Small Businesses

Researcher probes how much CEOs really matter

  • 6 min Read
  • May 28, 2021

Author

Tasnim Ahmed
Tasnim Ahmed

Tasnim Ahmed is a content writer at Escalon Business Services who enjoys writing on a multitude of subjects that include finops, peopleops, risk management, entrepreneurship, VC and startup culture. Based in Delhi NCR, she previously contributed to ANI, Qatar Tribune, Marhaba, Havas Worldwide, and curated content for top-notch brands in the PR sphere. On weekends, she loves to explore the city on a motorcycle and binge watch new OTT releases with a plateful of piping hot dumplings!

Table of Contents

Guoli Chen, a professor of strategy at Insead graduate business school in France, explains what his research shows about the influence of the CEO on a company’s organizational outcomes on a recent “Insead Knowledge” podcast segment dubbed “Do CEOs Matter?”

The seed for “Do CEOs matter” was planted when, as a 20-year-old professional at a Chinese state-owned firm, Chen came to view his senior management as fascinating and not in a good way.

If reading newspapers, drinking tea and dishing with colleagues could be considered work, his boss’s boss excelled at it. He began to contemplate whether the company’s performance would be affected if the boss were replaced by anybody else.

Rather than waiting to find out, Chen moved to an investment bank and was riveted to see that the venture capital wing of the firm selected which companies to fund based mostly on the strength of the founding team, particularly the CEO.

This early-career experience sparked a brilliant academic career devoted to the study of C-suite executives and the complexities that can make or break a business.

Romanticized leadership

Chen began to examine whether the American model of the CEO as a charming, all-powerful leader who alone controlled a company’s destiny was based more in myth than fact. He also looked into cultural distinctions, such as the striking difference between CEOs in the U.S. and Japan. The average Japanese CEO is appointed at age 61, a decade older than their U.S. counterparts.

CEOs of Japanese companies are figureheads with much less power than their American counterparts, which Chen attributes to Japan’s consensus culture and to banks’ ownership shares in huge corporations, giving leaders less control. But CEOs of private companies like so many in the U.S. have more discretion and consequently a stronger impact on the firm’s success.

Drawing a further distinction, Chen says the leaders of technology and manufacturing companies have far more influence over prices, product design, packaging and distribution than their counterparts in the heavily regulated oil and gas. Industries. Further, ambitious CEOs have an easier time making an impact at smaller, younger companies with an entrepreneurial culture versus large, established companies.

According to Chen’s research, CEOs are responsible for roughly 15% to 20% of a company’s business results. CEOs are important, but not so much as to dictate a firm’s entire fortune on a single person – that amounts to a romantic hero worship, he says.

Lords and masters!

In the course of investigating the kind of CEOs that are most likely to thrive. Chen also studied how overconfidence and narcissism, two common personality qualities among high-profile CEOs, affect their performance.

CEOs with these two traits favor big, dramatic decisions. They tend to believe they are always correct and need external affirmation. Many dramatically overspend on acquisitions, typically in unrelated industries and at inflated higher prices.

For example, French businessman Jean-Marie Messier was forced to resign in 2002 after turning a water utilities company into a media company and losing the company $16.6 billion.

Chen asserts that arrogant CEOs often disregard the advice of other executives. His research shows that CEOs who reject the counsel of others can undermine the benefits of diversity in the top management team.

Even corporate social responsibility investments can be held prisoner by CEOs’ inflated egos, Chen claims. A narcissistic CEO’s CSR initiatives are apt to be motivated by their desire for personal glory and risk a negative impact on a company’s financial performance.

Perhaps because they are convinced of their ability to overcome any difficulty, overconfident CEOs have also been found to be less inclined to invest in CSR and to be more likely to engage in socially unacceptable behaviors, Chen adds.

On the plus side, overconfident and egotistical CEOs are more likely to be inventive simply because of their personalities. For example, narcissistic CEOs are more proactive in their adoption of disruptive technology, according to Chen.

The rest of the C-suite

In addition to the CEO, Chen focused his research on two other increasingly important members of the C-suite: the chief financial officer and the chief sustainability officer.

When it comes to mergers and acquisitions, the big picture-focused CEO usually finds the perfect foil in the CFO because they latter “lead the … negotiation, financing and contractual arrangements as well as lots of fine details in M&A activism,” says Chen.

His research has also demonstrated the value of aligning the cognitive orientations of optimism and pessimism, which he calls role congruence, with C-suite roles, A successful M&A requires an optimistic CEO who believes in positive results, but it also necessitates a pessimistic CFO who is attentive to any information that can point to a failure.

Ideally, Chen says whether it’s the CEO, CFO or other C-suite executive, their personalities should match the demands of their jobs. For acquisition organizations, a pessimistic CEO and an upbeat CFO might spell doom.

Talking the talk on sustainability

The chief sustainability officer is a relative newcomer to the executive suite. Although the role is rapidly gaining clout in a world beset by climate change, Chen and his colleagues were the first to investigate the CSO’s actual impact.

They discovered that while CSOs guide S&P 500 companies to engage in more responsible activities, they tend to be more focused on lowering irresponsible behaviors, such as pollution. Chen proposes companies have a clear sustainability strategy and devote appropriate resources to achieving it, to maximize the impact of the CSO.

The board of directors must pick the CEO wisely

When it comes to the CEO, Chen maintains that the board of directors is solely responsible for selecting someone for the role. Matching the firm’s specific demands and difficulties to the candidate’s capabilities, expertise and social capital is among their primary roles.

For example, firms with high losses and in dire need of a turnaround “are more likely to need a thorough, tough, and cost reduction or cost control CEO,” he notes. On the other hand, if an organization requires innovation, candidates who are more open to failure and willing to try new things become more critical.

In the end, no one – not even the CEO – is irreplaceable in business or in life.

“Personally, I hope that the CEOs and leaders should not have too big an impact on firms … Can Apple continue its success without Steve Jobs? I hope the answer is yes,” Chen concludes.

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