From Elon Musk to Mark Zuckerberg, some chief executive officers have more control over their companies while others have less, but does it make a difference?
A recent study conducted by Tuck School of Business professor Gordon Phillips and finance professors Minwen Li and Yao Lu of Tsinghua University in Beijing, China has found that powerful CEOs add significant value to firms engaged in competitive product markets.
Phillips said that he and his fellow researchers conducted the study in light of recent criticism of high-profile company heads, like former Uber CEO Travis Kalanick, and the academic research that has consequently confirmed these denunciations.
The researchers wondered if “firms [were] making systematic mistakes” in their hiring decisions or if there were cases where powerful CEOs would indeed benefit the firms,” Phillips said.
According to Phillips, the research team decided to solely analyze data sources rather than conduct personal interviews.
The team looked primarily at firms’ investments from 1999 to 2010, focusing on the amount of money spent on advertising and product development and the number of capital expenditures made, Li said.
According to her, previous studies had found that powerful CEOs received excessive compensation, made inefficient investment decisions and ran firms with lower profitability. She added that these findings left the researchers wondering why so many firms endow their leaders with such authority.
The researchers used a model from a 2002 paper which analyzes a CEO’s role in a company. Li noted that the researchers added an additional element of “high-phased competition” to the model, which factors in the influence of a competitive market, in which there is a necessity for firms to act quickly when making decisions and investments or otherwise risk losing market share.
In adding this element, Li said the team discovered that in certain industries — ones in which companies face a lot of competition and which require company leadership to respond quickly and sometimes dramatically — firms benefit from having powerful CEOs. She added that these competitive industries do not have CEOs associated with excessive compensation, a finding that contradicts previous studies’ conclusions.
Both Li and Phillips said Steve Jobs’ tenure at Apple, Inc. is an example that confirms their study’s findings.
“Apple, back then, faced a lot of competition [and] technological change,” Li said. “If we look at the founder Steve Jobs ... it was very notorious that he had a lot of power in governing the company.”
At the same time, Apple “developed a lot of good products and had a very high valuation,” Li said, adding that this demonstrates the potential benefits of CEO power.
Lu noted that the study refutes the idea that a CEO “dictatorship” is necessarily an impediment to a company’s progress.
“[If a firm chooses] the right person who has good ethics, who is very capable ... it may be helpful for a company’s growth or development, because it can make the company move [faster], reduce coordination and communication costs [and help the firm] react better to the market,” Lu said.
Lu said she and her fellow researchers hope for those making the decisions of allocating power to CEOs “to have a more balanced view” and recognize that there are cases in which dominant CEOs may contribute to positive returns on investment.
