John Almandoz is an assistant professor at IESE Business School in Barcelona, where he teaches courses on leadership and organizational behavior in MBA and executive programs. He holds a Ph.D. organizational behavior from Harvard University and has extensive experience in actuarial consulting, corporate banking, and non-profit management.
System Logic interviewed Professor Almandoz about his most recent article “Founding Teams as Carriers of Competing Logics: When Institutional Forces Predict Banks’ Risk Exposure,” forthcoming in Administrative Science Quarterly, one of the world’s top scholarly journals on organizational theory.
System Logic: Your forthcoming article explores how the degree of risk taking varies across local banks, and you show that founding teams have an important effect on banks’ risk strategies. How would you summarize the key results for a non-academic audience?
John Almandoz: My recent article explores how bank founders make a difference in the risk strategies of banks. It focuses on a very specific type of risk, which is use of brokered deposit, a type of deposit that is more volatile and can expose banks to liquidity shortfalls when those deposits reach maturity and must be replaced by new deposits. Even though they expose the bank to liquidity risk, brokered deposits can also fuel loans at a faster pace than regular checking or savings account deposits, which are often harder to obtain, and thus allow banks to reach higher growth and profitability targets. Evidence from interviews and statistical data shows that founding teams are a determining factor in the degree of risk-taking tolerated by the organization.
The study shows that the growth appetite and risk predispositions of organizations can be traced back to how deeply steeped founders were in financial and community logics. Local bank founders steeped in a financial logic tend to see the bank as an investment vehicle and seek to maximize profits, while those motivated by a community logic are driven to meet community needs and focus less on profits. Distinct financial and community institutional logics—defined as taken-for-granted understandings of appropriateness in distinct settings—are carried by founders into their new organizations. The bottom line is that backgrounds and prior professional experience of founders can provide hints as to the strategic and risk predispositions of the organizations they found.
Interestingly, the role of founders in transmitting risk attitudes into the newly founded organizations, based on the institutional logics that have shaped them, is especially prominent in larger founding teams. The presence of founders aligned with either financial or community logics has a stronger effect on shared risk assumptions, values, and norms if the founding team is large than if it is small.
SL: What are the implications of these results for bank founders and subsequent managers? How about financial regulators who seek to ensure the stability of the financial system?
JA: The implication for bank founders is to be conscious of the phenomenon of groupthink that could result from assembling founders with similar backgrounds and identifiable attitudes with respect to risk. Some of those attitudes implicit in certain professional backgrounds or communities may be taken-for-granted and not explicitly discussed. The presence in founding teams of people with stereotypically aligned assumptions, values, and norms about risk may accentuate those risk predispositions beyond what could be expected by polling each of the team members separately. Bank founders may want to explicitly discuss the premises of their decision-making so that they do not transfer the responsibility for those decisions to the group. Bank founders, who end up generally in the boards of directors, are seen as “big men”—most founders tend to be male—in their communities, and would not be easily cajoled into passive roles, but they may unconsciously surrender their independent opinion by adopting the stereotypical views of a distinct group within the founding team.
The implication for bank regulators is that they may need to keep a more watchful eye on bank boards with large concentrations of members with financial careers, such as investment bankers, hedge fund managers, or investors, who may accentuate the risk appetite of each other when making decisions as a group—especially when those boards are large. As part of the training that board members receive, it would be helpful to include facilitation skills, especially in larger groups, to ensure that all relevant premises to a decision are listened to and considered before rushing to a consensus.
SL: Much of your research, including this article, focuses on local banks in the U.S. What are some of the implications of your work—either this article or your other research—for practitioners who struggle with issues of risk and uncertainty in other industries?
JA: The U.S. banking sector is very interesting because bank founders come from a wide variety of professional backgrounds such as banking, law, farming, real estate, entrepreneurship, politics, and others, with diverse attitudes toward risk. Much of my research builds on the understanding that those backgrounds leave a cognitive and motivational imprint on board members that conditions how they view the world and what assumptions, values and norms they consider appropriate when making decisions. Understanding the life story of a person can help one predict or at least understand their predisposition toward risk.
Discussions about risk are often permeated by analyzing objective factors, but subjective elements such as the biases and predispositions of individuals and how those get potentially accentuated in groups may be just as relevant.
SL: Through your various research articles, you have made some very interesting contributions to the scholarly literature on institutional logics, which is a large and very active research area for scholars in business schools. Given that this is a very well researched topic, what are some lessons, implications, or ideas that this literature might suggest for practicing managers?
JA: Institutional logics can be a powerful lens for practicing managers to think about innovation.
We tend to think of cultures, for example at the national level, as uniform and stable. However, as the literature on institutional logics has shown, within the institutions inherent in a society, there are contradictory practices and beliefs. A modern society can be seen as capitalistic, bureaucratic, democratic, or family-oriented, depending on what lens is used or what particular institutions one focuses on. Because individuals frequently engage with multiple institutions with relatively stable but distinct standards of appropriateness, they are accustomed to such variety and can transition from one set of assumptions and values to another in a relatively seamless manner as they walk from the voting booth to work or to church and return home to their family at the end of the day. The standards for what is just or legitimate, or what is taken for granted in distinct institutional settings, even in the same society, are different. Those cultural differences in society can be tapped by organizations combining them in creative ways.
Institutional logics are the ferment in which organizations obtain shared understandings that facilitate interactions. The most common taken-for-granted rule for business organizations has been, and still is, the market logic, which is largely driven by profits and short-term results, but as societies have matured and become more complex other institutional logics have entered that space of business organizations. Because multiple institutional logics are accessible and available to entrepreneurs, new types of hybrid organizations are emerging that integrate logics that up to that point had been seen as competing or incompatible. Micro-lending organizations and green banks are examples of hybrids productively combining market and social logics. A green logic can represent an opportunity to tap resources such as deposits from like-minded customers—but first the organization must convince those potential customers that a values-based banking proposition makes sense. And even before that, it must also convince regulators and investors that such an experiment is legitimate and could work from the standpoint of both banking and green logics.
Experimenting with distinct institutional logics is not exempt from risks, as those alternative ways of understanding appropriateness can be the source of disagreement and conflict. Additionally, existing institutional logics have evolved in a certain way for a reason and tinkering with them can result in confusion and failure. Spanish Cajas de Ahorros, now extinct, are a notorious reminder of the risks of thoughtlessly combining banking and political logics.