Do Leaders Really Make a Difference?

Business Storm Courtesy:

Business Storm

With leadership election debates in the offing plus a spate of variable company results, the role of leadership is once again highlighted. But sometimes, there’s a sneaking suspicion that what happens will be in spite of the leader’s efforts. So what evidence is there that leaders really do make a difference?

On investigation, the answers are mixed. Some notable studies over the years have demonstrated that the results and fate of an organisation are more affected by circumstances and history than their CEOs. In one, the ‘CEO effect’ explained a mere 14% of the variance in corporate profitability. Even Jack Welch, revered CEO of GE, agreed in an interview for the Financial Times that: “It was an easier time to be a CEO in the 1990s, the wind was on our backs.”

Other studies claim to show the opposite. A review of the impact of CEO death on Danish firms concluded that the absence of a CEO had an “economically and statistically significant effect on profitability, revenue, and investment outcomes.” [1]

However, a better question might be: When do leaders make a difference? And of course the answer is: When they have a lot of discretion. In tightly regulated industries dependent on the price of fuel or government expenditures, or traditional industries where the pace of change is slow, leaders are more titular figureheads than forces for change or determiners of performance. In SMEs or industries driven by innovation and competition, leaders have far greater impact and are ‘unconstrained’.

However, the frightening thing some of the research reveals is that, where leaders are less constrained (SMEs, consumer electronics etc.), the ‘CEO effect’ is negative as often, if not more often, than it is positive. As one pair of researchers concluded: “If we had to choose as a society between doing away with Figureheads or Unconstrained Managers, clearly it is the Figureheads we would keep.” [2]

Recent events in investment banking, food retailing and almost everywhere else you care to look, might suggest that if you are in a relatively unconstrained leadership position, be careful what you do. Which leaves the question:

  •  Which type are you? And what impact are you having?

No wonder people in leadership positions get stressed!

[1] Bennedsen, M,. Pérez-González, F. & Wolfenzon, F.D. (2006). Do CEOs Matter. Working paper 13-2007, Copenhagen Business School

[2] Hambrick, D. C., & Finkelstein, S. (1987). Managerial discretion: A bridge between polar views of organizational outcomes. Research in organizational behavior.


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