Impact of CEO's managerial and engineering background on global automotive companies' performance

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GOVERNMENT OF THE RUSSIAN FEDERATION

NATIONAL RESEARCH UNIVERSITY

HIGHER SCHOOL OF ECONOMICS

Faculty of world economy and international affairs

Master of international business program

MASTER THESIS

Impact of CEO's managerial and engineering background on global automotive companies' performance

Student: Sergey Chashchin

Research Advisor:

Anastasia N. Stepanova,

Candidate of Sciences (PhD) in Finance,

Senior Lecturer of Corporate Finance,

Department of Corporate Finance.

Moscow 2019



Structure

Introduction

1. Theoretical aspects of CEO's background

1.1 Previous research of CEO's background influence on the firm performance

1.2 Managerial background in theory and previous research

1.3 Engineering background in theory and previous research

2. Case study of the global automotive producers

2.1 Study of company's CEO with managerial background

2.2 Study of company's CEO with engineering background

2.3 Comparison of their performance with analysis for correlation.

3. Findings and recommendations

Conclusion

References



Introduction

Every company has an executive and top management team that steer the company. Their day to day work is happening under the uncertainty and changing surroundings. Their actions determine strategy and tactics that the firm will perform. The performance of company could be measured in many ways, starting from the market capitalization, how people perceive company and it's goodwill to profit indicators which capitalize the goodwill from the topline to the bottom and the total shareholders return - the money that go directly to the shareholders, one of the reasons they invest into the company.

But there is no united opinion of the researchers on the matter of whether the CEO influences the companies' performance. Another question is that does the background of the executive matter? Furthermore, if it matters then which one is better?

Today those questions are relevant to the global automotive companies as never, as the automotive industry and producers are on the edge of major industries disruption such as electric vehicles and autonomous vehicles. Nowadays, shareholders and boards of directors should decide whether their current executives and teams correspond the challenges that will bring the disruptions. And if the changes are needed, how to pick the right person?

Another issue, where to look for the right executive. There is no united opinion on the industry factor, to which extend it matters. Furthermore, for technological companies it is not clear from the theory which CEO to prefer - with managerial background or with engineering background.

Unfortunately, there is no one opinion on the following issues. Researchers have different points of view on CEO impact on company's performance. Also, there are some scientist that consider the CEO doesn't impact the performance, but the inertia of an organization and it is being self-regulated as an organism.

To find out what is needed for the global automotive companies we would research the existing information of impact of a CEO on company's performance, we will compare managerial CEO background and engineering CEO background. Also, we will take a closer look on industry factor and the balances of powers and power limits of CEO, and we will answer the question does CEO matter at all?

In the absence of that unified opinion on the listed matters, we would study the cases of different automotive producers who are managed by different background CEO, engineering and managerial. In addition, we would make a model and we will perform the analysis for correlation of last 5 year reports available of Top-10 automotive car companies by sales in 2018.

After the analysis of existing research, case study and analysis for correlation, we would give the results and recommendations on the impact of CEO background of company's performance and our suggestions what to do for the global automotive companies and how to pick a CEO in the corresponding situation the company has.



1. Theoretical aspects of CEO's background

1.1 Previous research of CEO's background influence on the firm performance

There are a tot of studies that research the CEOs and top management team (TMT). One of them is upper echelons theory. That study suggested 1 propositions about CEOs. But this was not only about background as the professional issue, but also about age and socio-economic background. Upper echelon theory (1984, Hambrick and Mason) has several propositions that are interesting for our research and we will start from that theory.

But does CEO actually mater? The researchers are not united on any opinion. For example, Hall (1977) suggested that CEO doesn't matter and big organizations are living by themselves in the changes caused by environmental events. And with that it has to be decided how to study the influence of managerial background on organization, which indicators could be used to link firm performance and CEO personal characteristics. With that, Hambric and Mason suggested that return on investment relative to the industry would fit. Furthermore, they suggested that it would be better to always keep in mind and in the text that every case of studying of CEO background should be considered through the prism of industry specifics.

Considering the specifics of the CEO background, every CEO or TMT member has its own perception. First part of that perception is field of vision - the areas where the attention is directed and it is not unlimited. Second, the person selects the information from this field. And, third, it is interpreted through the prism of values and cognitive base of the person (figure 1).



Figure 1¹ Created by authors based on Donald C. Hambric and Phyllis A. Mason, The Academy of Management Review, Vol. 9, No.2, p. 195, 1984.

Strategic choice Under Conditions of Bounded Rationality

The studies suggest that managerial background is influencing the outcomes of the organization and these outcomes could be predicted, not fully, from this background. And the backgrounds of CEOs are the results of previous organizational actions. This previous managerial background could be industry specific. For example top-executives of banking industry have significant banking experience.

Theory suggest that managerial background affects the strategic decisions of the company in the way that top-executive could be picked by board of directors accordingly to the directions which the board or owners want to implement. That raises again the question of is there a role of CEO? Maybe the strategic choices are not linked to his/her managerial background, but are just dictated by the will of board and owners.

We suggest to look at the Figure 2 to imagine upper echelons model.



Figure 2 Created by authors based on Donald C. Hambric and Phyllis A. Mason, The Academy of Management Review, Vol. 9, No.2, p. 198, 1984 - An Upper Echelons Perspective of Organization

Further we will take a look how different factors, suggested in upper echelon theory, such as age, tenure, insider/outsider of a company/industry, education and its amount, career path and functional background, how they influence the rationality of an executive and how they affect organizational performance.

The influence of background firm performance was researched thoroughly. First of all, already mentioned upper echelon theory. The background of the CEO, education and, consequently, the knowledge base the he/she possesses, defines the perception of information. Furthermore, it defines the flow of information and its processing, breadth of problem framing and search for alternatives, willingness to undertake the change. The more narrow and specific the knowledge base of the person, the more is the possibility that the problem is perceived narrow and specifically according to the knowledge. On the contrary, the wider is the knowledge base the more options are available to a person (Datta and Rajagopalan, 1998). “Overall, then, variations in the cognitive attributes and type of knowledge possessed by the CEO are likely to manifest themselves in variations in their strategic choices and, hence, the types and range of competitive actions pursued by them” (Datta and Rajagopalan, 1998).

The cognitive process was divided by Strabuck and Milliken (1988) into two categories for a decision-maker such as noticing and sensemaking. If we talk about background of a CEO and its manifestation through perception, top-manager can focus different amount of attention on different aspects while both stimuli are in his/her “eyesight”. Sensemaking occur as a manager frames the context of the decision calculates outcomes and forms casual attributions. So the information in the perceptual process is not only noticed differently it is attributed with the meaning (Tyler and Steensma, 1998)

Going back to the influence of the CEOs background, researchers who used meta-analysis came to a conclusion that such aspects as age, tenure, education, career experience have positive influence of future company performance (Wang, Holmes, Oh, Zhu, 2016). An age factor did not predict the broad indicator of company's strategic actions. It contradicts the theoretical suggestions in upper echelons theory on the conservatism of the more aged CEOs. But also, in particular it corresponds the theory, in the aspect that the more aged CEOs are negatively related with product innovations and risk taking (Wang, Holmes, Oh, Zhu, 2016).

In general, CEO age and tenure was positively associated with future performance of the company according to the research of Wang, Holmes, Oh and Zhu (2016).

However, going down to the specific geographical areas of the research, the study of Kaur and Singh (2018) of 500 Indian firms showed that gender, education level, and the duality of a CEO (as also a chairman of the board) have no significant effect on the company's performance in the representation of return on assets (ROA).

After analyzing what has the influence on the behavior of CEO it was supposed that in differently oriented companies within one industry there will be a different set of upper echelons (Chaganti and Sambharya, 1987). Researches used the typology of prospector, analyzer and defender firms. Prospector - a company that is extensively developing new products and market opportunities. Defender - guard their position and trying to stay low for safety. Analyzers - something in between of Defenders and Prospectors (Miles and Snow, 1978). Miles and Snow supposed that prospector firm has to have marketing and R&D directors playing the major role. For Defenders this role should be occupied by financial and production managers. And Analyzer companies include all the executive-types above.

Based on that typology Changanti and Sambharya conducted the research of three tobacco companies. Researchers suggested that every type of companies would have a different amount or proportion of outsiders, the people from another company or industry.

Outsiders were supposed to have knowledge and skills that could not be formed within a company (Grusky, 1963; Carlson, 1963) and they will be more inclined to implement changes in the company than those who raised within (Helmich and Brown, 1972). The outsiders are not limited to the knowledge and skill that could be gained in one company. They are free of a corporate memory of the specific firm that they are outsiders for. And in the changing world the challenges of the outside of the company not always could be met with the arsenal that is only received within one company or even industry.

What it has to do with background of CEO and the influence of it on firm performance? Because in order to accept challenges from outside and deal with the problems, first thing for CEO would be identify the problem. And that depends on the background. “Functional specialization of top executive biases the definition (Dearborn and Simon, 1958) and influences the course action adopted in an organizational setting” (Chaganti and Sambharya, 1987). Hitt, Ireland and Palia (1982) referred strategies of the companies to the functional importance. Companies that grow inside favorited general administration, HR and R&D. Other firms that were oriented on external growth were focused on the functions of general administration, finance and marketing. Companies that were focused to be safe and sound preferred marketing and finance. That's why functional background of CEO would have a big influence on the firm performance. Where he/she would lead the company, what would be the core function and what would be the recipe of CEO's own TMT.

Findings of Chaganti and Sambharya showed that more outsiders with different background were presented in the prospector companies, less outsiders were presented in analyzer company and the least amount of them was presented in defender type of company.

But it should be stressed that by Snow and Miles, the ones who developed the typology, it was said that findings could differ from one industry to another.

And one of the outcomes of the study of Chaganti and Sambharya is that CEO's and TMT's background and characteristics should correspond the environmental challenges and with the strategy that is carried out by firm. It was discovered that there is a significant positive relationships between throughput-function experienced managers and strategies that are oriented on efficiency. And this study strengthens the upper echelon theory of Hambric and Mason (1984).

Consistent with upper echelons theory, some researches argued on the point of top management team heterogeneity in the aspect of experience, that TMT with diverse kind of experience and in different fields will help them to deal with the problems more effectively that TMT with less diverse experience (Bigley and Wiersema, 2002).

Firm performance is versatile. One of the forms of company's performance is its market capitalization and its changing. There are several studies that research how the background of CEO and TMT affect the stock market and the decisions of investors.

One of them studies the processes of IPO and the links between IPO and background of TMT(Higgins and Gulati, 2006). For companies that go to IPO is crucial to be invested by institutional investors (such as pension funds, for example). And as the significant investments involved, institutional investors thoroughly examine the companies that go to IPO. For that reason and also to be more transparent, companies disclose the information about CEO and TMT background. Furthermore, companies are forced to do that by Securities and Exchange Commission (in USA), firm has to state 5-year career history of managing officers and members of the board of directors.

The background of CEO and TMT can be divided to certain areas, or legitimacies. First, resource one. The idea behind is that investors can see, from which industry or company CEO or TMT-members came, in order to decide whether their human capital (knowledge and skills) and social capital (people they know) are corresponding the company and are those credible or not.

Second, role legitimacy. It is about executives corresponding the occupied position considering their previous background and expertise. Such correspondence makes company's organizational actions more predicable (Suchman, 1995).

Third, endorsement legitimacy. “The more prestigious firm undertaking an IPO's lead underwriter, the greater the number end quality of institutional investors” (Higgins and Gulati, 2006).

Researchers picked 858 biotechnological firms from U.S., that are “young” - 4,87 years in average from founding to IPO. Results of the study are the following. Resource legitimacy were found in case, when TMT employment affiliations with downstream companies (in this case - pharmaceutical) more institutional investors are ready to invest in young companies going to IPO. Role legitimacy was also confirmed. The more chief executives with relevant background occupy the positions, the more rich institutional investors are ready to invest in young firms. And the endorsement legitimacy works only with the corresponding background of TMT (Higgins and Gulati, 2006).

These findings show that background of CEO and TMT is relevant not only for inside organization and its strategic decisions but also is relevant for third parties, outside world and most important for investors. The principles of correspondence and using strong partner as the guarantee of legitimacy could be used to restore organizational functioning and the image of firm if needed.

The other study researches the signaling role of CEO background. `This research, however, sheds little light on the manner in which executive background influences how investors respond to specific organizational actions' (Zhang and Wiersema, 2009). Researches find the background of the CEO can serve as a strong signal of the credibility of CEO certification of the financial reports, becausethe CEO is the symbolic representative of his/her company (Pfeffer and Salancik, 1978).

Proceeding with the market reaction, by Wang and Yin (2018) it was discovered that stock market reacts positively to CEOs education-state acquisitions. As education is the significant part of a background of a manager, we can conclude that CEOs background matters and influences the company performance in the representation of stock market. The same study by Wang and Yin (2018) explains that the reaction of the market also enhanced because CEOs in the education-state acquisition tend to bid less of a target premium for acquiring. Supposedly it is caused by informational advantage through school networks of a CEO with education from state of acquisition (Wang and Yin, 2018)

The tenure of CEO was not supported by strong evidence to have credibility of certification of financial statement in the perception of third parties such as investors. But age as the part of CEO background was found to have positive influence on the credibility of certification of statement. The more age - the more knowledge, experience and connections with people (Cohen and Dean, 2005:686).

It was proposed and found that CEO background and its attributes can serve as market signals regarding the credibility of CEO certification of financial statements, and thus affect the stock market's response to CEO certification (Zhang and Wiersema, 2009).

These two studies show that the background of the CEO is the powerful tool for influencing financial health of the company on the stock market. Right CEO with right background can add value in the perception of the investors with significant amounts of funds when firm is going through IPO. Also, it can be used for restoring company's performance or image. Other application of CEO background in the perception of the third parties is the creation of credibility of the financial statements of the firm, which directly affects stock prices and trust of investors of the company.

Researchers, such as Hambric and Mason (1984) suggested that the influence of certain background of CEO or TMT is industry specific. For example, even in science and capital-intensive industries the role of the engineering and R&D background could have different effect from industry to industry.

Results of the research of (Datta, Rajagopalan, Zhang, 2003) reflects the industry specific factors. It argues that the ability of a new CEO to design and perform a new strategy is strongly increased or constrained by the industry of the company. Even if the top-manager is ready for change he/she may be unable to work with the new strategy because of the situation when industry limits the opportunities for discretion.

But some studies oppose that the industry matter. Datta and Rajagopalan (1998) argue that the industry structure plays important but limited role for the explanation of the variations in CEO successor characteristics. Meaning that the top-management that comes for a succession is not necessary limited by the industry factor.

Study “CEO characteristics: does industry matter” states that industry factor is not significant.

Among the factors in the study were the following. First, firm tenure. By earlier researches it was concluded that the firms with longer tenure are oriented on stability and efficiency, and ones with the shorter tenure are more focused on innovation in product portfolio and on diversification.

Also the tenure of top-management influences the company. Younger, more educated and those who have lower levels of firm tenure are more eager to challenge the status quo of the company (Datta, Rajagopalan, Zhang, 2003). And accordingly, longer-tenured CEOs may have less interest to pursue strategy of innovation with more spending for R&D, choosing stability and efficiency instead (Barker and Mueller, 2002).

Tenure of a CEO was found negatively related to strategic actions of the company, such as strategic risk taking and strategic change. And the strategic actions are positively related to the future firm performance and to the broad measure of company's profitability specifically Wang, Holmes, Oh and Zhu, (2016). The results of the study of Wang, Holmes, Oh and Zhu, (2016) indicates that longer-tenured CEOs tend to avoid risks and are resistant to change.

Second is education level. It was supposed to be positively associated with diverse product portfolio, stability and industry growth. However, the problem of education level, its measurement and compartment with “self-made” education was indicated by Hambric and Mason (1984), who suggested that non-managerial educated “self-made” people tend to more risk and product innovation when MBA-degree or other managerial-educated people are capable of solving short-term managerial problems and are less capable on innovation activates.

In the defense of MBA-programs, Wang, Holmes, Oh and Zhu, (2016) propose that positive influence of CEO's formal education on the company's performance probably attributed to MBA degrees.

Some researches argue that not the type but the amount of education matters if the topic is innovation activities. Mangers who have professional background or higher education degrees tend to spend more on R&D (Lin, Lin, Song, Li, 2011). “Educational specialties either have no association or a negative association with R&D spending likely suppresses the relationship between the overall level of education achieved and R&D spending” (Barker and Mueller, 2002). So the part of managerial background such as amount of education influences the part of innovative activity of the company in R&D aspect.

On the other hand there, if we include a geography factor, the aspect of the background such as amount of education can change its role in the affection on the performance of the company. Serra, Trкs and Ferreira (2016) who studied 73 listed companies from Brazil for the period of 1997-2012 found that in firms where CEO has better academic qualification has no improvement in company's performance.

However the same study underlines that CEO's influences greatly on the EBITDA indicator and it could be caused by the short-term concerns of an executive (Serra, Trкs and Ferreira, 2016)

Third, functional background among other factors is forming a prism through which CEO or member of TMT is perceiving the reality, how he/she defines problems and which background and experience he/she has to solve it and in which way.

Fourth, as the part of functional background issue, heterogeneity of this background. The more it differs, the more CEO or TMT member has the field of vision and experience, meaning he/she can find solutions of the problems in different fields looking at the problem from more different angles. There are more solution to different kinds of problems with different functional knowledge.

The functional background aspect could be perceived as a career experience and it was found to have a complex of a relationships with the strategic actions of a company (Wang, Holmes, Oh and Zhu, 2016) Prior career experience in any given area, position or role, would prepare an executive for taking more strategic actions. CEO's throughout and nonthroughput were positive and significant factors to predict the undertaking the strategic actions. Furthermore, not also the functional type, but also geographical factor in the representation of manager's international experience also positively influences the broad factor of strategic actions Wang, Holmes, Oh and Zhu, 2016).

Although international experience positively relates to the strategic actions, some researches state that foreign directors, meaning brought form outside of the country of operation, could have negative impact on the company's performance (Elsharkawy, Paterson and Sherif, 2018).Furthermore, the research of Kaur and Singh, 2018 of 500 Indian listed firms on the 5-year period showed that foreign CEO are negatively related to ROA. Along with that it was found that the remuneration is positively related to the company's performance.

As it was previous discovered in theory task experiences strongly influences the individual performance. And as the major job of a CEO is the strategy, strategic actions, background in the representation of a previous task experience was found to have positive influence on strategic actions indicator. In other words, the CEO's daily job is represented in the activity and performance of the whole company, hence his/her individual performance influence becomes firm-level (Wang, Holmes, Oh and Zhu, 2016).

Talking about personal contribution and personality attributes by Wang, Holmes, Oh and Zhu, (2016) it was discovered that executives who evaluate themselves as the persons capable on influencing to their environment are more likely to undertake the strategic actions, probably because of their confidence and ambitions. As an addition, the executives with the same self-concept are more eager to strategic risks.

The findings of the research of Wang, Holmes, Oh and Zhu (2016) show that CEOs characteristics predict the performance of the company.

Also, it was studied that the more difference in the functional backgrounds of the top managers of TMT there are the more internationalization diversification in firm's strategy there is. Top-managers with different experience and various backgrounds can perceive strategy broader and implement it not only in domestic market (Bany-Ariffin, McGowan Jr, Bolaji Tunde and Shahnaz, 2014).

The research took 410 firms from three time periods from different industries. The study showed that industry factor plays an insignificant role for explanation of variations of CEO characteristics and the performance implications of such variations. But this study raises very interesting question. What if the CEO with certain background and characteristics picks the certain industry? (Rajagopalan and Datta, 1996).

Talking about role of the CEO and the amount of his/her influence we can refer to upper echelon theory and the top management team as the part of it. As Hambrick and Mason (1984) CEO shares his power, to some extent. Also, it could be that CEO does not only shares the power but also represents the power of company's subunits. For example, when there is a managerial change, new person brings reform agenda and in the company it can cause a disruption and employee tension, and in this situation different subunits of the company can gain power on the expense of others (Simson and Koper, 1997). A new CEO could serve as an indicator, functional background of the leader represents resource base and power of the unit he/she came from/which he/she represents. “Hence, if the new CEO comes from a finance background, it is assumed that finance has won the intraorganizational struggle for subunit dominance” (Simson and Koper, 1997). The subunit from which top-manager came from, provides the way company sees the world, understands and solves problems (Simson and Koper, 1997). From that we can suppose that the background of the CEO is not only the perception part, but also the social part. It affects not only the way manager makes decisions, but it is a representation of the power balances in the companies.

Mentioning the sociological aspect in the CEOs background, it was studied that background of an executive in the education part, in the place of education specifically, can be used to exploit education state information advantages in order to organize acquisitions (Wang, Yin, 2018).

Background and the influence on the company's performance was studied by Wand and Yin (2018) and showed that CEOs tend to acquire targets headquarters in the states where they earned at least bachelor's degree. Furthermore, education state acquisitions have a higher rate of completion than non-education state ones. Researchers supposed that the educational background of a manager could give him/her unique information advantage or CEO could be familiar with firms in the state of education.

Proceeding power representation and subunits, we should also remember that usually CEO is not the highest instance because he/she depends on the board of directors. And all the research of the issue of CEO background influence on firm's performance should be studied from the perspective of how much powerful the CEO is.

Filkinstein suggested the definition of CEO power as “capacity of individual actors to exert their will” (Filkenstein, 1992:205)

Dalton and Kesner, (1987) proposed that the powerful CEO threatens the independent decisions of the board. He or she affects more and reduces the influence of the board (Haynes & Hillman, 2010).

However Zahra and Pearce (1989) has another view, that without powerful CEO directors would have to be engaged in discussions and as a result there would be more diverse points of view (Haynes & Hillman, 2010).

Talking about the power of CEO Golden and Zajac (2001) found that when CEOs have power of vis-а-vis the board, the board has less effect on strategic changes of the company (Haynes & Hillman, 2010).

As we know from upper echelon theory (Hambrick & Mason, 1984) that newly appointed CEOs tend for a change we can also consider that if the CEO is from the firm's own focal industry, the mandate for change is overridden by the mandate to conform to industry norms (Haynes & Hillman, 2010).

During the research Haynes and Hillman (2010) “maintained that the presence of a powerful CEO moderates the relationship between board capital and strategic change, such that powerful CEO's preference to remain committed to the status quo and industry norms prevail”. Also, powerful CEO can act against the recommendations of the board.

Considering the power of CEO and his influence on the firm's performance, it was researched that the more powerful is the CEO, meaning the more centralized is decision making, the more performance of the companies varies from the average. Also it was found that CEO power is positively associated with stock-return variability. However, the possible cost of decreasing the power of CEO is that the performance will be less variable but the probability of spectacular performance will also be lower. So the results suggest that the CEO influence on firm's performance depends in the degree of centralization. And when the power is more centralized, the results for different companies are the worst ones and the best ones at the same time (Adams, Almeida, Ferreira, 2005).

In addition, from the human capital point of view, the background of a CEO that he/she gained in particular jobs and tasks can be transferred not fully, imperfectly, when a person is chosen for a CEOs role. The researchers Wang, Holmes, Oh and Zhu (2016) suggest that the mere general experience is gained by an individual the better it would contribute to the future company's performance.

Considering the other theories, in order to analyze the CEO performance, we should remember the agency problem which is problem between shareholders and CEO. It is important because we have to know why the performance of different CEOs can vary, and the agency problem is one of the reasons.

Agency relationship is defined “as a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent” (Jensen & Meckling, 1976).

If both parties to the relationship maximizing the utility, it is considered that the agent will not always act in the best interests of the principal. To prevent that, the principal can limit divergences from his interest by establishing appropriate incentives for the agent and by monitoring which is designed to limit the aberrant activities of the agent. In addition in some situations it will pay the agent to expend resources (bonding costs) to guarantee that he will not take certain actions which would harm the principal or to ensure that the principal will be compensated if he does take such actions (Jensen & Meckling, 1976).

“However, it is generally impossible for the principal or the agent at zero cost to ensure that the agent will make optimal decisions from the principal's viewpoint” (Jensen & Meckling, 1976).

The agency costs are the sum of cots for monitoring by principal, bonding costs of the agent and the residual loss. The last one is the costs of reduction in welfare experienced by the principal due to this divergence between the agent's decisions and those decisions which would maximize the welfare of the principal (Jensen & Meckling, 1976).



1.2 Managerial background in theory and previous research

Starting with upper echelon theory in its application to managerial background study, we take the proposition which suggests that top managers with experience in marketing, sales and product R&D (output-functions) will use them in strategic choices and development of the company. The indications of that could be innovation, related diversification, advertising and forward implementation. On the other hand managers with throughput-function experience such as production, process-engineering and accounting would be using their experience in the strategic choices of the company in the way of automation, plant and equipment update and backward integration (Miles and Snow's (1978).

From that we can conclude that CEOs with different kind of background would make different strategic choices differently. The CEO with engineering background may be would be more focused on product by itself (cars) and the CEO with managerial background would be more focused on the strategic development of the company management and company system.

From that we can suggest the following hypothesis:

Hypothesis 1 - firms with CEO with managerial background would be more effective administratively than firms with CEO with engineering background, producing more cars and bringing more profit in terms of ratios per employee .

Hypothesis 2 - firms with CEO with engineering background would be more effective than firms with CEO with managerial background in terms of profit per cars sold.

Other types of background of managers such as law and finance, which are not related to core activity could be treated differently. Researches call it peripheral-function experience. And this kind of background of CEO could affect company in the way of higher complexity and unrelated diversification.

Managerial background is differentiated by the industry. And different kinds of background could lead to different amount of changes in organization which would be brought by new CEO. Managers that are outsiders related to the company and to the industry are tend to implement more organizational changes than people who are “raised” within.

This part of the theory is enhanced with the research of PWC strategy department, where it was found that 22% of companies' boards through the years 2012-2015 decided to appoint CEO from outside of company (PWC, 2015).

From the human capital theory point of view this position could be reinforced by Gelekanycz and Hambrick (1997) who suggested that connections and ties that going beyond one industry (social capital) lead to exposure to novel information (human capital) (Haynes & Hillman, 2010).

Also the nature of the industry and the competitiveness in the industry of companies where CEO was involved and worked in. For example, it could be harder for CEO from monopoly to work in the high competitive oligopolistic industry.

Considering managerial background, “there is no relationship between the amount of formal management education of top managers and the average performance (either profitability or growth) of their firms. However, firms whose managers have had little formal management education will show greater variation from industry performance averages than will firms whose managers are highly educated in management. Firms whose top managers have had substantial formal management education will be more complex administratively than will firms whose managers have had less such training. Specific forms of administrative complexity include thoroughness of formal planning systems, complexity of structures and coordination devices, budgeting detail and thoroughness, and complexity of incentive-compensation schemes” (Collins & Moore, 1970).

Another relation of the managerial background of CEO and the education is that the amount, but not the type of formal education will be positively associated with innovation (Hambrick and Mason, 1984).

Going further with education it was suggested that the formal managerial education (especially MBA) is directed to the achieving of short term results and not building the innovation competences. And it is suggested that there is no link between the amount of formal management education and the average firm performance. However, it was also mentioned that managers with little amount of formal education and the performance of their companies would vary significantly from the industries average performance indicators.

Formal managerial education is supposed to be one of the factors that influences administrative complexity. The more of this kind of education - the more complex the system is.

Socio-economic background of the managers is also considered an important factor. It is suggested that CEO from lower economic background would pursue strategies of acquisitions and unrelated diversification. Also, these firms could have various from industry's average profitability and greater growth than those with top-managers from higher socio-economic background.

Considering wealth and financial position, it is suggested that corporate profitability is not tied to the amount shares that CEO owns (as a stimulus for firm to growth as the income of CEO depends on stock price increase or decrease). However, it is related to the percent of cumulative income of top-executive that he/she receives from the firm.

The idea to tie the earnings of the manager to the profit of organization was born from the agency theory, as the way to minimize an opportunistic behavior. Considering the types of background and different incentive schemes, there is an interesting research suggesting that the companies headed by finance and administrative CEOs have higher offending levels than companies with CEOs with the different backgrounds. Top-managers that are oriented on financial indicators of performance tend to have quick profits and high levels of compensation(Simpson and Koper, 1997). The researchers found out that CEOs from administration and finance subunits can involve company in antitrust offending. Also the internal company strain may develop among departments and managers as the company becomes driven by bottom-line performance criteria(Simpson and Koper, 1997).

Now going to TMT. It is important who are the members of the team. Because if they have relatively the same experience within one industry or one company they field of perception, their scope of background and experience is limited. So the differences between TMT members in managerial background synergistically broadens the horizons of perception and experiences to be applied when solving the problems.

The group heterogeneity research which was conducted by Jackson, May and Whitney (1995) showed that, in sum, more heterogeneous groups are more creative and make better decisions (Haynes & Hillman, 2010).

Upper echelons theory shows that how the CEO perceives the world, competitors, organization by itself, outside and inside of it and then as an outcome how he/she behaves and how the strategy is built, all of this is affected and formed by such factors as age, education, socio-economic and functional background, how united CEO is with the TMT and is he/she outside of the company.

Basically Hambrick and Mason analyzed the psychological studies and looked through the perspective of them on the managerial and economical fields.

Moving forward to an update of upper echelons theory. From the original article we know that actions of top-managers are based on how they interpret strategic situations that they deal with. The interpretation by itself is based on personality, experience and values of executive (Hambrick, 2007). In the original theory it was suggested that the younger the CEO or TMT the more they are opened to major strategic changes in the company. The same thing is considered when CEO is brought outside of the company, not raised within. For him/her it seems more attractive to make huge changes of strategic directions of a firm. However in them update it is proposed to look at this issue not like a CEO's peculiarities but as a transfer and implementation of a board of directors. From that point of view it matters less which background CEO has but the board desire really matters.

Also this issue could be studied from the human capital perspective. Which human capital for TMT firm in an automotive industry should allocate: managerial of engineering. And it could not be an answer only managerial or only engineering. As well as it would not be simply “make-or-buy” decisions (Miles & Snow, 1984). Maybe managerial-background CEO could be acquired from the market or maybe he/she have to brought up by the company within.

From the perspective of human capital theory, the internal employment includes stability, person can be predictable, having skills and capabilities for the job, he/she would need less time to socialize if it's within the firm and it is has less transactional costs (Lepak & Snell, 1999).

If we remember the upper echelon theory, Hambric and Mason suggested the same that person from within the company tends less to make so changes, mare stable and conservative. In the model of Lepak and Snell that would correspond internal development of human capital.

The acquired human capital would correspond for hiring outside which is by Hambrick and Mason is more risk oriented and changes-seeking direction for the firm.

The external models of Lepak and Snell would not be considered in that case for several reasons. First, we are talking about top-management, CEO exactly and there is no top automotive producer which gives the right to manage for outsourcing. Second, the question is which of the backgrounds affects and in which way, but not from where is this background.

Talking about human capital, such researchers as Quinn and Venkatesan suggested that employment decisions should be based on the degree to which skills contribute to the core capabilities of the firm (Lepak & Snell, 1999).

But in case of CEO of automotive producer the core capability of the company is the production and development of the new cars. In that example, should the capability of automotive CEO be enhanced with an engineering background?

Talking about core capabilities, Wright, Smart and McMahan (1995) suggested that the core employee skills should be developed and maintained internally, whereas those of limited or peripheral value can be outsourced (Lepak & Snell, 1999).

This also raises a question, should be the management of the automotive company, which is not a core capability of the company, outsourced. If our research would show that managerial background influences more than engineering on then why not? The management function then could be treated as the function for outsourcing.

Ulrich and Lake (1991) suggest that such values as technological, financial, strategic or organizational could be formed with human capabilities that are realized by consumers. The researchers also say that the competitive advantage can be gained with unique of employees skills (Lepak & Snell, 1999).

Talking about managerial background and automotive producers let us consider the developing of human capital. The mode of internal development engages when the human capital is valuable and unique. As high competitive field automotive industry requires specific skills and competences. As a highly concentrated market, automotive producers distinguish themselves differently. And in order to keep the product and the company distinguishable it could be more effective to raise the human capital inside the firm transferring the knowledge throughout the employee life in the company. It could be treated as decision by default because it is considered that the firm-specific skills are not available in the market. Possessing these unique and valuable skills these employees are the core which creates the competitive advantage of the firm (Lepak & Snell, 1999).

And again, in that case, what could be more important for CEO? Maybe having both of these backgrounds is the best option. When contributing to the company in its core capability, also manage to drive the company as the CEO.

Going further with human capital, Becker (1976) suggested that firms will invest significantly into the development of unique firm-specific skills through extensive training, career development and mentoring programs in order to build specific kind of knowledge which is more valuable to the firm than to its competitors.

We looked at the specific management background of CEO as an unique thing which can be grown inside the automotive company in order not only to raise the manager but also to raise the employee which is contributing to the core capability of the firm.

However we can apply the other angle and treat the managerial background as it is and not take into account the industry specifics. Then the allocation and acquisition of human capital could be more suitable. As the decision makers of the company would suggest that the skills are not unique the internal development of such capabilities could be cut down to some extent. That way, the employees, especially if it would be the CEO would consider these relationship symbolic, based on utilitarian approach and mutual benefit (Lepak & Snell, 1999).

If we apply a geography factor to the engineering background of manager ant its influence on the performance, we can face the researchers who argue on this aspect. Serra, Trкs and Ferreira (2016) who studied 73 listed companies from Brazil for the period of 1997-2012 discovered that the technological competence of a CEO, measured in level of academic qualification has no influence on the performance of the company.

1.3 Engineering background in theory and previous research

Going through the propositions of upper echelon theory on functional track of the CEO and his/her career experience, we proceed with the another type of background, which we generalize by engineering. By that we understand education and career path that belong to exact sciences (math, physics, chemistry), technical and engineering spheres (R&D, production processes).

In upper echelon theory we can identify that kind of background in throughput-function and output-function experience, process engineering and R&D accordingly.

Proceeding with the engineering background of the CEO we were looking for studies about impact of functional background on company's activity and scientific and engineering experiences affections on performance researches.

There is no united point of view on whether engineering, scientific or functional background affects firm performance and the strategy of the firm. However, there are some strong findings of relationships of technological background and alliances between companies. “In a mail survey asking executives to rate the attractive- ness of various fictitious technological alliances, executives having engineering and technology as their primary work experience were more likely to perceive opportunity in technological alliances and less likely to perceive risks. As such, executives having a technology functional background were more likely to perceive technological alliances favorably” (Barker and Mueller, 2002). In that we can suppose the manifestation of upper echelon theory on the subject of throughput- and output-function experience. The Barker and Mueller study (2002) it was discovered that R&D expenditures are positively associated with the number of technical degrees attained by the CEO. The managers with technological and engineering background in throughput function, of, for example, process engineering can treat alliances as the form of efficient cost saving processes for R&D. Or, from another point of view, the managers with technological and engineering background in output function, such as R&D, may see technological alliances as an investment to empower R&D.

Despite that, it proposed, that the R&D spending is perceived as “right thing to do” for managers, that are experienced and/or educated in technical sphere as they value innovation. Consequently, R&D spending could be interpreted as the manifestation of values of a person with technological or marketing background when he/she faces the ambiguity and uncertainty of strategic choices. On the other hand, CEO with background in legal sphere or production processes may respond to the ambiguity and uncertainty of strategic choices with opposite and more conservative actions, for example, cutting of R&D expenditures, being totally sure that it is “the right thing to do” according to his values. That could be a wider point of view and deeper cause than an interpretation through perception alone (Barker and Mueller, 2002).