If you watched the recent Apple event, whether as an Apple devotee, an investor, or a critic, the temptation to compare Tim Cook against the quasi-mythical Steve Jobs is almost impossible to resist. To waste a solid hour of time, perform an Internet search on “Jobs vs. Cook” and you will be buried in commentary comparing and contrasting the two leaders. Cook is a southern gentleman, a mild-mannered pedigree engineer who rose through the ranks at IBM and Compaq before being hired by Jobs to run Apple. Jobs, on the other hand was the face of legacy Apple, was brash, tough, opinionated, and an inspirational leader with his unique blend of hubris, charm, and vision – all things that Cook is not.
Given the fact that the two could not be more unlike each other, why is it that Apple seems in so many ways pretty much the same old Apple as it was under Jobs’ leadership? For a business practitioner, the question arises, how central is the role of the CEO to an organization’s success?
For almost 100 years, scholars have questioned the central role of a chief executive. In the 1930’s Charles Barnard was one of the first scholars to ask the question. He concluded that the corporation was above all other things a social organization and that the CEO was peerless as a social force, and therefore pivotal to a corporation’s success.
Opposing that position was pioneering social theorist Max Weber. As the 20th century began to unfold, Weber posited that newer institutions, especially large business corporations, were incapable of imbuing people with a sense of purpose, reducing the role of a CEO as a social force to somewhere between figurehead and super-manager.
In 1972 a groundbreaking study titled “Leadership and Organizational Performance: A Study of Large Corporations” asked the question a different way. Authors Stanley Lieberson and James O’Connor argued that a CEO’s influence was seldom decisive in a company’s performance and they had numbers to back up their assertion.
Drawing on data from 167 companies, they demonstrated that “industry effects,” such as capital availability and market stability, accounted for almost 30 percent of the variance in corporate profits. “Company effects,” such as the firm’s competitive position, explained about 23 percent. “CEO effects” explained just 14.5 percent of the ups and downs in performance.
More-recent studies have fallen on both sides of the argument. Several follow-up studies have tended to find an even smaller CEO effect than did the 1972 study—ranging from 4.5 percent to 12.8 percent of profit variance. Others have criticized the number-crunching methods of Lieberson and O’Connor and, using a different methodology, concluded that CEOs have a dominant influence on performance.
Still others suggest that in any well-run company, candidates for the top job are so similar in their education, skills, and psychology as to be virtually interchangeable. All that matters is that someone be in charge.
The waters are further muddied by a cottage industry of management gurus and executive-compensation consultants. These have substantial self-interest to sell boards of directors, investors, journalists, and CEOs themselves on the notion that the chief executive is inordinately valuable.
In a media-dominant age, the drama sometimes plays out as a battle of words and commentator opinions between rock-star personalities. Jeffrey Immelt, the successor to Jack Welch as CEO of General Electric, defensively commented, “Not only could anyone have run GE in [the bear market of] the 1990s … a German shepherd could have run GE.” Welch, to his credit, more or less agreed with this assessment.
The practical question in today’s business environment is just how much stock to put in a superstar CEO. Does the company’s future depend on precisely the right choice, or, is the CEO only marginally important to future performance? The truth is likely that it depends.
One hinge factor is the natural constraints that will be placed on a CEO to influence the organization. Consider at one end of the spectrum an electrical utility. The company’s operations are largely regulated and the pace of change is slow. It is difficult to justify a superstar CEO, as his or her actions are likely to be constrained by factors out of the company’s control.
At the other end of the spectrum, CEOs in some industries have a great deal of discretion to act. Apple is a good example. In the case of new technology, the CEO is the one who guides decisions on which new technologies to release, whether being first to market is better than being good, and which component suppliers to team with. Those decisions can matter a great deal. In hotly competitive industries where new-product development is crucial and choices about which markets to focus upon are difficult—industries like communications equipment, computers, or aircraft—a CEO can have a big impact.
A second consideration is the extent to which culture drives success of the company. If the corporation depends on the collective social force of its professionals, the CEO can be peerless in terms of ability to set and influence the people tone of the organization. In any organization reliant upon innovation, the right people properly channeled and directed is essential. Conversely, an organization highly reliant on fixed capital investment such as a railroad or industrial process manufacturer does not rely in the same way on the collective social force of its people, diminishing that role of a CEO.
A final consideration is risk mitigation. While there is lively debate and healthy disagreement about what a good CEO can do for a company’s performance, there is little disagreement about the effect of a bad or unethical CEO. Buffoonish and scoundrel CEOs have highlighted the chief executive’s outsize influence for ill.
CEOs may or may not make great companies, but they can destroy them. Dennis Kozlowski’s fall from grace for looting Tyco International was the cause of the company’s disintegration. Enron collapsed with Jeffrey Skilling’s criminal acts. The autocratic Maurice “Hank” Greenberg steered AIG into the credit-default-swaps business, precipitating the company’s eventual descent and the global economy’s unraveling.
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