CEO claims of success are a double-edged sword
New research highlights that senior leaders who link company success to themselves may be sowing the seeds of their own future dismissal
In our last post, we wrote about a topic, robotic process automation, that is under-represented in business research. Today's topic, CEO performance, is at the opposite end of the scale. Leadership changes in big companies are an especially alluring subject for researchers, and there is an extensive literature that looks at how external factors such as the economic downturns or technology disruptions can lead a board to fire a CEO. A driver of this interest is that the frequency of CEO dismissal has significantly increased in recent years. Indeed, studies report that CEO dismissal now accounts for 24% of succession events in S&P 500 companies, reducing the average CEO tenure in the U.S to 9 years in 2017 compared to 14 years before the 1990s.
As noted, researchers tend to focus on company performance or external factors when analyzing CEO changes. Far less attention has been paid to the actions, or even words, of the CEO themselves. We should ask to what extent things CEOs tell internal and external constituents affect their tenure. After all, most CEOs are in a continuous dialogue with their employees and boards, as well as with important external agents such as financial analysts, journalists, activists, and even professors. It stands to reason that what they communicate about themselves in these relationships should affect how others gauge their performance. Furthermore, it is likely that in many cases, external narratives impact a CEO's tenure as much as internal performance. But how exactly does that work and how do a CEO’s own words shape how she is perceived by others? These questions are the subject of new research from Sun Hyun Park (Seoul National University), Sung Hun (Brian) Chung (Rice), and Nandini Rajagopalan (USC).
The authors base their research on the hypotheses that (1) a CEO’s narrative about her own performance shapes how others see her and that (2) this effect creates beliefs about a CEO’s connection to her company’s performance that can produce unintended consequences. To test their hypotheses, the authors focus specifically on what they call performance attributions, a term that refers to the links a CEO attempts to establish between her leadership and her company’s results. A CEO makes an internal performance attribution when she takes credit for the company's success and an external attribution when she does the opposite (e.g., blaming industry conditions for bad performance).
Attribution strategy is important, the authors note, because "studies of CEO career dynamics suggest that throughout a CEO's career, a firm’s constituents develop heuristics for evaluating leadership efficacy." Thus, when a CEO makes internal performance attributions, constituents may "develop enhanced expectations for continued favorable performance outcomes and the CEO's strategic leadership, causing the self-serving rhetoric to backfire when these expectations are not met." Indeed, studies show that internal performance attributions “allow romanticized conceptions of a CEO's leadership, where the firm’s constituents overestimate the leader's role in the success of firm performance outcomes, which are essentially causally indeterminate and ambiguous.”
Knowing that performance attributions affect how stakeholders judge a CEO's performance, the authors ask a simple question: Can a CEO's internal performance attributions impact not just how they are seen but how they are treated in difficult times? In other words, can a CEO’s own words lead to her termination when her company does not perform as expected?
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