Dominant CEOs and How They Affect Business Performance

This study defines “dominant CEOs” as those leaders of companies who are comparatively more powerful than others on the executive team. The study focused on examining the sort of effects these dominant CEOs bring about on a company’s overall performance and strategy. The findings showed that companies and firms that have dominant CEOs have a different strategy compared to industry standards, and this shows in huge losses or large gains but nothing in between. However, if the board is powerful it can successfully reign in the dominant CEO from being extreme and also push him or her towards large gains.

Both anecdotal experience and studies have indicated that company leaders with dominant power tend to do more harm than good. This type of dominance among CEOs tends to give rise to internal politics and also form communication gaps in the top management team. Thus it may affect decision making and the ability for the company to gain prominence in the marketplace. CEO dominance was differentiated from CEO hubris, CEO narcissism and CEO charisma. Both the implicit and explicit exercises of power used by the CEOs are important. This study attempted to look deeper into the issue and discover if there was a hidden positive aspect to this dominance. Also, methods to achieve maximum gain for the firm using these dominant CEOs were explored.

* The study looked at 51 publicly traded, single-business firms from the U.S. computer industry between 1997 and 2003.
* Researchers assessed CEO dominance by five different indicators, like ranks or titles, compensation in terms of money, bonds and shares and the executive being a relative or one of the founders of the firm.
* They also assessed Board power of the top management team. This included factors like percentage of outside directors, and share-holding of outside directors.
* The researchers assessed deviation from usual company strategy or “strategic deviance.” Similarly, extremeness in the firm’s performance in terms of large gains or big losses was also detected.

* Results revealed that with rising dominance of a CEO, the deviance from routine strategies rises. This gives rise to either big gains or big losses.
* Examining the effect of a strong and powerful board, it was noted that CEO dominance continued to deviate from routine strategies in spite of a powerful board. However, this deviance is not associated with extreme performance results.
* Researchers note that a dominant CEO affects a firm’s performance in a more positive way if the board holds more power.

Authors admit that, while they considered dominant CEOs to give extreme performance reports, it may also be true that extreme performances give rise to dominance in the CEOs. This theory may have skewed the present results and observations. Further studies in this direction may bring out more information. Also, this study mainly looked at a particular category of firms. Further studies may look at dominance of the management within other institutions and settings, as well.

Authors find that “the effect of dominant CEOs on firm performance is more positive when the board is powerful than when the board is less powerful.”  According to this study, dominant CEOs do not have as much of a negative or positive effect on company performance as thought. Instead the deviant strategy that they create shows results in extreme performance, which could mean either big losses or wins.  We need to consider power balance as a broader concept. This study adds to the present knowledge of corporate politics and shows how a perceived negative force can be channeled in a more positive way by deviating from routine strategies and improving the performance of firms.

For More Information:
Dominant CEO, Deviant Strategy, and Extreme Performance: The Moderating Role of a Powerful Board
Publication Journal: Journal of Management Studies, 2011
By Jianyun Tang; Mary Crossan; Memorial University of Newfoundland, and University of Western Ontario

*FYI Living Lab Reports Are Summaries of the Original Research.