Characteristics of a CEO, such as confidence, political views, age, education and military background, not only influence leadership, but also innovation and value creation in companies, finds Koen Pauwels
How investors respond to firms and companies on the stock market receives a great deal of attention. However, firms and companies are not simply faceless corporations; it is the choices made by a small group of executives at the top of an organisation that have a huge impact on company outcomes.
Specifically, individuals such as the CEO can set a company’s targets and determine many strategies, including major market entry and exit, innovations, and resource allocations. The strategies they choose to follow arise from their individual opinions which are determined by their personalities, demographics, experiences, interests and values.
Alongside colleagues from the US and Switzerland, we comprehensively reviewed 170 pieces of research on senior executives and the effects of their personality, experiences, and characteristics on company success through innovation and stock returns.
This involved conducting a search of publications that had investigated the relationship between CEO/CMO and innovation/stock returns. We included articles in our review based on two criteria: Firstly, articles that empirically examined how CEO/CMO personality, demographics, and experience affect innovation.
Second, we focused on studies that explore the impact of CEO characteristics on stock returns through innovation. The research we reviewed came from 77 major marketing journals and leading journals in related fields, such as management, accounting, finance, and economics.
Our study reveals that the characteristics of a CEO, such as confidence, political views, age, education and military background, not only influence leadership, but also innovation and value creation in companies. There was little empirical evidence yet for CMOs, which we identified as a key need for future research.
Confidence
Previous studies have shown that managers with very high confidence are more innovative at work because they are more creative and prefer change over routine. Multi-billionaire Elon Musk, currently the richest person in the world, exemplifies such confidence. However, overconfidence can become problematic if the CEO overestimates their own ability to make good decisions and control situations. Overconfidence refers to the tendency for individuals to believe they are better than they really are in terms of ability, judgement, or gauging the prospects of a successful outcome.
Military background
Many would associate a military background with qualities such as a high level of confidence, willingness to take risks, and solid leadership skills; all qualities that could reasonably make a very successful CEO. In reality, recent research suggests companies led by those with military backgrounds are less likely to innovate and less likely to invest in R&D. One reason for this may be that military training emphasises subordination to authority, duty and self-sacrifice which encourages low risk-taking in a company. However, although risk aversion and discipline may limit company growth in ordinary times, it could be seen as an asset in certain crisis situations, such as the ongoing pandemic.
Education
Some studies have found that companies are more innovative if their managers are highly educated. Education can be used to gauge a person’s knowledge, skill base, and cognitive ability, with the level, type, and quality of education being the most important indicators of a CEO’s educational background. Specifically, senior managers with MBA degrees from well-respected business schools are more likely to pursue innovative or risky business models, leading to improved stock returns. Case in point, Google CEO Sundar Pichai holds both a master’s degree in engineering from Stanford and an MBA from Wharton. Education also has a beneficial impact on ex-military CEOs as holding an MBA negates the adverse effects military training has on their innovation.
Age
Age can be an important indicator of a person’s experience. However, several studies show that firms managed by older CEOs tend to underperform compared to those led by younger CEOs: Younger CEOs tend to be more aggressive in their approach and spend more on research and development, while older CEOs are more concerned about their own financial and professional safety and invest less in R&D. Also, older CEOs are on average slower to learn new technologies and less likely to seek growth through innovation.
Politics
In the United States, researchers have also explored the relationship between CEOs’ political views and firm performance as the political ideology of CEOs, which reflects beliefs and values, can influence their managerial actions and decisions. Political ideology is a multidimensional concept, but many Americans identify themselves along the liberal-conservative continuum. The research finds that leaders with liberal values are more likely to innovate as they are more open to ambiguity and tolerant of change, whereas leaders with conservative values are resistant to change and fear uncertainty. Companies led by Republican-leaning executives in the US also experience more internal conflict, weaker results, and show lower emphasis on corporate social responsibility, but simultaneously have less debt and cases of tax evasion.
Hobbies
Amazon CEO Jeff Bezos spends his spare time on submarines hunting for old NASA rockets, Mark Zuckerberg hunts wild boar with a bow and arrow, and Google co-founder Sergey Brin enjoys skydiving, roller-hockey and circus stunts. Meanwhile, Elon Musk claims that his hobby is his job. Not so surprising since his job involves building space rockets, fast cars that you can update like a phone app, and underground transport systems – and in the process becoming the richest person in the world.
The fact that many senior executives spend their free time jumping out of places, climbing rock walls, or making high-risk personal investments is perhaps not so strange when they are also expected to make risky decisions at work. However, despite the most successful CEOs engaging in unconventional pastimes, those with risky hobbies can potentially scare away shareholders. Boards may have to reconsider whether what makes a person a successful CEO also makes them likely to engage in highly risky hobbies.
Our review of this research suggests that board members responsible for the selection of CEOs need to recognise that personality, demographics and experience are key factors in firm performance, including innovation and stock returns. Boards of directors need to be aware that characteristics such as overconfidence, military background, and political ideology may affect decision-making, innovation output and shareholder returns. The young, MBA-educated skydiver might seem like a risky individual, but they might be the best choice.
Therefore, executive recruiters should not let traditionally sought-after CEO traits distract them from identifying which specific qualities a company will need to solve specific challenges and perform well: the aforementioned CEO characteristics must be considered in order to build a strong and well-balanced top management team and increase the chances of a business being successful.
Koen Pauwels is an Adjunct Professor from the Department of Marketing at BI Norwegian Business School, President-Elect of the American Marketing Association’s Academic Council, and the Vice President of Practice at the INFORMS Society for Marketing Science
