Why are innovative CEOS usually in a controversy?

KENNESAW, Ga. | Feb 20, 2023

The Research Brief

CEOs who have high degree of integrity tend to have lower levels of creativity, they are less active in decision making and also not as great risk takers. Additionally, firms who have CEOs portraying overconfidence and who serve as the chairperson of the board, experience diminished creativity and risk taking behavior. On the contrary, when the CEO is compensated with higher equity, that firm experiences improved creativity as well as risk taking. To confirm these findings, we gathered data from 213 of the Forbes 500 companies across 4 years from 2014 to 2017. Using shareholder letters, we ran multiple analyses, supporting most of our hypotheses.

The Problem:

In numerous markets globally, firms are exposed to fast-changing consumer tastes, unstable suppliers’ demands and aggressive competitors’ actions. Firms, on average, under-invest in innovation, while those who do, have greater rates of new product introductions, greater investments in R&D and a record of introducing creative advertisements, demonstrate superior firm performance.

Firms that are entrepreneurial in their marketing strategies, such as those that seek out new customer segments, those that are eager to create and launch new products and those that proactively change their price, product, promotion, and place strategies after foreseeing trends tend to outcompete their peers.

Unfortunately, for firms to demonstrate this competitive behavior, they have to demonstrate innovative, active and risk-taking behavior. These behaviors to great extent depends on the CEO. This research proves that the firms who are led by CEOs with high integrity do not show these attributes, thus missing the opportunity.

The Solution:

Firms that have high focus on customers experience the diminishing impact of CEO integrity on the innovation, proactiveness and risk taking of the firm. Thus, board members of firms can mold the risk-averse behavior of their CEOs by introducing customer advocates into the top management team, and by introducing processes that encourage a customer centric culture.

Our research also reveals that corporate boards should consider prospective CEO’s integrity in their hiring decisions. While we do not suggest that corporate boards should be cautious about hiring CEOs with high integrity, we do suggest that they should try to inculcate a risk-taking mindset among CEOs with high integrity through training and the use of corporate governance mechanisms. When a firm recruits a new CEO, there is substantial uncertainty about the kind of strategic actions the CEO would be taking in the future. Investors can use the CEO’s integrity as an effective signal to predict the CEOs’ strategic choices.

It is advantageous for CEOs to understand that integrity is a double-edged sword, so that CEOs leverage the strengths of their integrity, while simultaneously diminishing its negative aspects, via training. High integrity CEOs may benefit by surrounding themselves with risk-taking, promotion-focused and creative TMT members in order to minimize the EO-related deficiencies.

The Follow Up:

After studying the integrity of CEOs, another issue that we came across was the language used by some CEOs when having daily conversations. The language of CEOs can be interpreted by the employees and customers of the firm in various ways. What we expect to find: when the CEOs speak with their subordinates, without using diplomatic language, it results in better creativity, compared to using indirect language, which can result in lost trust in the CEO. We are currently in data collection phase. Links below demonstrate follow up study covered in press:

image source: https://www.greaterkashmir.com/opinion/integrity-a-way-of-life/

Why are innovative CEOS usually in a controversy?

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