CEO PERSONALITY, STRATEGIC FLEXIBILITY, AND FIRM PERFORMANCE: THE CASE OF

THE INDIAN BUSINESS PROCESS OUTSOURCING INDUSTRY

Author(s): SUCHETA NADKARNI and POL HERRMANN
Source: The Academy of Management Journal , October 2010, Vol. 53, No. 5 (October
2010), pp. 1050-1073
Published by: Academy of Management

Stable URL: https://www.jstor.org/stable/20788808

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? Academy of Management Journal
2010, Vol. 53, No. 5, 1050-1073.

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 break
throughs, 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 ever
changing environmental conditions, a firm's ability
to change direction quickly and to reconfigure stra
tegically is crucial to its success in achieving sus
tainable competitive advantage (Hitt, Keats, & De
Marie, 1998). In other words, firms need to embrace
strategic flexibility (Hitt et al., 1998; Johnson, Lee,
Saini, & Grohmann, 2003). Ample empirical evi
dence supports the contention that strategic flexi
bility drives firm performance (Grewal & Tansuhaj,
2001; Nadkarni & Narayanan, 2007; Worren,
Moore, Cardona, 2002). It is therefore not surpris
ing 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 re
lates 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 review
ers for their excellent and developmental feedback,
which helped us immensely in improving the paper.
1050
Copyright of the Academy of Management, all rights reserved. Contents may not be copied, emailed, posted to a listserv, or otherwise transmitted without the copyright holder's express
written permission. Users may print, download or email articles for individual use only.
(Sanchez, 1995; Worren et al., 2002; Young-Ybarra
& Wiersema, 1999) has ignored the role of CEOs in
developing strategic flexibility. This gap is espe
cially notable because the strategic choice (Child,
1972) and upper echelons (Hambrick & Mason,
1984) perspectives have highlighted the impor
tance of top managers, especially CEOs, in driving
strategic changes in firms (Rajagopalan & Spreitzer,
1997). The CEO has been characterized as a firm's
chief cognizer and decision maker (Calori, Johnson,
& Sarnin, 1994). Hambrick and Mason (1984) ar
gued that firm strategies reflect the characteristics
of its powerful actors, among whom the CEO is
prominent. Moreover, empirical evidence has sug
gested 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 im
plications for firm performance. However, these
studies have examined the influence of CEO per
sonality on firm performance without paying ade
quate 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 spe
cific strategic behaviors with implications for firm
performance. Examining these underlying mecha
nisms 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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 2010 Nadkarni and Herrmann 1051
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 de
cide on appropriate responses, by shaping their
fields of vision (how CEOs acquire and disseminate
information), their selective perception (which in
formation 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 mecha
nisms that form the basis for a CEO's strategic
choices either enhance or inhibit strategic flexibil
ity in a dynamic industry context. We further the
orize that strategic flexibility influences firm per
formance 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 be
tween CEOs' personality attributes and firm perfor
mance. We theorize and empirically test these re
lationships for a dynamic industry context because
research has suggested that the influence of strate
gic 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 off
shore business process outsourcing industry in In
dia. Offshore business process outsourcing is the
transfer of the operational ownership of one or
more of a firm's processes to an external provider
from another country that then manages the pro
cesses according to predetermined metrics (Ghosh
& Scott, 2005). It is becoming a widespread strat
egy, and India is a dominant service provider in
this field, accounting for 75 percent of offshore
delivery value (Neale, 2004). Indian business pro
cess outsourcing is a fast growing and dynamic
industry characterized by low barriers to entry, rap
idly changing and unpredictable process technolo
gies, ever-changing client demands, shifting global
competition, and constant client pressure to im
prove value and delivery speed (Ramachandran &
Voleti, 2004; Tapper, 2004). Anecdotal evidence
suggests that strategic flexibility is essential for suc
cess in this industry (Mehta, Armenakis, Mehta, &
Irani, 2006). Our results extend previous research
by highlighting the role of CEO personality in de
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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 flexibil
ity as a firm's ability to precipitate strategic changes
(Evans, 1991; Harrigan, 1985). Aaker and Mas
carenhas (1984) defined it as the ability to adapt to
substantial, uncertain, and rapidly occurring envi
ronmental changes that meaningfully impact firm
performance. Thus, strategic flexibility reflects a
firm's ability to respond continuously to unantici
pated changes and to adjust to unexpected conse
quences of predictable changes (Lei, Hitt, & Gold
har, 1996).
Most studies of strategic flexibility have focused
on technology (Evans, 1991; Sanchez, 1995; Wor
ren et al., 2002), resources (Harrigan, 1985; Young
Ybarra & 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 specific
ity (Young-Ybarra & Wiersema, 1999) and immobil
ity 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 firm's CEO,
as an important member of the firm's "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 ev
idence indicate that the CEO has a disproportion
ate, sometimes dominating, influence on his or her
firm. Finkelstein and Hambrick (1996) asserted that
not only does the CEO have the overall responsi
bility for the firm's management but also that the
CEO's characteristics are of serious consequence to
the firm.
Researchers studying CEOs have often used de
mographic characteristics as proxies for deeper
 1052 Academy of Management Journal October
psychological constructs (Carpenter, Geletkanycz,
& Sanders, 2004). Demographic variables such as
age, education, and experience allow researchers to
effectively capture characteristics such as back
ground 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 re
searchers at a loss as to the real psychological at
tributes that drive CEO behavior (Carpenter et al.,
2004), undermines the robustness of theories re
garding the links between psychological character
istics 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 am
biguity, 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 re
sponse 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 innova
tion strategies, whereas CEOs with high needs for
achievement chose broad market strategies. Hay
ward and Hambrick (1997) found that CEO hubris,
manifested as exaggerated pride or self-confidence,
was positively related to paying acquisition premi
ums and negatively related to firm performance.
Chatterjee and Hambrick (2007) suggested that nar
cissistic CEOs chose bold strategies (e.g., large ac
quisitions) 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 rela
tionships between CEOs' personality attributes and
firm performance (Cannella & Monroe, 1997; Hiller
& Hambrick, 2005). The five-factor model, which
represents current orthodoxy in personality assess
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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 five
factor model encapsulate many important aspects
of personality (Judge, Bono, Hies, & 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). Consci
entiousness indicates achievement and depend
ability. Emotional stability is the ability to adapt to
diverse situations and to cope with stress. Agree
ableness is the tendency to be altruistic and com
pliant. Extraversion represents sociability and ex
pressiveness. Openness to experience represents
the tendency to be creative, imaginative, percep
tive, and thoughtful.
THEORY DEVELOPMENT AND HYPOTHESES
CEO Personality, Strategic Flexibility, and
Firm Performance
The upper echelons (Finkelstein & Hambrick,
1996; Hambrick & Mason, 1984) and CEO psychol
ogy (Hiller & Hambrick, 2005) literatures suggest
that psychological attributes of CEOs influence
their strategic choices through a three-stage filter
ing process?defining a field of vision, selective
perception, and interpretation. This filtering pro
cess is considered to be central to developing stra
tegic flexibility (Johnson et al., 2003; Nadkarni &
Narayanan, 2007; Shimizu & Hitt, 2004).
Psychological attributes determine how in
tensely CEOs search for information, how much
information they scan, how they learn about exter
nal 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 CEO's focus of attention or field of vision,
which serves as a filter between an objective stra
tegic situation and the subjective reality of the sit
uation 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
 2010 Nadkarni and Herrmann 1053
quently, internally focused CEOs develop broader
fields of vision than externally focused CEOs. Nad
karni and Narayanan (2007) proposed that such a
broad field of vision fosters strategic flexibility by
enabling a firm to develop a comprehensive aware
ness of new opportunities and new resources and
also helps the firm to change its competitive pos
ture quickly, by promoting better understanding of
continuously shifting competitor moves. Johnson
et al. (2003) also stressed that the panoramic sur
veillance 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 manag
ers 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 & Dr?ge,
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 com
placent. 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, extrapolat
ing, 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 & Ham
brick, 1996). Shimizu and Hitt (2004) underscored
the importance of timely and effective interpreta
tion in developing strategic flexibility. For exam
ple, 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 re
sources 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
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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 interpre
tation 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 de
pendability avoid taking actions that deviate signif
icantly from their past experience. An achievement
orientation represents a need for control and a need
to receive concrete feedback on actions (Miller &
Dr?ge, 1986). "High achievers" feel a strong need to
take responsibility for doing things immediately.
Because of their concern for legalism, conscien
tious CEOs are likely to rely strongly on depend
able, 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 Dr?ge (1986) found that CEOs with
high needs for achievement tend to hold most of
the power in their own hands and to closely mon
itor and control employee activities in their firms.
Such closely controlled and highly structured de
cision making is likely to deny creative employees
the autonomy and freedom to question existing as
sumptions, 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
 1054 Academy of Management Journal October
(Lant, Milliken, & B?tra, 1992), which inhibit stra
tegic 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 con
scientious CEOs, performance feedback and long
range planning are central to making strategic
choices (Miller & Dr?ge, 1986; Miller & Toulouse,
1986). Researchers have described such a perfor
mance-driven approach to strategy formulation as a
"competence trap," because it creates a strong se
lective perception bias by disposing strategic deci
sion makers to ignore new and different environ
mental information unless significant performance
declines occur (Bogner & Barr, 2000; Brown &
Eisenhardt, 1997; Johnson et al., 2003). Thus, con
scientious 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 devel
oping new strategic thinking can create delays in
strategic decision making and impede responsive
capability (Eisenhardt & Martin, 2000; Shimizu &
Hitt, 2004). To develop efficient responsive capa
bility, strategic decision makers need to engage in
interpretation and search activities that are intui
tive and exploratory rather than feedback-oriented
(Bogner & Barr, 2000; Daft & Weick, 1984). Recent
evidence from organizational behavior supports
this negative relationship between conscientious
ness and the ability to adapt to changing contexts.
In their experimental study, Lepine, Colquitt, and
Erez (2001) found that participants with low con
scientiousness adapted better to changing task
contexts.
Hypothesis 1. CEO conscientiousness is nega
tively related to strategic flexibility.
Emotional stability. Emotional stability reflects
a capacity for emotional adjustment and self-confi
dence. Emotional adjustment is the ability of indi
viduals to adjust their emotional states to varied
situational demands and to remain calm and bal
anced in stressful situations (McCrae & Costa,
1997). Emotional stability is considered a strong
predictor of a person's adaptability to unpredict
able 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 sta
ble ones. For example, De Hoogh, Den Hartog, and
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Koopman (2005) found that emotional stability pre
dicted 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 dy
namic situations, we hypothesize that CEOs' emo
tional stability promotes strategic flexibility.
Emotionally stable managers remain calm and
provide focus in dynamic situations, shift focus to
initiate appropriate actions to deal with unpredict
able situations, and act decisively in crises (Peter
son et al., 2003). Emotionally stable leaders create a
safe atmosphere for employees by reducing their
anxiety in difficult situations and by providing en
couragement in cases of failure (Edmondson, 1999).
This outline suggests that emotionally stable CEOs
feel less threatened by new and unpredictable stim
uli and encourage employees to experiment with
new interpretations of these stimuli. The adaptabil
ity of emotionally stable CEOs reduces their hesi
tance 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, emotion
ally 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 stra
tegic 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 re
moving barriers such as organizational inertia and
filtering biases.
Hypothesis 2. CEO emotional stability is posi
tively related to strategic flexibility.
Agreeableness. Agreeableness represents the
tendency to be altruistic (empathetic, kind, cooper
ative, 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
 2010 Nadkarni and Herrmann 1055
change is ambiguous because of two underlying,
opposing mechanisms. On the one hand, agreeable
ness (altruism and compliance) fosters a culture of
creativity and risk taking based on cooperative,
open, and trust-based relationships with employ
ees (Judge & Bono, 2000). On the other hand, ex
cessive agreeableness can also give rise to passivity,
in which leaders act modest, focus more on what
employees think of them than on accomplish
ments, and avoid conflicts at all costs. These two
sets of mechanisms evoke leader behaviors (Lan
gan-Fox, Cooper, & Klimoski, 2007) that may either
enable or inhibit adaptability and innovation
(LePine & Van Dyne, 2001). We propose that me
dium levels of agreeableness allow CEOs to opti
mally balance these opposing mechanisms so as to
maximize strategic flexibility, whereas very high
levels of agreeableness induce passivity and com
pliance and very low levels undermine employee
creativity and risk taking, inhibiting strategic
flexibility.
Disagreeable CEOs promote a climate of compe
tition and fear (Peterson et al., 2003) that is likely
to promote compliance rather than independent
thinking. Intimidated by disagreeable CEOs, em
ployees are hesitant to bring to their attention in
formation that may challenge the CEOs' personal
beliefs (Peterson et al., 2003), and this hesitancy
narrows the CEOs' fields of vision. Moreover, dis
agreeable 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 em
ployee as an individual, and focus on employee
empowerment, which fosters free and comprehen
sive exchange of information between diverse em
ployees (Bono & Judge, 2004). Such comprehensive
information exchange is likely to broaden a CEO's
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 individu
als value and strive for cooperation and harmony,
they may avoid engaging in certain functional task
focused behaviors when their behaviors have the
potential to upset other individuals with whom
they work, which is likely to inhibit decision effec
tiveness. Similarly, Lepine and Van Dyne (2001)
found that high agreeableness inhibited voice be
havior, which is defined as the extent to which an
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individual speaks up with constructive suggestions
for change. They found that high levels of agree
ableness were detrimental in situations of innova
tion 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 respon
sive capabilities. Thus, the perceptions and inter
pretations 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 bi
ases that create barriers to developing strategic flex
ibility (Shimizu & Hitt, 2004).
CEOs with medium levels of agreeableness may
maximize strategic flexibility by balancing em
ployee 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 hid
den assumptions, unlearning old behaviors, and
overcoming major obstacles (Senge, 1990; Shimizu
& Hitt, 2004). Moderately agreeable CEOs may
broaden their fields of vision by empowering em
ployees 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 organiza
tional 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 persua
sion (Elenkov, Judge, & Wright, 2005). CEO asser
tiveness can reduce the perceptual and interpreta
tion 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.
Extraversi?n. Extraversion is associated with so
ciability 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
 1056 Academy of Management Journal October
fore, extraverted leaders build broad and diverse
networks of social relationships. Extraverted lead
ers 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 inter
actions result in comprehensive information gath
ering, support interpretation of new information
(Kraatz, 1998), and promote its speedy transmis
sion (Davis & Greve, 1997). McDonald, Khanna,
and Westphal suggested that CEOs who develop
extensive "advice networks" (2008: 453) are ex
posed to alternative and novel points of view; this
exposure enhances CEOs' ability to quickly iden
tify 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 (Nad
karni & Narayanan, 2007; Shimizu & Hitt, 2004).
Developing the ability to quickly adapt to envi
ronmental 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 (Kirk
patrick & Locke, 1991), which can create inertia
and barriers to strategic flexibility (Hitt et al., 1998;
Shimizu & Hitt, 2004). Extravert CEOs can effec
tively remove such resistance and promote rapid
implementation of new strategies through their ex
ceptional 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 cre
ative (McCrae & Costa, 1987). Open individuals
have a strong need for change and are highly capa
ble of understanding and adapting to others' per
spectives (Costa & McCrae, 1988). Leaders who are
open to new experiences actively seek excitement
and risks (Judge et al., 2002). This need for change
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and risk taking can promote behaviors that may
disrupt the existing product and resource advan
tages of stable firms (Nadkarni & Narayanan, 2007).
However, CEOs' openness to new experiences is
central to promoting strategic adaptation in dy
namic environments (Datta et al., 2003).
Developing the capability to precipitate strategic
change requires that strategic leaders (CEOs) under
stand and adapt to multiple perspectives and that
they be open to and accepting of strategic change
(Black & Boal, 1996). Because of their broad inter
ests, 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 perspec
tives. Open CEOs can quickly and effectively notice
and interpret new and diverse environmental infor
mation that does not fit the existing mind-set and
are likely to consider a wide range of strategic al
ternatives, 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 ig
noring important new stimuli that do not fit their
fields of vision, interpreting new stimuli inappro
priately, 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 rela
tionship between CEO personality and firm perfor
mance. Ample theoretical and empirical evidence
supports the relationship between strategic flexibil
ity and firm performance. In today's 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
 2010 Nadkarni and Herrmann 1057
ments, firms need to develop strategic flexibility by
recalibrating their strategies and refocusing re
sources on successive decision points, often with
different "rules of engagement" (Bahrami & Evans,
1989). Stability may lock company resources into
outdated products and processes, adversely affect
ing performance (Nerkar & Roberts, 2004). Hitt et al.
(1998) argued that in today's competitive land
scape, characterized by increasing strategic discon
tinuities, disequilibrium, hypercompetition, inno
vation, and continuous learning, firms' success
depends on their ability to respond quickly to
changing competitive conditions (strategic flexibil
ity). 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 em
pirical support for the positive relationship be
tween 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 busi
ness 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 pro
cess 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 advan
tages (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 recog
nition of the importance of examining this industry
(Dibbern, Winkler, & Heinzl, 2008; Levina & Vaast,
2008). However, few studies have empirically ex
amined 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
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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 pro
cess 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 de
ployed by the new entrants have created major
shifts in competitive spaces in the offshore busi
ness process outsourcing markets in India (Ram
achandran & Voleti, 2004). Other reasons for the
dynamism include the numerous and unpredict
able changes in communication and process tech
nologies, constantly shifting client needs, and rad
ical changes in client businesses (Mehta et al.,
2006). Steady improvement of products and ser
vices 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 exper
tise (Nag, 2004), improve delivery speed and value
to clients, and find radically new ways of develop
ing new service products (Ramachandran & Voleti,
2004). Their survey of Indian business process out
sourcing managers led Mehta et al. (2006) to con
clude 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. Finkel
stein 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 au
thority 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 de
cision making, and set the climate of the firm
through their style, goals, and attitudes. Several
empirical studies have also found strong relation
 1058 Academy of Management Journal October
ships between CEO personality, firm strategy, and
performance in SMEs (Miller & Dr?ge, 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 dom
inate larger and older firms. Therefore, CEO traits
exert a significantly stronger influence on firm
strategies than would be likely in the organization
al 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 theo
rized relationships.
Fourth, our research design, which we con
structed to avoid common method bias and biases
resulting from using secondary sources to model
CEO personality (e.g., Peterson et al., 2003), re
quired 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 con
textualize 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 un
derstanding the role of CEO personality in Indian
business process outsourcing firms: (1) the consis
tency 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 socio
cultural context.
Consistency and relevance of the five-factor
model in India. Two central issues here are
whether the five-factor model has a similar mean
ing 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, Aliik, McCrae, & Benet-Mar
tinez, 2007). These studies also demonstrated con
sistency 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 mean
ing in India to its meaning in the United States but
also is central to understanding the relationships
between personality and behaviors in the Indian
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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 rele
vant 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 fam
ily 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 exam
ple, Sinha and Verma (1994) found that Indian
graduate students express more individualist orien
tations, with emphasis on independence, auton
omy, and individual goals, than collectivist orien
tations, as the result of Western influence,
immediate life concerns, and exposure to mass me
dia. Similarly, Sinha, Sinha, Verma, and Sinha
(2001) found that Indian students considered indi
vidual goals as important as or even more impor
tant than family and collective goals. Ghosh (2004)
found that entrepreneurs and small business own
ers in India had significantly more highly individ
ualistic orientations than did other professionals,
such as teachers. CEOs of Indian business process
outsourcing firms represent the educated (95 per
cent 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 de
cision making than are broader social consider
ations, such as family background and socioeco
nomic status.
Second, as have earlier studies of Indian cul
ture (Hofstede, 1980; Krishna, Sahay, & Walsham,
2004), recent studies have shown that Indian busi
ness process outsourcing managers have a high
"power distance" orientation, implying an accep
tance of hierarchical authority and associated work
behaviors. For example, Levina and Vaast (2008)
found that senior Indian business process outsourc
ing managers dominated decision making and in
teractions with clients, whereas lower-rank em
 2010 Nadkarni and Herrmann 1059
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) pro
fessionals in business process outsourcing firms. A
high power distance orientation of both CEOs and
other employees is likely to increase CEO domi
nance in strategy formulation and implementation
in Indian business process outsourcing firms, com
pared with Western firms, in which CEOs are likely
to embrace decision-making styles reflecting an ori
entation to relatively low power distance. Thus,
CEO personality is likely to exert a stronger influ
ence 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 Feder
ation 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 off
shore business process outsourcing industry. After
sample selection, we called each firm to ensure that
it was independent and that offshore business pro
cess 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 pro
cess outsourcing as their primary business.
We contacted the CEOs of the 427 firms by tele
phone 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 col
lected data at four different times through a desig
nated 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 report
ing directly to their firm's CEO. All the scales were
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in English. Finally, we requested financial perfor
mance records from each firm's designated coordi
nator at two different time points: six months and
one year following the receipt of the strategic flex
ibility surveys. We contacted the coordinator by
telephone to confirm the receipt of each question
naire 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.), owner
ship type (publicly held or privately held) (F =
1.26, n.s), and range of service offerings {F =
1.61, n.s.). We also used Heckman's (1979) two
step 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 Mill's 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 five
factor model (Costa & McCrae, 1988). Examples of
items include "I often feel inferior to others" [emo
tional 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 inter
ested in people" {agreeableness). All items were
scored on a scale ranging from 1 ("strongly dis
agree") to 5 ("strongly agree"). We reverse-coded
the ratings on emotional stability to improve our
interpretation of results. Coefficient alpha reliabili
ties were .79 for emotional stability, .70 for extra
version, .81 for conscientiousness, .74 for agree
ableness, and .72 for openness to experience.
Strategic flexibility. We measured strategic flex
ibility by adapting Grewal and Tansuhaj's (2001)
five-item scale assessing a firm's ability to respond
to environmental variations. Use of this scale was
consistent with our conceptualization of strategic
flexibility. The scale is conceptually robust, spe
cific to the strategic domain (unlike other scales
 1060 Academy of Management Journal October
that address product development or technology
flexibility), and valid and reliable (Grewal & Tan
suhaj, 2001).
We pilot-tested the five strategic flexibility items
on 30 middle-level Indian business process out
sourcing managers who were not in our final sam
ple. After completing the pilot questionnaire, each
of these managers reviewed all questions for con
tent, clarity, meaningfulness, and construct mea
surement (Bagozzi, 1980). We also used item-total
correlation and discrimination based on f-statistics
to eliminate redundant items (Churchill, 1979).
None of the five items had low item-total correla
tions. Given these results of the pilot test, we re
tained the five strategic flexibility items.
The five items of this scale were (1) "We regu
larly share information and costs across business
activities," (2) "We frequently change our strategies
and structures to derive benefits from environmen
tal changes," (3) "Our strategy emphasizes exploit
ing new opportunities arising from environmental
variability," (4) "Our strategy reflects a high level of
flexibility in managing political, economic, and fi
nancial risks," and (5) "Our strategy emphasizes
versatility and empowerment in allocating human
resources." All items were scored on a scale rang
ing 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 pro
prietary 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 anal
yses we used a half-year lag and found that the
hypothesized results were unchanged.
Control variables. We used three firm demo
graphic 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 flex
ibility than older and larger firms, which are likely
to focus on tried and true strategies and the status
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quo (Miller & Chen, 1996). We measured firm age as
the number of years from a firm's founding date to
2005 (the year in which we collected the data). We
measured a firm's size by the logarithm of the three
year average of its total number of employees
(Guthrie & Olian, 1991).
Existing firm characteristics, such as capital in
tensity, R&D intensity, and advertising intensity,
represent important contingencies for developing
future strategic flexibility. High capital intensity
(capital expenses divided by sales) indicates a
firm's 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 (Rajago
palan & Datta, 1996). Thus, capital intensity is
likely to inhibit, whereas R&D and advertising in
tensity are likely to foster, strategic flexibility. We
measured these variables using data from the finan
cial records of the sampled firms for the year pre
ceding the date of collecting CEO personality
variables.
Change in performance is an important determi
nant of strategic change (Greve, 1998; Rajagopalan
& Spreitzer, 1997). An increase in performance re
inforces the value of existing strategies and results
in maintenance of the status quo, whereas perfor
mance declines force managers to question the va
lidity 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 flexibil
ity, whereas older CEOs are likely to inhibit it.
CEOs with long tenures develop set habits, estab
lish 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 flexibil
ity 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
 2010 Nadkarni and Herrmann 1061
of education increases a CEO's 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 = "undergradu
ate degree," 4 = "attended graduate school," 5 =
"master's degree," 6 = "attended doctoral pro
gram," 7 = "doctorate") (Herrmann & Datta, 2002).
The greater size of a firm's TMT, the greater the
diversity of skills and perspectives it contains, and
this diversity is likely to stimulate strategic flexi
bility (Eisenhardt & Schoonhoven, 1990). Follow
ing 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 out
comes 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 struc
tural equation modeling (SEM; J?reskog & S?rbom,
1993) . We used LISREL 8 (J?reskog & S?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 mea
sures on their a priori defined factors.
Second, we examined the significance of the
nonlinear relationship of agreeableness with strate
gic flexibility by comparing two structural models:1
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 model's
parameters, we fixed the error variances of the manifest
variables (J?reskog & S?rbom, 1993). Error variance was
calculated via the reliability estimates (alpha coeffi
cients) presented in Table 1 (J?reskog & S?rbom, 1993:
37-38). This procedure allows an analysis of the struc
tural 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).
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a linear-only model and a nonlinear model. In the
linear-only model, we included only the linear
agreeableness variables (without the squared agree
ableness term). In the nonlinear model, we in
cluded 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 relation
ships of CEO personality variables to firm perfor
mance and indirect relationships of strategic flexi
bility with the CEO personality variables and with
firm performance), and a nonmediated model (di
rect relationship of CEO personality variables to
firm performance). Following the recommenda
tions 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; J?reskog & S?rbom, 1993), incremental fit
index (IFI; Bollen, 1989), and root-mean-square er
ror of approximation (RMSEA). A significant im
provement in the fit of the fully mediated model
over the nonmediated and partially mediated mod
els 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 con
struct 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; ex
traversion, .78 to .94; agreeableness, .83 to .90; emo
tional stability, .75 to .90; and openness to experi
ence, .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, rf/= 30; AGFI = .92,
IFI = .95, RMSEA = .05) had a considerably better
 16
.44*

15
.41*

14
.19+.23*
.30**
.25*.32**

13 .20+
.22+ .20+

12 -.24*
-.22*
-.25* -.37*** -.29**

11 .15 .09
-.19+ -.23* -.22* -.28**

10 .16 .07 .04 .09 .05.19+.21+

.05 .09
.18 .12.22*.20+
.14 .10

.05.09 .04 .15

.12 .07
-.20+ .08 -.21+ .17
.09 .11 .04 .10 .15 .11 .07
-.25* .14

.11
-.16
.12
-.17

.12.22+.20+.21+ .14

TABLE 1
Descriptive Statistics and Correlations'

.28**
.18 .17
.22+ .19 .11 b 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.

.15 .08.20+ .07 .14

-.20+ -.14

.05.22f .19 .12 .13 .04 .09 .10

.24* .11.20+ .14 .17.20+ .09.19+ .16

Alpha 14. Extraversion 3.75 0.52 .70 .17 .12 .21+ -.17 .20+ .22+ 17. Firm performance 0.10 0.03 .85 .10 .16 .29** -.20+ .24* .22+

Coefficient Mean s.d. Reliabilities

11. Conscientiousness 3.48 0.74 .81 .07 .11 -.19+ .22+ -.20+ -.21+

13. Agreeableness 3.69 0.47 .74 .05 .14 .15 .15 .15 .17 16. Strategic flexibility 3.34 0.74 .84 -.18 -.15 .26* -.25* .23* .20+
12. Emotional stability 3.09 0.59 .79 .12 .08 -.17 .12 -.15 -.11 15. Openness to experience 3.84 0.62 .72 .14 .09 .25* -.20+ .24* .20+

7. CEO age 32.12 5.42

6. Advertising intensity 1.14 0.29

8. CEO education 4.41 1.72

3. Past performance4.0.08 0.10 intensity5.0.78
Capital R&D0.21
intensity 1.35 0.32
9. CEO tenure 6.14 2.37
Variables
1. Firm sizeb 2.15 1.04
2. Firm age 8.57 3.12
10. TMT size 3.01 2.16

* < .05
+ < .10

a = 195. ** < .01

*** < .001
Model variables

Controls

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2010 Nadkarni and Herrmann 1063

FIGURE 1
Standardized Structural Coefficients for the Hypothesized Fully Mediated Model3

Conscientiousness

-0.35

0.34

^^A^eeableness

^Agre^

Openness to
Experience

a 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

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, < .001, df =
3), indicating that our hypothesized nonlinear
model had a better fit with the data than the linear
only model. We show the standardized structural
parameters of our hypothesized nonlinear model in
Figure 1. Agreeableness squared relates negatively
with strategic flexibility (? = -0.25, < .01),
which confirms the inverted U-shaped relationship
between agreeableness squared and strategic flexi
bility 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 incre
mental 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
2 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 per
sonality variables, strategic flexibility, and firm perfor
mance. 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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1064 Academy of Management Journal October

TABLE 2
Model Fit Indexes

Null Nonmediated Partially Mediated Fully Mediated

Model Fit Model Model Model (Hypothesized) Model
* (df) 371.23 (54) 149.56 (33) 94.03 (25) 97.14 (30)
AGFI 0.50 0.69 0.80 0.92
IFI 0.54 0.64 0.82 0.95
RMSEA 0.20 0.11 0.07 0.05

variable and the dependent variable mode

(fully mediated) as a
for mediation (James model and
et al., the non
2006). Sec
mended by Kelloway
plete mediation is confirmed in the SEM
by explicitly testingated
themodel,
indirect we specif
relation
personality
the independent variable to the variables
dependen
through the mediator,cluded all other
rather than by specite
esized model.
decrease in the coefficient of the In the
relatio
tween the independentified anddirect paths f
the dependen
once the mediator is entered,
variable to as in the
firm perf B
Kenny approach (Shrout & Bolger,
direct paths from200 th
fore, in the SEM approach,
strategic the relations
flexibility an
variables to firm
the independent variable to the dependen perf
Thein
is not used as a control partially
estimating mediatthe
fit with
ship between the mediator andthethedata [ 2
depen
IFI =
able. Rather, mediation is .82, RMSEA
indicated = .0
when
between the independent
fit is notvariable (here,
as strong for
personality variables) and
as for the
the mediato
hypothesi
value
(strategic flexibility), of chi-square
as well as the path
the mediator variablehypothesized model w
(strategic flexibility
nificant
outcome variable (firm [ 2 = 3.11,
performance) ar
cant, and the overalldirect
modelpathsshowsfrom accept c
ness of fit (James et al., 2006).
n.s.), emotional stabil
ness (?
The model fit indexes, = 0.09,
which aren.s.),
pres
Table 2, suggest an -0.19,
excellentn.s.), extravers
fit for our
sized model [ 2 = 97.14,
ness to df= 30; AGFI(?
experience =
.95; RMSEA = .05). The
mance structural
were not coeffi
sig
model
our hypothesized, fully did not
mediated fit th
model
indicate that conscientiousness
dexes failinghas a nega
to meet t
tionship to df = flexibility
strategic 33, AGFI = (?
.69
=
.001), whereas emotional stability
results that arerelates
consist
to strategic flexibility
tion of(? complete
= 0.29, < med
.00
extraversion (? = 0.37,
(James< .001)
et al.,and ope
2006). T
new experience
have a positive
fully relationsh
mediated hypot
tegic flexibility
(?and
= 0.41, < .001).
supported Thes
Hypot
support hypotheses Hypotheses 1, 2, 4,
We checked for intera
discussed earlier, thefactors. We did not fin
agreeableness-square
negative and significant
fivefor strategic
constructs inflexib
infl
-0.25, < .01), indicating an inverted
relationship and supporting Hypothesis 3
flexibility (? = 0.34, < .001) relates
DISCUSSION pos
firm performance. Thus, Hypothesis 6 is su
Our studysupport
Together, these results yielded two major results:
the (1) medi
each
ditions (James et al., .2006).
variable in the five-factor model of personality
To further test the measured
mediationfor a firm's CEO influenced
hypothesisthe firm's f
tegic flexibility, we
strategiccompared our me
flexibility and (2) strategic flexibility hyp

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 2010 Nadkarni and Herrmann 1065
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 atten
tion to the mechanisms underlying the relation
ships between CEO personality and firm perfor
mance (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 in
fluence firm performance. We specified a media
tor (strategic flexibility) through which CEO per
sonality influences firm performance. Our results
suggest that the effectiveness of a CEO personal
ity 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 un
dermined firm performance by inhibiting flexi
bility. Medium levels of agreeableness maxi
mized 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 ap
peal, 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 person
ality 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, pro
vides a valid, robust, and comprehensive way of
representing fundamental personality differences
(Judge et al., 2002). Despite this model's rigor and
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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 mak
ing, whereas we focus on strategic behavior (strate
gic flexibility). Our results highlight the relevance
of CEO personality factors measured to one strate
gic behavior and underscore the need for examin
ing 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 personal
ity 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 demo
graphic variables as proxies for personality vari
ables (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 appropri
ate proxies for personality variables. Our results
support recent criticisms of the use of CEO demo
graphic characteristics as proxies for CEO person
ality attributes (Carpenter et al., 2004; Lawrence,
1997).
Personality research. Our results have impor
tant implications for personality research in the
field of organizational behavior. Our results for
emotional stability, extraversion, and openness to
experience were consistent with published psy
chology and leadership research (Bono & Judge,
2004; Judge et al., 2002). However, our results
for conscientiousness and agreeableness differed
somewhat from results of extant studies. Leader
ship studies have indicated that conscientiousness
and agreeableness relate positively to the effective
ness of team and functional leaders (Bono & Judge,
2004); our results indicate that conscientiousness
undermines firm performance by inhibiting strate
gic flexibility, whereas a medium level of agree
ableness maximized strategic flexibility and conse
quently firm performance.
The inconsistency in these results may have sev
eral explanations. First, it suggests that insights
about psychological attributes in the psychology
and leadership literatures based on lower- and mid
dle-level managers may not always be replicated
fully in studies concerning CEOs. Our results sup
port the contention of the strategic choice (Child,
 1066 Academy of Management Journal October
1972) and upper echelons (Finkelstein & Hambrick,
1996; Hambrick & Mason, 1984) theories that deci
sion 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 in
volved in decision making at top levels than for
managers operating at other levels in the firm. Fu
ture theorists of strategic leader attributes may
want to consider the uniqueness of the strategic
level.
Second, the negative impact of conscientious
ness on strategic flexibility and consequently on
firm performance could be due to the high mu
nificence (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 munif
icence may have provided incumbent firms with
the confidence and energy to develop an aggres
sive, opportunistic, change orientation that is
then further validated by high performance
(Lumpkin & Dess, 2001). Therefore, attributes of
conscientiousness such as dependability, perse
verance, and need for achievement served as bar
riers in this virtuous cycle of change propelled by
high industry munificence. However, these pat
terns of relationships could be different under
conditions of economic downturn eroding indus
try growth. In times of moderate or low munifi
cence, incumbent firms may shift to a more sta
ble, cautious, and rational orientation (Van de
Ven & Poole, 1995) in which attributes of consci
entiousness such as dependability, achievement,
perseverance, efficiency, and responsibility may
help the firms cope effectively with environmen
tal scarcity and improve rather than inhibit per
formance. 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 conscientious
ness could have resulted from our focus on short
term performance (we measured six-month and
one-year lags). Recent literature on strategic flexi
bility suggests that although it generally has a pos
itive influence on performance in fast-changing en
vironments, 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 change
and flexibility-oriented strategy may yield superior
performance. However, to achieve long-term suc
cess, firms need to balance tried-and-true strategies
and tighter control with change and risk taking
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(Musteen, Datta, & Herrmann, 2009). This argument
suggests that conscientiousness may be related neg
atively 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 long
term 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 informa
tion that is beyond the cognitive capacities of stra
tegic decision makers, who make sense of this
vastness and complexity by constructing mental
models as bases for strategic decision making. Un
like personality attributes, which are relatively sta
ble, mental models are dynamic and change
through learning (Cannella & Monroe, 1997; Ham
brick & Fukutomi, 1991).
An important area of research in bounded ra
tionality is how strategic decision makers de
velop 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 atten
tion focus of top managers was directed toward
the general or the task sector of the external en
vironment. Ocasio (1997) theorized that firms'
communication and procedural channels (e.g.,
action memoranda, personnel evaluations, bud
getary and capital appropriations requests) affect
the attention of decision makers.
Our results extend this literature by hinting
that personality attributes (measured per the five
factor model) of CEOs may influence their atten
tion focus, which in turn may influence strategic
flexibility. Although we did not explicitly mea
sure 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 at
tention may mediate the relationship between
 2010 Nadkarni and Herrmann 1067
personality factors and strategic flexibility. This
contention is consistent with cognitive psychol
ogy studies that have shown that although indi
vidual 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 intel
ligence (Goleman, 1995) influence them. For ex
ample, Goetzmann et al. (2007) found that five
factor model traits influenced the types and
frequency of metaphors salient in the domain
specific mental models of lung transplant pa
tients. Thus, these traits may influence the types
of mental models that CEOs develop, the fre
quency 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. Ex
amining 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 highlight
ing the role of CEO personality in developing such
flexibility. This literature has focused on the influ
ence 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 litera
ture 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-effi
cacy, emotional stability, and locus of control
(Judge, Thoresen, Pucik, & Welbourne, 1999). Re
cently, Hiller and Hambrick (2005) stressed the rel
evance of the core self-evaluation attributes to ex
plaining CEOs' strategic behaviors. Future studies
could examine the relationship between these at
tributes and strategic flexibility.
Our results also have implications for the role
of industry context. Organizational behavior
studies have suggested that relationships be
tween five-factor model traits and work outcomes
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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 indus
try contexts (Bogner & Barr, 2000; Eisenhardt &
Martin, 2000; Nadkarni & Narayanan, 2007). To
gether, these studies suggest that the relation
ships 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 im
portant area of future research.
Limitations and Future Directions
Our use of SMEs in this research limits the gener
alizability of the current results to large corporations.
However, SMEs play a critical role in several high
technology industries, including electronics, aero
space manufacturing (Kaivanto & Stoneman, 2007),
and biotechnology (Luukkonen, 2005). Moreover, re
sults of SME studies have made valuable contribu
tions to strategic theories such as those on knowl
edge-based resources (Wiklund & Shepherd, 2003)
and internationalization (Oviatt & McDougall, 1995).
Nonetheless, future studies should test these relation
ships 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. How
ever, our focus on a single industry limits the gen
eralizability of our results. Anecdotal evidence sug
gests 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 out
sourcing in response to recent calls to conduct em
pirical 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) empha
sized 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
 1068 Academy of Management Journal October
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 per
sonality, strategic flexibility, and firm performance
(especially for conscientiousness). A different pat
tern of relationships might be found in times of
economic downturn.
Fifth, this study focused on the direct relation
ship between the elements of CEO personality and
strategic flexibility. To achieve this focus, we con
trolled for several firm contingencies by choosing a
relatively uniform sample of firms (relatively
young, service-oriented SMEs in a specific IT seg
ment 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 be
tween CEO personality and firm strategies. Exam
ining the nature of this moderation is an important
area of future research.
Finally, the five-factor model is only one poten
tial operationalization of personality. Other mea
sures, 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) re
sulted 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 perfor
mance, 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 individ
uals who possess these traits for their top manage
ment 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 me
dium levels of agreeableness) to manage conflicts
and resistance to implementing these ideas. Sec
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ond, our results suggest that the five-factor model
as applied to CEO personality is particularly rele
vant 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 dy
namic industries and thus, in making investment
decisions.
In conclusion, our results highlight the impor
tance of the personality attributes of CEOs in fos
tering 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.
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-/i?v

Sucheta Nadkarni (ssn28@drexel.edu) is an associate Pol Herrmann (pol@iastate.edu) is an associate professor

professor of management in the LeBow College of Busi
ness at Drexel University. She received her Ph.D. in
strategic management at the University of Kansas. Her
research interests include strategic cognition, CEO per
sonality and temporal attention, and strategic flexibility.
of management in the College of Business at Iowa State
University. He received his Ph.D. in strategic manage
ment at the University of Kansas. His research interests
include technology and innovation management, strategic
leadership, strategic change, and international strategies.

-? -

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