Economy June 2009

Do CEOs Matter?

Steve Jobs, Apple’s ailing CEO, is scheduled to return to work this month after a six-month leave, but investors are feeling skittish. Every time he sneezes, shares of Apple catch a cold. Can a CEO—even one as talented and visionary as Jobs—really make or break a corporation? Many business scholars have grown skeptical of the idea of chief executive as superhero. Cutting-edge research reveals that while some CEOs clearly do make a big difference, many are merely the most visible cogs in complex machines.

The debate over the centrality of the CEO began in earnest in the 1930s, with the work of Chester Barnard, a onetime president of New Jersey Bell. Barnard was one of the first scholars to recognize that the corporation was, first and foremost, a social organization, and that social phenomena such as groupthink and the development of rival factions influenced a corporation’s actions at least as much as coldly rational analysis and deliberation. According to Barnard, the chief executive was peerless as a social force within the organization; only the CEO could infuse working life with the values and aspirations that spurred people to do more than merely make a living.

Barnard’s preoccupation with the CEO’s meaning-making power issued from the same anxieties that run through the work of the historian Henry Adams and of the pioneering social theorist Max Weber. As the 19th century gave way to the 20th, and the power of the church and other established institutions waned, Weber worried in books like The Protestant Ethic and the Spirit of Capitalism that newer institutions, especially large business corporations, were incapable of imbuing people with a sense of purpose. Adams gloomily wondered, in The Education of Henry Adams, whether his classical knowledge had any value in a new century dominated by science and commerce. Both wondered how modern workers, in service to mammon, could summon the same passion that earlier generations had called upon to build Europe’s great palaces and cathedrals. They feared that the human spirit would shrivel in the face of the coldly rational, impersonal demands of capitalism, and foresaw a future of ever-increasing anomie and social atomization.

Barnard was relatively optimistic, though, that the corporation could supplant religion as a repository of purpose and meaning. In fact, he thought that corporate survival depended on the CEO’s ability to make work meaningful. “Even in purely commercial organizations,” he wrote in his classic work, The Functions of the Executive, “material incentives are so weak as to be almost negligible except when reinforced by other incentives.” Without inspirational CEOs, companies would ultimately lose sight of their higher calling and drift into failure.

Since Barnard’s days, it has become conventional to think that a corporation, for better or worse, takes on the coloration of its CEO—Jack Welch turns GE into a tribe of aggressive, rigorously unsentimental alpha dogs; Jeff Skilling populates Enron with nihilists expert in gaming the system. One of Barnard’s principal intellectual heirs is the management theorist Jim Collins. In the 2001 best seller Good to Great: Why Some Companies Make the Leap ... and Others Don’t, Collins singled out 11 CEOs who were vital, he said, to the enduring success of their organizations. What they had in common was “extreme humility.” Rather than throwing their weight around in the corporate hallways, barking orders, and crushing all in their path, Collins said, they quietly subordinated their personalities to the corporation, inspiring the rest of the company by the power of their example.

But how strong is this power—or any executive power? In their groundbreaking “Leadership and Organizational Performance: A Study of Large Corporations,” first published in 1972 in American Sociological Review, Stanley Lieberson and James O’Connor argued that it’s weak indeed. Perhaps reflecting the anti-authoritarian spirit of the times, the authors asserted that the CEO’s influence was seldom decisive in a company’s performance. They had the numbers to back up this view. Working with a database of 167 companies, they teased out the effects that various factors had on corporate profitability, from the competitive state of the industry to the size and structure of an individual company to the CEO’s managerial decisions. “Industry effects,” such as the amount of available capital and the stability of the market, accounted for almost 30 percent of the variance in corporate profits. “Company effects,” such as the firm’s historical place in the corporate pecking order, explained about 23 percent. “CEO effects” explained just 14.5 percent. And even this impact should be viewed skeptically: it unavoidably bundles CEO actions that were genuinely smart and skillful with those that were merely lucky.

Other scholars have attempted to replicate and extend Lieberson and O’Connor’s findings, and many have likewise concluded that external forces influence corporate performance far more than CEOs do. Indeed, more-recent studies have tended to find a smaller CEO effect than Lieberson and O’Connor did—ranging from 4.5 percent to 12.8 percent of profit variance. (The scholar Alison Mackey, at Ohio State University, is a prominent dissenter. In a recent paper, she criticizes the number-crunching methods of Lieberson and O’Connor and, using a different methodology, concludes that CEOs have a dominant influence on performance that may well justify their high pay.)

James March, a management professor at Stanford, goes so far as to say that in any well-run company that’s conscientious about grooming its managers, 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. “Management may be extremely difficult and important even though managers are indistinguishable,” he writes. “It is hard to tell the difference between two different light bulbs also; but if you take all the light bulbs away, it is difficult to read in the dark.”

This view has won support from some people who might be expected to see executive power in more expansive terms. Earlier this year, Jeffrey Immelt, the beleaguered successor to Jack Welch as CEO of General Electric, rather defensively told a gathering sponsored by the Financial Times that in the 1990s, “anyone could have run GE and done well.” Warming to his theme, he added, “Not only could anyone have run GE in the 1990s, [a] dog could have run GE. A German shepherd could have run GE.” Welch, to his credit, more or less agreed with this assessment. “It was an easier time to be a CEO in the 1990s,” he told the FT. “The wind was on our backs.” As they say on Wall Street, never confuse brains with a bull market.

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Harris Collingwood is a business writer living in New York.

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