stanord closer look series 3
Is a powerful ceo good or bad for shareholders?
CEOs are more likely to develop strong personaland proessional networks, which can benet theirorganizations by giving them and their companiesaccess to important market inormation, manage-ment practices, and proessional contacts.
Finally, research suggests that individuals some-times preer to work in hierarchical settings, wherepower relationships are clearly dened. 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.”
Similarly, Jost and Banaji (1994) ndthat people voluntarily disempower themselves tocreate or maintain hierarchical relationships.
Inthis way, having a powerul 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 powerul CEO cre-ates the potential or him or her to abuse thisposition to extract personal benets or engagein excessively risky activities. At the same time,the research also shows that power is oten criti-cal to the successul completion o tasks and theachievement o corporate objectives. o this end,powerul CEOs can ultimately be a success or a ailure (see Exhibit 1). Are shareholders better or worse of with a powerul 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?
Sydney Finkelstein, “Power in op Management eams: Dimen-sions, Measurement, and Validation,”
Furthermore, attempts to measure the impact o CEO power onan outcome o interest (e.g., CEO compensation) will depend onhow the researcher denes power and the measures used to quantiy 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 aliations.
,(HarperCollins Publishers: 2010), p. 200.
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,
(Har-vard University Press: 2006); and Krista B. Lewellyn and MaureenI. Muller‐Kahle, “CEO Power and Risk aking: Evidence rom theSubprime Lending Industry,
Edward J. Zajac, and James D. Westphal, “Who Shall Succeed?How CEO/Board Preerences and Power Afect the Choice o New CEOs,”
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,”
John E. Core, Robert W. Holthausen, and David F. Larcker, “Corpo-rate Governance, Chie Executive Ocer Compensation, and FirmPerormance,”
Warren Bennis and Burt Nanus,
(Harper and Row: 1985), p. 6.
Jefrey Pefer, “Understanding Power in Organizations,”
(1992); cites: Abraham Zaleznick and ManredF. R. Kets de Vries,
(Houghton Mi-in: 1975), p. 109.
Renee B. Adams, Heitor Almeida, and Deniel Ferreira, “PowerulCEOs and their impact on corporate perormance,”
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. Grueneld, andCameron Anderson, “Power, Approach, and Inhibition,”
Frederick Rhodewalt and James Davidson Jr., “Sel-Handicapping and Subsequent Perormance: Role o Outcome Valence and Attri-butional Certainty,”
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,”
(2004); and David F. Larcker, Eric C. So, and CharlesC. Y. Wang, “Boardroom Centrality and Stock Returns,” Rock Center or Corporate Governance at Stanord University Working Paper No. 84. (2010). Available at SSRN:http://ssrn.com/ab-stract=1651407.
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,”
John . Jost and Mahzarin R. Banaji, “Te Role o Stereotyping inSystem-Justication and Production o False Consciousness,”