A research project by the Center of Public Policy and Leadership (CPPL), United Arab Emirates University (UAEU) has put understanding of rationality of managerial decisions on the verge of a new era.
An international research team; consists of a research team at UAEU and University of Toledo (UT), USA; is investigating whether brains of managers possessing different leadership styles function differently in making rational managerial and financial decisions.
This research project is a forefront of adopting neuroscience technologies in business research. Decision-making rationality is bounded by managers' cognitive capabilities. Neuroscience indicates that human brains are able to deploy processes of emotional stimuli to make rational decisions. Empirical evidence, from previous studies, show that human brain activation, in specific brain regions, correlates to the disclosure of information; and that brain emotion reaction can influence decision making in social and economic events.
"There are two leadership style dimensions: structure dimension and measure dimension. The structure dimension relates to the way managers use performance indicators, e.g. in a rigid or lenient way. It consists of two structures: initiating structure and consideration structure; the former aims to direct subordinates with clear performance targets; while the latter is concerned with promoting subordinates by creating supportive relationships. The measure dimension concerns managers' use of performance measures. It consists of objective performance measures and subjective performance measures; the former refers to use of quantitative measures linked with targets, while the latter refers to the use of qualitative measures. It is, however, interesting that previous studies remain inconclusive on the way these two dimensions interact". Said Dr Ahmed Abdel-Maksoud, an Associate Professor at College of Business and Economics, UAEU, and a member of the research team.
"In this project, we adopt a functional neuroimaging technique to investigate rationality of making managerial decisions by managers with different leadership styles. We are trying to investigate, empirically, whether different brain activations vary for managers with different leadership styles?; how managers' leadership style interacts with their use of performance measures?; and whether inconsistency between leadership style of a manager and her/his subordinate has anything to do with various brain activations?", said Dr Ahmed Abdel-Maksoud.
The study extends further to investigate how brain emotion reaction influence financial decision making, in particular, in situations such as proximity to debt covenant violation and earnings management. "Although there is an evident relationship between brain activation and financial decision making, in general; it is still unclear and no explanations are available on how brain functions in debt covenant violation and earnings management decisions. We argue that this relationship is contingent upon managers' leadership style and question how leadership style could influence rationality of such decisions. No previous research study, to the best of our knowledge, has examined this", said Professor Hassan HassabElnaby, a Professor at College of Business and Innovation, UT, USA, and a member of the research team.
"The project's functional brain neuroimaging experiments were performed at the University Hospital, UT, USA. Over 60 experiments were performed on senior managers, i.e. upper management, working for reputable organizations in USA. The experiments also incorporated junior managers, i.e. middle management. Our experiments' tentative findings indicate that managers' leadership style and financial decision hold a neurobiological mechanism that relates to brain cognitive and emotion substrate. They indicate that proximity to debt covenant violation conveys positive or negative emotional information to managers. In other words, managers engage in earnings management when they react to negative emotional information and refrain from such manipulating behavior when they react to positive emotional information. Surprisingly, the reactions to emotional information seem to be influenced by the two different leadership style dimensions, i.e. structure and measure dimensions". Said Dr Ahmed Abdel-Maksoud and Professor Hassan HassabElnaby.
"This is a pioneering research project which fulfils the 2021 vision of UAE government. It has several practical implications for UAE public and private sectors. The project findings will contribute to better understanding of how to rationalize managerial decisions made by upper and middle management in UAE public firms. Findings, also, contribute to better understanding of financial decisions related to debt covenants in UAE multi-billion U.S. dollar world-wide investments", said Dr Ateeq Al Mansoori, Director of CPPL, UAEU.
Members of the research team are as follows:
Dr Ahmed Abdel-Maksoud, Associate Professor, Accounting Department, College of Business and Economics, UAEU, UAE.
Professor Hassan HassabElnaby, Chair of Accounting Department, College of Business and Innovation, UT, USA.
Professor Haitham Elsamaloty, Chair of Radiology Department, College of Medicine, UT, USA.
Dr Xin Wang, Associate Professor of Psychiatry, Neurosciences, and Radiology, Psychiatry Department, College of Medicine, UT, USA.
Dr Amal Said, Associate Professor, Accounting Department, College of Business and Innovation, UT, USA.