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Continued from Previous……
There is a huge body of work on CEOs, on their role, leadership, style, time management, effectiveness, inspiration, and much more. The reason for extended focus is because the role of CEO is extremely important.
In today’s post, I shall present to you some findings from a survey published in Harvard Business Review in October 2017. [Link appears at the end]
The survey was conducted by Oriana Bandiera, Stephen Hansen, Andrea Prat, and Raffaella Sadun. They have done plenty of work on this subject and we referred to one of their researches earlier as well.
They used survey data from over 1,000 CEOs across six countries and related the time spend to their companies’ financial performance.
They recorded every activity a CEO undertook in a week, whether it was preplanned or not, and who else were involved. They used machine learning and algorithm which came back by dividing them into two types: ‘managers’ and ‘leaders’. The first type – managers – behavior included relatively more visits to sites and plants, interactions with supply chain staff, meetings with sales teams, clients, and suppliers. The other type – leaders – had had more interactions with senior management, functional heads, personal communication, planning, and meetings with wide variety of internal functions and external stakeholders. The line between the two so-called types is not a deeply drawn boundary though, instead the researchers used an index which classified each CEO as a mix of two types.
Which CEO Type is Better for Companies?
The data analysis shows that the CEOs who tilted more towards “leader” than “manager” ran more productive and more profitable companies. The difference is significant because it is about one-fifth as big as the impact of a firm’s capital inputs such as machinery, equipment, building etc. To see if there might have been a bias and that the more effective CEOs just happened to work at better performing companies, they looked at the before and after data of a company where a new CEO was appointed. It was again found out that the productivity improved after a ‘leader’ CEO took charge of the company. The effect did not appear suddenly, but showed up three years later, which suggested that ‘leaders’ were doing the hard work of changing the company from the core.
Is One CEO Type Always Better?
Further analysis of other variables shows that the answer to this question cannot be a simplistic yes or no.
Leaders – showed up more pervasively in larger companies that were more complex, multi-layered and more skill-intensive.
Managers – appeared to run smaller and may be simpler organizations where there was a greater intensity of routine tasks, and many of them did run successful companies.
The authors discussion highlights the following points.
- It may seem that the more effective, higher performing ‘Leader’ CEOs do not get entangled in the details of day-to-day management. Instead, they focus on higher level leadership tasks such as planning, strategizing, and communicating their vision across all functions.
- The performance difference might have been due to imperfect CEO-Firm fit. Some companies need hands-on managers as CEOs, while some other need high-level, visionary leaders.
- The ‘managers’ are more abundant than ‘leaders’.
- Because the availability and hiring of CEOs is also imperfect, sometimes, the ‘managers’ get hired where actually a leader should have been selected. This error of choice negatively affects the performance of the firm.
- Market factors notwithstanding, the data suggests that the fit between company and CEO’s behavioral traits really impacts firm’s performance.
- Finally, the onus is on the management/BOD/Family to understand the nature of their business, what type of CEO their organization requires and should find the right fit.
All too often, even BODs of large corporations make the mistake of hiring the wrong kind of CEO. It should be understood that a CEO is expensive in all respects, and her/his effect on the organization is also expensive, whichever may it goes.
To be Continued……
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