What drives acquisitions? Does an individual’s outlook (glass half full or glass half empty) impact their decision-making to undertake the acquisition of a new piece of land or the acquisition of company? Can compensation overcome a natural tendency to avoid acquisitions or propel an already acquisitive executive into hyper-acquisition mode?
Researchers Gamache, McNamara, Mannor and Johnson in their Academy of Management Journal article (2015, Vo. 58, No. 4), “Motivated to Acquire? The Impact of CEO Regulatory Focus on Firm Acquisitions” argue “that CEO attributes have a profound impact on firm action and performance.” This is especially interesting given that “many CEOs continue to purse acquisitions in spite of the evidence which indicates that acquisitions frequently result in negative returns.”
The authors looked at two major topics impacting decision-making and goal pursuit of executives--their outlook or focus and the impact of incentive compensation as a moderator of their outlook.
Regulatory focus theory suggests that “any goal can be attained through the use of different strategic means.” “Specifically, people can pursue their goals via a promotion or a prevention focus.” “A promotion focus involves acting in ways that attempt to maximize gains.” A promotional focus is associated with an entrepreneurial spirit, generating new ideas, seizing opportunities and acquiring resources. Carpe diem (seize the day)!
A prevention focus is on the other side of the continuum. “A prevention focus is associated with a preference for a vigilance strategy, which is concerned with protection, safety, and responsibility.” “People with a strong prevention focus take the time for careful and systematic decision-making; emphasize accuracy and quality over quantity; and create a sense of security by adhering to rules and conventional routines.” In a sense--first do no harm!
Each of us falls along this continuum. Some are strong promotion focus while others may be mildly promotion focus, mildly prevention focus, or strongly prevention focus. The key is that our focus shapes how we look at opportunities: opportunities to acquire firms, to open new markets, or to acquire a piece of land. Understanding the natural biases that come with each perspective can help us avoid the dangers of such biases.
“Acquisition involve opportunity to boldly grow and advance a firm, as well as the potential for big returns--two decision criteria that are related to a promotion focus. However, they also involve significant uncertainty and potential for major losses, and require careful diligence, all of which are criteria that map onto a prevention focus.”
Given all of this, the authors hypothesized and found that individuals with a promotion focus are “associated with both a higher quantity and larger scale of acquisitions because a promotion focus involves a strategic preference to acquire.” The authors also found support for their second hypothesis that “a prevention focus is associated with a lower quantity of acquisition because a prevention focus is characterized by a concern for security and responsibility, and increased due diligence in evaluating a potential acquisition.”
The second part of the research involved the question of whether incentive-based compensation (specifically stock options) moderate both a promotion and a prevention focus. Specifically, could incentive compensation encourage decision-makers to be more promotion focused no matter where they fit along the continuum? For instance, would an executive with a more prevention focused outlook be more acquisitive if incentive compensation encouraged him to do so.
The authors found that indeed incentive compensation can encourage executives with a prevention focus to become more acquisitive. Interestingly, they found that incentive compensation had little impact on executive with a promotion focus; they were already acquisitive and incentive compensation did not encourage them to be even more acquisitive.
So what does all this mean for each of us? I think the first thing is to understand where you fit along this continuum. “Executives who are able to understand their natural tendencies have an opportunity to capitalize on the positive aspects (biases) of these tendencies and avoid some of the negative elements (biases).”
For instance, if you’ve never seen a piece of land you didn’t love, putting in place stronger processes around comprehensive due diligence might mitigate the chance of making a bad purchase decision. If your tendency, is to shy away from bold initiatives, you might want hire one or more individuals one your staff who tends to work with more of a promotion focus. By cultivating an environment where open dialogue is encouraged and appreciated, conversations among your team that balance your more prevention focus with others' more promotion focus, may allow you to seize opportunities that you may naturally shy away from.
Finally, boards of directors and senior executives can use incentive compensation to encourage decision-makers who are more prone to a prevention focus to search out and take advantage of the benefit of acquisitions. Conversely, boards of director and senior executive need to be more cautious with executives with a strong promotion focus, putting in place oversight to encourage careful acquisition behavior.
Jamie M. Pirrello is the president of American New Homes Group. American New Homes Group is focused on building a super-regional home builder through acquisition.