The limited (but real) impact of the CEO

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Do CEOs really matter? Back in 1972, an article by Stanley Lieberson and James O’Connor in the American Sociological Review contended that the identity of the chief executive mattered far less to corporate performance than which company he ran and which industry it happened to be in.

Ever since then, management scholars have been arguing about whether Lieberson and O’Connor were right. I think it’s fair to say that the consensus now is that they weren’t–CEOs do matter. Two interesting recent papers on the topic available online, for those of you who like footnotes and advanced statistics, are “The Good, The Bad, and the Lucky: CEO Pay and Skill,” by Robert Daines, Vinay B. Nair, and Lewis Kornhauser, and “How Much Do CEOs Influence Firm Performance–Really?” by Alison Mackey.

But it’s also fair to say that academic research does not reveal CEOs to be the corporate superheroes we often portray them as in the business media. Consider the recent study of “superstar CEOs” by Ulrike Malmendier of the University of California at Berkeley and Geoffrey Tate of the University of Pennsylvania’s Wharton School, who found that companies run by top executives who won awards handed out by the business press between 1975 and 2002 consistently underperformed the market after being honored. Malmendier and Tate argue, in part, that CEOs who are anointed as superstars neglect their jobs.

I got into this subject while working on a story for the latest Fortune on “The CEO Stats That Matter.” My initial faint hope was that maybe there was a Bill James of corporate statistics out there who had figured out what we should and shouldn’t be focusing on. The closest thing is probably Jim Collins, whose statistic of choice is shareholder return, measured a decade or two after the CEO in question has retired.

Using that standard, Collins identified 11 CEOs in his book Good to Great who steered their corporations to sustained leaps in stock performance. They were all self-effacing insiders who put their companies ahead of themselves and focused most of their early efforts on surrounding themselves with good people.

That seems to be where leaders really can have an impact, by making incremental changes in the functioning of an organization. At least, that’s how they can have a positive impact. “Good leaders can make a small positive difference,” Stanford Business School’s Jeffrey Pfeffer told me. “Bad leaders can make a huge negative difference-because they drive people out. If you said to me, ‘Who can fix GM?’ I don’t know. But there’s no question that someone could make an enormous difference on the downside.”

Pfeffer thinks the business media does a great disservice by portraying CEOs as “all-powerful deities” (his new book with Robert I. Sutton, Hard Facts, Dangerous Half-Truths, and Total Nonsense: Profiting from Evidence-Based Management, which includes a nice review of academic work on CEO impact, disapprovingly cites a couple of Fortune articles on this count). I think we’re just trying to find ways to tell compelling stories that readers will finish, but of course he has a point. Large corporations are vast and complex entities, with customs and attitudes that are hard for any one leader to change. So why do we talk as if the CEOs are truly in charge–and more importantly, why do we pay them that way?

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