Most of us have grown up appreciating one or more superheroes and now that we have grown up we still fancy the idea one person can truly matter. The effect a CEO can have on the performance (profitability) of a company has traditionally been measured in the 10-20 percent range. Depending on people’s perspective this CEO effect can be heralded as negligible or as considerable.
CEO-effect guru Donald Hambrick (and associate) , recently, have taken an advanced approach to measuring the CEO effect. With the “CEO in context” approach Hambrick provides a much more accurate measurement of the CEO effect. Among others there is a much more accurate indicator of industry performance (excluding the focal company) and company performance (with controls for inherited profitability and company health). The results are – frankly – shocking.
With the traditional CEO effect being in the 10 – 20 percent range you could still argue whether this was small or big. With Hambrick’s new research the CEO effect is measured a whopping 38.5%. This is one big effect and it is for better or worse.
Hambrik provides convincing validity testing of the new technique. And, finally, he also illustrates the CEO effect with comparing Lou Gerstner and Sam Palmisano of IBM. The traditional indicators mis-identified Gerstner as a poor CEO. This new measurement puts him in the top decile. It is all very convincing.
Now, if you are a CEO…
What is it that you are thinking when you hear your impact is twice the size?
You definitely matter and because you do the essence of your job to make everybody else matter. The buck does not stop at your desk, it starts at your desk. Make sure the CEO effect will be a positive one because if it negative…the impact is also twice as big..