Megalomaniac CEOs: Good or bad for company performance?

Jan 26, 2011

According to a new study, dominant CEOS, who are powerful figures in the organization as compared to other members of the top management team, drive companies to extremes of performance. Unfortunately for shareholders, the performance of a company with an all powerful CEO can be either much worse than other companies, or much better. But there is one solution to an all powerful CEO: a strong board of directors. Companies with strong boards counteract powerful CEOS, and swing the tide of performance to the plus side. This study on dominating CEOs and powerful boards is now published in the Journal of Management Studies.

CEOs are typically the individual with the most power in the top management team for a . Yet, casual observation has shown that some companies with strong CEOs, such as General Electric under Jack Welch or Microsoft as led by Bill Gates have performed tremendously well. Meanwhile, other companies have failed miserably, with often disastrous results for employees and shareholders, when the CEO is very dominant, such as Enron under Kenneth Lay.

The key idea is that a dominant CEO may lead a firm to a deviant strategy. This strategic deviance can yield a strong position for a firm in its markets, or it can drive it to big losses. To control the negative effects of strategic deviance, and balance the power of the CEO, a company needs a strong board of directors. A strong board provides a useful watchdog and a second set of valued opinions to the strategic direction of the company. This oversight by the board can help catch the deviant strategy that could lead to firm failure, before it is implemented by the CEO and the organization's top management team.

Although strong boards can help counter the potential for big losses or even firm failure that comes from having a dominant CEO, the board does not completely eliminate such a possibility. Other mechanisms of firm governance need to be activated to also provide greater levels of caution against firm failure in light of an all powerful CEO.

Having a dominant CEO can place an organization in jeopardy, but it is a challenge that can be managed. As recommended by the authors of the study, "Having dominant CEOs is risky, but powerful boards help control the downside risk while leaving the upside potential relatively open. Thus, it is possible that coupling dominant CEOs with powerful boards represents an ideal governance arrangement."

Explore further: 'Patent trolls' jeopardize innovation, study finds

More information: "Dominant CEO, Deviant Strategy, and Extreme Performance: The Moderating Role of a Powerful Board."; Jianyun Tang, Mary Crossan, and W. Glenn Rowe. The Journal of Management Studies; Published Online: January 26, 2011 DOI:10.1111/j.1467-6486.2010.00985.x

add to favorites email to friend print save as pdf

Related Stories

Workers Get Paid More When They Work For Powerful CEOs

May 19, 2006

For workers at publicly held companies, it literally pays to have a very powerful boss. A new study found that entrenched CEOs – those who have more control rights in their company than all other shareholders combined -- ...

Is a friendly board a better board?

Aug 24, 2006

Research by UQ Business School's Professor Renée Adams suggests that increasing the independence of boards may not be so good for shareholders. Professor Adams and co-author Daniel Ferreira found that boards emphasising ...

Recommended for you

'Patent trolls' jeopardize innovation, study finds

14 hours ago

(Phys.org) —New research co-authored by a Naveen Jindal School of Management accounting professor suggests that companies that don't manufacture goods or products but sue companies that do threaten innovation and economic ...

Sustainability reporting falling short

15 hours ago

Once on the fringe of institutional investors' considerations, reporting on environmental, social and governance related issues is now common practice among major listed companies.

Marcellus drilling boom may have led to too many hotel rooms

Sep 18, 2014

Drilling in Pennsylvania's Marcellus Shale region led to a rapid increase in both the number of hotels and hotel industry jobs, but Penn State researchers report that the faltering occupancy rate may signal that there are ...

Entrepreneurs aren't overconfident gamblers

Sep 17, 2014

Leaving one's job to become an entrepreneur is inarguably risky. But it may not be the fear of risk that makes entrepreneurs more determined to succeed. A new study finds entrepreneurs are also concerned about what they might ...

User comments : 1

Adjust slider to filter visible comments by rank

Display comments: newest first

Moebius
not rated yet Jan 26, 2011
LOL, which part of this wasn't known?

the performance of a company with an all powerful CEO can be either much worse than other companies, or much better. But there is one solution to an all powerful CEO: a strong board of directors. Companies with strong boards counteract powerful CEOS, and swing the tide of performance to the plus side.


Unless it was much better in which case it would swing to the negative side. All this was known from our experience with a monarchy. The saying goes something like "nothing is better than a good king, and nothing is worse than a bad one." The good ones were rare but they were really good. Wasn't Apple struggling, with a board of directors I assume, until Jobs came back? Would Microsoft have done so well if Gates was a wimp and gave all the power to a board? I would rather own stock in a company run by a good dictator than a mediocre board of directors. Same goes for a country. [/blockquote]