Credible managerial vision

Abstract

We develop a model in which managers choose whether or not to reveal their 'vision' for the future of their companies. Visionary managers are valuable because they generate incentives for workers to develop profitable innovations for the firm. However, managerial vision is not necessarily credible. After workers have invested in developing ideas, there is no a priori reason for a manager to keep her earlier promises when new contingencies arise and make it profitable to change the firm’s strategic direction. We show that credible managerial vision will arise in equilibrium when managers have career concerns. In order to credibly implement their visions, managers issue public 'mission statements' to motivate workers. Mission statements are not legally binding contracts and their value comes solely from their effects on managerial opportunities outside the firm. Among the new implications of the model, we show that managerial vision is more likely to be credible in industries in which managerial turnover is high and in which the managerial skill premium is high. Differently from the related literature that take managerial biases as exogenous, we show not only that biases increase workers’ incentives, but also that the need to provide incentives to workers increases managers’ incentives to become credible visionaries.