Does CEO charisma matter?
From the Briefcase: Research produced by America's Best Business Schools
Authors: Bradley Agle, Nandu Nagarajan, Dhinu Srinivasan (Katz Graduate School of Business, University of Pittsburgh), and Jeffrey Sonnenfeld (Yale School of Management)
Status: Academy of Management Journal, February/March 2006
Summary: CEOs matter. Just ask them. But a new study finds that there may be no correlation at all between CEO charisma and a company's financial performance.
In 2005, the average chief executive of a company in the S&P 500 earned $11.75 million in total compensation. That is over 400 times more than the average American worker. CEOs, of course, argue that they're worth every penny. They work long hours, they make big decisions, and they are under an incredible amount of pressure to deliver. The market seems to agree. Charismatic CEOs, in particular—those blessed with that elusive mix of vision, dynamism, and the uncanny knack for getting people to buy into their ideas—have become heroic figures in the business world. If you falter, they will come. You will pay for it, but they will come.
But can a charismatic CEO really make a difference? Do CEOs have any real effect on a company's finances? These are the questions posed by a group of scholars from the Katz Graduate School of Business and the Yale School of Management in their new study, "Does CEO Charisma Matter?"
"A lot of people out there are asking, 'Are CEOs worth what they're being paid?' " says Bradley Agle, a professor of business at the Katz School and one of the study's coauthors. "Our study suggests perhaps not."
In what is considered the most extensive analysis of its kind, the authors surveyed the top management teams at 128 companies averaging $6.5 billion in assets and 16,000 employees. They asked 770 high-level managers to rate their CEOs on five elements of charisma—dynamic leadership, exemplary leadership, concern and respect for others, high expectations, and willingness to take personal risks. Then the authors compared their findings with the companies' actual financial results—stock returns, returns on assets, returns on sales, returns on equity, and sales growth—before and after the arrival of the CEO. The results were not what they expected.
"If you look at it over the long term," says Agle, "there is no correlation." Charismatic leaders, in other words, have no effect on subsequent financial performance.
This surprised the authors. At the very least, they expected CEOs operating in uncertain environments—with sales plummeting, say, or business models changing—to register on their scale. But even that didn't happen. While a new CEO may have had an effect on stock price in the short term, over the six-year tenure of the execs they studied, their overall effect was negligible. "That charismatic effect occurs early on, and then that effect goes away," says Agle. The authors' conclusion is stark: "The lack of corroborating evidence from objectively assessed CEO performance suggests that the search for charismatic CEOs may be based more on implicit theory or halo effects than on solid evidence that charisma really does make CEOs more effective."
So why are CEOs still being paid so much? Part of it, Agle says, has to do with the fact that perception is reality when it comes to management. Senior managers' impressions of their CEO are based largely on past successes. The more effective a CEO had been in the past, the more "charismatic" he appears to be. That there is no reflection of this charisma in subsequent financial results is disturbing but not totally unforeseeable. To managers and investors who believe in heroic CEOs, their faith in charisma is unshakeable. "If everyone believes it," says Agle, "then it's true."
The lesson here, for investors—and for would-be CEOs—is a positive one, in some ways. Animal magnetism, it turns out, isn't everything. "Charisma is not necessarily the thing that's going to bring your organization to the top," says Agle. "Experience and competence and regular leadership skills are sufficient." Memo to all of those boards of directors praying for the next Jack Welch: Even if he comes, he may not be able to build anything.