Wednesday, 24 March 2010

Senior Leaders, Organizational Performance and Sir Fred

When I'm doing presentatations on leadership, I often like to throw in the quotes from Jeff Pfeffer and Robert Sutton's well known book,  'Hard Facts, Dangerous Half Truths and Total Nonsense', which summarises the academic evidence on the (lack of) impact of senior leaders on organizational performance. 

'Scholars who conduct and evaluate the best peer-reviewed studies argue over how much leadership matters and when it matters most. But when they set aside their petty differences, most agree that the effects of leadership on performance are modest under most conditions, strong under a few conditions, and absent in others.
'Studies from leaders from large samples of CEOs…, university presidents to managers of colleges and professional sports teams show that organizational performance is determined largely by factors that no individual - including a leader - can control’. Pfeffer & Sutton, 2006 (p. 192).

However, they do make the point that senior leaders that senior leaders can have an enormous negative effect, especially on reputations!

In the august Academy of Management Journal this month, there is an excellent article which explains why Sir Fred Goodwin may have be one of the few leaders to have had a strong effect, positively and negatively on RBS - he went from hero to zero in a few years, like many of his counterparts in the banking crisis.  For those interested, the reference is Li, J. & Tang, Y. (2010) CEO hubris and firm risk taking in China: the moderating role of managerial discretion, Academy of Management Journal, 53: 45-68.

Popular views of the impact of leadership are that CEOs have a big effect on firm performance, partly explained by our need to attribute relatively simple causes to complex issues.  The underlying theory and data that Pffeffer and Sutton are referring to, however, comes from two different stables of research - popular ecology and neoinstitutionalist theories - both of which argue that CEO and senior leaders can have little effect on firm performance, except under certain conditions, because of overwhelming external forces such as market pressures, etc.  The two Chinese authors point to recent attempts to reconcile these views through something called 'Upper Echelon' theory, which highlightlights the role of managerial discretion.  In bringing this idea together with the notion of managerial hubris - the exagerated belief that some managers have about the their own judgements against objective standards - they help us understand the dark side of management.  For example, they point to research which shows that CEO hubris is associated with paying over the odds for acquisitions, and that cross-border acquisitions are often driven by managerial hubris.  Which brings us to Sir Fred Goodwin's impact on RBS's failure.

Li and Tang demonstrate in a Chinese context that CEO hubris is postively related to firm risk-taking, which is facilitated by the market context to support risk, the complexity of the market, room for opportunities to take risk and the degree of market uncertainty. When the context is munificent, when there are opportunities and when information is ambigious, overconfident CEOs can, and do, feel compelled to take greater risks.  At the organizational level, there are also key constraints on CEOs, including the age of the firm, its size, its resources and the governance structures of the board.  If a CEO has greater control over the board and has resources, s/he is more likely to act on the basis of hubris in making risky decisions.  What is evident from the RBS case is that most of these factors were evident, so providing a better good explanation than  some of the woolier theories of semi-detached, narcisisstic leadership and its negative effects.  What do readers think?

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