The CEO Effect: What’s the Value of Who’s in Charge?

Reading the business news makes it obvious that CEOs have a huge impact on organizational success. When corporations succeed, their CEOs are usually credited for company performance. When corporations fail, sometimes in colossal fashion, their CEOs are blamed and unceremoniously removed. At Hogan, we are no strangers to this conversation, frequently emphasizing the critical role of leadership in organizational success and failure. But just how important is it for organizations to get the right person in charge? What is the value of an effective CEO?

Several management scholars have investigated this question with a variety of data sets and methods. Here, we review the major papers on this topic and draw conclusions based on their findings. To start, we know that CEO personality characteristics often drive business successes and failures. Leader personality characteristics predict both who emerges as a leader and who is effective at leading. Bright-side CEO characteristics (e.g., interpersonal sensitivity) influence management team cohesion and can have a positive effect on overall firm performance. Conversely, dark-side characteristics (e.g., narcissism) negatively influence leader decision-making, which can lead to organizational failure. Finally, CEO bright- and dark-side personality traits predict ethical misconduct, fraud, and sexual misconduct that often put the organization at risk with long-term implications to the company’s reputation.

But is there a measurable impact when it comes to the company’s bottom line? In the 1980s, researchers found that CEOs could influence changes to a company’s stock price, controlling for company size. In the early 2000s, researchers started reporting the effect of CEOs on profitability and return on assets (ROA), with estimates ranging from 15% of the total variance in profitability to 29% of the variance in ROA. Shifting to a different metric, researchers are now focusing on firm value (using Tobin’s Q) and estimate that CEOs are responsible for at least 25% of a company’s market value, after controlling for industry effects. As the management field continues to refine its methodologies and factor in context, these performance estimates may, in fact, be higher (38% of ROA variance explained) than what has been reported to date. Of course, the amount of managerial discretion also plays a role in that CEOs can only affect their company’s performance when given enough latitude to steer the ship around obstacles and chart new strategic direction.

Fortunately, we are in a great position to help companies navigate this uncertainty. Even with a conservative estimate of 10% to 20%, this is a significant impact CEOs have on their company’s financial returns. Selecting the right leader can leap a company forward — and choosing poorly will set the organization back several steps.

Hogan has decades’ worth of research and thousands of archival studies showing how our personality tests deliver ROI in making the right hiring and development decisions for your company. Holding on to your talented employees, developing them, and finding a great CEO is the cornerstone of best practices that lead to long-term company success. We built a C-suite personality benchmark tied to company financial performance that is unmatched in the industry. We are leveraging this data into new research articles that link CEO personality to firm performance. Our findings confirm how critical it is to have a CEO with the right set of personality characteristics. In fact, CEO agreeableness, or the ability to build quality relationships across all levels of the organization, helps with team cohesion, engagement, and eventual company financial growth.

Using the Leadership Forecast Series leaders fully understand their performance capabilities, challenges and drivers – the key to getting ahead and helps you to foster professional growth of the leaders within your company and evaluate a leader’s impact on the climate and culture of an organization.

Source: Hogan Assessments Blog