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.

Perhaps to ask whether the CEO really matters is to ask the wrong question. Three Harvard professors—Noam Wasserman, Bharat Anand, and Nitin Nohria—say in a recent paper that the right question is, When does leadership matter? Using advanced statistical techniques that go by a wonderfully CSI-style name, “variance decomposition analysis,” the authors examine 531 companies in 42 industries and isolate leadership effects from other determinants of corporate performance. They conclude that leadership matters sometimes. It doesn’t make much difference at electrical-utility companies, which are so constrained by government regulations and the cost of fuel that there’s very little room for the CEO to exercise any discretion. The professors used the term “Titular Figureheads” for such CEOs. In addition to utilities, you’ll find them in stable, old-line industries—paper mills, meat wholesalers—where the pace of change is slow.

At the other end of the spectrum, CEOs in some industries have a great deal of discretion. They’re known as “Unconstrained Managers.” In a company such as Research in Motion, Motorola, or, for that matter, Apple, the CEO is the one who decides which new cell phone to release to a waiting public, which chip company will supply the integrated circuits that make it work, and which phone-service providers to partner with. Those decisions can matter a great deal, as might be suggested by the diverging fortunes of Research in Motion, whose newest BlackBerrys are flying off the shelves, and Motorola, whose last hit phone was the Razr, introduced in 2004—a lifetime ago in that industry, where product cycles are measured in months.

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—an Unconstrained Manager can have a big impact. Investors worry about Steve Jobs’s health because they believe Apple needs his flair for making inspired choices. When Jobs returned to Apple in 1997, after being ousted in a 1985 boardroom revolt, he made the decision to throw the company’s resources into the iMac, which had been languishing in the product-development lab, and the candy-colored, Internet-friendly machine reversed Apple’s declining fortunes. He scored an even bigger coup when he decided that Apple’s next signature product would be an MP3 player. Although the iPod was a late entrant in a crowded market, the elegant little machine took the world by storm.

Not every Unconstrained Manager is a Steve Jobs, of course. “It is worth reinforcing here,” Wasserman, Anand, and Nohria write, “that a large CEO effect need not imply a positive impact.” In fact, the CEO effect is sharply negative at least as often as it is positive. Donald Hambrick and Sydney Finkelstein, who coined the Titular Figurehead/Unconstrained Manager dichotomy in a 1987 article in Research in Organizational Behavior, even suggest that the world would be better off if leadership effects were always negligible. “If we had to choose as a society between doing away with Figureheads or Unconstrained Managers,” they wrote, “clearly it is the Figureheads we would keep.”

They might have been thinking of what happened to Beatrice Companies when two Unconstrained Managers, first Wallace Rasmussen and then James Dutt, took over as CEOs in the late ’70s, after a succession of Figureheads. As recounted in an absorbing study—no, really—by the Harvard professor George Baker in The Journal of Finance, their predecessors had followed a well-thumbed playbook to build Beatrice from a small Nebraska creamery into a money-spinning conglomerate that sold everything from Meadow Gold dairy products to Samsonite luggage. Most of its acquisitions were profitable, family-owned companies in need of additional capital. They were well-run, but their managers lacked polish and up-to-date technical skills. Beatrice supplied capital and intensive management training, but otherwise left them intact.

Rasmussen and Dutt changed all that. Instead of pursuing family-owned firms, they plunged into costly bidding wars for big public corporations. Dutt in particular centralized decision-making at Beatrice’s Chicago headquarters, forcing units that had operated independently into six large divisions. Profits shrank, shareholders dumped their stock, and rumors began to swirl that Beatrice would fall to a corporate raider. After five of the company’s top managers threatened to resign en masse if Dutt stayed on, the CEO was out. Leveraged-buyout titan KKR bought the company and broke it up. It took two CEOs nine years to wreck what 85 years of patient accumulation had built.

Maybe that’s the ultimate lesson here: CEOs can matter, but we all might be better off if they didn’t. “Good leaders can make a small positive difference; bad leaders can make a huge negative difference,” Stanford’s Jeffrey Pfeffer told Fortune in 2006. Many Americans, surveying the aftermath of eight years with an Unconstrained Manager as their chief executive, might be tempted to agree.

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Harris Collingwood is a writer in New York.

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