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"Sunflower" Management Can Distort Decision-Making

5/12/2003 --

ANN ARBOR, Mich. -- In an effort to gain favor with their bosses and to advance their own careers, some employees are inclined to give biased favorable, or unfavorable, evaluations of new projects, depending on what they think senior management most wants to hear, says a researcher at the University of Michigan Business School and his colleagues in a forthcoming article in the Journal of Business.

Anjan V. Thakor, finance professor at the U-M Business School and Arnoud W.A. Boot of the University of Amsterdam and Todd T. Milbourn of Washington University in St. Louis have labeled this phenomenon “sunflower management,” based on the way sunflowers always bend their heads toward the sun, seeking its life-sustaining rays. They contend this type of misinformation can have undesirable repercussions on decision-making and, ultimately, affect bottom-line profits in business organizations.

“The ‘sunflower incentives’ are most severe for untalented analysts because the negative reputational consequences of going against a senior executive’s prior beliefs are the greatest,” said Thakor, the Edward J. Frey Professor of Banking and Finance at the U-M Business School.

In business organizations, senior executives often delegate the assessment of new ideas to their subordinates, seeking objective evaluations and sound recommendations either to accept or reject proposed projects, the researchers say. When the delegation process works properly, it can provide upper-level decision-makers with accurate, unbiased information about how and where to make sound capital investments.

The process breaks down, they add, when bosses are unable to separate their own preconceptions about the quality of new ideas from their assessments of the abilities of those assigned to evaluate those proposals. As a result, personal career concerns may prompt junior analysts to ignore their own conclusions and to agree instead with their bosses’ prior evaluations of the ideas. This inaccurate information diminishes the value of delegation and runs counter to companies’ efforts to generate multiple assessments of business situations.

There also are implications for capital budgeting, particularly the choice between centralized systems (where projects must be approved by top management) and decentralized systems (where projects can be approved at lower levels), they say. Key factors affecting this choice include: the senior executive’s prior beliefs about project quality, the junior analyst’s concern with reputation and expected job duration, the difficulty of evaluating the project, and the senior executive’s assessment of the analyst’s talent for making an evaluation. For example, a senior executive may decide to use centralized capital budgeting if he or she is already convinced an idea is high quality or believes an analyst lacks the talent or objectivity to evaluate a proposed project and provide an unbiased recommendation. On the other hand, decentralized capital budgeting may be selected when a senior executive is relatively unsure of project quality but believes an analyst is sufficiently talented to assess an idea and has a strong incentive, such as performance-sensitive wages, to make a sound evaluation.

Ultimately, sunflower management may help to explain why some companies make poor investment decisions, pursue bad projects or discard good ideas altogether, Thakor and colleagues say. Problems are compounded when an organization lacks sufficient resources for project evaluation, thereby creating a bias in favor of projects already supported by senior management.

“We know from our analysis that, in such cases, sunflower management leads to over-investment,” Thakor said. “Thus, when a firm increases the amount of capital available for investment, there is also likely to be an increase in the expected losses due to over-investment, despite the fact neither the senior executive nor the analyst has any innate desire for capital or ‘empire-building.’”



For more information, contact:
Bernie DeGroat
Phone: 734.936.1015 or 734.647.1847
E-mail: bernied@umich.edu