Veronica Rawlings | May 31st 2012 | @EG_LeadershipTE
Who’d be a CEO? In this week’s Economist, the Schumpeter column highlighted the increasingly short tenure of today’s chief executives. This got me wondering: what are boards hoping to achieve by replacing CEOs so frequently? And what effect does a CEO have on the success of the business?
Surprisingly little, according to Nobel prize winning economist and psychology professor Daniel Kahneman in his recent bestseller Thinking, fast and slow. This fascinating book explores in great detail the thought processes behind human decision-making, and where we can or cannot trust our intuition. Citing studies where a particular set of criteria was used to identify “strong” CEOs, and the financial performance of their companies compared to those run by “weaker” CEOs the author comes to the conclusion that yes, leadership and management practices do influence the market performance of firms, but only very slightly. The companies run by the stronger CEOs outperformed the ones run by the weaker CEOs in 60% of cases, which is an improvement of a mere 10 percentage points over random guessing.
Of course the problem is those annoyingly unpredictable factors like the state of the global economy or the competitive landscape. You may be the best-run company rolling out the most fantastic products or services, but you have no control over what the competition might come up with to leave you dead in the water.
So really, a lot of a CEO’s success boils down to luck, and not making any big mistakes. It’s just that it’s hard to construct a compelling narrative around that. And where does this leave the thousands of books, articles, courses, entire industries in fact, devoted to the art and science of leadership?
I think there will always be a market for this sort of stuff. It appears to satisfy a basic human need for an illusion of control and an orderly universe where we can influence the outcome of events by our actions – where if we are smart and work hard we can figure out the rules and be rewarded with success. And of course, these things do work, but probably to a far lesser degree than we are prepared to acknowledge to ourselves.
Does that mean leadership isn’t important? Of course not. When it comes to delivery and execution of strategy, motivating and inspiring a workforce then there is clearly a place for a talented and visionary leader. But if you want a leader to guarantee the future performance of a business, it seems you can do only marginally better than tossing a coin.
So, good luck to this year’s new CEO recruits. More than anything else, that’s what they’re going to need.