A new study published in the Strategic Management Journal reveals the crucial role that experienced and powerful boards play in harnessing the innovation potential of overconfident CEOs. The research highlights how boards with expertise and independent sway can guide these bold leaders towards making better decisions and driving breakthrough innovations, particularly in high-tech industries.
Overconfident CEOs and the Destron by duality
The C-suites are usually stacked with sheer determination and self-confidence in their own abilities. This overconfidence can give them impetus in tandem with wild and revolutionary concepts but the second lead to thinking stupidly if not managed.
Researchers looked into the links between CEO overconfidence and breakthrough innovation within companies in a study. This analysis was based on a subset drawn from among U.S. publicly traded companies in the high-tech industries that are expected to drive some of these disruptive innovations within the S&P 1500.
The Importance of Board Skill and Power
In particular, the researchers noted there being two important board characteristics that can help reign in the power of overconfident CEOs: expertise and power. Experience on the board is key, especially around innovation breakthroughs. Board members often find that this experience helps them to understand the risks and potential rewards of new projects, and can collectively ensure the right decisions are being madeени.fromFunction;
Board power, looking at how independent the board is from control by CEO. A strong board, one where the CEO does not also serve as chair, where members have been around longer than the CEO or where a significant share of their compensation comes in company stock is more likely to question a leader’s hubris and make sure all relevant information has been examined prior to major decisions.
Unleashing Innovation to the Fullest
Next, I examined when CEO overconfidence was most effective in driving breakthrough innovations — concluding that the relationship between CEO-overconfidence and breakthrough innovations is strongest in firms with high board expertise and power, leading to a 113% increase in breakthrough innovations relative to the sample mean. One interpretation of these results is that a match made in heaven consists of overconfident CEOs who are kept in check by experienced and powerful boards.
“The strong board is needed to either ratchet back some of these changes or counter act some overconfidence,” says the study’s lead author. “Although it is inherent in both worlds of stopping that CEO from being innovative — and I’m always glad when a CEO really is aggressive about innovation — it’s just that we need to guide those decisions very subtly as to where the right projects really are, but make resource allocation decisions and also allow them when new data comes from later stages of project development,” he said.
