A powerful CEO less helpful to a company in time of crisis?
Bestowing considerable power in the CEOs may not create value for the firm during industry-wide downturns, a study led by Indian-origin scientist has found.
“We look at severe industry downturns. The essential idea is, when you have concentrated power in the hands of the CEO or a small group of decision-makers, does that lead to better decision-making or worse?” said Vikram Nanda, Professor at the University of Texas – Dallas, US.
The study found that for innovative firms with powerful CEOs, an industry downturn results in a notable decrease in the firm’s value, or book-to-market ratio, relative to a less powerful CEO.
Conversely, for competitive industries and high-discretion industries with powerful CEOs, a downturn results in a decrease in firm value.
In the study, the team wanted to look at crisis situations in which urgency — the speed of making a decision — could potentially be really important.
They found that a small concentration of power does not work well, even in times of crisis.
Although decisions may be made faster because only one or two persons need to weigh in, but it could be detrimental if the CEO does not get input from other sources.
Instead, companies should keep their information channels open. The search for more information should not be sacrificed by urgency, the study suggested.
Regulatory response has been to increase the power of the board or make the board independent of the CEO. Although there is some skepticism about the benefits of intervention, such as independent audit committees, on average, these regulations have helped, Nanda said.
“CEOs can actually benefit from having a board of independent members, or having different voices in the boardroom. That can lead to better decision-making. It would be positive for the firm to view it from that perspective. Many of them do, but there are always people who want more power and more authority, and don’t want to have people looking over their shoulder. On the other hand, that may be what helps a firm deal with a crisis,” Nanda noted.