Better the Devil you Know: Executive Hiring Modes and the Emergence of Top Management Team Diveristy

Abstract

Recent research shows that internally promoted executives are systematically different in demographic characteristics than their externally hired counterparts. We extend this notion by proposing that the hiring origin of new executives affects the emergence of top management team (TMT) diversity. Drawing on opposing theoretical streams on the evolution of diversity in teams, we postulate that there is a substitution effect between external hiring and dissimilarity of newly appointed executives. Firms overcome their homogeneity inclinations by selecting dissimilar executives from the internal rather than external labor market, yet firm complexity and environmental uncertainty moderate this propensity. Data from 567 non-CEO executive appointments at 167 large European firms between 2005 and 2009 provide support for the hypothesized negative relationship between external hiring and dissimilarity of newly appointed executives. It also shows that the observed substitution effect is weaker under conditions of organizational complexity, and stronger if environmental uncertainty is high. Implications of these findings for the emergence and consequences of TMT diversity are discussed together with directions for further research.