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CGRP-28 Is a Powerful CEO Good or Bad for Shareholders?

CGRP-28 Is a Powerful CEO Good or Bad for Shareholders?

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Americans tend to admire powerful leaders. Powerful leaders are seen as exerting influence over their organizations and shaping outcomes around them. CEO power can be exercised across a wide spectrum of decisions, including those regarding corporate strategy, operations, acquisitions, organizational design, culture, and governance. However, it is not clear the extent to which having a powerful CEO is beneficial to an organization. CEO power can be positive or negative, depending how it is manifested and how it is exercised. We examine this topic in greater detail, and ask: · *Are shareholders better or worse off with a powerful CEO? · * Where should the board draw the line between giving its CEO discretion and providing appropriate oversight? · * How much power is too much power? Read the Closer Look and let us know what you think!

Americans tend to admire powerful leaders. Powerful leaders are seen as exerting influence over their organizations and shaping outcomes around them. CEO power can be exercised across a wide spectrum of decisions, including those regarding corporate strategy, operations, acquisitions, organizational design, culture, and governance. However, it is not clear the extent to which having a powerful CEO is beneficial to an organization. CEO power can be positive or negative, depending how it is manifested and how it is exercised. We examine this topic in greater detail, and ask: · *Are shareholders better or worse off with a powerful CEO? · * Where should the board draw the line between giving its CEO discretion and providing appropriate oversight? · * How much power is too much power? Read the Closer Look and let us know what you think!

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Topics, Issues, and Controversies in Corporate Governance and Leadership
STANFORD CLOSER LOOK SERIES
stanord closer look series 1
Is a Powerful CEO Good or Bad forShareholders?
IntroductIon
 Americans tend to admire powerul leaders. Power-ul leaders wield inuence over their organizationsand external environments. Tey command consid-erable resources, both nancial and nonnancial,and direct these toward the pursuit o their objec-tives. In addition, they garner signicant attentionrom internal and external constituents, which they leverage to ampliy their impact and shape out-comes around them.For these reasons, there is no shortage o proleson powerul leadership. Countless books, articles,documentaries, and courses are devoted to the ex-amination o executive power. Tese include notonly biographies o well-known CEOs but also theleadership lessons o non-business leaders (politi-cal, historic, athletic, etc.) which are recast to apply to a managerial setting. Furthermore, periodicalsregularly publish lists o powerul leaders, includ-ing 
Time 
magazine’s “Most Inuential People in the World,”
Forbe 
s’ list o “Te World’s Most PowerulPeople,” and
Fortune’s 
“Most Powerul Women inBusiness.”Despite the attention, it is not clear the extentto which having a powerul CEO is benecial to anorganization and its shareholders. Tere are nega-tives as well as positives to executive power thatmust be taken into account to arrive at a reasonedassessment.
defInItIon of ceo Power
Finkelstein (1992) denes power as “the capacity o individual actors to exert their will.”
1
However, notall maniestations o power are the same. Finkel-stein identies our dimensions o power:
By dv . l  B tynvmb 13, 2012
•Structuralpower
is derived rom the position thatan executive occupies in the organizational hier-archy. CEOs hold considerable authority simply because o their ormal position at the top o thecorporation, which gives them decision making authority as well as superior access to inside in-ormation. Some extend this power by holding the dual title o chairman and CEO. Structuralpower allows a CEO to resolve disputes overstrategy, acquisitions, organizational practices,and resource allocation in a manner consistent with his or her preerences. In this way, CEOsare able to give “the nal word” on matters o disagreement.
•Ownershippower 
reects the degree o economicor voting interest that an executive holds in theorganization. Executives are ultimately respon-sible to the owners o the corporation. Tereorea CEO with signicant ownership interest willhave more power than a CEO with no owner-ship interest. Ownership power maniests itsel in the boardroom where corporate matters aredecided (explicitly or implicitly) by vote.
•Expertpowe
results rom superior knowledge,experience, or access to inormation within theorganization and in relation to the external en-vironment. Expert power puts an executive in a position to resolve matters o uncertainty, there-by gaining inuence over corporate choices. Ex-pert knowledge is accrued through experience,education, and network connections within a relevant eld. Expert power is oten narrowly conned to a particular setting or industry.
•Prestigepowe
is derived rom the positive per-ception that others have o an executive basedon his or her reputation. Prestige power might
 
stanord closer look series 2
Is a powerful ceo good or bad for shareholders?
accrue rom educational background, aliation with outside organizations or associations, gov-ernment relations, personal relations with other“stars” or “elites,” network connections, or priorsuccess. Prestige power is perhaps the most in-tangible maniestation o power because it relieson the assumption that these associations givelegitimacy to an executive’s ability or judgment.Note that these dimensions are not mutually exclu-sive, nor are they necessarily correlated. CEOs willhave diferent degrees o power based on the com-bination o these dimensions that they maniest,as well as the importance o each to the relevantcorporate setting.
2
Furthermore, CEO power canbe exercised across a wide spectrum o decisions,including those regarding corporate strategy, opera-tions, acquisitions, organizational design, culture,and governance.
the downsIdes of Power
Te research literature on CEO power is mixed. Ac-cording to Pefer (2010), “Studies on the efects o power on the power holder consistently nd thatpower produces overcondence and risk taking, in-sensitivity to others, stereotyping, and a tendency to see other people as a means to the power holder’sgratication.”
3
 Consistent with this, companies with a pow-erul CEO exhibit higher turnover among seniormanagement, higher pay diferentials between theCEO and senior management, and are more likely to engage in risky corporate activities.
4
Similarly,companies with a powerul CEO are less likely tohave a ormal succession plan in place, and power-ul CEOs are more likely to inuence the outcome when a succession event does occur. For example,Zajac and Westphal (1996) nd that powerulCEOs play an integral role in the selection o theirsuccessor, and that they are more likely to steer thechoice o a successor toward one who has similarcharacteristics to themselves.
5
Tis can make it very dicult to replace an entrenched CEO becausethere are no real alternatives or the board to con-sider.Finally, the research indicates that companies with powerul CEOs tend to award higher executivecompensation. For example, Belliveau, O’Reilly,and Wade (1996) nd that CEOs with greater so-cial status relative to other board and compensationcommittee members tend to receive larger compen-sation packages.
6
Similarly, Core, Holthausen, andLarcker (1999) nd that compensation is higher when outside directors are appointed by the CEO.Tis suggests that directors are more willing togrant large compensation when they are beholdento the CEO or their position.
7
the uPsIdes of Power
Despite these negative ndings, CEO power is animportant leadership quality and ofers many po-tential benets to an organization. Bennis and Na-nus (1985) explain that “power [is] the basic energy to initiate and sustain action translating intentioninto reality, the quality without which leaders can-not lead.”
8
Pefer (1992) argues that “individualsuccess in organizations is quite requently a mattero working with and through other people, and or-ganizational success is oten a unction o how suc-cessully individuals can coordinate their activities.[…] In achieving success in organizations, ‘powertransorms individual interests into coordinated ac-tivities that accomplish valuable ends.’”
9
Adams, Almeida, and Ferreira (2005) nd thatrms with powerul CEOs have greater variance inrm perormance (a type o risk or shareholdersand employees). Powerul CEOs are identied inboth the best and the worst perorming companiesthat they examine. Tey conclude that powerulCEOs are better able to implement their decisionsand that this has a positive efect when the CEOmakes good decisions and a negative efect whenthe CEO makes bad decisions.
10
Research also conrms that powerul CEOs aremore likely to take actions to pursue their objec-tives, which can have a positive efect on corporateperormance. Keltner, Grueneld, and Anderson(2003) nd that powerul people are more likely to exhibit “approach” behavior—that is, taking ac-tions to try to obtain what they want. Tey alsoexhibit decreased inhibition, meaning that they eelless subject to social restraints that otherwise limitbehavior.
11
Sel-inhibition can negatively impact u-ture perormance, and powerul CEOs might ben-et rom avoiding this tendency.
12
Also, powerul
 
stanord closer look series 3
Is a powerful ceo good or bad for shareholders?
CEOs are more likely to develop strong personaland proessional networks, which can benet theirorganizations by giving them and their companiesaccess to important market inormation, manage-ment practices, and proessional contacts.
13
Finally, research suggests that individuals some-times preer to work in hierarchical settings, wherepower relationships are clearly dened. iedens,Unzueta, and Young (2007) nd that individualsvoluntarily create hierarchies when they are aboutto embark on a shared task. Tey argue that “peoplehave an unconscious desire or motivation or hier-archically diferentiated relationships […] and thatpeople sometimes experience hierarchy as more en- joyable and productive than nonhierarchical rela-tionships.”
14
Similarly, Jost and Banaji (1994) ndthat people voluntarily disempower themselves tocreate or maintain hierarchical relationships.
15
Inthis way, having a powerul CEO clearly positionedat the top can contribute to stability and productiv-ity in the organization.
why thIs Matters
1. A system o corporate governance is intendedto protect shareholders rom the sel-interestedbehavior o management. Te research literatureclearly shows that having a powerul CEO cre-ates the potential or him or her to abuse thisposition to extract personal benets or engagein excessively risky activities. At the same time,the research also shows that power is oten criti-cal to the successul completion o tasks and theachievement o corporate objectives. o this end,powerul CEOs can ultimately be a success or a ailure (see Exhibit 1). Are shareholders better or worse of with a powerul CEO?2. While it is the role o the board o directors tooversee management, at some point the boardmust empower management to make decisions. Where should it “draw the line” between giving its CEO discretion and providing appropriateoversight? How much power is too much power?
1
Sydney Finkelstein, “Power in op Management eams: Dimen-sions, Measurement, and Validation,”
 AcademyofManagementJour 
-
nal
(1992).
2
Furthermore, attempts to measure the impact o CEO power onan outcome o interest (e.g., CEO compensation) will depend onhow the researcher denes power and the measures used to quantiy power. For example, structural power might be measured (rightly or wrongly) by the titles held by an executive (CEO, chairman, etc.);ownership power might be measured by the size o equity stake orvoting rights; expert power might be measured by prior experience,education, or external board seats; and prestige power might be mea-sured by press mentions, quality o educational experience, and out-side aliations.
3
Jefrey Pefer,
Power:WhySomePeopleHaveIt—AndOthersDon’t 
,(HarperCollins Publishers: 2010), p. 200.
4
Chris Mann, “CEO Compensation and Credit Risk,” Moody’s In-vestors Service, Global Credit Research Report no. 93592 (2005);Olubunmi Faleye, Ebru Reis, and Anand Venkateswaran, “Te De-terminants and Efects o CEO–Employee Relative Pay,” working paper (2012); Lucian A. Bebchuk and Jesse M. Fried,
PayWithoutPerformance:eUnfullledPromiseofExecutiveCompensation
(Har-vard University Press: 2006); and Krista B. Lewellyn and MaureenI. Muller‐Kahle, “CEO Power and Risk aking: Evidence rom theSubprime Lending Industry,
CorporateGovernance:AnInternationalReview
(2012).
5
Edward J. Zajac, and James D. Westphal, “Who Shall Succeed?How CEO/Board Preerences and Power Afect the Choice o New CEOs,”
 AcademyofManagementJournal
(1996).
6
Maura A. Belliveau, Charles A. O’Reilly III, and James B. Wade,“Social Capital at the op: Efects o Social Similarity and Status onCEO Compensation,”
 AcademyofManagementJournal 
(1996).
7
John E. Core, Robert W. Holthausen, and David F. Larcker, “Corpo-rate Governance, Chie Executive Ocer Compensation, and FirmPerormance,”
 JournalofFinancialEconomics 
(1999).
8
Warren Bennis and Burt Nanus,
Leaders:eStrategiesforTakingCharge
(Harper and Row: 1985), p. 6.
9
Jefrey Pefer, “Understanding Power in Organizations,”
California ManagementReview
(1992); cites: Abraham Zaleznick and ManredF. R. Kets de Vries,
PowerandtheCorporateMind
(Houghton Mi-in: 1975), p. 109.
10
Renee B. Adams, Heitor Almeida, and Deniel Ferreira, “PowerulCEOs and their impact on corporate perormance,”
eReviewofFinancialStudies
(2005).
11
Note, however, that these tendencies can also be negative i the ob- jectives o the person eeling disinhibited are not in the best interesto the organization. Dacher Keltner, Deborah H. Grueneld, andCameron Anderson, “Power, Approach, and Inhibition,”
Psychologi 
-
calReview
(2003).
12
Frederick Rhodewalt and James Davidson Jr., “Sel-Handicapping and Subsequent Perormance: Role o Outcome Valence and Attri-butional Certainty,”
BasicandAppliedSocialPsychology
(1986).
13
See: Katherine J. Klein, Beng-Chong Lim, Jessica L. Saltz, and Da-vid M. Mayer, “How Do Tey Get Tere? An Examination o the Antecedents o Centrality in eam Networks,
 AcademyofManage 
-
mentJournal
(2004); and David F. Larcker, Eric C. So, and CharlesC. Y. Wang, “Boardroom Centrality and Stock Returns,” Rock Center or Corporate Governance at Stanord University Working Paper No. 84. (2010). Available at SSRN:http://ssrn.com/ab-stract=1651407.
14
Larissa Z. iedens, Miguel M. Unzueta, and Maia J. Young, “An Un-conscious Desire or Hierarchy? Te Motivated Perception o Domi-nance Complementarity in ask Partners,”
 JournalofPersonalityandSocialPsychology
(2007).
15
John . Jost and Mahzarin R. Banaji, “Te Role o Stereotyping inSystem-Justication and Production o False Consciousness,”
British JournalofSocialPsychology 
(1994).

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