In these difficult times, companies want the best possible CEO. But what do boards prefer? A CEO they can push around—or a powerful chief executive who rules the roost?
New research from Saïd Business School at Oxford University concludes that when the economy gets tough and uncertainty pervades, it is the “powerful” CEO who receives the backing of boards.
The study finds that fewer powerful CEOs are fired during tough times than their weaker colleagues elsewhere, indicating a preference among board members for having single-minded leaders when things go awry in the business landscape. According to Jiaqi Zheng, a researcher at Saïd, “Powerful CEOs are more desirable in turbulent times.”
The research looked at 2,732 US firms between 1999 and 2020 to consider what happens to corporate leaders considered powerful during challenging times. The Covid-19 pandemic was used as a proxy for economic difficulties, while CEO power was judged on whether a chief exec was also the company chair, their length of tenure, whether they were in post before the senior independent director and the addition of other titles, such as “president”.
In what may be the first research to consider the preference for tough CEOs, Zheng found that more “powerful” CEOs remained in post during crisis periods—and without a pay rise—than their less influential colleagues.
He writes that there may be two underlying reasons for this. Powerful CEOs are more willing to share information with their boards, and “more capable of taking swift action” to avert calamity.
Better information sharing—measured by looking at the level of company disclosures—appears to engender “favour” among board members. “Powerful CEOs are less checked by boards and thus more willing to disclose information to boards, which might explain why they are more desirable in uncertain times,” writes Zheng.
Quick decision-making appears to be a function of boards being stacked with busy directors who rely on their powerful CEOs to forge ahead with less consultation.
Survival of the fittest
Zheng argues that his findings support what is known as “optimal dismissal theory”, which argues that boards make decisions about their CEOs based on their “perceived” qualities. This, he says, has more explanatory power than “entrenchment theory”, which claims powerful CEOs determine their own fates.
But Zheng concludes with a warning. Much of the debate about CEOs revolves around how to constrain their influence—a familiar discussion when Elon Musk is in the news nearly every day—but this may not always be useful.
“Much of the existing and proposed regulations focus on limiting CEOs’ power,” writes Zheng, who adds, “having a powerful CEO is sometimes a firm’s optimal choice, and thus external imposed constraints on CEO power might create, rather than fix, distortions.
“Alternative to restricting CEO power, it might be advisable for policymakers to assess other tools for protecting shareholder value, like regulating long-term incentive plans to align the CEOs’ and shareholders’ interests.”
Zheng presents some powerful insights for boards caught in constant calculations about who is best equipped to lead their companies. It’s unclear whether Tesla shareholders will draw much comfort from them.