Effect of Ceos
THE EFFECT OF CEOS ON FIRM PERFORMANCE
ALISON MACKEY Assistant Professor of Management Orfalea College of Business California Polytechnic State University San Luis Obispo, CA 93407 Tel: (805) 756-1232 Fax: (805) 756-1473 mackey@calpoly.edu
Keywords: Executive Leadership, CEOs, Firm Performance, Leadership, Variance Decomposition, Managers Forthcoming in Strategic Management Journal
THE EFFECT OF CEOS ON FIRM PERFORMANCE
ABSTRACT The extent to which CEOs influence firm performance is fundamental to scholarly understanding of how organizations work; yet, this linkage is poorly understood. Previous empirical efforts to examine the link between CEOs and firm performance using variance decomposition, while provocative, nevertheless suffer from methodological problems that systematically understate the relative impact of CEOs on firm performance compared to industry and firm effects. This paper addresses these methodological problems and re-examines the percentage of the variance in firm performance explained by heterogeneity in CEOs. The results of this paper suggest that in certain settings the “CEO effect” on corporate-parent performance is substantially more important than that of industry and firm effects, but only moderately more important than industry and firm effects on business-segment performance.
2
Do CEOs have an impact on firm performance? And if they do, where in a firm do they matter most—at the corporate or segment level? These questions have captured the attention of business scholars and practitioners for over a century (Bass, 1991; Carpenter, Geletkanycz, and Sanders, 2004; Yukl, 2002). On the one hand, some theorists (Barnard, 1938) and many
practitioners (e.g., Drucker 1954; Collins, 2001) have argued that leadership—especially in a firm’s senior positions—has an important impact on firm performance and survival at all levels. Barnard (1938), for example, argued that top leaders formulate a collective purpose that binds
ALISON MACKEY Assistant Professor of Management Orfalea College of Business California Polytechnic State University San Luis Obispo, CA 93407 Tel: (805) 756-1232 Fax: (805) 756-1473 mackey@calpoly.edu
Keywords: Executive Leadership, CEOs, Firm Performance, Leadership, Variance Decomposition, Managers Forthcoming in Strategic Management Journal
THE EFFECT OF CEOS ON FIRM PERFORMANCE
ABSTRACT The extent to which CEOs influence firm performance is fundamental to scholarly understanding of how organizations work; yet, this linkage is poorly understood. Previous empirical efforts to examine the link between CEOs and firm performance using variance decomposition, while provocative, nevertheless suffer from methodological problems that systematically understate the relative impact of CEOs on firm performance compared to industry and firm effects. This paper addresses these methodological problems and re-examines the percentage of the variance in firm performance explained by heterogeneity in CEOs. The results of this paper suggest that in certain settings the “CEO effect” on corporate-parent performance is substantially more important than that of industry and firm effects, but only moderately more important than industry and firm effects on business-segment performance.
2
Do CEOs have an impact on firm performance? And if they do, where in a firm do they matter most—at the corporate or segment level? These questions have captured the attention of business scholars and practitioners for over a century (Bass, 1991; Carpenter, Geletkanycz, and Sanders, 2004; Yukl, 2002). On the one hand, some theorists (Barnard, 1938) and many
practitioners (e.g., Drucker 1954; Collins, 2001) have argued that leadership—especially in a firm’s senior positions—has an important impact on firm performance and survival at all levels. Barnard (1938), for example, argued that top leaders formulate a collective purpose that binds
References: Ancona DG. 1990. Top management teams: preparing for the revolution. In Applied social psychology and organizational settings, Carroll J (ed). Erlbaum: Hillsdale, NJ; 99-128. Barnard C. 1938. The functions of the executive. Harvard University Press: Cambridge, MA. Bass BM. 1991. Bass & Stogdill 's handbook of leadership: theory, research, and managerial applications (3rd ed). Free Press: New York. Bertrand M, Schoar A. 2003. Managing with style: the effects of managers on firm policies. The Quarterly Journal of Economics 118(4): 1169-1208. Bowman EH, Helfat CE. 2001. Does corporate strategy matter? Strategic Management Journal 22: 1-23. Brown MC. 1982. Administrative succession and organizational performance: the succession effect. Administrative Science Quarterly 27:1-16. Brush TH, Bromiley P. 1997. What does a small corporate effect mean? A variance components simulation of corporate and business effects. Strategic Management Journal 18: 825-835. Calder BJ. 1977. An attribution theory of leadership. In New direction in organizational behavior, Staw BM, Salancik GR (eds). St. Clair: Chicago, IL; 179-204. Carpenter MA, Geletkanycz MA, Sanders WG. 2004. Upper echelons research revisited: antecedents, elements, and consequences of top management team composition. Journal of Management 30: 749-778. Collins JC. 2001. Good to great: why some companies make the leap…and others don’t. HarperCollins Publishers: New York. DiMaggio PJ, Powell W. 1983. The iron cage revisited: institutional isomorphism and collective rationality in organizational fields. American Sociological Review 48:147-60. Drucker P. 1954. The principles of management. Harper-Collins Publishers: New York. Finkelstein S, Hambrick DC. 1996. Strategic leadership: top executives and their effects on organizations. West’s Strategic Management Series: Minneapolis/St. Paul, MN. Hage J, Dewar R. 1973. Elite values versus organizational structure in predicting innovations. Administrative Science Quarterly 18: 279-290. Haleblian J, Finkelstein S. 1993. Top management size, CEO dominance, and firm performance: The moderating roles of environmental turbulence and discretion. Academy of Management Journal 36:844-863. Hambrick DC, Mason P. 1984. Upper echelons: the organization as a reflection of its top 20 managers. Academy of Management Review 9:193-206. Hambrick D, Finkelstein S. 1987. Managerial discretion: a bridge between polar views of organizational outcomes. In Research in organizational behavior, Vol. 9, Staw B, Cummings LL (eds). JAI Press: Greenwich, CT; 369-406. Hannan MT, Freeman JH. 1989. Organizational ecology. Harvard University Press: Cambridge, MA. Heckman J. 1979 Sample selection bias as specification error. Econometrica 46: 1251-1271. Jensen M, Zajac E. 2004. Corporate elites and corporate strategy: how demographic preferences and structural differences shape the scope of the firm. Strategic Management Society 25: 507-524. Lawrence PR, Lorsch JW. 1967. Organization and environment. Graduate School of Business Administration, Harvard University: Boston, MA. Lieberson S, O’Connor JF. 1972. Leadership and organizational performance: a study of large corporations. American Sociological Review 37: 117-130. Mackey TB, Kiousis PK, Barney JB. 2005. Is the industry effect constant over time? Fisher College of Business, Ohio State University Working Paper. Magnan ML, St-onge S. 1997. Bank performance and executive compensation: a managerial discretion perspective. Strategic Management Journal 18: 573-581. McGahan AM, Porter ME. 1997. How much does industry matter, really? Strategic Management Journal, Summer Special Issue 18:15-30. McGahan AM, Porter ME. 1999. The persistence of shocks to profitability: comparing the marketstructure and Chicago views. Review of Economics and Statistics 81(1):143-153. McGahan AM, Porter ME. 2002. What do we know about variance in accounting profitability? Management Science 48: 834-851. McGahan AM, Porter ME. 2003. The emergence and sustainability of abnormal profits. Strategic Organization 1(1):79-108. McNamara G, Vaaler PM, Devers C. 2003. Same as it ever was: the search for evidence of increasing competition. Strategic Management Journal 24(3): 261-278. Meindl JR, Ehrlich SB, Dukerich JM. 1985. The romance of leadership. Administrative Science Quarterly 30: 78-102. Misangyi VF, Elms H, Greckhamer T, Lepine JA. 2006. A new perspective on a fundamental debate: a multilevel approach to industry, corporate, and business unit effects. Strategic Management Journal 27: 571-590. 21 O’Reilly CA, Caldwell DF, Chatman JA. 2005. How leadership matters: the effects of leadership alignment on strategic execution. Research Paper Series No. 1895 Stanford Graduate School of Business. Pfeffer J. 1977. The ambiguity of leadership. Academy of Management Review 2:104-112. Pfeffer J. 1981. Management as symbolic action: the creation and maintenance of organizational paradigms. In Research in organizational behavior, Vol. 3, Staw B, Cummings LL (eds). JAI Press: Greenwich, CT; 1-52. Pfeffer J, Davis-Blake A. 1986. Administrative succession and organizational performance: how administrator experience mediates the succession effect. Academy of Management Journal 29:72-83. Pfeffer J, Salancik GR. 1978. The external control of organizations: a resource dependence perspective. Harper & Row: New York. Podolny JM, Khurana R, Hill-Popper M. 2005. Revisiting the meaning of leadership. In Research in organizational behavior, Vol. 26, Staw B, Kramer R (eds). Elsevier: New York; 1-36. Romanelli E, Tushman ML. 1988. Executive leadership and organizational outcomes: an evolutionary perspective. In The executive effect: concepts and methods for studying top managers, Hambrick DC (ed). JAI Press: Greenwich, CT. Roquebert JA, Phillips RL, Westfall PA. 1996. Markets vs. management: what ‘drives’ profitability? Strategic Management Journal 17: 653-664. Rosen S. 1990. Contracts and the market for executives. NBER Working Paper, No. 3542. Rumelt R. 1991. How much does industry matter? Strategic Management Journal 12:167-185. Schmalensee R. 1985. Do markets differ much? American Economic Review 75:341-351. Selznick P. 1957. Leadership in administration. Harper & Row: New York. Thomas AB. 1988. Does leadership make a difference in organizational performance? Administrative Science Quarterly 33:388-400. Thompson JD. 1967. Organizations in action. McGraw-Hill: New York. Tichy NM, Cohen E. 1997. The leadership engine: how winning companies build leaders at every level. Harper: New York. Waldman DA, Yammarino FJ. 1999. CEO charismatic leadership: levels-of-management and levels-of-analysis effects. Academy of Management Review 24: 266-285. 22 Wasserman N, Nohria N, Anand BN. 2001. When does leadership matter? The contingent opportunities view of CEO leadership. Harvard Working Paper No. 02-04. Weiner N. 1978. Situational and leadership influence on organization performance. Proceedings of the Academy of Management, 230-234. Weiner N, Mahoney TA. 1981. A model of corporate performance as a function of environmental, organizational, and leadership influences. Academy of Management Journal 24: 453-470. Woodward J. 1965. Industrial organization: theory and practice. Oxford University Press: New York. 23 Table 1 Descriptive Statistics Execucomp File 1992-2002 Executive Characteristics Salary Salary + Bonus Total Compensation Firm Characteristics Return on Assets Tobin’s q Net Income Operating Income before Depreciation Sales Percent Change in Sales Employees Assets Sample Restriction #1: Only Firms with CEO Turnover $672,836 $1,322,461 $4,211,427 4.66 1.78 346,400,100 1,060,647,000 6,626,926,000 8.35% 30,504 9,109,517,000 Sample Restriction #2: Only Firms With CEO Turnover and Serial CEOs $713,987 $1,553,545 $6,618,000*** 4.23 1.67 259,658,900 985,708,500 6,869,000,000** 12.54%* 43,263*** 6,987,000,000 $656,280 $1,291,412 $3,816,000 4.63 1.78 281,952,100 901,276,100 5,526,265,000 9.95% 24,941 7,558,000,000 13550 8522 801 Segment Year Observations 562 459 98 Industries 988 520 51 Corporate-parents 3025 1802 181 Business-segments 1641 1176 92 CEOs Significance test denotes differences between the most restrictive sample and the entire execucomp file. * p