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As CEO pay reaches ever more stratospheric heights, new study questions value of charismatic corporate chiefs

April 1, 2006

For more information, contact: Benjamin Haimowitz,

With new figures showing that CEO pay in the U.S. soared to record stratospheric heights last year, the value of the new breed of corporate chieftain that has emerged over the past three decades seems bound to receive new scrutiny - and with it the element of charisma that, scholars agree, has been an important element in the rise of this new breed.

Research has shown that charisma contributes significantly to the compensation of CEOs. Is it worth the money? Plausible though it may seem to assess a chief's personal magnetism as a valuable company asset, scholarly studies of the relationship between CEO charisma and firm performance have, in fact, yielded mixed results.

And now, in what may be the most extensive research on this question, a report in the current issue of the Academy of Management Journal finds that CEO charisma bears little or no relationship to how a company will do in the future.

"The present study is not able to provide stock analysts, investors, and boards of directors with evidence that CEO charisma is necessarily beneficial in terms of predicting future financial performance, even under conditions of uncertainty, and suggests that they need to be cautious when considering the potential benefits of charismatic leaders," conclude the study's authors, Bradley R. Agle, Nandu J. Nagarajan, and Dhinu Srinivasan of the University of Pittsburgh and Jeffrey A. Sonnenfeld of Yale University.

Charisma and firm performance are not entirely unrelated, however: the impression that a CEO is charismatic, the study finds, does stem to some degree from prior firm performance under his or her leadership. "The better a company has been doing under a CEO, the more likely its top managers are to view the chief as charismatic," says Prof. Agle. "We call it the 'halo' effect. But, in the end, by far the best predictor of a company's future is its recent performance. If a company is doing well, the likelihood is that it will continue to do well, whether the CEO is charismatic or not."

The findings are based on a survey of the top management teams of 128 big companies averaging $6.5 billion in assets and 16,000 employees, by far the largest number of firms sampled with respect to the subject in question. Some 770 top managers, an average of about six per company, responded to the survey, which asked them to rate their CEOs on five elements of charisma - dynamic leadership, exemplary leadership, concern and respect for others, high expectations, and willingness to take personal risks.

The researchers then analyzed the ratings for charisma with respect to the company's previous performance under the CEO and its performance during the seven years following the survey or until the CEO's departure, whichever came first. Performance was gauged through five measures -- stock returns, returns on assets, returns on sales, returns on equity, and sales growth. In addition to gathering objective measures for each, the researchers asked members of top management teams for their subjective assessments of the firm's performance on sales, earnings, market share, and return on investment since the CEO's ascension.

The CEOs in the sample had an average tenure of 6.6 years at the time the questionnaire was administered and stayed for an average of 4.5 after the survey.

The researchers found that, when they controlled for pre-survey firm performance, CEO charisma had no subsequent effect on any of the five performance measures. This remained true even for firms that confronted uncertain or turbulent business conditions, which was something of a surprise, since, as the study's authors put it, "under conditions of uncertainty and crisis, followers feel the need for greater direction and guidance and their inclination to accept influence may be greater."

The researchers used the volatility of stock returns as a proxy for business uncertainty. Unsurprisingly, the study also reveals that the tendency of executives to view their chief as charismatic goes hand in hand with a tendency to overestimate the firm's financial performance. Thus, CEO charisma ratings had much more to do with top managers' subjective impressions of company performance than with actual financial results.

As the authors put it, "Our evidence suggests that CEOs who are perceived to be more charismatic appear to be perceived as more effective. In this subjective sense CEOs matter. However, the lack of corroborating evidence from objectively-assessed CEO performance suggests that the search for charismatic CEOs may be based more on implicit theory or halo effects than on solid evidence that charisma really does make CEOs more effective."

The study, entitled "Does CEO Charisma Matter? An Empirical Analysis of the Relationships among Organizational Performance, Environmental Uncertainty, and Top Management Team Perception of CEO Charisma," is in volume 49, number 1 of the Academy of Management Journal. This peer-reviewed publication, now in its 49th year, is published every other month by the academy, which, with about 16,000 members in 90 countries, is the largest organization in the world devoted to management research and teaching. The academy's other publications are the Academy of Management Review, Academy of Management Perspectives, and Academy of Management Learning and Education.

Media Coverage:
Associated Press. Study sees no link between success and CEO charisma. (Wednesday, May 03, 2006).
USA Today. Not All Successful CEOs Are Extroverts. (Wednesday, June 07, 2006). Does CEO Charisma Matter?. (Monday, May 08, 2006).

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