Truce Breaking and Remaking: The CEO's Role in Changing Organizational Routines

Abstract

This paper reports on the “CEO’s-eye-view” of the 1990 commercial real estate crisis at Citibank using unique data from CEO John Reed’s private archives. This qualitative analysis sheds light on questions that have perennially plagued executives and intrigued scholars: How do organizations change routines in order to overcome inertia in the face of radical change in the environment? And, specifically, what is the role of the CEO in this process? Inertial behavior in such circumstances has been attributed to ingrained routines that are based on cognitive and motivational truces. Routines are performed because organizational participants find them to cohere to a particular cognitive frame about what should be done (the cognitive dimension) and to resolve conflicts about what gets rewarded or sanctioned (the motivational dimension). The notion of a “truce” explains how routines are “routinely” activated. Routines are inertial because the dissolution of the truce would be inconsistent with frames held by organizational participants and fraught with the risk of unleashing unmanageable conflict among interests in the organization. Thus, the challenge for the CEO in making intended change is both to break the existing truce and to remake a new one. In this study, I uncover how the existing organizational truce led to the crisis at Citibank, why Reed’s initial attempts to respond failed, and how he ultimately found ways to break out of the old truce and establish new routines that helped the bank survive. These findings offer insight into the cognitive and motivational microfoundations of macro theories about organizational response to radical change.

Keywords: CEO, routines, truces, cognition, motivation, incentives, organizational change, microfoundations

JEL Classification: L20, L21, L23, M1, M14, M54