Wednesday, 19 June 2024

HEC Paris study links CEO influence to a 30% difference in firms' performances in CSR

5 min read

Large-scale study links CEO influence to a 30% difference in firms’ performances in the areas of social responsibility – a finding that informs the debate over the power and leeway of senior executives in general and for corporate social responsibility in specific.

For many years the jury has been out on just how much influence CEOs actually have on the concrete actions, behaviours and outcomes of a business.

The so-called “CEO effect” is hard to measure in reality, because of the confluence of other factors – cash flow, external pressures, market conditions and so on – that can also shape and determine results.

But new research just published in the The Academy of Management by Georg Wernicke, HEC Paris Assistant Professor of Strategy & Business Policy and member of the school’s Society & Organizations Institute, suggests that CEOs do in fact hold considerable sway – for better or for worse.

Together with Miha Sajko and Christophe Boone from the University of Antwerp, Wernicke ran a comprehensive study across more than 1000 US firms looking at the impact of CEOs’ influence on corporate social responsibility (CSR) outcomes – a measurable area of activity that is less prone than financial performance, for instance, to influence from factors beyond CEOs’ immediate control.

Using statistical techniques to assess the interplay of CEO clout and outcomes – the “CEO in context” variance partitioning method – Wernicke and his colleagues determine that CEOs account for a significant 30% variation between the different firms’ CSR behaviours and actions.

In other words, individual CEOs appear to hold considerable sway over their firms – at least in the sphere in social responsibility; though the finding also shares interesting new light on the influence and power of chief executives in general, says Wernicke.

“In this study, we look at CSR because organisational actions and policies in this area are voluntary and typically go well beyond what’s mandated by law or regulation. CSR outcomes, in this sense, give us a clearer insight into how much leeway the chief decision maker will have in a firm, given the voluntary nature of this kind of activity.”

“To really assess the impact of CEO influence, we look at a large dataset of about 1200 US firms from 1993 to 2015 and calculate the variable average value – how much they vary between each other in terms of CSR-type outcomes over time. Then we look how this value can change depending on who is at the helm of the firm as CEO, as opposed to other things like changing societal norms, industry pressure or cash flow. And we find that the presence one CEO over another accounts for a good 30% variation between firms these types of activities, and that is a highly significant level of influence.”

This is a finding that informs universal understanding about the degree of sway top executives exert, says Wernicke.

“In terms of corporate citizenship, it sheds light on the importance of who you select to run your business: a Trump versus a Biden type, for instance, will impact your outcomes significantly in theory but as we show, also in practice.”

“But beyond CSR, our findings suggest it is likely that CEOs will exert quite a lot of influence on the firms they run in general, which has historically been something of a moot point for scholars and practitioners alike.”

On the basis of this research, CEOs “matter a great deal,” says Wernicke; their world view, values, position on climate change, capitalism, or even the treatment of employees will dictate organisational culture, behaviours and outcomes to a significant extent.

As a result, he and his co-authors urge boards to reflect more deeply on issues such as hiring and compensation for C-suite executives.

“CEOs matter, and they matter a lot. So maybe it is a good idea to ensure that they are appropriately compensated in their pay. For example, if corporate citizenship is a priority, boards might want to think about tying CSR activities to financial incentives for their top executives.”

Re-disseminated by The Wealth and Society

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