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 others aspects of CEO personality impact firm performance in small and medium enterprises (SME) in a dynamic industries (e.g. high technology).

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 posses 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 occurs. 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.

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 TwitterFacebook, and LinkedIn.

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About the author

David Burkus is an organizational psychologist, keynote speaker, and bestselling author of five books on leadership and teamwork.

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