individuals value and strive for cooperation and harmony, they may avoid engaging in certain functional taskfocused behaviors when their behaviors have the potential to upset other individuals with whom they work, which is likely to inhibit decision effectiveness. Similarly, Lepine and Van Dyne (2001) found that high agreeableness inhibited voice behavior, which is defined as the extent to which an

individual speaks up with constructive suggestions for change. They found that high levels of agreeableness were detrimental in situations of innovation and adaptability because voice behavior was suppressed. This evidence suggests that a strong need for affiliation and concern about what others think of them may suppress the voice behaviors of CEOs and prompt them to surrender their views in situations of conflict rather than engage in the strong influencing tactics needed to foster responsive capabilities. Thus, the perceptions and interpretations of highly agreeable CEOs may be driven primarily by their need for affiliation and social acceptance rather than by a decision focus based on objective information, a focus that is likely to create strong selective perception and interpretation biases that create barriers to developing strategic flexibility (Shimizu & Hitt, 2004). CEOs with medium levels of agreeableness may maximize strategic flexibility by balancing employee concern and empowerment with the strong and assertive voice, rhetoric, and assertiveness that are needed to build a culture of change. Building strategic change capability involves assessing hidden assumptions, unlearning old behaviors, and overcoming major obstacles (Senge, 1990; Shimizu & Hitt, 2004). Moderately agreeable CEOs may broaden their fields of vision by empowering employees to generate new and controversial ideas that challenge existing assumptions and behaviors. At the same time, CEOs can exercise assertiveness in the situations of conflict among departmental and operational managers about possible organizational changes that typically occur in the process of building the capability for strategic change (Burgelman, 1984). These conflicts tend to slow down and freeze the capability-building process, unless CEOs and other strategic leaders actively intervene with strong rhetoric and effective persuasion (Elenkov, Judge, & Wright, 2005). CEO assertiveness can reduce the perceptual and interpretation biases resulting from passivity and excessive need for affiliation. Therefore, we expect CEOs with medium levels of agreeableness to maximize strategic flexibility. Hypothesis 3. CEO agreeableness has an inverted-U relationship with strategic flexibility. Extraversion. Extraversion is associated with sociability and expressiveness (Judge et al., 2002). Extraverted leaders tend to take the initiative in social settings, to introduce people to each other and to be socially engaging by being humorous, introducing topics of discussion, and stimulating social interactions (House & Howell, 1992). There-

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fore, extraverted leaders build broad and diverse networks of social relationships. Extraverted leaders are expressive and articulate individuals who persuade, influence, and organize others (Bono & Judge, 2004). The sociability of extraverted CEOs allows them to mobilize others and to develop extensive social interactions both internally (within their firms) and externally (outside the firms). CEOs networks of contacts are central determinants of their fields of vision (McDonald & Westphal, 2003). CEOs use these networks to both receive and disseminate information (Kotter, 1982). Extensive social interactions result in comprehensive information gathering, support interpretation of new information (Kraatz, 1998), and promote its speedy transmission (Davis & Greve, 1997). McDonald, Khanna, and Westphal suggested that CEOs who develop extensive advice networks (2008: 453) are exposed to alternative and novel points of view; this exposure enhances CEOs ability to quickly identify the strategic challenges facing their companies and develop high-quality solutions to them. Use of broad networks for information acquisition and dissemination allows for intensive discussion and validation of new information, reducing selective perception and interpretation biases (McDonald & Westphal, 2003). Reduction in these biases reduces barriers and promotes strategic flexibility (Nadkarni & Narayanan, 2007; Shimizu & Hitt, 2004). Developing the ability to quickly adapt to environmental changes requires creation of new ideas that may deviate from past strategies (Johnson et al., 2003), and the newness of such strategies may itself create resistance among employees (Kirkpatrick & Locke, 1991), which can create inertia and barriers to strategic flexibility (Hitt et al., 1998; Shimizu & Hitt, 2004). Extravert CEOs can effectively remove such resistance and promote rapid implementation of new strategies through their exceptional expressive skills and their ability to take the initiative and persuade and influence people so as to promote strategic flexibility. Hypothesis 4. CEO extraversion is positively related to strategic flexibility. Openness to experience. People who are open to new experiences are intellectually curious, open to a wide range of stimuli, value unusual thought processes, and often seen as thoughtful and creative (McCrae & Costa, 1987). Open individuals have a strong need for change and are highly capable of understanding and adapting to others perspectives (Costa & McCrae, 1988). Leaders who are open to new experiences actively seek excitement and risks (Judge et al., 2002). This need for change

and risk taking can promote behaviors that may disrupt the existing product and resource advantages of stable firms (Nadkarni & Narayanan, 2007). However, CEOs openness to new experiences is central to promoting strategic adaptation in dynamic environments (Datta et al., 2003). Developing the capability to precipitate strategic change requires that strategic leaders (CEOs) understand and adapt to multiple perspectives and that they be open to and accepting of strategic change (Black & Boal, 1996). Because of their broad interests, divergent thinking, and receptiveness to a wide range of stimuli, CEOs with high openness to experience are likely to develop broad fields of vision by considering multiple strategic perspectives. Open CEOs can quickly and effectively notice and interpret new and diverse environmental information that does not fit the existing mind-set and are likely to consider a wide range of strategic alternatives, including those that deviate greatly from existing strategies. Thus, open CEOs are likely to minimize selective perception and interpretation biases, which inhibit strategic flexibility (Johnson et al., 2003; Nadkarni & Narayanan, 2007; Shimizu & Hitt, 2004). In contrast, executives who are averse to new experiences are likely to possess relatively restricted fields of vision within which to seek (Cyert & March, 1963) and evaluate alternatives (Finkelstein & Hambrick, 1996). Such CEOs, over time, develop habits, establish routine information sources, and rely mostly on past experience (Datta et al., 2003). These biases, which may lead to ignoring important new stimuli that do not fit their fields of vision, interpreting new stimuli inappropriately, and avoiding effective strategic response options that deviate from past strategies (Kiesler & Sproull, 1982), create strong barriers to strategic flexibility (Shimizu & Hitt, 2004). Hypothesis 5. CEO openness to experience is positively related to strategic flexibility. Strategic Flexibility and Firm Performance We propose that CEO personality influences firm performance by fostering strategic flexibility. In other words, strategic flexibility mediates the relationship between CEO personality and firm performance. Ample theoretical and empirical evidence supports the relationship between strategic flexibility and firm performance. In todays business environments, products, market, and competitive boundaries are in a state of continuous flux (Evans, 1991; Johnson et al., 2003; Nadkarni & Narayanan, 2007). To compete effectively in such intensely competitive and technologically changing environ-

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ments, firms need to develop strategic flexibility by recalibrating their strategies and refocusing resources on successive decision points, often with different rules of engagement (Bahrami & Evans, 1989). Stability may lock company resources into outdated products and processes, adversely affecting performance (Nerkar & Roberts, 2004). Hitt et al. (1998) argued that in todays competitive landscape, characterized by increasing strategic discontinuities, disequilibrium, hypercompetition, innovation, and continuous learning, firms success depends on their ability to respond quickly to changing competitive conditions (strategic flexibility). Sanchez, Heene, and Thomas (1996) stated that strategic flexibility allows for the attainment of high performance and the ability to take advantage of firm opportunities. Nadkarni and Narayanan (2007) and Grewal and Tansuhaj (2001) found empirical support for the positive relationship between strategic flexibility and firm performance in dynamic environments. Hypothesis 6. Strategic flexibility is positively related to firm performance. Hypothesis 7. Strategic flexibility mediates the relationship between CEO personality and firm performance. METHODS Setting Four factors guided our choice of the Indian business process outsourcing industry as our research setting. First, this industry is gaining increasing importance in both the academic and practitioner literature in management. Offshore business process outsourcing has become a widespread strategy, with a projected annual growth rate of 60 percent (Tapper, 2004); in 2004, over 40 percent of Fortune 500 companies were estimated to have outsourced activities offshore to enjoy cost and time advantages (Mehta et al., 2006). Offshore firms provide a variety of services, including customer support, back-office transaction processing, information technology and software operations, finance and accounting services, and human resource services (Nag, 2004). Paralleling the popularity of business process outsourcing is increasing academic recognition of the importance of examining this industry (Dibbern, Winkler, & Heinzl, 2008; Levina & Vaast, 2008). However, few studies have empirically examined strategy issues in the industry. India is the leader in business process outsourcing services, controlling 75 percent of offshore delivery value (Neale, 2004). The scarcity of empirical studies us-

ing samples of firms from this industry and the dominance of Indian firms in it were the primary motivations for our choice of Indian business process outsourcing as setting. Second, along with spectacular growth rates, the Indian business process outsourcing industry has been experiencing many competitive shifts as a result of low barriers to entry and an influx of new competitors, both domestically and globally (e.g., from countries such as China and the Philippines). The new and different rules of engagement deployed by the new entrants have created major shifts in competitive spaces in the offshore business process outsourcing markets in India (Ramachandran & Voleti, 2004). Other reasons for the dynamism include the numerous and unpredictable changes in communication and process technologies, constantly shifting client needs, and radical changes in client businesses (Mehta et al., 2006). Steady improvement of products and services is no longer sufficient for surviving in the global market. To cope with the rapidity of change, business process outsourcing firms need to develop new areas of technical and business domain expertise (Nag, 2004), improve delivery speed and value to clients, and find radically new ways of developing new service products (Ramachandran & Voleti, 2004). Their survey of Indian business process outsourcing managers led Mehta et al. (2006) to conclude that to successfully meet the challenges in the industry, firms must encourage employees to think outside the box, develop the ability to adapt to change, and foster a learning culture. Thus, strategic flexibility is central to survival, not to mention success, in this Indian industry. Third, the majority of the firms in the Indian business process outsourcing industry are SMEs founded by entrepreneurs; 92 percent of the CEOs in our sample founded their companies. Finkelstein and Hambrick (1996) argued that because of the small size of operations and the dual roles of CEOs as both owners and managers, CEOs in such SMEs enjoy considerably more power in strategy formulation and implementation than do their counterparts in large firms, where ownership is separated from management and the large size of operations requires CEOs to delegate significant authority to other managers. Kets de Vries and Miller (1984) found that CEO personality had a dramatic influence on SMEs, because CEOs frequently have direct and personal contact with most levels of management. CEOs in SMEs play a vital role in determining and reshaping strategy, dominate decision making, and set the climate of the firm through their style, goals, and attitudes. Several empirical studies have also found strong relation-

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ships between CEO personality, firm strategy, and performance in SMEs (Miller & Droge, 1986; Miller & Toulouse, 1986). Moreover, young SMEs, such as those in business process outsourcing (92 percent of sampled firms were less than ten years old), are transitional, have short histories, and face few of the institutional and bureaucratic forces that dominate larger and older firms. Therefore, CEO traits exert a significantly stronger influence on firm strategies than would be likely in the organizational and institutional context likely to exist in older and larger firms (Kets de Vries & Miller, 1984). Thus, we considered the SME nature of the Indian firms to be well-suited to examination of our theorized relationships. Fourth, our research design, which we constructed to avoid common method bias and biases resulting from using secondary sources to model CEO personality (e.g., Peterson et al., 2003), required us to have considerable access to CEOs, other top managers, and firms financial records. This setting also offered satisfactory access to these difficult-to-obtain data. Although use of samples from outside the United States is increasingly encouraged, international management scholars are urging researchers to contextualize their theoretical models deeply within the cultural context of the country studied (Tsui, 2007). We discuss two specific facets of the Indian sociocultural context that are most relevant to understanding the role of CEO personality in Indian business process outsourcing firms: (1) the consistency and relevance of the five-factor model in India and (2) the nature of the influence of CEO personality on firm strategies in the Indian sociocultural context. Consistency and relevance of the five-factor model in India. Two central issues here are whether the five-factor model has a similar meaning in India and in the U.S. and whether it shows a pattern of relationships with expected traits and behaviors in Indian samples that is similar to that shown in U.S. samples. Several studies have found scalar and factor structure equivalence in tests of the model between Indian and U.S. samples (Judge et al., 2002; Schmitt, Allik, McCrae, & Benet-Martinez, 2007). These studies also demonstrated consistency in the magnitude of the five factors and in their patterns of distribution across age and gender in Indian and U.S. samples. Finally, the five-factor model predicted expected behaviors and traits (e.g., self-esteem) in the Indian samples. These results suggest that the model not only has a similar meaning in India to its meaning in the United States but also is central to understanding the relationships between personality and behaviors in the Indian

context. Therefore, we expected our theoretical predictions based on empirical five-factor model studies conducted with U.S. samples to be valid in the Indian context. Influence of CEO personality on firm strategies in the Indian sociocultural context. We expected our theoretical predictions about the influence of CEO personality on firm strategies to be both relevant and strong in the Indian sociocultural context for two reasons. First, although traditional studies have labeled Indian culture as collectivist, with small cohesive social groups and emphases on family considerations and on collective rather than individual goals (Hofstede, 1980), recent studies examining cultural orientation at the individual level have found mixed results for India. For example, Sinha and Verma (1994) found that Indian graduate students express more individualist orientations, with emphasis on independence, autonomy, and individual goals, than collectivist orientations, as the result of Western influence, immediate life concerns, and exposure to mass media. Similarly, Sinha, Sinha, Verma, and Sinha (2001) found that Indian students considered individual goals as important as or even more important than family and collective goals. Ghosh (2004) found that entrepreneurs and small business owners in India had significantly more highly individualistic orientations than did other professionals, such as teachers. CEOs of Indian business process outsourcing firms represent the educated (95 percent of sampled CEOs had completed at least an undergraduate degree) and relatively young (with a mean age of 37.12 years) entrepreneurs (90 percent of sampled CEOs founded their companies), who have been shown to have a more individualistic orientation than the general Indian population. Therefore, we expected the CEOs of Indian SMEs to exercise autonomy and independence in strategic decision making, with an emphasis on individual goals rather than family and social considerations, making individual CEO characteristics, such as personality traits, more influential in strategic decision making than are broader social considerations, such as family background and socioeconomic status. Second, as have earlier studies of Indian culture (Hofstede, 1980; Krishna, Sahay, & Walsham, 2004), recent studies have shown that Indian business process outsourcing managers have a high power distance orientation, implying an acceptance of hierarchical authority and associated work behaviors. For example, Levina and Vaast (2008) found that senior Indian business process outsourcing managers dominated decision making and interactions with clients, whereas lower-rank em-

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ployees willingly accepted guidance and directions from superiors and clients. Dibbern et al. (2008) also found high power distance behaviors such as dominance among information technology (IT) professionals in business process outsourcing firms. A high power distance orientation of both CEOs and other employees is likely to increase CEO dominance in strategy formulation and implementation in Indian business process outsourcing firms, compared with Western firms, in which CEOs are likely to embrace decision-making styles reflecting an orientation to relatively low power distance. Thus, CEO personality is likely to exert a stronger influence on firm strategies in Indian business process outsourcing firms than in firms in the U.S. and other low power distance cultures. Sample and Data Collection First, we obtained a list of firms from the Federation of Indian Micro and Small and Medium Sized Enterprises (FISME), which, with over 200,000 members, is the largest SME association in India. We targeted SMEs in a large Indian city that hosts a large number of business process outsourcing firms. These firms varied in age (two to ten years), size (20 to 2,500 employees), type and range of services offered (e.g., customer interaction services, front- and back-office services), and clientele (e.g., large and small businesses from Europe and North America). Analysis of variance (ANOVA) based on FISME membership data revealed no significant differences in demography between these firms and those in other major cities in India. Thus, these firms represented a microcosm of the Indian offshore business process outsourcing industry. After sample selection, we called each firm to ensure that it was independent and that offshore business process outsourcing was its primary business, defined as at least 60 percent of sales coming from this segment (Rumelt, 1974). We obtained a sample of 427 independent firms with offshore business process outsourcing as their primary business. We contacted the CEOs of the 427 firms by telephone and asked if they and their top managers would participate in the study by completing and returning two questionnaires and by furnishing their recent financial performance data. The CEOs of 217 firms initially agreed to participate. We collected data at four different times through a designated coordinator in each firm. First, we sent the CEOs a personality and demographic survey. A month later, after we had received the completed CEO surveys, we sent strategic flexibility surveys, to be filled out by at least two top managers reporting directly to their firms CEO. All the scales were

in English. Finally, we requested financial performance records from each firms designated coordinator at two different time points: six months and one year following the receipt of the strategic flexibility surveys. We contacted the coordinator by telephone to confirm the receipt of each questionnaire as well as to remind him or her about the return of the questionnaires. For 84 firms, we had to conduct multiple follow-ups. We did not find any significant differences in the model and control variables between early- and late-responding firms. A total of 195 firms provided complete data, which we used in the analyses. The 195 firms in the final sample did not differ significantly from nonresponding firms (232) in age (F 1.41, n.s.), size (F 1.09, n.s.), ownership type (publicly held or privately held) (F 1.26, n.s), and range of service offerings (F 1.61, n.s.). We also used Heckmans (1979) twostep residual procedure to estimate selection bias caused by the nonresponding firms. The rho ( 0.11, s.e. 0.07, n.s.), sigma ( 0. 04, s.e. 0.02, n.s.), and Lambda/inverse Mills ratio ( 0.17, s.e. 0.12, n.s.) were insignificant for the selection equations. These statistical values suggest that our sample was representative and did not suffer from nonresponse bias. Measures CEO personality. We measured personality via the 60-item revised NEO Five-Factor Inventory (12 items for each factor) (Costa & McCrae, 1992), an extensively validated and used measure of the fivefactor model (Costa & McCrae, 1988). Examples of items include I often feel inferior to others (emotional stability); I like to have a lot of people around me (extraversion); I am pretty good about pacing myself so as to get things done on time (conscientiousness); I spend time reflecting on things (openness to experience); and I am interested in people (agreeableness). All items were scored on a scale ranging from 1 (strongly disagree) to 5 (strongly agree). We reverse-coded the ratings on emotional stability to improve our interpretation of results. Coefficient alpha reliabilities were .79 for emotional stability, .70 for extraversion, .81 for conscientiousness, .74 for agreeableness, and .72 for openness to experience. Strategic flexibility. We measured strategic flexibility by adapting Grewal and Tansuhajs (2001) five-item scale assessing a firms ability to respond to environmental variations. Use of this scale was consistent with our conceptualization of strategic flexibility. The scale is conceptually robust, specific to the strategic domain (unlike other scales

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that address product development or technology flexibility), and valid and reliable (Grewal & Tansuhaj, 2001). We pilot-tested the five strategic flexibility items on 30 middle-level Indian business process outsourcing managers who were not in our final sample. After completing the pilot questionnaire, each of these managers reviewed all questions for content, clarity, meaningfulness, and construct measurement (Bagozzi, 1980). We also used item-total correlation and discrimination based on t-statistics to eliminate redundant items (Churchill, 1979). None of the five items had low item-total correlations. Given these results of the pilot test, we retained the five strategic flexibility items. The five items of this scale were (1) We regularly share information and costs across business activities, (2) We frequently change our strategies and structures to derive benefits from environmental changes, (3) Our strategy emphasizes exploiting new opportunities arising from environmental variability, (4) Our strategy reflects a high level of flexibility in managing political, economic, and financial risks, and (5) Our strategy emphasizes versatility and empowerment in allocating human resources. All items were scored on a scale ranging from 1 (strongly disagree) to 5 (strongly agree). The coefficient alpha reliability for the scale was .84. Firm performance. We used three established accounting-based measures of firm performance from the financial records provided by the sampled firms: return on assets (ROA), return on sales (ROS), and return on investment (ROI) (McDonald et al., 2008). Because our sampled firms were proprietary or partnership firms, we could not include market-based measures of performance, such as the ratio of book value to market value, or stock price. In the primary analyses, we lagged performance by one year after the survey date, but in separate analyses we used a half-year lag and found that the hypothesized results were unchanged. Control variables. We used three firm demographic characteristics (firm size, firm age, and firm past performance), three firm resource variables (R&D intensity, capital intensity, and advertising intensity), three CEO demographic variables (CEO age, CEO position tenure, and CEO education), and TMT size as controls (Carpenter et al., 2001). Younger and smaller firms are more dynamic and transient than older and larger firms, which tend to become bureaucratic (Miller & Chen, 1996). Thus, younger and smaller firms are likely to shift their strategies frequently and then achieve greater flexibility than older and larger firms, which are likely to focus on tried and true strategies and the status

quo (Miller & Chen, 1996). We measured firm age as the number of years from a firms founding date to 2005 (the year in which we collected the data). We measured a firms size by the logarithm of the threeyear average of its total number of employees (Guthrie & Olian, 1991). Existing firm characteristics, such as capital intensity, R&D intensity, and advertising intensity, represent important contingencies for developing future strategic flexibility. High capital intensity (capital expenses divided by sales) indicates a firms heavy investment in long-term assets, which fosters strategic persistence rather than flexibility (Dess & Beard, 1984). High R&D intensity (R&D expenses divided by sales) and high advertising intensity (advertising expenses divided by sales) imply heavy investment in innovation and product differentiation, which drive searches for new ideas and new ways of doing things in the future (Rajagopalan & Datta, 1996). Thus, capital intensity is likely to inhibit, whereas R&D and advertising intensity are likely to foster, strategic flexibility. We measured these variables using data from the financial records of the sampled firms for the year preceding the date of collecting CEO personality variables. Change in performance is an important determinant of strategic change (Greve, 1998; Rajagopalan & Spreitzer, 1997). An increase in performance reinforces the value of existing strategies and results in maintenance of the status quo, whereas performance declines force managers to question the validity of existing strategies and foster changes in strategies. Thus, change in past performance is likely to relate negatively to strategic flexibility. We measured the one-year change in past performance using ROA, ROS, and ROI (McDonald et al., 2008) for the year immediately preceding the survey date. Greater CEO age has been associated with rigidity and resistance to change, whereas lower CEO age has been associated with aggressive strategic change (Wiersema & Bantel, 1992). Therefore, younger CEOs are likely to drive strategic flexibility, whereas older CEOs are likely to inhibit it. CEOs with long tenures develop set habits, establish routine information sources, and rely largely on past experience; high commitment to the status quo and reluctance to consider strategic change result (Finkelstein & Hambrick, 1996; Wiersema & Bantel, 1992). Thus, CEOs with shorter position tenures are likely to foster greater strategic flexibility than CEOs with longer tenures. We measured CEO position tenure as the number of years a CEO had held the position at the time of data collection (Herrmann & Datta, 2002). Previous studies have suggested that a high level

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of education increases a CEOs receptivity to change in corporate strategy (Wiersema & Bantel, 1992); highly educated CEOs are likely to promote strategic flexibility more than CEOs with relatively lower levels of education. CEO education level was assessed by use of a seven-point scale (1 high school, 2 attended college, 3 undergraduate degree, 4 attended graduate school, 5 masters degree, 6 attended doctoral program, 7 doctorate) (Herrmann & Datta, 2002). The greater size of a firms TMT, the greater the diversity of skills and perspectives it contains, and this diversity is likely to stimulate strategic flexibility (Eisenhardt & Schoonhoven, 1990). Following previous TMT research (Judge & Miller, 1991), we measured TMT size by asking each CEO to name the key managers who actively participated in strategic decisions. This operationalization of TMT size was based on the premise that the outcomes of a strategic decision are largely a function of who participates in the decision-making process (Jackson, 1992). ANALYSES AND RESULTS We tested our theoretical model by use of structural equation modeling (SEM; Joreskog & Sorbom, 1993). We used LISREL 8 (Jo reskog & So rbom, 1993) to test our model in three steps. As recommended, we used mean-centered values of our construct measures in the SEM analysis (Bollen, 1989). First, we used confirmatory factor analysis (CFA) to examine the convergent validity of our construct measures as based on the factor loadings of the individual measures on their a priori defined factors. Second, we examined the significance of the nonlinear relationship of agreeableness with strategic flexibility by comparing two structural models:1

a linear-only model and a nonlinear model. In the linear-only model, we included only the linear agreeableness variables (without the squared agreeableness term). In the nonlinear model, we included both the linear variables and a squared agreeableness term (Bollen, 1989). We computed the squared term from the mean-centered variables of agreeableness. Third, we tested the mediation effects of strategic flexibility by comparing three alternative, nested models: the fully mediated model (hypothesized model), a partially mediated model (direct relationships of CEO personality variables to firm performance and indirect relationships of strategic flexibility with the CEO personality variables and with firm performance), and a nonmediated model (direct relationship of CEO personality variables to firm performance). Following the recommendations of others (e.g., MacCallum & Austin, 2000; Marsh, Balla, & McDonald, 1988), we used several widely accepted model fit adequacy indexes: the chi-square statistic, adjusted goodness-of-fit index (AGFI; Joreskog & Sorbom, 1993), incremental fit index (IFI; Bollen, 1989), and root-mean-square error of approximation (RMSEA). A significant improvement in the fit of the fully mediated model over the nonmediated and partially mediated models would confirm the mediation effects of strategic flexibility. We report the results of these analyses in the following sections. Validity and Reliability of Construct Measures We validated the construct measures using CFA, which is most suitable for confirming whether construct measures load on their respective a priori defined constructs (Browne & Cudek, 1993). The range of loadings for the five personality factors were as follows: conscientiousness, .81 to .92; extraversion, .78 to .94; agreeableness, .83 to .90; emotional stability, .75 to .90; and openness to experience, .79 to .91. The factor loadings of the strategic flexibility measures ranged from .77 to .93, and those of firm performance ranged from .84 to .95. Table 1 shows descriptive statistics, correlations, and reliabilities for the eight construct measures. These results suggest high reliability and validity for our study measures. Nonlinear Model Fit Analyses Our comparison of the linear-only (without agreeableness squared) and the nonlinear models (with agreeableness squared) indicated that the nonlinear model ( 2 97.14, df 30; AGFI .92, IFI .95, RMSEA .05) had a considerably better

1 For each model, we assigned one manifest variable (based on the participants average of the mean-centered scale scores) to one latent variable for the five personality factors, strategic flexibility, and firm performance. As the reliability estimates of manifest variables affect a models parameters, we fixed the error variances of the manifest variables (Jreskog & Srbom, 1993). Error variance was calculated via the reliability estimates (alpha coefficients) presented in Table 1 (Joreskog & Sorbom, 1993: 3738). This procedure allows an analysis of the structural relations among the latent rather than the manifest variables. However, we also tested our hypothesized model using the three individual performance measures (ROA, ROS, ROI) rather than the averaged single measure of firm performance. These results were consistent with the primary results ( 2 104.51; AGFI .90; IFI .92; RMSEA .05).

TABLE 1 Descriptive Statistics and Correlationsa

Variables

Coefficient Alpha Mean s.d. Reliabilities 1 2 3 4 5 6 7 8 9 10 11 12

13

14

15

16

Controls 1. Firm sizeb 2. Firm age 3. Past performance 4. Capital intensity 5. R&D intensity 6. Advertising intensity 7. CEO age 8. CEO education 9. CEO tenure 10. TMT size 1.04 3.12 0.10 0.21 0.32 0.29 5.42 1.72 2.37 2.16 .24* .11 .20 .14 .17 .20 .09 .19 .16 .05 .22 .19 .12 .13 .04 .09 .10 .15 .20 .14 .08 .20 .07 .14 .22 .18 .17 .19 .28** .11 .12 .22 .20 .21 .14 .16 .12 .17 .11 .09 .11 .04 .12 .07 .05

2.15 8.57 0.08 0.78 1.35 1.14 32.12 4.41 6.14 3.01

Model variables 11. Conscientiousness 12. Emotional stability 13. Agreeableness 14. Extraversion 15. Openness to experience 16. Strategic flexibility 17. Firm performance 0.74 0.59 0.47 0.52 0.62 0.74 0.03 .81 .79 .74 .70 .72 .84 .85 .07 .12 .05 .17 .14 .18 .10 .11 .08 .14 .12 .09 .15 .16 .19 .17 .15 .21 .25* .26* .29** .22 .12 .15 .17 .20 .25* .20 .20 .15 .15 .20 .24* .23* .24* .21 .11 .17 .22 .20 .20 .22

3.48 3.09 3.69 3.75 3.84 3.34 0.10

.10 .15 .11 .07 .20 .25* .21

.05 .09 .04 .15 .08 .14 .17

.09 .14 .10 .18 .12 .22* .20

.16 .07 .04 .09 .05 .19 .21

.19 .15 .09 .23* .22* .28**

.24* .22* .25* .37*** .29**

.20 .22 .23* .20 .25* .41*** .19 .30** .32** .44***

n 195. Mean and median values of firm size are the natural logarithmic transformations of the raw data. The mean firm number of employees was 411.05 and the median was 396. p .10 * p .05 ** p .01 *** p .001

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FIGURE 1 Standardized Structural Coefficients for the Hypothesized Fully Mediated Modela

Conscientiousness 0.35 Emotional Stability

***

0.29

***

Agreeableness

0.21

0.34 Strategic Flexibility

***

Firm Performance

0.25 Agreeableness Squared

**

0.37

***

0.41 Extraversion

***

Openness to Experience
The standardized structural coefficients for the control variables are as follows: firm size, 0.09; firm age, 0.05; past performance change, 0.17*; capital intensity, 0.14*; R&D intensity, 0.20*; advertising intensity, 0.09; CEO age, 0.15; CEO education, 0.08; CEO tenure, 0.16; TMT size, 0.10. *p .05 **p .01 ***p .001
a

fit to the data than the linear-only model ( 2 139.71, df 33; AGFI .75, IFI .79, RMSEA .07). The chi-square difference between the two models was also significant (32.57, p .001, df 3), indicating that our hypothesized nonlinear model had a better fit with the data than the linearonly model. We show the standardized structural parameters of our hypothesized nonlinear model in Figure 1. Agreeableness squared relates negatively with strategic flexibility ( 0.25, p .01), which confirms the inverted U-shaped relationship between agreeableness squared and strategic flexibility and supports Hypothesis 3. Mediation Model Fit Analyses We tested our complete mediation model using the SEM approach suggested by James and Brett

(1984), which differs from the widely used incremental approach of Baron and Kenny2 (1986) in two ways (for details, refer to James, Mulaik, and Brett [2006]). First, unlike the Baron and Kenny approach, which uses a partial mediation model as the base model, the SEM approach uses the more parsimonious complete mediation model as its baseline. Thus, the SEM approach a priori excludes the direct relationship between the independent

We tested our mediation model by means of the Baron and Kenny approach in a regression analysis using composite average mean-centered measures for the personality variables, strategic flexibility, and firm performance. These results were consistent with our primary results and supported our mediation hypotheses; they are available from the authors upon request.

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TABLE 2 Model Fit Indexes

Model Fit
2 (df) AGFI IFI RMSEA

Null Model 371.23 (54) 0.50 0.54 0.20

Nonmediated Model 149.56 (33) 0.69 0.64 0.11

Partially Mediated Model 94.03 (25) 0.80 0.82 0.07

Fully Mediated (Hypothesized) Model 97.14 (30) 0.92 0.95 0.05

variable and the dependent variable as a condition for mediation (James et al., 2006). Second, complete mediation is confirmed in the SEM approach by explicitly testing the indirect relationship from the independent variable to the dependent variable through the mediator, rather than by testing the decrease in the coefficient of the relationship between the independent and the dependent variable once the mediator is entered, as in the Baron and Kenny approach (Shrout & Bolger, 2002). Therefore, in the SEM approach, the relationship from the independent variable to the dependent variable is not used as a control in estimating the relationship between the mediator and the dependent variable. Rather, mediation is indicated when the paths between the independent variable (here, the CEO personality variables) and the mediator variable (strategic flexibility), as well as the path between the mediator variable (strategic flexibility) and the outcome variable (firm performance) are significant, and the overall model shows acceptable goodness of fit (James et al., 2006). The model fit indexes, which are presented in Table 2, suggest an excellent fit for our hypothesized model ( 2 97.14, df 30; AGFI .92; IFI .95; RMSEA .05). The structural coefficients of our hypothesized, fully mediated model (Figure 1) indicate that conscientiousness has a negative relationship to strategic flexibility ( 0.35, p .001), whereas emotional stability relates positively to strategic flexibility ( 0.29, p .001). Both extraversion ( 0.37, p .001) and openness to new experience have a positive relationship to strategic flexibility ( 0.41, p .001). These results support hypotheses Hypotheses 1, 2, 4, and 5. As discussed earlier, the agreeableness-squared term is negative and significant for strategic flexibility ( 0.25, p .01), indicating an inverted U-shaped relationship and supporting Hypothesis 3. Strategic flexibility ( 0.34, p .001) relates positively to firm performance. Thus, Hypothesis 6 is supported. Together, these results support the mediation conditions (James et al., 2006). To further test the mediation hypothesis for strategic flexibility, we compared our hypothesized

(fully mediated) model with the partially mediated model and the nonmediated model, as recommended by Kelloway (1998). In the partially mediated model, we specified direct paths from the CEO personality variables to firm performance and included all other specifications in the basic hypothesized model. In the nonmediated model, we specified direct paths from each CEO personality variable to firm performance and dropped the indirect paths from the CEO personality variables to strategic flexibility and from the strategic flexibility variables to firm performance. The partially mediated model had a satisfactory fit with the data ( 2 94.03, df 25, AGFI .80, IFI .82, RMSEA .07). However, the model-data fit is not as strong for the partially mediated model as for the hypothesized model. The change in the value of chi-square between this model and the hypothesized model was also marginal and nonsignificant ( 2 3.11, df 1). Moreover, the added direct paths from conscientiousness ( 0.10, n.s.), emotional stability ( 0.14, n.s.), agreeableness ( 0.09, n.s.), agreeableness squared ( 0.19, n.s.), extraversion ( 0.12, n.s.), and openness to experience ( 0.17, n.s.) to firm performance were not significant. The nonmediated model did not fit the data well, with several indexes failing to meet the requirements ( 2 149.56, df 33, AGFI .69, IFI .64, RMSEA .11), results that are consistent with the a priori assumption of complete mediation in the SEM approach (James et al., 2006). These results indicate that the fully mediated hypothesized model had the best fit and supported Hypothesis 7. We checked for interaction effects among the five factors. We did not find any interactions among the five constructs in influencing strategic flexibility.

DISCUSSION Our study yielded two major results: (1) each variable in the five-factor model of personality measured for a firms CEO influenced the firms strategic flexibility and (2) strategic flexibility me-

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diated the relationship between CEO personality and firm performance. Theoretical Implications Upper echelons and CEO psychology research. Our results contribute to the upper echelons and CEO psychology theories in several ways. First, previous studies have not paid adequate attention to the mechanisms underlying the relationships between CEO personality and firm performance (exceptions are studies by Gupta and Govindarajan [1984] and Peterson et al. [2003]). Our study extends upper echelons research by suggesting how personality attributes of CEOs influence firm performance. We specified a mediator (strategic flexibility) through which CEO personality influences firm performance. Our results suggest that the effectiveness of a CEO personality trait depends on whether the trait enhances or inhibits strategic flexibility. CEO extraversion, emotional stability, and openness to experience enhanced firm performance by fostering strategic flexibility, whereas CEO conscientiousness undermined firm performance by inhibiting flexibility. Medium levels of agreeableness maximized strategic flexibility and, consequently, firm performance. An important implication of this result is the need for empirical studies to identify specific mediators in the relationship between CEO personality and firm performance. Such studies are critical to developing a more complete understanding of how CEO personality attributes influence firm performance. Second, our study demonstrates the importance of the five-factor model of personality in a strategic context. Prior studies have examined attributes that capture only a narrow slice of CEO personality (e.g., locus of control) or that, despite intuitive appeal, lack strong psychological and methodological grounding (e.g., CEO hubris) (Hiller & Hambrick, 2005: 298). Researchers have been urged to use valid frameworks from the psychology literature that comprehensively explain fundamental personality differences in CEOs (Carpenter et al., 2004; Hiller & Hambrick, 2005). Cannella and Monroe (1997) noted that the CEO psychology literature may understated the contribution that personality can make to explaining the behavior of CEOs (and other top managers), because researchers have failed to use comprehensive and robust frameworks of personality attributes in their studies. The five-factor model, one such framework, provides a valid, robust, and comprehensive way of representing fundamental personality differences (Judge et al., 2002). Despite this models rigor and

comprehensiveness, to our knowledge only one prior study has used it to examine CEO personality (Peterson et al., 2003). Moreover, the authors of that study examined the relationship of the personality factors measured for CEOs to TMT decision making, whereas we focus on strategic behavior (strategic flexibility). Our results highlight the relevance of CEO personality factors measured to one strategic behavior and underscore the need for examining their relationship to other strategic behaviors, such as innovation (Subramaniam & Youndt, 2005) and alliance formation (Eisenhardt & Martin, 2000). Such studies may strengthen the contributions of CEOs personality attributes in explaining their strategic behaviors. Third, studies examining specific CEO personality attributes are sparse (Gupta & Govindarajan, 1984; Miller, Kets de Vries, & Toulouse, 1982; Miller & Toulouse, 1986; Peterson et al., 2003). Most upper echelons studies have used demographic variables as proxies for personality variables (Finkelstein & Hambrick, 1996; Pitcher & Smith, 2001). We found weak correlations between CEO demographic characteristics (e.g., age, tenure, and education) and CEO personality attributes. An important implication of this result is that, for CEOs, demographic variables may not be appropriate proxies for personality variables. Our results support recent criticisms of the use of CEO demographic characteristics as proxies for CEO personality attributes (Carpenter et al., 2004; Lawrence, 1997). Personality research. Our results have important implications for personality research in the field of organizational behavior. Our results for emotional stability, extraversion, and openness to experience were consistent with published psychology and leadership research (Bono & Judge, 2004; Judge et al., 2002). However, our results for conscientiousness and agreeableness differed somewhat from results of extant studies. Leadership studies have indicated that conscientiousness and agreeableness relate positively to the effectiveness of team and functional leaders (Bono & Judge, 2004); our results indicate that conscientiousness undermines firm performance by inhibiting strategic flexibility, whereas a medium level of agreeableness maximized strategic flexibility and consequently firm performance. The inconsistency in these results may have several explanations. First, it suggests that insights about psychological attributes in the psychology and leadership literatures based on lower- and middle-level managers may not always be replicated fully in studies concerning CEOs. Our results support the contention of the strategic choice (Child,

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1972) and upper echelons (Finkelstein & Hambrick, 1996; Hambrick & Mason, 1984) theories that decision making at the top level (the strategic level) is unique and distinct from that at other levels in a firm. Thus, deemphasizing conscientiousness and balancing assertiveness and altruism (medium agreeableness) may be more critical for CEOs involved in decision making at top levels than for managers operating at other levels in the firm. Future theorists of strategic leader attributes may want to consider the uniqueness of the strategic level. Second, the negative impact of conscientiousness on strategic flexibility and consequently on firm performance could be due to the high munificence (60 percent growth) (Tapper, 2004) in the Indian business process outsourcing industry for our study period that has occurred as a result of the global outsourcing boom. This high munificence may have provided incumbent firms with the confidence and energy to develop an aggressive, opportunistic, change orientation that is then further validated by high performance (Lumpkin & Dess, 2001). Therefore, attributes of conscientiousness such as dependability, perseverance, and need for achievement served as barriers in this virtuous cycle of change propelled by high industry munificence. However, these patterns of relationships could be different under conditions of economic downturn eroding industry growth. In times of moderate or low munificence, incumbent firms may shift to a more stable, cautious, and rational orientation (Van de Ven & Poole, 1995) in which attributes of conscientiousness such as dependability, achievement, perseverance, efficiency, and responsibility may help the firms cope effectively with environmental scarcity and improve rather than inhibit performance. Examining the relationships between conscientiousness, strategic flexibility, and firm performance in periods of low munificence is an important extension of our study. Finally, the negative influence of conscientiousness could have resulted from our focus on shortterm performance (we measured six-month and one-year lags). Recent literature on strategic flexibility suggests that although it generally has a positive influence on performance in fast-changing environments, the specific costs and benefits associated with strategic flexibility in the short and the long run may differ (Johnson et al., 2003). For example, in the short run, an aggressively changeand flexibility-oriented strategy may yield superior performance. However, to achieve long-term success, firms need to balance tried-and-true strategies and tighter control with change and risk taking

(Musteen, Datta, & Herrmann, 2009). This argument suggests that conscientiousness may be related negatively with short-term performance but may have an inverted U-shaped relationship with long-term performance. Very high levels of conscientiousness may result in inertia and adverse performance, whereas very low levels of conscientiousness may create instability and uncertainty for firms and, as a result, firm performance may be maximized at medium levels of conscientiousness. Examining the implications of strategic flexibility for longterm performance is an important area for future research. Managerial cognition. We based our hypotheses about the relationships between the personality factors and strategic flexibility on the cognitive filtering mechanisms described in research on bounded rationality (Simon, 1991) and managerial cognition (Weick, 1995). The central contention in this body of work is that firms are continuously bombarded with complex and ambiguous information that is beyond the cognitive capacities of strategic decision makers, who make sense of this vastness and complexity by constructing mental models as bases for strategic decision making. Unlike personality attributes, which are relatively stable, mental models are dynamic and change through learning (Cannella & Monroe, 1997; Hambrick & Fukutomi, 1991). An important area of research in bounded rationality is how strategic decision makers develop attention in mental models. Most scholars in this area have theorized about the impacts of industry context (Nadkarni & Barr, 2008) and firm context (Cho & Hambrick, 2006; Ocasio, 1997) on the attention focus of managers. For example, Nadkarni and Barr (2008) found that industry velocity influenced whether the attention focus of top managers was directed toward the general or the task sector of the external environment. Ocasio (1997) theorized that firms communication and procedural channels (e.g., action memoranda, personnel evaluations, budgetary and capital appropriations requests) affect the attention of decision makers. Our results extend this literature by hinting that personality attributes (measured per the fivefactor model) of CEOs may influence their attention focus, which in turn may influence strategic flexibility. Although we did not explicitly measure mental models, the theoretical mechanisms that we used to develop our hypotheses are closely tied to attention, which is embedded in mental models (Bogner & Barr, 2000; Nadkarni & Narayanan, 2007). Thus, our results hint that attention may mediate the relationship between

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personality factors and strategic flexibility. This contention is consistent with cognitive psychology studies that have shown that although individual mental models are dynamic and change over time through learning, relatively stable traits such as cognitive ability (Bieri, 1961; Meyer, 1982; Ryan & Sackett, 1987) and emotional intelligence (Goleman, 1995) influence them. For example, Goetzmann et al. (2007) found that fivefactor model traits influenced the types and frequency of metaphors salient in the domainspecific mental models of lung transplant patients. Thus, these traits may influence the types of mental models that CEOs develop, the frequency with which CEOs change their mental models, and the patterns of changes in the mental models. For example, CEOs with high openness to experience may notice and absorb more new stimuli and thus may develop broad and complex mental models, as well as change their mental models more frequently and more substantially than CEOs with low openness to experience. Examining the relationship between personality and attention in mental models is an important area of future research. Strategic flexibility. Our results also contribute to the literature on strategic flexibility by highlighting the role of CEO personality in developing such flexibility. This literature has focused on the influence of technological (Evans, 1991; Sanchez, 1995; Worren et al., 2002), resource (Harrigan, 1980; Young-Ybarra & Wiersema, 1999), and network (Young-Ybarra & Wiersema, 1999) structures on strategic flexibility. Our results extend this literature by suggesting that CEO personality is crucial. Our results are especially meaningful because we included several controls, including resource and demographic variables that have been considered as antecedents of strategic flexibility. An important implication of our results is the need for studies in this area to focus on other CEO attributes that could potentially influence strategic flexibility. The core self-evaluation (CSE) framework, for instance, identifies a significant and common core of four attributes: self confidence, generalized self-efficacy, emotional stability, and locus of control (Judge, Thoresen, Pucik, & Welbourne, 1999). Recently, Hiller and Hambrick (2005) stressed the relevance of the core self-evaluation attributes to explaining CEOs strategic behaviors. Future studies could examine the relationship between these attributes and strategic flexibility. Our results also have implications for the role of industry context. Organizational behavior studies have suggested that relationships between five-factor model traits and work outcomes

could be contingent on the dynamism of a task context (Lepine & Van Dyne, 2001). The strategy literature also suggests that effective adaptation to environment is different for firms in dynamic environments than it is for firms in stable industry contexts (Bogner & Barr, 2000; Eisenhardt & Martin, 2000; Nadkarni & Narayanan, 2007). Together, these studies suggest that the relationships between five-factor model traits (especially conscientiousness and agreeableness), strategic flexibility, and firm performance could pan out differently in a stable industry context. Testing our model in a stable industry context is an important area of future research. Limitations and Future Directions Our use of SMEs in this research limits the generalizability of the current results to large corporations. However, SMEs play a critical role in several hightechnology industries, including electronics, aerospace manufacturing (Kaivanto & Stoneman, 2007), and biotechnology (Luukkonen, 2005). Moreover, results of SME studies have made valuable contributions to strategic theories such as those on knowledge-based resources (Wiklund & Shepherd, 2003) and internationalization (Oviatt & McDougall, 1995). Nonetheless, future studies should test these relationships in large corporations. Second, we tested our hypotheses in a single industry (business process outsourcing in India) to control for confounding industry variables and to improve the internal validity of our results. However, our focus on a single industry limits the generalizability of our results. Anecdotal evidence suggests that our studied industry is high in growth and dynamism (Mehta et al., 2006; Ramachandran & Voleti, 2004; Tapper, 2004). Future studies could test the influence of CEO personality on strategic behaviors and firm performance in both dynamic and stable industries. Such studies could confirm the generalizability of our model or could yield some important differences between the two contexts. Third, we used Indian business process outsourcing in response to recent calls to conduct empirical research in countries that are emerging as important global players and at the same time have sociocultural contexts very different from those of Western countries (Tsui, 2007). Tsui (2007) emphasized that such studies are critical to developing theories that are meaningful in the global context. Nonetheless, the Indian sociocultural context may have influenced the relationships between CEO personality factors (especially agreeableness) and strategic flexibility. These relationships could be

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very different in samples from Western countries with different cultural orientations. Fourth, we conducted our study at a time when the Indian economy in general and the studied industry in particular were experiencing record growth levels. This unique business context may have influenced the relationships among CEO personality, strategic flexibility, and firm performance (especially for conscientiousness). A different pattern of relationships might be found in times of economic downturn. Fifth, this study focused on the direct relationship between the elements of CEO personality and strategic flexibility. To achieve this focus, we controlled for several firm contingencies by choosing a relatively uniform sample of firms (relatively young, service-oriented SMEs in a specific IT segment in India business process outsourcing) and by using several firm variables as controls in our analysis. However, firm contingencies (Pettigrew, 1988), such as age, size, R&D focus, and knowledge intensity, could moderate the relationships between CEO personality and firm strategies. Examining the nature of this moderation is an important area of future research. Finally, the five-factor model is only one potential operationalization of personality. Other measures, such as the core self-evaluation framework (Hiller & Hambrick, 2005; Judge, Erez, Bono, & Thoresen, 2003) may also be relevant to strategic flexibility. Practical Implications Our results have two important implications for practicing managers and entrepreneurs. First, our results guide CEOs and entrepreneurs in dynamic industries on how to maximize firm performance. We found that a one-point increase in strategic flexibility (measured on a Likert-type scale) resulted in increases of 4.21 percent in ROA, 5.01 percent in ROS, and 3.85 percent in ROI. To foster strategic flexibility and consequently firm performance, CEOs from such industries need to adopt extraversion and openness to new experience and to avoid comprehensiveness, detail, and the status quo in decision making. CEOs could enlist individuals who possess these traits for their top management teams and could give them prominent roles in specific strategic domains. For example, CEOs could balance goal achievement and assertiveness with likability by empowering highly agreeable TMT members to promote idea generation and by enlisting more assertive TMT members (with medium levels of agreeableness) to manage conflicts and resistance to implementing these ideas. Sec-

ond, our results suggest that the five-factor model as applied to CEO personality is particularly relevant to predicting firm performance in dynamic industries. This implies that venture capitalists could use these personality measurements in predicting the success of SMEs operating in dynamic industries and thus, in making investment decisions. In conclusion, our results highlight the importance of the personality attributes of CEOs in fostering strategic flexibility and firm performance. We hope that these results spur additional research encompassing CEO psychology, strategic behavior, and firm performance. Such research could further understanding of the mechanisms underlying the relationship between CEO characteristics and firm performance. REFERENCES
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Sucheta Nadkarni (ssn28@drexel.edu) is an associate professor of management in the LeBow College of Business at Drexel University. She received her Ph.D. in strategic management at the University of Kansas. Her research interests include strategic cognition, CEO personality and temporal attention, and strategic flexibility.

Pol Herrmann (pol@iastate.edu) is an associate professor of management in the College of Business at Iowa State University. He received his Ph.D. in strategic management at the University of Kansas. His research interests include technology and innovation management, strategic leadership, strategic change, and international strategies.

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