C-suite executives are often characterised by their strong personalities, which can be pivotal in driving new and appealing offerings. However, when the focus shifts to significant technological innovations, recent research published in the Strategic Management Journal highlights the critical need for a balance between CEO overconfidence and a well-equipped board of directors.
This balance is vital, as earlier research has established that while overconfident CEOs tend to push for groundbreaking innovations, their propensity to overlook potential risks associated with these ventures can be problematic. The challenge of effectively utilising the attributes of overconfident CEOs was less explored until the new study conducted by Priscilla S. Kraft from WHU – Otto Beisheim School of Management, Teresa A. Dickler from IE University in Madrid and the University of Marburg, and Michael C. Withers from Texas A&M University. Their research emphasised the role of corporate boards as a fundamental component in achieving successful innovation breakthroughs.
To validate their hypotheses, the research team focused on selecting U.S. publicly listed companies within the S&P 1500, specifically those operating in high-tech sectors. Previous studies have demonstrated that revolutionary innovations — drastically altering or creating new markets — are particularly crucial in these sectors. The study centred on two pivotal aspects of board composition: expertise and authority. The value of knowledge, previously well-documented in contexts such as mergers and acquisitions, proved equally significant here. Boards that possess a thorough understanding of navigating breakthrough innovations can mitigate investment concerns more effectively.
The researchers also measured the board’s authority regarding its independence from the CEO. Indicators of a robust board included scenarios where the CEO does not serve as the chair, board members possess longer tenure than the CEO, or hold a significant stake in the company. These conditions typically enable the board to exert considerable pressure on the CEO to substantiate their ideas and ensure comprehensive information flow.
Kraft notes the indispensable role of a powerful board in correcting any misconceptions that might arise from CEO overconfidence. The aim is not to curb the CEOs’ innovative impulses but to steer them towards making better decisions about project selection, resource allocation, and incorporating new information as projects progress.
The study found a robust correlation between CEO overconfidence and the rate of breakthrough innovations in firms with boards that are both knowledgeable and authoritative. This relationship was quantified as a 113% increase in breakthrough innovations compared to the average. The findings underscore that expertise and authority are essential, revealing that mighty boards lacking in expertise could hinder the productive channelling of CEO overconfidence.
Kraft advises that firms aiming to excel in pioneering innovations should be meticulous in assembling their boards. It is crucial to select members who grasp the subject matter and provide valuable guidance. Furthermore, there must be an equilibrium of power between the CEO and the board to foster an environment conducive to innovation. This balance is fundamental to harnessing the potential of overconfident CEOs while mitigating associated risks and guiding the company towards successful and sustainable innovative outcomes.
More information: Priscilla S. Kraft et al, When do firms benefit from overconfident CEOs? The role of board expertise and power for technological breakthrough innovation, Strategic Management Journal. DOI: 10.1002/smj.3657
Journal information: Strategic Management Journal Provided by Strategic Management Society