14
Oct
2016
4

The Perils of Hiring a CEO for Culture Fit

By Rob Kaiser
President, Kaiser Leadership Solutions
Member, Division 13

It is taken as an article of faith in the search business that a strong CEO candidate needs to mesh with the prevailing culture. It sure sounds like common sense: who would doubt that a new CEO needs to share the company’s core values and get along with other senior managers?

Except, this conventional wisdom usually leads to lower corporate performance according to recent research published in the June edition of the Journal of Applied Psychology. In a study of 114 CEOs in the high tech industry, a global team of researchers led by Chad Hartnell found that it is actually the CEOs whose styles are different from the existing company culture who get better results (as measured by Return on Assets; ROA).

The researchers considered two broad themes commonly used to describe both leadership and culture: a task-orientation focused on goals, accountability, and results and a relationship-orientation focused on people, collaboration, and team work. They measured CEO leadership style and company culture with ratings from members of each firms’ Executive Teams and correlated them with ROA figures nine months later.

Much to the researchers’ surprise, the firms led by highly task-oriented leaders posted better performance results only when the culture was less task-oriented. The same was true concerning the soft side: firms led by more relational leaders performed better when the culture was less relationship-oriented. In fact, when the culture was strong in either of these areas, firm performance tended to decrease when the CEO was also strong in that same area.

These results suggest that the performance value of CEO leadership is in compensating for something missing in the culture. Since both leadership and culture signal to employees what actions and attitudes are valued, CEO behavior that is unique from the company culture sends a distinct message about where and how to focus effort and energy. For instance, when Microsoft brought in Satya Nadella two years ago, the new CEO vowed to “visibly change our culture” with a newfound emphasis on performance in a culture that had lost its way. Since taking the helm, the company’s stock has improved about three-times more than the S&P500.

When the culture is already strong in a particular area, however, CEOs with a similar style can actually be detrimental to performance. It’s a case of too much of a good thing, according to study co-author, Angelo Kinicki, who said, “CEO leadership that reinforces the current organizational culture may generate abundant resources of unnecessary guidance that fail to enhance firm performance.”

The major take home for selection committees and those who advise them is a cautionary tale: be aware of what the culture does and does not provide and supplement where possible. And be wary of the urge to find a harmonious fit, which could inadvertently turn a strength into a weakness.

Hartnell, C. A., Kinicki, A. J., Lambert, L. S., Fugate, M., & Doyle Corner, P. (2016). Do similarities or differences between CEO leadership and organizational culture have a more positive effect on firm performance? A test of competing predictions. Journal of Applied Psychology, 101, 846-861.

  • William Berman

    Rob –
    Congratulations on a great inaugural piece. There is so much folklore and opinion about CEOs that it is wonderful to have such good applied research available to us. The counter-intuitive results you describe make sense in an environment in constant turmoil and change. Thanks for the ideas.

  • Ted Hayes

    Great post Rob, glad you kicked this off! & it’s a good piece of research to discuss also. Hiring from the inside v. outside isn’t as black/white as it would seem.

  • Rob

    Thanks, Bill. There’s a nice empirical literature on CEOs and firm performance. It doesn’t tell the whole story–there is still more art than science in choosing a good chief–but we are far from the dark ages. And the supported insights are not just intuitive nuggets of common sense. At best I think you can get the hit rate from about 50/50 to 75/25 in these big-bet decisions.

  • Rob

    Thanks, Ted. I’m reminded of the Devil you know vs the Devil you don’t!

  • Dr Tomas Chamorro

    Very interesting, Rob. I think the findings are quite intuitive, but it is often the case that intuition is not backed up by data, so this is a very welcome finding. In a way it makes sense that if a major function of CEOs is to create an effective culture, they will be able to drive more change if they are not totally homogeneous with the existing culture. By the same token, when CEOs values are totally aligned with the existing culture it may be harder to claim that any organizational outcomes are caused by them. I think a good analogy is that of Barcelona soccer club. Cruyff created an incredibly progressive and radical new culture for the club when he first took over as a coach. He won trophies, but not as many as his successors, who simply followed all his precepts and focused mostly on ensuring that his values remained intact. All those winning coaches had a 100% Barcelona DNA – they fit in perfectly well – but for that very reason it is hard to attribute their successes to them rather than Cruyff. Also, if at any point their style becomes outdated or ineffective, then they better get a coach with a completely different set of values, who does not fit in with the existing culture.

  • Rob

    I like your example of Barca and the legacy of Cruyff, Tomas. It illustrates nicely the lasting impact of strong leadership in changing a culture for the better and in ways that last beyond the leader. Perhaps the ultimate measure of leadership effectiveness is in the enduring legacy one leaves behind.