January 28, 2022 | 6-minute read (1078 words)
On an "Insead Knowledge" audio segment titled "Do CEOs Matter?" Guoli Chen, professor of strategy at Insead graduate business school in France, describes what his research demonstrates about the CEO's effect on a company's organizational outcomes.
The idea for "Do CEOs Matter?" was sown when Chen, then a 20-year-old professional employed at a Chinese state-owned corporation, began to find his senior management fascinating — and not in a good way.
If reading newspapers, having tea and gossiping with coworkers were considered work, his senior leader was a master at it. He began to privately wonder whether the company's performance would suffer if the boss were to be replaced by someone else.
Rather than waiting to find out, Chen left to go work for an investment bank, where he was astounded to learn that the firm's venture capital arm chose which businesses to fund on the basis of mostly on the strength of the founding team, notably the CEO.
This early job experience paved the way for a bright academic career devoted to the study of C-suite executives and the complexity that may make or ruin a company.
Chen began to wonder if the American ideal of the CEO as a charismatic, all-powerful leader who alone controlled a company's fate was more fantasy than reality. He also looked at cultural differences, such as the stark contrast between CEOs in the United States and Japan. The typical Japanese CEO is 61 years old, a decade older than their American counterparts.
CEOs in Japan have far less influence than their counterparts in the U.S., which Chen attributes to Japan's consensus culture and banks' ownership stakes in large corporations, which render the CEO less control. Meanwhile, CEOs of private companies such as those found in the U.S. have more discretion and, as a result, a more significant impact on the firm's success.
Breaking down the data further, Chen explains that CEOs of private technology and manufacturing businesses have significantly more power over prices, product design, packaging and distribution than CEOs of the more tightly regulated oil and gas industries. Moreover, aspiring CEOs have an easier time making an effect at smaller, younger organizations with an entrepreneurial spirit than they do at larger, more established firms.
As per Chen's research, CEOs are responsible for about 15% to 20% of a company's financial success. CEOs are crucial, but not to the point where they can dictate a company's whole fortune — that, he claims, equates to romantic hero-worship.
Masters and lords
In the course of researching the most successful CEOs, Chen also looked into how narcissism and overconfidence, two personality traits frequently attributed to high-profile CEOs, impact their performance. These two characteristics are associated with CEOs who want to make large, dramatic judgments, Chen found.
Such individuals tend to feel that they are always right and seek external validation of their acumen. Many spend too much on purchases, sometimes in unrelated areas and at exorbitant prices. For example, after converting a water utility firm into a media corporation and losing $16.6 billion, French billionaire Jean-Marie Messier was forced to quit in 2002.
Chen argues that arrogant CEOs frequently reject other executives' recommendations. According to his findings, CEOs who dismiss the advice of others could be jeopardizing the benefits of diversity in the top management team.
According to Chen, even corporate social responsibility investments may be held hostage by CEOs with inflated egos. CSR activities undertaken by a narcissistic CEO are likely to be driven by a desire for personal glory and may negatively influence a company's financial success.
On the other hand, CEOs who are overconfident are less likely to invest in CSR and are more likely to engage in socially unacceptable behavior, Chen says, perhaps because they are certain of their capacity to overcome any challenge.
On the bright side, overconfident and narcissistic CEOs are more likely to be imaginative due to their dispositions. According to Chen, narcissistic CEOs, for example, are more aggressive in embracing disruptive technologies.
The remainder of the executive team
Chen focused his research on two additional increasingly significant C-suite members: the chief financial officer and the chief sustainability officer, in addition to the CEO.
When it's about mergers and acquisitions, the CEO frequently discovers the ideal foil in the CFO, who "leads the ... negotiation, financing and contractual arrangements, as well as lots of fine details in M&A activism," according to Chen.
His study has also shown the benefit of matching the cognitive orientations of optimism and pessimism with C-suite duties, which he refers to as role congruence. A successful M&A involves an upbeat CEO who believes in favorable outcomes, as well as a pessimistic CFO who is wary of any data that may indicate a failure.
Ideally, Chen argues, the personality of CEOs, CFOs and other C-suite executives should fit the demands of their professions. A gloomy CEO and an enthusiastic CFO might spell disaster for acquisition firms.
The importance of sustainability
The chief sustainability officer is a relative newcomer to the board of directors. Chen and some of his colleagues were the first to evaluate the CSO's impact, even though the job is fast gaining significance in a world ravaged by climate change.
They observed that, while CSOs assist S&P 500 firms in becoming more responsible, they are more concerned with reducing irresponsible practices like pollution. To maximize the impact of the CSO, Chen recommends that companies have a clear sustainability strategy and devote adequate resources to achieving it.
The board of directors must choose the CEO with caution
When it comes to the CEO, Chen believes that only the board of directors can choose someone for the position. One of the board’s key responsibilities is to match the firm's unique demands and challenges to the candidate's strengths, knowledge and social capital.
He points out that companies suffering from large losses and in desperate need of a reversal "are more likely to need a thorough, tough and cost reduction or cost control chief executive officer." Individuals who are more open to failure and eager to attempt new things, on the other hand, become more crucial if a company demands innovation.
In the end, no one is indispensable in business or life, including the CEO. "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 says.