Powerful Ceo

STANFORD CLOSER LOOK SERIES

Topics, Issues, and Controversies in Corporate Governance and Leadership

Is a Powerful CEO Good or Bad for Shareholders?

By david f. larcker and Brian tayan november 13, 2012

IntroductIon

Americans tend to admire powerful leaders. Powerful leaders wield influence over their organizations and external environments. They command considerable resources, both financial and nonfinancial, and direct these toward the pursuit of their objectives. In addition, they garner significant attention from internal and external constituents, which they leverage to amplify their impact and shape outcomes around them. For these reasons, there is no shortage of profiles on powerful leadership. Countless books, articles, documentaries, and courses are devoted to the examination of executive power. These include not only biographies of well-known CEOs but also the leadership lessons of non-business leaders (political, historic, athletic, etc.) which are recast to apply to a managerial setting. Furthermore, periodicals regularly publish lists of powerful leaders, including Time magazine’s “Most Influential People in the World,” Forbes’ list of “The World’s Most Powerful People,” and Fortune’s “Most Powerful Women in Business.” Despite the attention, it is not clear the extent to which having a powerful CEO is beneficial to an organization and its shareholders. There are negatives as well as positives to executive power that must be taken into account to arrive at a reasoned assessment.

defInItIon of ceo Power

Finkelstein (1992) defines power as “the capacity of individual actors to exert their will.”1 However, not all manifestations of power are the same. Finkelstein identifies four dimensions of power:

• Structural power is derived from the position that an executive occupies in the organizational hierarchy. CEOs hold considerable authority simply because of their formal position at the top of the corporation, which gives them decision...