CEO claims of success are a double-edged sword
New research highlights that senior leaders who link company success to themselves may be sowing the seeds of their own future dismissal
In my last post, I wrote about a topic, robotic process automation, that is under-represented in business research. Today's topic, CEO performance, is at the opposite end of the scale. Leadership changes in big companies are an especially alluring subject for researchers, and there is an extensive literature that looks at how external factors such as the economic downturns or technology disruptions can lead a board to fire a CEO. A driver of this interest is that the frequency of CEO dismissal has significantly increased in recent years. Indeed, studies report that CEO dismissal now accounts for 24% of succession events in S&P 500 companies, reducing the average CEO tenure in the U.S to 9 years in 2017 compared to 14 years before the 1990s.
As noted, researchers tend to focus on company performance or external factors when analyzing CEO changes. Far less attention has been paid to the actions, or even words, of the CEO themselves. We should ask to what extent things CEOs tell internal and external constituents affect their tenure. After all, most CEOs are in a continuous dialogue with their employees and boards, as well as with important external agents such as financial analysts, journalists, activists, and even professors. It stands to reason that what they communicate about themselves in these relationships should affect how others gauge their performance. Furthermore, it is likely that in many cases, external narratives impact a CEO's tenure as much as internal performance. But how exactly does that work and how do a CEO’s own words shape how she is perceived by others? These questions are the subject of new research from Sun Hyun Park (Seoul National University), Sung Hun (Brian) Chung (Rice), and Nandini Rajagopalan (USC).
The authors base their research on the hypotheses that (1) a CEO’s narrative about her own performance shapes how others see her and that (2) this effect creates beliefs about a CEO’s connection to her company’s performance that can produce unintended consequences. To test their hypotheses, the authors focus specifically on what they call performance attributions, a term that refers to the links a CEO attempts to establish between her leadership and her company’s results. A CEO makes an internal performance attribution when she takes credit for the company's success and an external attribution when she does the opposite (e.g., blaming industry conditions for bad performance).
Attribution strategy is important, the authors note, because "studies of CEO career dynamics suggest that throughout a CEO's career, a firm’s constituents develop heuristics for evaluating leadership efficacy." Thus, when a CEO makes internal performance attributions, constituents may "develop enhanced expectations for continued favorable performance outcomes and the CEO's strategic leadership, causing the self-serving rhetoric to backfire when these expectations are not met." Indeed, studies show that internal performance attributions “allow romanticized conceptions of a CEO's leadership, where the firm’s constituents overestimate the leader's role in the success of firm performance outcomes, which are essentially causally indeterminate and ambiguous.”
Knowing that performance attributions affect how stakeholders judge a CEO's performance, the authors ask a simple question: Can a CEO's internal performance attributions impact not just how they are seen but how they are treated in difficult times? In other words, can a CEO’s own words lead to her termination when her company does not perform as expected?
To test the impact of the claims of fired CEOs over their careers, the authors start by examining performance attributions made by CEOs in quarterly earnings announcements. These public discussions are not only great stages for a CEO to communicate to outsiders about her firm, they also act as a regular trigger for analysts, journalists, and boards to check in on a CEO’s performance. Analysts are a special focus for the authors, because they believe that the conclusions of financial analysts about a firm's performance are an important mediating variable between the CEO's claims and tenure. Moreover, analysts often play the role of "societal arbiters," as they shape a collective (internal and external) perspective on how well, or poorly, a CEO is performing.
As the foundation for their analysis, the authors looked at the tenure of 378 CEOs who left their job in 234 companies from 2000 to 2011. The companies were drawn from the list of S&P 1500 energy, chemical, pharmaceutical, and oil sectors. The sampling strategy focused on a handful of related industries, allowing the authors to "minimize potential confounding factors stemming from cross-industry variance, especially with respect to the heterogeneity in a firm's external environment and managerial discretion."
The team analyzed statements made by CEOs, analysts, and journalists commenting on each firm over a given CEO's leadership tenure. Press sources included national business publications (e.g., the Wall Street Journal), national non-business publications (e.g., The New York Times), news-wire agencies that consolidate other media outlets (e.g., Reuters), and local media in the market where each firm has its corporate headquarters (e.g., the Chicago Tribune).
The authors were careful to exclude turnover that occurred when CEOs died suddenly (five cases), when CEOs took a similar position at another firm (five cases), or when the focal firm was acquired (three cases). The authors also considered CEO age and continued board membership as additional criteria to identify a CEO dismissal case. CEOs older than 64 leaving a leadership position were excluded, as the change was attributed to retirement. Alternatively, CEOs under the age of 64 who did not remain on the board after the succession were classified as dismissals. In the end, the researchers focused their conclusions on 94 CEO dismissals cases that met all the criteria for analysis.
Consistent with prior studies, the authors found that CEOs who internally attributed their firm's positive performance — especially when they reported better than unexpected results — created strong links between CEOs and their firms in the minds of the analysts who covered their firms. Of course, this phenomenon can be a useful (and very lucrative) outcome when the firm does well. However, the authors found that it quickly becomes a potentially serious problem when a firm underperforms.
Indeed, the study results indicate that a standard deviation increase in CEO internal attributions for a positive earnings surprise “is associated with an approximately 51% increase in analyst internal attributions for a negative earnings surprise, when other variables are held constant at their means." Furthermore, when analysts made negative connections, they often had a direct impact on a CEO’s termination. As the authors note, a standard deviation increase in analyst internal attributions of a CEO for a negative earnings surprise is associated with an approximately “45% higher likelihood of CEO dismissal when other variables are held constant at their means.”
These findings are even more surprising when the authors point out that their examination of records preceding a CEO’s firing reveals that unfavorable firm performance alone is often not enough to get a top leader fired. Indeed, research has shown that most CEOs are very good at installing defense mechanisms to protect their jobs. Moreover, the link between negative firm performance and a CEO’s responsibility is often disrupted by other forces, such as boardroom politics or economic downturns. The causal linkage is further “weakened in CEO-dominated boards when the leader has appointed demographically similar board members or outside directors whose corporate elite status is lower than that of the CEO.” The linkage may be also decoupled when the board interprets the performance downfall as temporary, opting to stick with a positive belief in the CEO's ability to turn around the unfavorable situation.
In short, given all the factors that keep boards from firing CEOs when firms underperform, it is notable to find that CEOs who routinely take the credit for good outcomes often have to take the blame when things go bad.
In social science research, the Matthew Effect occurs when eminent team members receive credit for great work at the expense of their less-eminent collaborators. Said differently, a well-known researcher is often given more credit than less-known collaborators simply because she is famous. It is the scientific equivalent of the “rich getting richer.” The term has been extended into other areas of research, and this paper suggests that there may be a version of the Matthew effect at work in the C-suite. In other words, the stronger the link a CEO makes between herself and her firm’s positive performance, the more other people are willing to reinforce it. Over time, that high status can function as a buffer against potential failure, for, as the authors note, a CEO's internal performance attributions function as a “cognitive anchor or a source of confirmation bias” for external evaluations of the CEO's leadership throughout their career.
I suspect that what is true for CEOs also applies to other senior leaders in business, politics, and even sports. After all, it is not just CEOs who claim credit when the seas are calm and the ship speeds along in fair winds.
The real-world implications of this particular study are not difficult to comprehend. Its empirical analysis suggests that while CEOs’ internal attributions of positive firm performance "can be an active behavioral strategy of self-presentation," those very attributions can also be the reason boards fire them when things don't turn out as planned. Consequently, CEOs should think twice before they take personal credit for great firm performance. As the authors wisely advise:
Given the difficulty of predicting firm performance results over an extended period of time, CEOs should be wary of the possibility that when they take credit for positive firm performance, they may subsequently invite blame from firm constituents that is anchored around their self-serving attribution accounts. A more modest presentation of one's own abilities may be the best strategy when there exists the potential that an individual's impression management can backfire in the future.
A final note: in 2011, Swedish researcher Tobias Fredberg concluded that a CEO’s tendency to stress me over we was related primarily to whether or not she was dealing with a turnaround situation. Fredberg found that the best turnaround CEOs connected problems to themselves and success to their teams. In other words, they were more inclined to establish an internal performance attribution of negative performance, perhaps signaling to stakeholders that they were neither wholly to blame for problems nor fully to praise for success. This is an interesting, if risky, strategy for any senior leader, but it is one whose value is reinforced by the findings of this team’s insightful study.
Park, S. H., Chung, S. H. (B.), & Rajagopalan, N. (2021). Be careful what you wish for: CEO and analyst firm performance attributions and CEO dismissal. Strategic Management Journal, 1– 29. https://doi.org/10.1002/smj.3312