Do CEOs matter?

SpaceX founder and Tesla CEO Elon Musk Elon Musk is a good example of a leader open to taking risks. Reuters
SpaceX founder and Tesla CEO Elon Musk Elon Musk is a good example of a leader open to taking risks. Reuters

The American archetype of a charismatic, powerful chief executive is hardly universal. The affect a CEO has on an organisation depends on a complex interplay of factors – from culture, industry, and personality to timing and age.

Take American and Japanese CEOs for instance. On average, chief executives of major Japanese firms are appointed at the age of 61, a full 10 years older than their counterparts in the US. Chief executives in Japan are almost expected to have white hair – a cultural signifier of an experienced and wise person.

Yet for all their perceived seniority and experience, CEOs at Japanese companies are largely figureheads who tend to wield less power than their counterparts at American ones. This can be attributed, among other factors, to the collective and consensus culture in Japan.

This latitude in decision making is what underpins CEO impact. The greater the managerial discretion, the bigger impact the CEO makes. Top managers at state-owned enterprises, often straitjacketed by government diktat, have little say, even in hiring. In comparison, CEOs of private firms have much greater discretion and, by extension, a bigger impact on firm performance.

But even in the private sector, CEO discretion varies across industries and companies. Those who run technology or manufacturing firms have control over prices, product design, packaging and distribution that their counterparts in the highly regulated commodities industry such as oil and gas could only dream of. Ambitious leaders also find it easier to leave their mark on smaller, younger firms with a more open and entrepreneurial culture compared to older or established firms.

Research shows that about 15 to 20 per cent of firm outcomes can be attributed to CEOs, depending on the sample period and empirical models.

Thus, CEOs and leaders are important, but maybe not as much as we thought. People tend to over-attribute successes or failures of organisations to a single person. We call that “the romance of leadership”.

Still, 20 per cent is nothing to sniff at and it pays to delve into which kind of CEOs are most likely to succeed. We can look at high-profile leaders’ two common personality traits, overconfidence and narcissism, and how they affect CEO performance.

Whether they are overconfident and therefore believe that they are always right, or narcissistic with a craving for external validation, such CEOs favour big, bold moves. For example, they tend to splurge on acquisitions – often in an unrelated industry and at prices substantially above market value.

Leaders are important, but maybe not as much as we thought

Jean-Marie Messier, for instance, turned a French water utility company into media conglomerate Vivendi Universal over a string of mergers and acquisitions among firms with little synergy. Messier, who famously called himself “master of the world”, was forced to resign in 2002, a year after Vivendi lost €13.6 billion.

CEO narcissism hurts firms when the advice of other senior executives or directors are ignored. My research shows that the benefits of diversity in the board of directors can easily be undone by a chief executive who ignores others’ counsel. And when the overconfident chief executive stumbles, such as in earnings forecasts, she or he are less likely to correct their mistakes.

Even firms’ corporate social responsibility investments can be held hostage to the outsize ego of CEOs. Activities of corporate social responsibility (CSR) initiated by narcissistic leaders are more likely to be driven by their need for personal glory and therefore negatively affect a firm’s financial performance.

Research shows that overconfident chief executives, convinced of their ability to weather any adversity, are less likely to invest in CSR activities and more likely to engage in socially irresponsible ones.

On the positive side, overconfident and narcissistic CEOs, through sheer force of personality, are more likely to be innovative. Research also shows that narcissistic CEOs are more aggressive in adopting disruptive technology. For example, those in the pharmaceutical industry are more likely to initiate strategic alliances and acquisitions of new biotech firms.

Apart from the CEOs, it is beneficial to train our focus on two increasingly prominent members of the C-suite: chief financial officer and chief sustainability officer.

In the CFO I find the ideal foil to the CEO when it comes to mergers and acquisitions. In addition to identifying the resources and potential opportunities to pursue the strategy, CFOs lead the negotiation, financing and contractual arrangements as well as lots of fine details in M&A activities.

This insight extends beyond the role and reaches into the psyche. In a Harvard Business Review (online) piece I co-authored with Wei Shi, we showed the importance of aligning the cognitive orientation of optimism and pessimism – which affect how we think and how we behave – with roles in the C-suite. I call it “role congruence”.

For successful M&As you would want an optimistic CEO who believes in positive outcomes, supported by a pessimistic CFO who is sensitive to any information that might point to a dud.

CEOs are expected to be more optimistic and open to risks, like Jack Ma and Elon Musk. In the mergers acquisition context, the firm also needs a ’Mr No’ or a pessimistic CFO who seeks to minimise the risk.

Ideally, whether it is the CEO, CFO or other executives, the personalities in the C-suite should be consistent with the demands of their roles. A pessimistic CEO paired with an optimistic CFO could spell disaster for firms in acquisition.

Unlike the CFO, the chief sustainability officer is a relative newcomer to top management teams. Although the role is gaining stature, its actual affect had not been systematically examined until my colleagues and I took up the challenge.

We found that while CSOs helped firms in the S&P 500 engage in more responsible activities, they tended to be oriented more towards reducing irresponsible behaviours such as those that, for example, added to pollution. To make the most of a CSO, it would be advisable for a company to draw up a clear CSR strategy and allocate adequate resources to the CSO to implement it.

We found that while CSOs helped firms in the S&P 500 engage in more responsible activities, they tended to be oriented more towards reducing irresponsible behaviours such as those that, for example, reducing pollution. To make the most of a CSO, it would be advisable for a company to draw up a clear CSR strategy and allocate adequate resources to the CSO to implement it.

In the ideal case, the firm should have a long-term strategy that is consistent with high-level commitments. A very clear role and definition for the CSO is critical. What about CEOs? Picking the right CEOs is the exclusive responsibility of the board.

The task entails matching the firm’s unique needs and challenges with the right candidate’s strengths, expertise and social capital. In turnaround situations, for instance, with heavy losses and bleeding, to get back to the cash flow, firms are more likely to need a tough and cost cutting or cost control CEO.

By contrast, if an organisation needs innovation, then the candidates who are more open to failure, who would like to do all kinds of experiments become more critical.

Ultimately, in business as in life, no one – not even a CEO – is irreplaceable. CEOs and leaders should not have too big an impact on firms. If people ask, for instance, could Apple continue its success without Steve Jobs? The desirable answer, as we've seen, would be yes.

Guoli Chen is a professor of strategy at Insead

A version of this article was first published in Insead Knowledge

Updated: May 27, 2021 09:37 AM

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