Centers of gravity: The effect of stable shared leadership in top management teams on firm growth and industry evolution

• DOI: http://doi.org/10.1002/smj.3048
• Published date: 01 March 2020
• Author: Atsushi Ohyama,Serguey Braguinsky,Rajshree Agarwal
• Date: 01 March 2020

SPECIAL ISSUE ARTICLE

Centers of gravity: The effect of stable shared

leadership in top management teams on firm growth

and industry evolution

Rajshree Agarwal

1

| Serguey Braguinsky

1,2,3

| Atsushi Ohyama

4

1

Robert H Smith School of Business,

University of Maryland, College Park,

Maryland

2

National Bureau of Economic Research,

Cambridge, Massachusetts

3

Institute of Social and Economic Research,

Osaka University, Osaka, Japan

4

Institute of Innovation Research,

Hitotsubashi University, Tokyo, Japan

Correspondence

Rajshree Agarwal, Robert H Smith School

of Business, University of Maryland,

College Park, MD 20742.

Email: rajshree@umd.edu

Funding information

JSPS KAKENHI, Grant/Award Number:

15KK0078; National Science Foundation,

Grant/Award Number: 1632833

Abstract

Research Summary:We study the processes of firm

growth in the evolution of the Japanese cotton spinning

industry during 1883–1914 by integrating strategy and

historical approaches and utilizing rich quantitative firm-

level data and detailed business histories. The resultant

conceptual model highlights growth outcomes of path

dependencies as firms evolve across periods of single ver-

sus shared leadership, establish stability in shared leader-

ship, or experience repeated discord-induced top

management team (TMT) leader departures. While most

firms do not experience smooth transitions to stable shared

TMT leadership, a focus on value creation, in conjunction

with talent recruitment and promotion, enabled some firms

to achieve stable shared leadership despite discord-

induced departures, engage in long-term expansion, and

emerge as “centers of gravity”for output and talent in the

industry.

Managerial Summary:We demonstrate stable shared

leadership is at root of firms who emerge as centers of

gravity in an industry and account for the lion's share of

output. Stable shared leadership enables growth strategies

such as talent recruitment, product diversification, down-

stream integration, and acquisitions. Stable shared leader-

ship, however, is extremely difficult to maintain. Most

firms experience discord-induced departures in TMTs due

to politics and power struggles. Firms that deviate from

this norm to become industry leaders achieve stable shared

Received: 30 September 2017 Revised: 9 April 2019 Accepted: 10 April 2019 Published on: 18 June 2019

DOI: 10.1002/smj.3048

Strat Mgmt J. 2020;41:467–498. wileyonlinelibrary.com/journal/smj © 2019 John Wiley & Sons, Ltd. 467

leadership by adhering to fundamental principles related

to long-term value creation as opposed to short-term gain,

adoption of merit-based promotion systems in defiance of

stereotypes, sharing of power within TMT leadership to

enable efficient division of labor, and honorable resolution

of conflicts and ethical breaches.

KEYWORDS

entrepreneurial firm growth, historical methods, industry evolution,

stable shared leadership, top management teams

1|INTRODUCTION

A few firms often dominate as industries evolve from early stages of entrepreneurial entry through

shakeouts and market consolidation (Gort & Klepper, 1982; Klepper, 1996). Firm characteristics

such as first mover advantage, pre-entry experience, scale economies, and returns to innovation are

often used to explain this dominance (Bayus & Agarwal, 2007; Klepper & Simons, 2000; Klepper,

1996). This led Felin, Foss, and Ployhart (2015) to note: “evolutionary arguments in strategy …are

fundamentally silent about individuals”(p. 581). Our study answers calls for examining the micro-

foundations of firm's managerial talent (Abell, Felin, & Foss, 2008) by addressing the questions:

What characteristics of top management teams (TMTs) determine which firms are likely to grow and

dominate in an industry? How do these characteristics impact the strategies undertaken by the firm,

as they leverage opportunities or confront impediments to growth?

We answer the above questions in the historical context of the Japanese cotton spinning industry.

This industry and time period are ideal for three reasons. One, the industry exhibits the classic pat-

terns documented in industry evolution studies, and represents a context where some firms rose

among seemingly identical others to become “centers of gravity,”a term we use to denote those firms

who represented the industry's leading share for talent and output, and thus dominance in an industry.

Two, the time period represents the concurrent emergence of Japan's status as an industrialized nation

and its educational system. Importantly, Japan's firm governance system during this period closely

resembles what we observe in the West, then and now.

1

Three, rich firm and industry historical

accounts documented at the time of occurrence enable triangulation of qualitative and quantitative

data over entire firm and industry lifecycles, and uncover TMT transitions and evolution through

entry and exit of members.

In undertaking the study, we depart from the typical hypothesis-testing used in strategic manage-

ment studies, and also from the typical narrative approach used in historical research. Instead, we

integrate both approaches, consistent with studies combining deep dives into phenomena over long

periods with rigorous empirical methods (Braguinsky & Hounshell, 2016; Ingram, Rao, &

Silverman, 2012). We first utilize rich historical data to inform the quantitative panel data analysis

1

While Japanese firms are sometimes viewed to have a consensus decision-making culture (e.g., Aoki, 1990), the view applies

(if at all) to much later periods, such as immediately pre- and post-World War II. During our study period, the Japanese

economic system and its firm governance system closely resembled the West (Noguchi, 1998; Okazaki & Okuno-Fujiwara,

1993). This is reflected in corporate governance and decision making of firms included in our study; almost 90% were joint

stock corporations with dispersed ownership and decision-making.

468 AGARWAL ET AL.

and adjudicate across plausible relationships among key variables of interest. Consistent patterns

observed in the quantitative analysis across different empirical specifications and over different his-

torical periods then serve as guiding lights for the historical narrative, and enable separating the

wheat from the chaff. Together, these inform the path dependencies through which TMT characteris-

tics manifest into growth implications, and uncover the mechanisms at play.

The quantitative analysis reveals a strong association between stable shared TMT leadership and future

firm growth. Shared leadership is defined as the presence of two or more active TMT leaders at the helm.

We leverage historical data to discern actual leaders withintheTMTratherthansimplyrelyontitulardes-

ignations. Stability in TMT is defined as the lack of discord-induced departures (when one of the leaders is

ousted or resigns due to a conflict within shared leadership teams). We find that periods of single leadership

are associated with lower future growth, and periods following discord-induced departure events, especially

repeated ones, are associated with even lower future firm growth. Importantly, firms with stable shared

leadership accumulate more resources, most notably, they recruit and accumulate better engineering talent,

and this eventually leads them to become “centers of gravity”in the industry.

The quantitative findings set the stage for an in-depth examination of business histories. A com-

parison of seemingly similar firms (early movers with similar size) reveals salient pathways of TMT

evolution for growth consequences. Becoming a center of gravity through smooth transition to stable

shared leadership was the exception rather than the norm. A few firms with single leadership all

through their history experienced limited growth and exit. The majority of firms experienced

discord-induced departures of TMT leaders. Regardless of whether the underlying reasons for the

departure related to strategic, interpersonal, or ethical discords, these firms followed one of two dis-

tinct pathways. Some firms were able to establish stable shared leadership because they focused on

value-creation in their resolution of discord-induced departures, and were willing to break from tradi-

tion by promoting talent to their TMT based on merit for human capital complementarities. In turn,

stable shared leadership permitted these firms to become centers of gravity through long-term expan-

sion strategies such as superior product choice, expansion of scale (including acquisition of less well

managed firms), and downstream integration. In contrast, other firms failed to establish stable shared

leadership. Their business histories reveal either multiple discord-induced departures stemming from

politics and power struggles, or reversion to single leadership. These firms, hampered in their ability

to pursue growth strategies, experienced limited growth, and ultimately exited the industry.

Taken together, our findings contribute to existing literature streams in entrepreneurship, TMTs,

and evolutionary economics by uncovering path dependencies and embracing the endogeneity and

feedback effects over time between managerial talent, firm, and industry evolution. Stable shared lead-

ership is not something firms are endowed with exogenously. The in-depth examination of business

histories allows us to open the black box of “higher-level”causality, revealing the fundamental factors

that influence explanatory variables in the quantitative analysis. The combinations of quantitative anal-

ysis with historical methodology depict how firms evolve through virtuous spirals between stable

shared leadership, accumulation of talent and physical capital, and growth for industry dominance.

Across an industry census, we highlight that the growth of entrepreneurial firms is intricately related to

founding teams developingstable shared leadership as they transition to TMTs over the firmlifecycle.

2|THE EVOLUTION OF THE JAPANESE COTTON SPINNING

INDUSTRY

The Industrial Revolution started with the mechanization of cotton spinning, which was also the

starting point to Japan's status as the only industrialized nation in the East during much of the 20th

AGARWAL ET AL.469