Is a Powerful CEO Good or Bad for an Organization?

Norman Marks, CRMA, CPA, is a vice president for SAP and has been a chief audit executive and chief risk officer at major global corporations for more than 20 years.

 

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?

Posted on Feb 26, 2013 by Norman Marks

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  1. What's most interesting to me about the Stanford article is that its findings about powerful CEOs overlap almost 100% with the findings by Chatterjeee and Hambrick about narcissistic CEOs in "It's All About Me: Narcissistic CEOs and Their Effect on Strategy and Performance." 

    http://www.bus.umich.edu/Academics/Departments/Strategy/pdf/F06Hambrick.pdf

    So there is a key question as to the relationship of these behavioral outcomes to narcissism, to power, or to both (one can think of many reasons why there might be a large overlap between narcissistic CEOs and powerful CEOs, not least that narcissists seek power).

  1. I believe that a strong CEO is good for a company under the condition that the 'countervailing power' has been arranged sufficiently and periodically reassessed.

    This requires specific attention from the Board in first instance. Next to that, I agree that there is a role for the risk officer and internal assurance providers this is something to monitor and bring forward for discussion.

  1. Here's a thought of an upside. If the CEO is powerful and has high regards for risk management and internal audit, then this may work towards the benefit of the organization in terms of considering risk while attempting to fulfill objectives. However, the downside would be becoming too risk averse and not achieving healthy growth.
  1. My view is that established and growing nonprofit need a trons CEO focused on operational issues with high regard for risk who is robustly evaluated by the board annually. This also assume that the audit committee does a thorough job. Otherwise the easily CEO can use the organization for his/her own benefit. See my book Policy vs.Paper Clips (2011 Third Edition) for ways to achieve this type of nonprofit board organization. http://amzn.to/eu7nQl
  1.  Powerful CEO is good. He will be effective. However he should have enough humility to correct himself if his initiative or decisions go wrong.... He should build in a system where all deviations are captured, and serious or in-auctioned ones are escalated and brought to his attention.

  1.  I dare say that a CEO needs to be powerful. However, the powers of the CEO must not be able to override the company policies and operational processes. The internal auditor also needs to be empowered and enabled to carry out his or her job professionally without interference and this can only happen if the reporting line is to the audit committee/board of directors rather than to the management that is led by the powerful CEO. With this clear segregation of duties and reporting lines, an organization shoul function efficiently.

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