More Evidence For How Company Performance Is Affected By CEO Personality

It’s not often that we see a well designed study that tries to explain how a leader’s personality affects the performance of a company. As I reported here previously, there is very credible evidence that a narcissistic leader will take a company on a wild ride that won’t result in any better or worse performance. 

A study just published in the Academy of Management Journal examined how other aspects of CEO personality impact firm performance in small and medium enterprises (SME) in dynamic industries (e.g. high technology).

How Does the Personality of a CEO Shape Company Performance?

The CEO’s personality plays a significant role in reshaping company performance. Different aspects of their personality impact the company’s growth, performance, and success. Here’s how it works:

Decision-Making Skills

CEOs willing to take risks find it easy to enter new markets and adopt innovative technology and approaches, thus enabling organizational growth.

Openness

An open culture fosters clear and open communication and invites employee feedback and ideas for innovation. There is a high level of employee engagement in such a place. It encourages employees to be more creative and take initiative, leading to high performance.

On the contrary, if the leader or CEO is an authoritarian, he’ll create a structured, more disciplined environment that may inhibit ideas and initiatives.

Friendly vs. Aggressive

A friendly leader and environment boost employees’ confidence and morale, resulting in high job satisfaction and reduced employee turnover rates. But if the CEO is aggressive, insults employees, and creates a negative working space, it won’t be long before you lose your key employees.

Hence, both aspects affect organizational performance and success. With a friendly leader, employees perform better and are more productive. In the latter case, achieving the organization’s goals would be hard, and turnover would also be higher.

Conservative vs. Dynamic

If your CEO is conservative, the company may be more risk-averse and prefer to adhere to standard industry practices. So, though the organization would stay safe from losses or other issues, there wouldn’t be much innovation or exciting new opportunities they’d opt for.

Similarly, having someone in the position who’s always up for the challenge will bring about change and innovation. The difference is primarily due to their decisions based on the approach.

Outgoing Vs. Inert

CEOs with dynamic, outgoing personalities have strong relationships with their board members, other stakeholders, the media, etc., which gives them a number of benefits, including access to capital and networking.

Those who have more inert personalities usually stick by the rules, are better at following procedures and policies, and have a more compliant staff.

Ability to Remain Calm

CEOs with a high threshold for emotional control and patience stay calm in pressing situations. They can easily manage crises and steer the company through without panicking. The opposite personality may react impulsively to crises, leading to losses or decisions that may affect the organization’s growth and performance.

On the other hand, they may actually make some key decisions at the right time of crisis that may actually save the company.

Company Financial Performance

A study has correlated the CEO’s personality type with the company’s financial performance. For example, extrovert CEOs take initiatives that drive revenue growth. They can easily manage large teams and better control the organization’s operations and finances.

More Evidence: How Company Performance is Affected by CEO Personality

This study of 195 SMEs “found that a one-point increase in strategic flexibility (measured on a Likert-type scale) resulted in increases of 4.21 percent in return on assets (ROA), 5.01 percent in return on sales (ROS), and 3.85 percent in return on investments (ROI).” (p. 1068). To be clear about what that means, here are the five questions they asked the CEOs to evaluate strategic flexibility: (1= strongly disagree, 5 = strongly agree)

1. We regularly share information and costs across business activities
2. We frequently change our strategies and structures to derive benefits from environmental changes
3. Our strategy emphasizes exploiting new opportunities arising from environmental variability
4. Our strategy reflects a high level of flexibility in managing political, economic, and financial risks
5. Our strategy emphasizes versatility and empowerment in allocating human resources

Strategic choice is shaped between the ears of the CEO, and the CEO’s strategic choices either enhance or inhibit strategic flexibility. Personality does not explain everything, but it does affect how CEOs acquire and disseminate information, what information they pay attention to or choose to ignore, and how they interpret the information they selectively choose to perceive.

The study found that the CEO’s personality did indeed predict the strategic flexibility of the firm. The aspects of personality that had a positive effect on strategic flexibility were (in order of importance) openness to experience, extraversion, emotional stability, and agreeableness. The personality trait that had a negative effect on strategic flexibility was conscientiousness. The authors conclude:

To foster strategic flexibility and consequently firm performance, CEOs from such industries need to adopt extraversion and openness to experience and avoid comprehensiveness, detail, and the status quo in decision-making. CEOs could enlist individuals who possess these traits for their top management teams and could give them prominent roles in specific strategic domains…Venture capitalists could use these personality measurements in predicting the success of SMEs operating in dynamic industries and thus, in making investment decisions (p. 1068).

I find these conclusions fascinating because conscientiousness reflects dependability and achievement orientation, which are good things. Conscientious folks are “high achievers that feel a strong need to take responsibility for doing things immediately” (p. 1053). Sounds like exactly the type of folks we often promote into positions of leadership.

The dark side of extreme and unbalanced conscientiousness is it can lock up the openness, creativity, and innovation necessary for firms to remain strategically flexible. High achievers as leaders favor strong controls and rigid structures that reduce uncertainty and provide specific feedback on performance. They create a “competency trap” for their companies by ignoring important information about changes in the external and internal environment of the firm unless significant performance declines occur. This strategic inflexibility is a recipe for disaster for any company in an uncertain and rapidly changing environment.

If you are an entrepreneur or CEO of a SME, you should purposefully surround yourself with people that are not like you. Your company must remain flexible to survive, and the most flexible firms have heterogeneity, not homogeneity, in their top management teams. Take a good look around. If everyone on your team looks, thinks, talks, and acts a lot like you, you might feel good, but your company could be in trouble.

Wrap Up

Although the CEO’s personality type significantly impacts company growth, there’s still no best kind of personality that’s the best fit for the CEO role in general.

It largely depends on the type of industry, office conditions, and other factors determining the best fit for the company. 

For example, Steve Jobs, the former CEO of Apple, had a personality highly tilted towards perfection and innovation. Both traits are highly reflective of the brand and the products that were launched during his era.

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Bret L. Simmons, Ph.D., is an Associate Professor of Management at The University of Nevada, Reno. He earned his doctorate in Business Administration at Oklahoma State University. Bret blogs about leadership and social business at his website Positive Organizational Behavior. You can also find him on Twitter, Facebook, and LinkedIn.