How Much Do Ceos Matter?

How much do CEOs matter?

How much senior management, especially CEOs, matter has not only become an attractive topic for the mass media, but also for many academic researchers who try to provide evidence about the importance of senior management and their impact on firm performance. This essay is a summary of different academic papers from different scholars and is divided into three parts. In the first part I discuss the influence of senior management in the firm performance. The second part is devoted to managerial behaviorism and their relatedness to corporate decision making, and finally I focus on executive compensation in relation to CEO knowledge and management styles.

a. CEO's contribution to firm performance

Do CEOs actually contribute to firm performance or not? I would like to introduce four theories that talk about the limited effect of CEOs and later provide theories, providing that they actually have an impact on firm performance.

Population ecologists and institutional theorists (Hambrick and Finkelstein, 1987) argue that managerial influence on firm outcomes is limited by environmental, organizational, and legitimacy constraints as these three elements restrict executive choice and therefore CEOs can do little to influence firm outcomes. I think to some degree it is true that the industries in which CEOs operate determine the latitude of options CEOs have in making strategic choices. Management discretion, which refers to the manager's freedom of judgment and decision making, is probably higher in newer industries with higher advertising capacity, more competitive environment and a regular and stable demand; let's say Facebook than in an older, more traditional industry like the utility sector, for example E.ON. On an organizational level, I think the company size has an important impact on management discretion. Whereas in bigger companies the responsibilities and resources are allocated in a stricter way, smaller firms have to be more flexible just only by its nature of being small, less regimented and also less scrutinized by the public and media. This allows therefore CEOs in smaller firms to have more freedom on decision making. Even though bigger firms often operate in diverse sectors (like conglomerates as General Electrics) which per se should allow a higher degree in decision making, I think that this greater degree of complexity has the opposite effect and restricts senior managers within their latitude.

Organizational theorists see CEOs as homogeneous with respect to personal characteristics, socialization, and training are therefore more less "interchangeable". This would mean that CEOs have no significant impact on firm performance (March and March, 1977). In my eyes it is true that the job description of a CEO requires a set of specific skills and knowledge and that therefore managers with these specific skills and attributes even get considered as being elected as a CEO, which could make us assume that there could be similarities between the managers' personal characteristics. On the other hand, I think that there is still a huge pool of personal attributes that allows a broad range of heterogeneity and that not all CEOs have the same degree of decision making capacity due to the industry and corporate specific settings and that therefore not all CEO jobs are homogeneous. I suggest therefore that there have to be fulfilled some basic characteristics to be a CEO, e.g. technical skills, leadership skills or low risk adversity, but according to the sector the company operates the more specific skills are needed. Concerning the argument that socialization and training makes managers equal, I have certain doubts. I think that training and socializing only help to improve operational performance in the day-to-day business but have a smaller impact on strategic, long term decisions. Finally I want to stress out that sometimes even within the same company CEOs are not homogenous and should not be homogenous. If a CEO did perform very well his successor is expected to show similar characteristics in order to continue being successful and to lead a company into a certain direction. But what happens in the case of not so well performing CEOs? Would shareholders really want to elect a CEO that is similar to the former one?

Sociologists want to show that CEOs have little impact on firm performance suggest that CEOs play more of a symbolic than substantive role in organizations (Pfeffer; 1981). Pfeffer's argument is that one of the key tasks of management is to provide explanations, rationalizations, and legitimation for the activities undertaken in the organization. Without no doubt, managers have to fulfill the requirements of the shareholders in the company and provide them credible explanations about the course of action they took. Maybe in some cases it could happen that the shareholders have strong influence on the firm and put therefore much pressure to the manager and so limiting his extend of free decision making and his personal contribution to firm performance. Of course, managers are also reliable to other stakeholders, either the public, employees, clients, governments or suppliers. In any case it is important for the manager to have high quality relationships to with his stakeholder in order to facilitate making business, either through achieving more resources or through selling more. In the end, it is important to have managers with these skills that have a positive impact on firm performance.

There is also the theory that the CEO is not the right unit of analysis for understanding the managerial determinants of firm performance and should be replaced by the top management team as the unit of analysis (Haleblian and Finkelstein, 1993). Their argument is that even though the CEO is part of the larger top management team at a firm and can play a role in creating and directing this team, dynamic relations among members of the team exert a much greater influence on firm performance than the CEO as an individual. They also found out that large teams and teams with less dominant CEOs were more profitable in a turbulent environment (the computer industry) than in a stable environment (natural gas distribution). Increased capabilities and resources a large team brings to the strategic decision-making process are more advantageous in turbulent environments than in stable ones. Furthermore, in the natural gas distribution industry, there were no significant top management team effects. This could be explained by the fact that the industry is not stable, it is also restricting the discretion available to top teams operating in it and information processing within a top team may be of less consequence to performance than historical norms, standard operating procedures, and the actions of regulatory