WORKING PAPERS ON HEALTHCARE MANAGEMENT EDITOR:PROF.DR.LUDWIG KUNTZ
Willingness to Compromise, Distribution of Power and the Procedural Rationality of Strategic
Executive Group Decisions
by Jörg Heil and Ludwig Kuntz
Working Paper No. 7
Cologne 2005
Chair for Healthcare Management, University of Cologne,
Albertus-Magnus-Platz, 50923 Cologne, Germany, phone: +49-221-470-5417, fax: +49-221-470-5418, www.wiso.uni-koeln.de/mig
Willingness to Compromise, Distribution of Power and the Procedural Rationality of Strategic
Executive Group Decisions
by Jörg Heil and Ludwig Kuntz
Abstract
We investigate the effect of two group characteristics, willingness to com- promise and distribution of power, on the procedural rationality of group decisions in the context of large capital investment decisions made by the executive teams of German hospitals. Both characteristics have a positive and significant effect.
About the authors
Prof. Dr. Ludwig Kuntz is full professor in Healthcare Management at the University of Cologne (Germany). e-mail: kuntz@wiso.uni-koeln.de
Jörg Heil, M.A. (Economics), is management consultant at Capgemini Deutschland.
Contents
1. Introduction
2. Theoretical Background 2.1 Group Decisions
2.2 The Concept of Procedural Rationality in Groups
2.3 Willingness to Compromise and Procedural Rationality 2.4 Distribution of Power and Procedural Rationality
3. Methododology
3.1 Research Setting 3.2 Data Source 3.3 Measures
3.3.1 Procedural Rationality 3.3.2 Willingness to Compromise 3.3.3 Distribution of Power
3.3.4 Control Variables 4. Results
4.1 Descriptive Statistics 4.2 Test of Hypotheses
5. Discussion and Conclusions
1. Introduction
Important decisions on the firm level have attracted significant attention in the academic community over the past decades (e.g. Papadakis, Lioukas and Chambers, 1998, and the references therein). One key objective of this stream of research is to identify those properties of the decision pro- cess which have a positive influence on the long-term performance of the firm (e.g. Papadakis, 1998, and references therein). In many settings, the
“decision maker” is a group and not a single person, and consequently part of this research considers the effect of special group characteristics on certain process variables. Such questions form a natural part of the large body of academic work on group decision making; related work in the strategy and organisations literature can also be found under the terms
“Top-Management Team (TMT)” (e.g., Hambrick, Cho and Chen, 1999;
Simsek et al., 2005) or “Upper-Echelon Executives” (e.g., Miller, Burke and Glick, 1998).
One of the central questions is whether the diversity among the group members has an influence on the decision making process. Important pro- cess variables are for instance behavioural integration (Hambrick, 1994) and comprehensiveness and extensiveness (Frederickson, 1984). A varie- ty of variables have been used to characterised a group’s diversity, ran- ging from demographic characteristics like education, team tenure and group size to variables concerning the diversity of preferences. The topic of this paper is related to this area of research. We will investigate the group decision from a decision analysis point of view and consider as a process variable the degree of rationality, i.e., procedural rationality (Dean and Sharfman, 1993).
There are a variety of reasons why we consider this variable. First, it is one of the most important dimensions of the strategic decision making process (Papadakis, Lioukas and Chambers, 1998). Second, we think that a rational decision has a high probability to be also a good decision. Unfor- tunately, there is no proof yet, which shows the linkage between procedu- ral rationality and the performance of the firm. A first attempt can be found
in (Montero, 2005). Third, there is considerable interest in the rationality and thus transparency of high-level decision-making processes from a go- vernance point of view. Fourth, the findings in the literature related to group diversity are inconclusive (e.g. Miller, Burke and Glick, 1998, and references therein); a study of variables which influence the decision pro- cess could explain some of the divergent results. While some aspects of procedural rationality, like multi-attributive decision modelling or the formal use of data, have already been studied in the context of individual decision making processes (e.g. Stahl and Zimmerer, 1984; Daake, Dawley and Anthony, 2004; Williams and Wilson, 1997), little attention has been given to the situation where decisions are made by a group.
The governance aspect of our research question is of particular interest in the hospital sector, which we have chosen for our empirical analysis. The question how hospitals can be governed in an effective and efficient man- ner is attracting a lot of attention in the political debate (e.g., NHS Founda- tion Trusts, 2005) and the academic health care literature (e.g., Alexander, Lee and Bazzoli, 2003; Beekun, Stedham and Young, 1998; Lomas, Veenstra and Woods, 1997).
There are further reasons why we chose the hospital sector as our study base. Hospitals are a central component of most countries’ gross domestic product and there is usually a strong homogeneous external normative influence with respect to strategic decisions (e.g. Krishnan, Joshi and Krishnan, 2004). Furthermore, the people involved in decision making are professionals with considerable autonomy and a strong dependence on strategic decisions of the firm (Abernethy and Stoelwinder, 1995; Comer- ford and Abernethy, 1999; Huckman, 2003). This reinforces the importan- ce of a well-designed group decision process (cf. e.g. Kleinmuntz and Kleinmuntz, 2001).
The German hospital sector is particularly well-suited for our analysis. The top-level decision-making groups have the same structure in all hospitals and exhibit considerable diversity. A group comprises of the hospital’s medical director, the head nurse and the commercial director. This under- lying structure allows us to study the effect of two special psychologically
oriented group characteristics, namely the willingness to compromises and the distribution of power. These factors, should they have a significant ef- fect on key characteristics of the decision-making process, could help to explain the divergent results concerning the influence of group diversity on the decision making process and beyond on the performance of the firm.
2. Theoretical Background 2.1 Group Decisions
Decision analysis is primarily a prescriptive discipline, helping people to make better decisions through the use of normative models but with an awareness of the limitations and descriptive realities of human judgement (Bell, Raiffa and Tversky, 1988).
The normative models of decision analysis are based on probability theo- ry, Bayesian statistics and utility theory (von Neumann and Morgenstern, 1944; Savage, 1954); the focus is on rational choice and guidance to help people make logically consistent decisions. Methods for the derivation of utilities for multiple conflicting objectives and individual decision-makers are well-developed (Keeney and Raiffa, 1976) and applied in numerous settings including strategic decision-making (Corner and Kirkwood, 1991;
Kasanen et al., 2000; Keefer, Kirkwood and Corner, 2004).
A major problem in the group setting is the aggregation of individual utili- ties to a group utility. From a normative perspective, there is no aggregati- on rule that combines individual preferences into a group preference without violating some reasonable assumptions (Arrow, 1963; Sen, 1970).
The key to overcoming Arrow’s famous “Impossibility Theorem” is to allow interpersonal comparisons of utility. Based on utility theory, there are con- ditions for the existence of a group’s cardinal utility function (Dyer and Sa- rin, 1979; Keeney and Kirkwood, 1975; Keeney and Raiffa, 1976). The group utility is expressed as the weighted sum of the individuals’ utilities with the weights including information on interpersonal trade-offs between the utilities of the group members (Harsanyi, 1955).
∑
== n
i i i
G x wu x
u
1
) ( )
( ,
∑
= n =
i
wi 1
1, wi >0
The group utility may be derived by means of the concept of a “supra de- cision maker” who seeks to incorporate the views of the group members prior to making his decision and therefore implicitly incorporates the prefe- rences of the group members (Keeney and Raiffa, 1976, p. 515). Alterna- tively, the group may want to choose a “participatory group model” and jointly share the responsibility to derive the group utility by explicitly addressing the trade-off considerations among group members’ utilities (Keeney and Raiffa, 1976, p. 520).
In practice, the latter approach might be preferred in strategic executive group decisions but it becomes tedious due to the numerous comparisi- ons, i.e. trade-offs among individuals, required. However, recent advances in the field of multiple criteria decision making in groups offer a practical solution by showing that it is possible to restrict utility comparisons to pairs of group members. The chosen pairs have to form a spanning tree in a complete graph with n nodes (Baucells and Sarin, 2003; Baucells and Shapley, 2000). Following this approach, it is sufficient to seek compromi- se and agreement on a chosen parameter from the two individuals comprising the pair. For a group of n individuals the group utility can be obtained by eliciting (n-1) bilateral agreements.
In our paper, we will consider participatory group decisions with individuals who are willing to perform interpersonal comparisons of utility. From a normative perspective, the willingness to agree on a compromise on the model’s parameter is essential for the existence of a group utility function.
The normative foundations of group decision analysis form the core of ra- tional decision making; from a prescriptive point of view, rationality can be extended to the process of obtaining the relevant information for the pa- rameters (cf. Keeney and Raiffa, 1976). We will discuss this later as “pro- cedural rationality”. Beforehand, we look at the descriptive side of decision analysis in groups.
Descriptive realities of group decisions are studied in great detail by psy- chologists and behavioural decision theorists (e.g. Horgath, 1990; von Winterfeldt and Edwards, 1986). The socio-psychological research that explores effects of group interactions on group decisions can be divided into three types of approaches (cf. Kaplan and Miller, 1983).
The normative social influence approach explores effects on individual preferences during group discussions based on other group members’
opinions and behaviours (cf. e.g. Baron and Kerr, 2003). Such effects are used to explain conformity, i.e. the tendency of group members to change their actions, verbal statements or behaviours to some salient social norm.
Results include the fact that minority and majority in groups influence each other (social comparison theory; social influence theory) but that also other factors such as group size and the relative importance of the group mem- bers have an influence on conformity (social impact theory).
The informational social influence approach is primarily concerned with the exchange of arguments during group discussions (cf. e.g. Baron and Kerr, 2003). Results include the fact that individuals are more likely to put for- ward information that is shared among group members as opposed to in- formation known to only single individuals (information sampling theory).
Arguments that are both compelling and new to some group members may lead to group polarization, i.e. to more extreme judgements among group members than existed before the discussion (persuasive arguments theory).
The social combination approach employs as basic unit of analysis actual individual group members’ preferences from which group results are deri- ved (cf. e.g. Baron and Kerr, 2003). In the prominent social decision scheme or SDS model the overall probabilistic distribution of a group deci- sion (described by all possible outcomes) is predicted based on the group members’ initial preferences. An extension is the social transition scheme model that allows the description of changes in preferences for discrete points of time during the course of the discussion. Results include the fact that numerically larger factions (e.g. majority, plurality) are more likely to prevail than their initial relative size would indicate (Stasser, Kerr and Da-
vis, 1989). However, the power of a minority advocating what can be per- suasively shown to be the “truth” can have a considerable influence (Kerr, 2001).
In addition to an analysis of group interaction, researchers have compared group decision-making to individual decision-making. Dimensions include the group members’ resources and task demands and explain phenomena such as process losses, coordination losses and motivation losses in groups (cf. e.g. Baron and Kerr, 2003).
The field of socio-psychological research on group decision-making is ex- tensive and the results presented above are by no means comprehensive.
This line of research is primarily concerned with an understanding of the process by which a group moves from initial disagreement to agreement.
Thus, some “willingness to compromise“ among group members is requi- red in order to come to a group decision. In addition, descriptive models for combining ordinal individual preferences are described and the power of individual group members, either as part of the majority or minority, was found to play a role for the ultimate decision made by the group. The two variables “distribution of power” and “willingness to compromise” form the basis of our analysis in this paper. We seek to explore the impact of these two factors on the “procedural rationality” of group decisions. By doing this we gain insights from a prescriptive decision analysis point of view.
We do not intend to propose a comprehensive model of procedural ratio- nality but focus on two influencing factors that we deem important.
2.2 The Concept of Procedural Rationality in Groups
The concept of procedural rationality is a central concept in the field of de- cision-making in general and on strategic decision-making in particular.
From a prescriptive decision analysis perspective, it encompasses rationa- lity in the normative sense, i.e. the existence of a group utility function, and the process of obtaining the relevant parameters for such a normative de- cision model. Our emphasis is on insights about the conceptual process and not on its numerical treatment (Edwards and Baron, 1994). In the de- cision analysis literature, a rational process for a decision problem at hand
includes the definition of clear objectives, pre-selection of alternatives, the search for relevant information, the use of analysis and ultimately the use of quantitative methods for making a decision (Keeney and Raiffa, 1976;
Keeney, 1992). In the organisational literature, this process view is refer- red to as “procedural rationality” (Simon, 1955) and has been utilized in the research on strategic decision-making (e.g. Fredrickson, 1984;
Fredrickson and Iaquinto, 1989; Fredrickson and Mitchell, 1984; Hickson et al., 1985; Mintzberg, Raisinghani and Theoret, 1976). Key features of this process view include the fact that procedural rationality is variable (cf.
Schoemaker, 1990) and that it can be measured (cf. Dean and Sharfman, 1993). Although this view is mainly motivated for research in psychology and organizational theory (cf. Dean and Sharfman, 1993), we leverage the concept for the study of prescriptive decision-making in groups. In our analysis, “procedural rationality” is the process variable measuring the de- gree of rationality of the group.
2.3 Willingness to Compromise and Procedural Rationality The socio-psychological research described earlier indicates that wil- lingness to compromise is required to come to a group decision. From a decision analysis point of view, a compromise on a parameter on the group utility function is essential for the existence of a group utility function and thus ultimately for the existence of a rational group decision. However, a compromise is not required among all group members but only among pairs of group members (Baucells and Sarin, 2003; Baucells and Shapley, 2000). If in a group of n individuals (n-1) pairs of group members, which form a spanning tree in a complete graph with n nodes, are willing to compromise then a group utility function will exist. Consequently, the more the pairs of individuals forming a spanning tree are willing to compromise, the greater the propensity for rational decision making. This motivates our first hypothesis (H1).
Hypothesis 1 (H1). The higher the willingness to compromise among (n- 1) pairs of group members forming a spanning tree, the higher the degree of procedural rationality.
2.4 Distribution of Power and Procedural Rationality
Power was found to be an important variable in socio-psychological re- search on group decision-making. However, the research gives no clear indication how it affects decision-making. From an organisational point of view, different concepts of power can be distinguished, notably perceived power, participation power, and position power. In the decision-making context, participation power is most important since it is based on the in- volvement and scope of influence a group member has in decision-making (cf. Williams and Wilson, 1997). Three sub-dimensions of participation po- wer can be distinguished, namely weight, scope, and domain (Kaplan, 1964). Weight refers to the extent or degree to which a group member af- fects the decision process. Scope is the range of decision areas that are affected, while domain refers to the number of group members whose be- haviours are affected. The presence of power is described as potentially resulting in suboptimal, less rational decisions (cf. Williams and Wilson, 1997).
From a decision analysis point of view, power is reflected in the weight of the group utility function as described above but no information can be prescribed for the actual magnitude; the normalised weights can range from zero (no power) to one (maximum power). Balanced power can be described by equal weights of all group members. The power is complete- ly unbalanced if only one group member has power. This is the case if all weights but one are zero.
If the presence of power is described as resulting in less rational decisi- ons, we posit that absence of power, i.e. balanced weights among all group members, will result in more rational decisions. Hence our second hypothesis (H2).
Hypothesis 2 (H2). The more balanced the distribution of power among group members, the higher the degree of procedural rationality.
3. Methododology 3.1 Research Setting
To test the hypotheses, we studied large capital investment decisions of the executive team of 35 German hospitals. The environmental context for such decisions in the hospital sector can be regarded as rather homoge- nous in Germany, in line with the situations in other countries (cf. e.g.
Kleinmuntz and Kleinmuntz, 2001; Krishnan, Joshi and Krishnan., 2004).
The German hospital sector is heavily regulated. Hospitals rely heavily on scarce public capital funds. Rapid advances in areas such as medical technology and information systems, however, create a persistent pressu- re to acquire and replace equipment. Financial pressures increase and create the need to invest in capital projects that generate revenues or im- prove operating efficiency. Deciding on the allocation of scarce funds to major capital investment projects is at the forefront of the hospital executi- ve team’s attention.
In Germany a hospital’s executive team is the so-called Dreierdirektorium (“triple directorate”), comprising of a hospital’s medical director, head nur- se and commercial director. Due to German tradition, this group of three is the top management team in most German hospitals, irrespective of hos- pital characteristics such as size and ownership. Therefore, group size is constant and other characteristics of diversity such as functional and edu- cational background (e.g. Bantel and Jackson, 1989; Papadakis, Lioukas and Chambers, 1998) are consistently high (Nowicki and Summer, 2002).
We investigate large capital investment decisions made by this group of executives. Such decisions are strategic as they relate to a hospital’s long- term planning and positioning; our setting relates to strategic planning (cf.
Miller, Burke and Glick, 1998). Despite economic pressures, hospitals are not motivated by profit alone (e.g. Friedman, 1996; Kleinmuntz and Klein- muntz, 2001; Krishnan, Joshi and Krishnan, 2004; Mechanic, 1994; Thor- pe, 1997). Consequently, from a decision analysis point of view, the set- ting is in fact a case for multiple criteria decision-making in groups. In addi- tion, capital investment decisions are reported to be subject to more ratio-
nal analysis compared to other strategic decisions (Papadakis, Lioukas and Chambers, 1998).
In summary, large capital investment decisions in German hospitals are appealing for an analysis of the relationship between procedural rationality and the group characteristics willingness to compromise and distribution of power because the setting is rather stable in terms of environmental fac- tors and group diversity and the decision context is reported to exhibit a high degree of rational analysis.
3.2 Data Source
A random sample of 200 hospital directors in Germany selected from the Deutsches Krankenhaus Adressbuch, a database containing all German hospitals, was phoned and upon willingness to take part in the survey, a questionnaire was mailed. Subjects were members of the hospitals’ Drei- erdirektorium responsible for administration affairs, i.e. the commercial director. All non-respondents received follow-up phone calls and e-mails.
Of the 200 initial phone calls, 66 respondents were on vacation, about to leave the hospital or not able to take part in the survey for other reasons, leaving 134 potential respondents. In total, 35 usable responses were re- ceived, a response rate of 18%. Each hospital responded only once, resul- ting in 35 hospitals represented. Appendix A provides a listing, by hospital size and by hospital ownership, of the final sample. To reduce potential bias, we asked respondents to refer only to the last three meetings of the Dreierdirektorium in which large capital investment decisions were taken.
3.3 Measures
3.3.1 Procedural Rationality
Procedural rationality (PR) was assessed through five questionnaire items (see Appendix B). These questionnaire items were inspired by the appro- ach employed by Dean and Sharfman (1993) to measure PR. However, we aligned it to the decision analysis perspective of our study. We consi- dered the five following items: pre-selection, clear objectives, information search, use of analysis, and quantitative methods (cf. Keeney and Raiffa, 1976; Keeney, 1992). Compared to Dean and Sharfman (1993), the first
two items specify “information focusing”, the last three items are identical, and “analytic vs. intuitive” is excluded. A five-point Likert-type scale was used to measure each item. Summation of the five items resulted in the overall measure for PR. Higher index values indicate a higher degree of PR.
In order to ensure that our construct of PR taps the same dimension as Dean and Sharfman’s construct of “procedural rationality”, we also asses- sed “political behaviour” for validation purposes (Dean and Sharman, 1993). Items were similar to Dean and Sharfman (1993) and a five-point Likert-scale was used for measurement. It should be noted that Dean and Sharfman’s (1993) construct of “political behaviour” includes four items (individual vs. organisational goals, open about preferences, use of nego- tiation, and use of power) all of which are defined in a different way com- pared to the two independent variables in our model.
3.3.2 Willingness to Compromise
Willingness to compromise (WTC) was assessed in a three step approach.
First, we assessed the WTC for each possible pair of the three individuals medical director (MD), head nurse (HN), and commercial director (CD) through three questionnaire items (see Appendix B). Each item was mea- sured on a five-point Likert-type scale. The higher the item score, the hig- her the respective bilateral WTC. For example, the WTC of MD and HN can be denoted by WTCMC,HN. Second, we calculated for all possible com- binations of two pairs, which are in this case all possible spanning trees, their combined WTC as sum of the bilateral WTCs. This is due to the fact that we only require the compromise of two pairs of individuals in a group of three individuals forming a spanning tree (Baucells and Sarin, 2003;
Baucells and Shapley, 2000). Third, we chose the two pairs with the hig- hest combined WTC. That is, our measure of WTC was calculated by the following formula.
}
;
;
max{WTCMC,HN WTCMC,CA WTCMC,HN WTCHN,CA WTCMC,CA WTCHN,CA
WTC= + + +
3.3.3 Distribution of Power
Distribution of power (DOP) was assessed in two steps. First, we asses- sed the relative power, more precisely the relative weights as discussed above (Kaplan, 1964), for each member of the executive group when ma- king investment decisions. A method in analogy to the swing-method, commonly used in decision analysis for measuring weights (von Winter- feldt and Edwards, 1986), was used for measurement purposes (see Ap- pendix B). Although it is not designed for measuring weights of individuals in a group decision context but rather for weights of attributes in multiple criteria decision problems, it was chosen due to its robustness in measu- ring weights (e.g. Edwards and Baron, 1994), its intuitive appeal and ease of application in a questionnaire survey (for a more advanced technique for determining individuals’ weights in group decisions, see Bodily, 1979).
The individual with the highest power gets an arbitrary score of 100 points;
the other individuals get a score in accordance to their relative power. For example, if the commercial director is the single decision-maker, he scores 100 and both medical director and head nurse score zero. Alternatively, if all group members have the same power, all score 100. The relative weight for each individual is calculated by their respective score divided by the sum of all scores. In the examples, the relative weights denoted by wi,
3 ..
=1
i , are 1,00 for the commercial director and zero for both medical di- rector and head nurse and 0,33 for all individuals, respectively.
Second, we assessed DOP by the means of the Herfindahl-Hirchmann index, a standard measure for concentration in economics. It is calculated by the sum of the squared weights and higher Herfindahl-Hirschmann in- dex values indicate higher concentration. Since we are interested in distri- bution as opposed to concentration, DOP is calculated as follows (cf. e.g.
Hambrick, Cho and Chen, 1996).
∑
=−
= 3
1
1 2 i
wi
DOP
That is, higher index values indicate higher DOP. In the two examples a- bove, DOP is 0,00 and 0,67 respectively.
3.3.4 Control Variables
Our intention is to investigate the impact of WTC and DOP on PR and not to develop a comprehensive model of procedural rationality. The chosen setting was described as rather stable. Nevertheless, we included, a priori, two further variables that may have an impact on procedural rationality in our empirical work.
First, we included hospital size measured by number of beds as an indic- tor of complexity. It may be that larger hospitals employ different invest- ment decision-making procedures due to greater complexity (cf. Beekun, Stedham and Young, 1998).
Second, we included hospital ownership to account for the diverse ow- nership structure in Germany’s hospital sector. Three types of ownership can be distinguished: public, private-not-for-profit, and private-for-profit.
However, all hospitals operate in the same highly regulated environment and in line with other research in the hospital sector we do not expect ow- nership to be a relevant factor in testing our hypotheses (cf. Beekun, Stedham and Young, 1998).
4. Results
4.1 Descriptive Statistics
Distribution statistics for the model’s variables are shown in Table 1. The index for PR ranges in the upper part of the hypothetical range supporting the notion that capital investment decisions are subject to high rationality (Papadakis, Lioukas and Chambers, 1998). The other two indices range almost in their entire hypothetical range indicating the existence of diffe- rences in the sampled groups’ WTC and DOP.
Hypothetical Range Actual Range
Variable n Mean Standard
Deviation min max min max Procedural rationality (PR) 33 20,10 2,32 5,00 25,00 14,00 24,00 Willingness to compromise
(WTC) 33 7,64 1,25 2,00 10,00 5,00 10,00 Distribution of power (DOP) 35 0,59 0,14 0,00 0,67 0,00 0,67 Table 1: Distribution statistics
The results of the construct validity test for the PR index are shown in Table 2. The factor analysis (principal components/varimax rotation) was constraint to no more than two factors (cf. Dean and Sharfman, 1993).
There is no cross-loading above 0,43. Hence, we accept our construct of PR as valid. Reliability of the PR index was measured by Cronbach’s al- pha and the value of 0,64 is acceptable.
Item Factor 1 Factor 2
Procedural rationality (PR)
Pre-selection 0,46 0,17
Clear objectives 0,58 0,01 Information search 0,69 0,41 Use of analysis 0,78 -0,11 Quantitative methods 0,60 -0,27 Political behaviour
Individual vs. organizational goals -0,03 0,69
Use of power 0,24 0,81
Open about preferences 0,43 0,44 Use of negotiation -0,32 0,50 Table 2: Factor analysis results
The Spearman rank order correlations are shown in Table 3. Significant correlations between PR and both WTC and DOP indicate initial support for our two hypotheses. The correlation between WTC and DOP does not indicate a multicollinearity problem among the independent variables. Cor- relations of the control variable hospital size are close to zero and not significant, thus, supporting the view that hospital size does not have an influence on our model’s variables. The other control variable, hospital ownership, has three possible values on a nominal scale. Hence, we used descriptive statistics shown in Table 4 to test for independence. For each of the three variables, the Levene-statistic is not significant at p<0,1, i.e.
the hypothesis that the variances are different has to be rejected. That is, the means can be analysed with a oneway ANOVA. For each variable, the resulting F-statistics are not significant at p<0,1, i.e. the hypothesis that
the means are different has to be rejected. Therefore, we conclude that hospital ownership does not have an influence on our model’s variables.
Variable (1) (2) (3)
Procedural rationality (PR) (1)
Willingness to compromise (WTC) (2) 0,47*** (33)
Distribution of power (DOP) (3) 0,35** (33) 0,20 (33)
Size (4) -0,11 (33) 0,04 (33) -0,06 (35)
*p<0,1; **p<0,05; ***p<0,01; n in (brackets)
Table 3: Spearman rank order correlations
Ownership Variable public private-not-
for-profit.
private-for- profit
Levene- statistic
F- statistic Procedural rationality 20,60 19,08 20,83 1,21 1,90 Willingness to compromise 7,93 7,42 7,33 1,90 0,78 Distribution of power 0,60 0,57 0,59 0,63 0,20
*p<0,1; **p<0,05; ***p<0,01
Table 4: Arithmetic means for ownership
4.2 Test of Hypotheses
The hypotheses were tested by the means of a linear OLS regression. The results are shown in Table 5.
Independent variables Coefficients Willingness to compromise (WTC) 0,41**
Distribution of power (DOP) 0,31*
constant 16,37***
Regression
2
Radj 0,27
F-statistic 6,53***
n 31
Standardised coefficients; *p<0,1; **p<0,05; ***p<0,01
Table 5: Results of regression analysis
Overall, the regression can be accepted as indicated by the highly signifi- cant F-statistic (F-statistic 6,53, p<0,01). 27% of the variances in PR can
be explained by the linear regression model (Radj2 = 0,27) which is accep- table since we did not intend to propose a comprehensive model of PR.
Both independent variables, WTC and DOP, are statistically significant at p<0,05 and p<0,1, respectively. Their positive sign indicates a positive re- lationship to PR. This is in line with the hypotheses, H1 and H2, both of which posit a positive relationship to PR.
Hence, the data supports our model, i.e. both WTC and DOP are found to have a positive influence on PR. These results will be discussed in the next section.
5. Discussion and Conclusions
The purpose of this study was to examine two factors that influence pro- cedural rationality of executive group decisions. Based on decision analy- sis and motivated by divergent results of socio-psychological research concerning group decision making, we studied a group’s willingness to compromise and distribution of power. Both variables were found to have a positive and significant effect on the procedural rationality of strategic executive group decisions.
From a governance point of view, our findings add insights to the debate about effective governance forms for hospitals, a topical theme in the healthcare literature (e.g., Alexander, Lee and Bazzoli, 2003; Beekun, Stedham and Young, 1998; Lomas, Veenstra and Woods, 1997).
First, our finding regarding the distribution of power suggest that when it comes to strategic decisions, such as large capital investment decisions, the executive group should not be concerned with the relative weights that are assigned to its group members for making the final decision. Rather, all executive group members should have the same relative weight, ir- respective of their role. That is, even if the CEO is part of the group, as in our setting the commercial director who in Germany often assumes this role, he should not have a stronger position in making the ultimate decisi- on. This confirms the practice employed by most voting procedures (“one man, one vote”) and is also reported practice in multiple attribute group
decision making settings (cf. e.g. Kleinmuntz and Kleinmuntz, 2001).
Further support for our finding could come from task motivation effects discussed in the socio-psychology literature (cf. e.g. Baron and Kerr, 2003). Specifically, individuals might be more motivated when they see that their level of effort is instrumental in achieving an outcome (expectan- cy-value and instrumentality theories: e.g. Vroom, 1964; Baron and Kerr, 2003).
Second, our finding regarding the willingness to compromise suggest that it is sufficient to seek compromise at pair level in group decisions, i.e., it is not required for a rational group decision that all group members unani- mously agree. This is important since unanimous agreement might hardly be reached in practice. Thus, our empirical findings support theory recent- ly presented in the decision analysis literature (Baucells and Sarin, 2003;
Baucells and Shapely, 2000). In our setting, in a group of three individuals only two pairs need to seek compromise to allow for a rational group deci- sion. Theory suggests that this can be extended, i.e. larger groups can be split up into pairs and their agreed preferences can be successively com- bined to ultimately reach a group decision. Alternatively, if this is too one- rous, coalitions might be formed who then seek comprise in a similar way (Baucells and Sarin, 2003; Baucells and Shapely, 2000). Applied to the hospital setting, this could mean, for example, that the medical director represents the preferences of the coalition of all medical staff and the head nurse those of the nursing staff.
Our results also add to the discussion on executive diversity, a topic that attracts increasing interest in the field of strategic decision-making (e.g.
Hambrick, Cho and Chen, 1999; Papadakis, 1998; Papadakis, Lioukas and Chambers, 1998; Zeki et al., 2005). The related research examines comprehensiveness and extensiveness of strategic planning as important process variables. Comprehensiveness is defined as the extent to which an executive group utilizes an extensive decision process when dealing with immediate opportunities and threats (Fredrickson and Mitchell, 1984) whereas extensiveness pertains to long-term strategic planning (Miller, Burke and Glick, 1998). Behavioural aspects for both dimensions include
the absolute amount of activity of the extent to which brainstorming sessi- ons occur, the number of alternative solutions that are seriously conside- red, and the extent to which quantitative analysis is conducted. Important- ly, both factors have been found to have an impact on firm performance (cf. e.g. comprehensiveness: Bourgeois and Eisenhardt, 1988; Glick et al., 1993; Miller and Toulouse, 1986; Priem et al., 1995; extensiveness: Boyd, 1991; Miller and Cardinal, 1994). In search of underlying factors that in- fluence comprehensiveness and extensiveness, researchers investigated the diversity of executive groups (e.g. Bantel and Jackson, 1989; Miller, Burke and Glick, 1998; Papadakis, Lioukas and Chambers, 1998). Howe- ver, the direction of the impact of diversity on both comprehensiveness and extensiveness is not clear, i.e. the common assumption that diversity promotes rather than inhibits both factors has been recently disputed (Miller, Burke and Glick, 1998).
In our setting, we solely focus on the extensiveness dimension since we only regard decisions on large capital investments which are by their very nature long-term oriented. Interestingly, the behavioural aspects of exten- siveness are clearly related to the concept of procedural rationality of group decisions (definition of clear objectives, pre-selection of alternatives, the search for relevant information, the use of analysis and ultimately the use of quantitative methods for making a decision; Keeney and Raiffa, 1976; Keeney, 1992). In terms of diversity, many of the characteristics are fixed in our setting: industry and decision context is fixed, group size is constant and diversity on both functional and educational backgrounds of the group members is consistently high (Nowicki and Summer, 2002). Ba- sed on this, we argue that if both willingness to compromise and distributi- on of power have an impact on procedural rationality, it may well be that these two socio-psychologically inspired factors also play a role in explai- ning extensiveness of strategic executive decisions and ultimately firm performance.
Clearly, the results of this paper should be interpreted with several caveats in mind. First, the study only considers one industry, the German hospital sector. Second, the focus is on one particular strategic decision making
context, large capital investment decisions. Third, the group of executives investigated is very stable in our setting in terms of group size and diversi- ty characteristics such as functional and educational background. Fourth, the scope of our study is, with 35 hospitals, limited. Elimination of these limitations is beyond the scope of our study. However, as a follow-up pro- ject, the study could be replicated with a larger scope, in other industries, and with another strategic decisions context, for example, internal reorga- nisation which is also reported to exhibit a high degree of rationality (Pa- padakis, Lioukas and Chambers, 1998).
A further caveat is the fact that we surveyed only one member of the exe- cutive group, namely the commercial director who often assumes the role of the hospital CEO. Hence, there is potentially room for response bias.
However, the variables that we included in our model did not give rise to this concern: The actual range for procedural rationality was expectedly skewed towards the upper part of the hypothetical range and the actual values of the other two variables were basically spread across the entire hypothetical range. In addition, chief executives are reported to accurately report on their peers and therefore, it does not seem necessary to survey all executives (cf. Miller, Burke and Glick, 1998).
An interesting topic for further research would be an investigation of the link between comprehensiveness/extensiveness and procedural rationality of strategic executive group decisions for two reasons. First, it would help to strengthen the notion that the two diversity-related factors willingness to compromise and distribution of power play a role in comprehensive- ness/extensiveness. Second, it would help to understand the relationship between rational executive group decision-making and firm performance since the research on comprehensiveness/extensiveness and firm perfor- mance is far more advanced.
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Appendix A – List of Hospitals Included in the Sample
Hospitals by Size
(Number of Beds) Number % 500 and more 15 43%
200 up to 500 13 37%
100 up to 200 6 17%
below 100 1 3%
Total 35 100%
Hospitals by Owner-
ship Number %
Public 15 43%
Private-not-for-profit 13 37%
Private-for-profit 7 20%
Total 35 100%
Appendix B – Abbreviated Research Questionnaire Procedural Rationality
Please assess the following statements. (response anchors for each ques- tion: 1 = fully disagree, 5 = fully agree)
Q1: Investments required to comply with regulatory, medical or other minimum standards have priority over any other investments.
Q2: The criteria for assessing investment proposals are in line with the hospital’s overall objectives/strategy.
Q3: Individuals in the group looked extensively for information to sup- port their decision.
Q4: Individuals in the group extensively analyzed the relevant informa- tion before making the decision.
Q5: Quantitative analytical techniques were very important for making the decision.
Willingness to Compromise
Q: To what extend are the following pairs willing to compromise when making investment decisions? (response anchors: 1 not at all =, 5 = very much)
a) medical director and head nurse
b) medical director and commercial director c) head nurse and commercial director
Distribution of Power
Q: How is the power among members of the Dreierdirektorium distrib- uted when it comes to deciding on large capital investment projects in your hospital? First, rate the individual with the highest power with 100 points and then assess the remaining individuals in accor- dance to their relative power. (response anchors: 0 = none, 100 = very high)
a) medical director b) head nurse c) commercial director
