Beyond Bounded Rationality: CEO Reflective Capacity and Firm’s Sustainable Performance

Abstract

In this study, by proposing, defining, measuring, and theorizing on CEO reflective capacity, we convey that CEO cognitive capability warrants systematic research in the upper echelons and managerial cognition perspectives. CEO reflective capacity is conceptualized as a behavior-oriented cognitive capability that may challenge the assumption of bounded rationality by transcending the three-stage filtering and narrowing information process into a broadening vision. We developed and validated a three-dimensional measure of CEO reflective capacity using multiple executive samples and then tested three hypotheses on how CEO reflective capacity links to a firm’s sustainable performance through two mediating mechanisms, based on the upper echelons framework and informational perspective. The results, based on analyses of multi-source two-wave surveys from 213 Chief Executive Officers and 256 of their subordinate-executives in Chinese small-to-medium enterprises (SMEs), reveal that: (1) CEO reflective capacity is positively associated with firm sustainable performance including economic, societal, and environmental dimensions. (2) Strategic decision comprehensiveness and CEO behavioral complexity mediate the relationship between CEO reflective capacity and sustainable performance. We discuss the implications of this study for future research on strategic leadership and managerial cognition in complex and dynamic contexts.