February 26, 2013
Is a Powerful CEO Good or Bad for an Organization?
There are some risks that the board has to own, assess, and respond as needed. One of those is whether the CEO has too little or too much power. Too little, and the CEO will probably not be effective as a leader. Too much, and there is a danger that the personal interests and influence of the CEO will overwhelm the voices and perhaps the interests of the rest of the executive team, the board, and the investors.
I mentioned the issues of a CEO who is a “bully” and of a dysfunctional executive team in an earlier post about
the risks that matter.
Now there is an interesting report from Stanford University,
Is a Powerful CEO Good or Bad for Shareholders?
It lays some groundwork by defining what it means by "power" as “the capacity of individual actors to exert their will”. It continues by explaining the different ways that power is derived: structural, ownership, expert, and prestige.
The authors describe some of the downsides of a powerful CEO:
- Companies with a powerful CEO exhibit higher turnover among senior management, higher pay differentials between the CEO and senior management, and are more likely to engage in risky corporate activities.
- Power produces overconfidence and risk taking, insensitivity to others, stereotyping, and a tendency to see other people as a means to the power holder’s gratification.
- Companies with powerful CEOs tend to award higher executive compensation.
They also describe some upsides:
- Power [is] the basic energy to initiate and sustain action translating intention into reality, the quality without which leaders cannot lead.
- Power transforms individual interests into coordinated activities that accomplish valuable ends.
- Powerful CEOs are more likely to take actions to pursue their objectives, which can have a positive effect on corporate performance.
- They also exhibit decreased inhibition, meaning that they feel less subject to social restraints that otherwise limit behavior.
- Having a powerful CEO clearly positioned at the top can contribute to stability and productivity in the organization.
The paper ends by asking but not answering the key question.
While it is the role of the board of directors to oversee management, at some point the board must empower management to make decisions. Where should it “draw the line” between giving its CEO discretion and providing appropriate oversight? How much power is too much power?
The authors do not consider the role and responsibility of the risk and assurance leaders of the organization. So, I will ask “what should they do if the CEO has either too much or too little power?” I think that this is something that both the risk officer and internal auditor should be concerned with and be prepared to discuss (carefully) with the board if the risk to the organization is, in their assessment, high.
What do you think?