Why CEOs Do Matter A Lot

THERE IS A LOT OF DISCUSSION about executive pay these days, specifically about the chief executive, raising the question, “Are CEOs worth it?” I want us to turn our attention to “Does the CEO matter?”

Yes the CEO does matter, and maybe even more than you think. Researchers from the University of Georgia and Penn State explain that CEOs simply matter more than they used to.

The CEO effect, which is exactly what the phrase implies – the effect of the CEO on organisational performance – affirms the CEO’s impact on three key metrics: return on sales, return on assets and market-to-book ratio.

In the 65 years since the CEO effect has been studied, it has more than doubled with the greatest growth coming from the past decade. The CEO effect on corporate performance is quite substantial – 29.2 per cent, almost four times larger than the corporate effect and five times larger than the industry effect.

While this holds true in dynamic and less predictable markets, the CEO effect has not always been as meaningful as it is today. Previously, the industry in which a company did business played a far greater role in predicting performance – the ‘industry effect’. Now changing and unpredictable market conditions, the CEO has the chance to prove his mettle.

Why does this matter to you if you are not the CEO but rather an employee in a company? You need to pick a company with a winning CEO. Perhaps you should research the quality of the CEO as much as you do the company as the CEO will scope the opportunity for organisational success.

And what does this mean if you are an owner, shareholder or board member? Quite simply, you need to get the best CEO you can. And you need to help the one you have become the best they can. The research is clear, the CEO effect impacts organisational performance.

The CEO can only impact organisational performance if he has influence over crucial decisions. Contrary to popular opinion and even what many books on leadership teach, the CEO effect requires centrality of decision-making versus consensus among the top executives.

If different individuals have different opinions, the distribution of decision- making power affects which decisions are made. The variability in organisational performance increases with the degree of CEO influence, because decisions with extreme consequences are more likely to be taken when the CEO is powerful and allowed to exercise his power.

Please do not mistake centralised decision-making with abdicating the responsibility to listen to others. Powerful CEOs are consultative. They gather input from others to inform their decision-making, but they do act decisively. This differs from consensus based deciding, which is when the group decides versus the individual leader. Research on the CEO effect shows that the consensus approach is juxtaposed to needed CEO action.

As we experienced in this region in the 2000s, high-growth markets and industries have shown to be less subject to the CEO effect, because the plethora of opportunities make it easier for mediocre executives to succeed. While this is true and we are entering into another rapid growth phase, this should not be an excuse for mediocre CEO performance. And we need to be careful that market growth is not a mask covering up for the CEO effect.

The CEO of a company is a more significant predictor of a company’s performance than at any time since it has been measured.