Dealing with a dominant CEO

2011

An aggressive, dominant CEO isn't just going to polarise the opinions of those who have to work with him. According to a new study, an all-powerful CEO can also deliver performance that is either much worse than other companies, or much better.

Casual observation can quickly find evidence to support this statement. Some companies with strong CEOs, such as General Electric under Jack Welch, Apple under Steve Jobs or Microsoft as led by Bill Gates, have performed tremendously well.

Others have failed miserably when the CEO is very dominant, with often disastrous results for employees and shareholders. Take Enron under Kenneth Lay or Lehman Brothers under Richard Fuld, for example.

According to the study, published in the Journal of Management Studies. the key factor in determining whether a dominant CEO is a great success or a resounding failure is having a strong board of directors to act as a counterbalance and swing the tide of performance to the plus side.

Authors Jianyun Tang, Mary Crossan and W. Glenn Rowe argue 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.

The findings echo research carried out in 2008 by consultants BlessingWhite into the effect of so-called "celebrity CEOs" brought in to turn around a failing company or deliver rapid results.

Far from being great for a company's bottom line, these CEOs are often a disaster in the medium- to long-term because they don't understand the culture they are working with and they end up harming the organization they set out to strengthen in their efforts to make short-term gains.

As BlessingWhite pointed out, while no one person can ever be responsible for the success of an entire organisation, that same individual can certainly cause more than their fair share of damage along the way.

So having a celebrity or a dominant CEO can place an organization in jeopardy, but the challenge can be managed. As Jianyun Tang states: "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."

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