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What are charismatic CEOs good for?

August 1, 2002

For more information, contact: Benjamin Haimowitz, HHaimowitz@aol.com

Will one of the casualties of the corporate scandals of the past year be executive charisma? As if there weren't already enough skepticism these days about personal magnetism in the corner office, new research presented at the 2002 annual meeting of the Academy of Management (Aug. 11-14) gives cause for more.

Based on monitoring of major corporate CEOs over a 10-year period, the study finds that charisma at the top makes little difference in how well a company does. Whether gauged by the price of the company stock or the bottom line on the company's balance sheet, CEO charisma has no significant effect on corporate performance.

What it does have a significant effect on, though, is how much money the chief makes. As the authors put it, "Even though we find no direct performance effects, charismatic CEOs receive higher total pay than their industry counterparts…Compensation of charismatic CEOs is relatively free from firm performance risk."

The sole exception to charisma's lack of effect on firm performance was in situations of market uncertainty, when customer demand became less stable and predictable. In such an environment, CEO charisma tended shore up a company's stock price. But no such effect was seen for other high-stress business environments, such as situations of political uncertainty, in which government actions at home or abroad become less predictable.

The findings are based on a survey of executives at 59 randomly selected major corporations during the period 1988 through 1997. Top managers of all firms were anonymously surveyed about the charisma of the CEO and the business environment confronting the firm. To provide a measure of charisma of CEOs, respondents rated their degree of agreement or disagreement with such statements as "I have complete confidence in him/her" or "Gives reasons to be optimistic about the future."

All CEOs served for at least four years, and 11 companies had the same CEO for all 10 years, including Jack Welch of General Electric, Kenneth Lay of Enron, Robert Crandall of AMR, and Paul O'Neill of Alcoa.

If charismatic CEOs have so little effect on company performance, why do they make so much money compared to low-key chiefs? One possibility is that a charismatic CEO is able to sway the board by sheer force of personality. But the authors concluded this to be unlikely, since high pay prevailed in all varieties of boards -- whatever the ratio of outside board members to total board members or whatever the stockholder equity concentration. Their conclusion: the high pay simply reflects the worth that people high in the business world have come to assign to charisma, a worth the authors believe is "overvalued."

Lead author of the study is Henry L. Tosi of the University of Florida, joined by Angelo Fanelli of the University of Florida, Francis Yammarino of the State University of New York in Binghamton, Vilmos F. Misangyi of the University of Delaware, and David Waldman of Arizon State University West.

Media Coverage:
The Denver Post. CEO charm may harm, scholar says. (Tuesday, August 13, 2002).

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