Toxic confidence and a shallow talent pool are two career-killers for CEOs

New research into the behaviours and motivations of business leaders reveals that 17% of CEOs are unsuited to the companies they lead.

Adding to this issue of a looming skills gap and shallow leadership talent pool, separate studies reveal that toxic confidence is the number one trait that can lead CEOs to business failure.

A study from Imperial College Business School analysed the behaviour of 1,100 CEOs based on their daily schedules. It found that CEO behaviour can be broken down into two categories: Leaders and Managers. While managers focus on undertaking tasks and take a hands-on approach to their job, leaders prioritise high-level functions within an organisation.

The research revealed that CEOs whose behaviour constitutes that of a leader generally run companies that are more productive and profitable. The researchers found this to be the case by comparing the performance of firms before and after appointing a CEO whose leadership style was closely aligned to the organisation’s mission and values and discovered that appointing such a leader resulted in an increase in sales after hiring.

“The most important message is that there is no one-size-fits-all CEO. Modern machine learning methods applied to data on leadership can help identify CEO styles and how they match firm needs,” Stephen Hansen, Associate Professor of Economics at Imperial College Business School and lead researcher for the study, said.

The study revealed that 17% of CEOs are ultimately not suited to their firm, largely thanks to the shortage of leader-type CEOs in the market.

The greatest difference in the supply and demand of this type of CEO exists in low- and middle- income countries. According to the researchers, this poor distribution could account for up to 13% of cross-country differences in labour productivity.

Companies often evaluate the success of their current business strategy through feedback in the form of their firm’s current financial results relative to their own previous performance or that of other market participants in the same industry and adapt their decisions accordingly.

A recently published study by Christian Schumacher from WU Vienna in collaboration with Steffen Keck and Wenjie Tang from the University of Vienna shows that the personality of CEOs plays an important role in these evaluation processes. Exaggerated self-confidence can stand in the way of rational decisions.

According to the research, overconfident CEOs assess the financial situation of their company more optimistically than their colleagues and react much weaker to external and internal feedback. That can stand in the way of rational decisions, the WU researchers report in the Strategic Management Journal.

“That means: Although the financial situation in the company is possibly very bad and would require a change in the company’s strategy, these CEOs interpret the precarious situation much more positively and only react with a change when it might already be too late – which can of course have devastating consequences for the company,” Schumacher said.

In their quantitative study, the study authors examined all companies in the S & P1500 Index, which includes the 1,500 largest American listed companies, in the period from 1992 to 2014.

The study also revealed that female CEOs were less likely to have an overly confident view of both their company’s financial situation, and their own abilities.

Christian Schumacher, Assistant Professor in the Department of Global Business and Trade at Vienna University of Economics and Business, added: “Women are less often overconfident about their own abilities, which is also reflected in our study. This more accurate assessment means that female CEOS are much more sensitive to different types of feedback about their companies’ current business strategy.”

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