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CEO Leadership Impact on Firm Performance

Abstract

Over the years, corporate governance has played a fundamental role in managing companies’ activities and instilling adequate organisational culture that are appropriate for the success of any institution, for-profit or not-for-profit. In this regard, organisational leadership is among the variables that determine the nature of the culture in a company and as such, the performance of such entities. The dissertation, therefore, examines the possible impact of CEO leadership on the performance and value of an organisation. The study analyses the correlation between the CEO of City Rooms Limited model of leadership and the performance of the company while considering employees and line managerial opinions.

The issues surrounding City Rooms Company (hereafter referred to as City Rooms) are fascinating (1) given the nature of business activities in the company that often result in organisational conflicts and external environmental concerns and (2) because such concerns may cause possible misunderstanding between company employees and its clients. The dissertation while analyzing the influence of CEOs to the success of organisations reviews various works of literature with different opinions and analysis of evidence and confirms that indeed the CEOs are among the world influential people when it comes to corporate leadership. As such, the paper employs a series of studies have been geared towards determining the existing relationship between the leadership of CEOs and the performance of the companies that they run. The study makes use of qualitative methodology. The methodology employs the use of questionnaires (sent to employees) and semi-structured interviews (carried out on line managers) for adequate analysis of the variables and their correlation to give practical outcomes.

Key Words: CEO, Performance, Organisation, Company, Organisational, Research

Introduction

I.1 Background of the Research

Company CEOs have significant influence on the performance of their entities based on their decisional roles, which have essential implications on effectiveness and operational efficiencies of the organisations. The CEOs play a fundamental role in their quest to achieve the set mission and vision of their companies to achieve sustainable growth and competitive advantage (Araujo-Cabrera et al. 2016). Such roles and responsibilities include but not limited to communicating organisational vision, setting strategic directions as well as upholding positive and adequate relations among all the stakeholders of their entities (Resick et al. 2009). As such, the capabilities and personalities of such leaders determine the extent of influence they impose on employees and the strategies they use to manage business activities to achieve positive performance (Weingarden at al. 2009). The past years have shown an emergence of a series of corporate dynamics including technological advancements, competition, and globalisation. The dynamics have led to complex system of engagements and as such, facilitation the need of a well-vast management systems in companies to achieve their objectives (Kim et al. 2013).

The debate about how CEOs affect organisational performance dates back to many years depending on applicable theories. While others argue that executives have influenced their enterprises’ performance, others believe that the CEOs have been constrained by systems dependence, limited resources, organisational ethics and cultural pressure. However, many researchers have within their studies linked executive compensation to organisational performance and as such, emphasised the importance of CEOs. Based on the views of Yang, Dolar and Mo (2014), the performance of an entity and the compensation of CEO have a positive correlation, and intrinsically, the executives are among the individuals who influence performance. For example, Figure 1 indicates the relationship between firm performance and CEO compensation in the previous years of the company’s operations with the increase of one variable showing a corresponding positive rise of the other.

Figure 1. Chief Executive Officer Compensation vs. Company Performance

Source: Journal of Accounting and Finance vol. 14(1) 2014

Scholarly attention to the role of CEO on organisational performance remains robust, and a number of different research works have studies and confirmed the relationship between CEO leadership and performance of businesses entities (see Wang et al. 2011; Tosi et al. 2004; Carmeli et al. 2011; Waldman et al. 2001; Elenkov 2002). Nevertheless, such scholars and many others have primary focused on lower leadership ranks rather than behavioural make-up of company CEOs and how it influence performance. The make-ups characterize CEOs’ personalities and capabilities, which are essential elements of adequate decision-making abilities and leadership roles. The attributes are in line with stewardship theory. The theory outlies that executive officers should be ready to serve and be responsible for all company stakeholders and as such, acts in the best interest of workers, suppliers, shareholders and lenders among others (Gini and Green 2013). While some CEOs embrace the notion that they may not control some organisational events, there is a need to offer leadership and influence followers to foster collaboration and capabilities that would take control of such circumstances (Banja 2015). Other CEOs may have such control but still be affected by Hubris and corporate social irresponsibility as they consider success their personal capabilities (Dagnino et al. 2010).

Past research studies have confirmed different results about the relationship between CEO leadership and performance of companies that were under consideration (Suarez-Acosta et al. 2016). In this regard, Duru et al. (2001), Murphy (1986), Bebchuk et al. (2005), Gibbons et al. (1992), Yang et al. (2014), Xian et al. (2011) as well Leonard (1990) among other researchers and studies investigated the perceived impact of financial incentives on the performance of different managers and CEOs and found out that variables that influence the performance organisational executives include among others, company dimensions, CEOs’ ability to curtail bias, duality of the executives, personal attributes, skills as well as abilities (Banja 2015; Davis et al. 2007; Dagnino et al. 2010; Zhu et al. 2016; Chun-Sheng 2009). Besides, other studies such as Favaro et al. (2011) and Zhang (2008) look into cases of CEO turnover as a fundamental issue that also affects company performance.

1.2 Research Aims and Objectives

The company carries out its activities in the London flat-sharing market. According to the statistics released by PricewaterhouseCoopers in 2003, the growth of the organisation’s private renters has doubled and by 2025, such growth is expected to be 7.2 million. However, prices, as well as the demand for the company’s rooms, are expected to fall. The fall is attributed to effects of Brexit expected to hinder the levels of immigration. Additionally, environmental variables will also affect the progress of the company given the competitive nature of the market and uncertainty. As such, the objective of the study is uncover how the leadership of the company can overcome the challenges by fostering high performance.

1.2.1 Research Aims and Question

The study analyses the impact of the leadership of City Rooms’ CEO on the performance of the company based on the views of employees and managers (frontline employees and first line managers). The Research question will be, “what is the level of CEO influence on firm performance and how is this perceived in City Rooms by employees?”

2. Literature Review

This section outlines the current state of literature as regards to CEO leadership correlation with the performance of the organisation (City Rooms). The components of the discussion include leadership styles, leadership and CEO, performance measurement model, top managerial teams, agency theory, appraisal systems, and the CEO leadership impact of the firm performance.

2.1 Leadership and CEO

There are a number of leadership styles that leaders apply to manager firms and as such, the concept of leadership is key to managerial practice. According to Kruse (2013) leadership is not about executive positions or titles. On the other hand, Winston and Patterson (2006) believe a leader refers to an individual (s) with followers. The influence of a leader links him/her to the followers and upholds the capabilities of translating organisational goals, visions, and thoughts to them. Influence, in this case, is more of an implication than power and as a result, a leader’s charisma is what attracts followers (Porter and Nohria 2010). Most importantly, CEOs become accorded the essence of leadership when exercising power and uphold the face of organisations (Fetscherin 2015).

2.2 Board of Directors and the CEO Characteristics

The era of industrial revolution showed the emergence of corporate leadership and firms. Their respective founders hence owned different companies then the existence of ownership and control in the leadership hierarchy. After many years, the sizes of the companies increased, it was difficult for only the owners to lead the firms, and as a result, managers were appointed to take the role of leadership. The circumstance made it possible for many individuals to invest in the companies as shareholders who relied on managers to carry out their managerial role based on their interests. The agency problem emerged when managers engaged in other activities that did not benefit the shareholders hence the importance of the board of directors came into play. Therefore, the board of directors of a company plays a critical role in containing the excesses of the CEO and management to ensure organisational activities are in line with set objectives. As such, effective engagement of the board improves CEO leadership, which in turn positively influences organisational performance.

The CEO characteristics are significant in fostering the performance of an organisation as they determine the nature and style of leadership that an individual would apply while leading organisational teams and groups. Selecting a CEO is as such, a vital company decision, which characterise essential implications for firm performance. To ensure a company succeeds in its goals and objectives, it is critical to find a good fit between the CEO’s characteristics and needed personalities and attributes for the position. CEOs with technical, functional backgrounds and higher education make it possible to have intensive research necessary for a company. CEO’s with adequate backgrounds have a good understanding how business works and would prefer taking risks that yield higher returns. Another characteristic that a CEO should have to foster performance is confidence. While overconfidence may have a negative impact on the performance of a firm, optimism is necessary to achieve the organisational mission.

2.3 Leadership Styles

According to Morgeson, DeRue, and Karam (2010), teams play a fundamental role in organisational performance. Martin and Bal (2006) also share the same sentiments. The role of organisational teams is in line with functional leadership theory. The theory looks into teams’ importance and the essential role of team leaders, individuals who foster the satisfaction of the needs of their teams (McGrath 1962; Hackman and Walton 1986; Schutz 1961). Leadership roles in teams may be at different levels, and the same team may have various leaders at different times with the common role of ensuring team effectiveness (McGrath 1962). Besides, ensuring team effectiveness, leaders also perform a series of roles such as team composition, establishing team goals and mission, setting goals, training, planning, monitoring, solving conflicts, communicating and providing feedback among others (Morgeson, DeRue, and Karam; 2010).

Nevertheless, based on the arguments of Fairhurst and Grant (2010) as well as the social constructionist leadership approach, leadership characteristics are good determinants of organisational performance, but the followers are as well of important. In this regard, leadership is a result of interactions of members of groups that is molded via events manipulation (Meindl 1998). Notably, the method is based on theatrics that gives meaning to organisational communications (Raisanen and Linde 2004).

As aforementioned, transformational leaders strive to elevate their employees by putting their interests first (Bass 1985). They inspire their employees, intellectually motivate them to take tasks in their capacities, and as such, foster ability to solve rationally organisational problems (Bass 1985). As such, organisations that foster such a style of leadership breed focused employees and get higher returns on invested capital. On the other hand, social-emotional leaders are those who concentrate on marinating strong relationships built on trust and confidence. In contrast to transformational leaders, social-emotional leaders often prefer to work with fewer hierarchies, as a result, reduce workers’ stress, and increase organisational outcomes (Bass 1985; Misumi and Peterson 1985).

Another leadership theory applicable to this case and plays a role in determining a firm’s performance based on CEO’s nature of the application is the Leader-Member Exchange Theory (LMX). The theory emphasises the relationship between a leader and his/her subordinates rather than a group. The subordinates may be in-group or out-group. While in-group subordinates take part in the decision-making process, members of out-group subordinates have limits of assistance and participation (Lunenburg 2010). An organisation should not separate the two groups since such decisions may lead to conflicts and hence low performance (McClane 1991; Yukl 2010).

2.4 Top Managerial Team

CEOs are among the most influential individuals in business organisations given the nature of decisions that they make and the fact that they determine the strategic future of a company. Nevertheless, top managerial teams also have essential roles in helping the CEO in its leadership function (Dehaene et al. 2001). According to Auden et al. (2006); Carpenter (2002); Hambrick et al. (1996), tenure, functional diversity and age of leaders can influence the composition of the top management team. Many of the past studies have outlined the existing relationship between senior management teams and performance (Murphy and McIntyre 2007). Scholars, for many years, have established a proper relationship between the two variables and the extent of CEO leadership in influencing performance (Bhagat and Black 1999; Nicholson and Kiel 2007; Johnson et al. 1996; Zahra and Pearce 1989). While studies by Bhagat and Black (2000) showed a positive correlation, that of Eisenberg et al. (1998) had negative results and Adjaoud et al. (2007) yielding insignificant correlation.

The study by Shaw (1981) outlines the importance of organisations teams and argues that they should be balanced, well-structured and have effective communication systems. The CEO should ensure there are trust and commitment among team members to improve performance (Edmondson et al. 2003). On the other hand, other studies show age is a critical factor that managers need to take consideration in team composition (see Upper Echelons Theory) (Hambrick and Mason 1984). Accordingly, age is an experience (Hermann and Datta 2005), and as a result, there is a contrasting correlation between age diversity of the top management team and the performance of an organisation (Kilduff et al. 2000; Nielsen and Nielsen 2013; Ozer 2010). As a caution, some scholars take average age as a moderating variable (Tanikawa et al. 2017) while others pick on a company’s levels of internalisation as the factor that affects the top management team and performance (Carpenter 2002). Additionally, few scholars such as Pelled et al. (1999) believe that team longevity (the intended time top management team to take working together) is the moderating factor. Nevertheless, increased performance in an organisation is as a result of adequate time team members spend working together (Barrick et al. 2007; Michel and Hambrick 1992; Carpenter et al. 2004; Cohen and Bailey 1997).

2.5 The Performance Measurement Models of a Firm

The argument is that company CEO influences the decisions in an organisation which has further effect on the value of a firm. Notably, the value of a firm depends on the applied performance measurement models. According to Neely et al. (1995), performance measurement is a critical component of corporate governance as it allows for the quantification of efficiency and effectiveness of actions taken as a result of decision-making processes. Besides, it provides a firm’s feedback though defining its objectives, tracking outcomes and identifying pertinent issues of concern as well as enforcing plans, supervising plans and developing and compensating managers (Waggoner et al. 1999). The approach allows the managers to know the direction of their organisation (Teeratansirikool et al. 2013).

The stated performance measurements include monetary, organisational and operational based systems (Hult et al. 2008; Li 2007). The financial indicators show the outcome or performance of a company based on the financial and market-based index and considers profitability ratios and shareholders’ wealth. Operational indicators measure the leverage of a company and may typify financial results (Venkatraman and Ramanujam 1986). They take into consideration product quality, market share, organisational productivity, efficiency and employee satisfaction (Hult et al. 2008; Li 2007). Lastly, organisational measurements include adequate competition, company image and accomplishments (Hult et al. 2008; Li 2007). Despite the existence of such indicators, many scholars prefer to use the financial index for measurement of a firm’s performance. Many managers also prefer to use financial indicators despite its inappropriateness in many circumstances (Richter et al. 2017). Nevertheless, Return on Assets (ROA), an accounting index measuring the profitability of a firm based on its total assets is among the most utilised performance measurement model (Kim et al. 2013).

When comparing the performance of similar units within or without an organisation, it is advisable to use benchmarking approach. The problem is that the approach only applies when measuring past performances (Parker 2000). In a nutshell, one needs to consider what needs to be measured to apply an appropriate measurement tool and such tools need to undergo constant reviews to be in line with the strategic objective of an organisation.

2.6 Agency Theory vis-à-vis Organisational Theory

In their operations and daily activities as managers and company CEOs, they may act in their interest, become risk-averse and realise goals that do not correspond to shareholders’ wealth maximisation. When the CEO engages in projects beneficial to him/her without keeping in mind shareholders’ results, the board of directors may act to prevent such phenomenon. The board’s duty would be to ensure effective monitoring of the company CEO in a manner that he/she acts in the interest of the company. Such concerns relate to agency theory, a relationship where a principal delegates some work and authority to an agent (Eisenhardt 1989). The relationship may be based on a contract with defined rules that both the agent and the principal need to comply with (Jensen and Meckling 1976). Conflicts, in this case, may arise when the parties have different interests as outlined and have a different attitude towards risks (Eisenhardt 1989). The primary objective of the theory is to ensure a good contract that would guide the relationship between the principal and his/her agent. The policy may be based on stock option, salaries, commission or hierarchical positions depending on the nature of the agreement.

Different scholars often analyse agency theory based on the perspective of Positivist as well as Principal-Agent Research (Jensen 1983). Positivist theorists appreciate the relationship between principal and agents as that of owners and managers hence the application of corporate governance to solve possible agency problems (Berle and Means 1932). On the other hand, Principal-Agent research focuses on the relationship between lawyer-client and employer-employee among others (Harris and Raviv 1978). In this regard, the principal takes into consideration behaviours of an agent to enforce control (Eisenhardt 1989).

Agency theory guides the relationship between company CEO and board of directors through the principle of autonomy that makes the parties independent in their operations (Fama and Jensen 1983; Eisenhardt 1989). Notably, agency problems characterise two types of hazards including adverse selection and moral hazard. While moral hazard entails inadequate efforts by an agent, adverse selection refers to a situation where an agent has abilities and skills that the principal cannot verify (Eisenhardt 1989; (Lambert 1983).

Organisation theory, on the other hand, is about the right culture that would set individuals towards achieving right goals and financial dividends (Andersen 2015). For private organisations, the application of organisational theory is to achieve set organisation, and the owner of the company establishes the goals and hires the right people to accomplish such goals. While organisational theory entails how executives act on behalf of business owners, agency theory is about the principal-agent relationship (Andersen 2015).

2.7 The Relationship between CEO Leadership And Company Performances

Corporate governance reinforces the correlation between CEO leadership and company performance. As such, Tosi et al. (2004) and Waldman et al. (2001 2004) believe that a firm’s certainties and uncertainties have a greater impact on the leadership style of company CEO and as such, affect the performance of the organisation. Adequate leadership solves such issues like uncertainties in organisations (Kim et al. 2013). As regards to CEO leadership and their role in the performance of organisations, Lubatkin et al. (2006) outline that those in private and small companies have a more significant impact than those in large entities. Besides, founder CEOs also have a more considerable positive influence on a firm’s performance than other CEOs (Ling et al. 2008).

In situations of high levels of uncertainties in an organisation, Milliken (1987), Bass and Stogdill (1990), Agle et al. (2006) and Shamir and Howell (1999) appreciates the need for CEOs to provide leadership to employees to influence performance. However, some challenges may seem to persist especially where the CEO is the founder of the company and runs it as a family business (Chrisman et al. 1998; Bennedsen et al. 2007). In this regard, there may be adverse outcomes in the firm’s performance due to the subjective nature of leadership and the desire by the CEO to retain family control (Astrachan, Allen, and Spinelli 2002) and play a role in determining the successor of the business when he/she retires (Ibrahim et al. 2001). Consequently, the successor may bring in different leadership styles based on his/her competence or incompetence (Chrisman et al. 1998; Ahrens et al. 2015). In this case, there would be a transfer of power to the new CEO in the form of ownership (Nordqvist et al. 2014).

2.8 The Impact of CEO Leadership on Employee Engagement

The nature and style of leadership of company CEO have an impact on the level of engagement of employees. Employees are among the most vital resources of a company, and they determine the extent of the realisation of set goals and objective (Heathfield 2016). The ability of a CEO to influence his/her employees to carry out particular activities shapes their engagement, which includes levels of motivation, satisfaction, and effectiveness (Papalexandris and Galanaki 2009). The concept of CEO leadership and employee engagement applies to all types of organisations.

Evidently, there are no adequate studies that link employees’ engagement and the performance of a firm (Rich et al. 2010). Nevertheless, according to Barrick et al. (2015), the framework of collective organisational engagement creates value for the company and as such improves performance. Such value is created due to increased interactions among employees that in turn lead to sharing of ideas ((Bakker and Schaufeli 2000) and increasing the levels of individual performance (Stewart, Courtright, and Barrick 2012). Promoting collective engagement rather than individual engagement should thus be an essential part of CEO leadership consideration.

CEO leadership should also consider taking the views of his/her employees to understand existing operational concerns and as such, improve performance (Sanchez 2007). According to Mabey et al. (1998), such a decision helps in avoiding the concept of managerialism that may not be embraced by many employees. Besides, taking the point of view of employees help in enhancing customer retention or loyalty (Smilansky 1997). Gibbs (2001) appreciates such actions given the importance of employees as end-users, context setters, and partners. As partners, they play a consultancy role and decision-making; as end-users, they utilise organisational services, and as context setters, they play a role in determining the operations of an organisation and its efficiency.

2.9 Systems of Appraisal for Manager Promotions in Small Entities

SMEs play an essential role in running the economies of many countries around the world and employ many individuals. Large corporations employ Human Resource Management systems such as appraisal policies to hire and maintain right employees to ensure the higher performance of the organisations (Koch and McGrath 1996). Nevertheless, some of the Human Resource Management practices may as well be applied in SMEs to improve performance (Cassell et al. 2002; Cook and Nixson 2000; De Kok et al. 2001).

3. Research Methods

The chapter outlines research philosophy about other views expressed in different past studies. Besides, it expounds on research approaches that entail methodologies used in conducting the interviews and collecting questionnaires to be employed in City Rooms. Techniques of data collection, data analysis, validity, reliability, transferability, and conformability of data, source criticism and research ethics are also explored in this section. The research instruments are employed adequately in pursuit of the objectives of the study. Essentially, research methodology is an essential component of any research, and according to Sapsford and Jupp (2006), it informs the style of research. The methodology entails a summary of techniques developed to carry out a study (Collis and Hussey 2003; Creswell 2009). Besides, it outlines the view of reality in research work (Saunders et al. 2009; Yin 2009).

3.1 Research Philosophy

Research philosophy entails the beliefs and personality of a researcher that inform the nature and type of methodological design that the study adopts. A researcher can employ various research paradigms which can aid in understanding beliefs, perceptions, and nature of truth about the assumptions made. The research paradigms include the application of positivist and interpretivist philosophies that help in making suppositions on “how to research,” “why research,” and “what to research.” Nevertheless, according to Gellner and Hirsch (2001), the optimal philosophical design to use in this nature of a study would be ethnography, which emphasises on the researcher’s role as an active individual. In this case, the researcher will join the City Rooms, engage with its employees and make observations within adequate time to get all necessary information needed.

The challenge of the philosophy is the difficulty steps involved in having content/context access relevant to the study. Nevertheless, the researcher in the study has worked at the company and he is a member of City Rooms hence no need to seek particular permits while accessing the company’s materials and premises. The researcher assumes the role of participant-as-observer since he is known thus similar to the study by Holliday (1995) acting as an active work-role participant.

3.2 Research Approaches

The study assumes the application of a pragmatic paradigm as the research approach (Creswell 2007). The approach employs different methodologies to admit divergent arguments and aids in giving answers to questions such as why, what, and how the study was conducted and the results obtained (Saunders et al. 2009). Given that the approach is among the most renowned paradigms in scholarly studies, it will be necessary for the study as it does not harden inquiry and knowledge and binds the researcher.

In this regard, the study applies inductive reasoning method. Based on analysis of Ketokivi and Mantere (2010), the approach should be supported by observations of the past. Saunders et al. (2009) add that the method is practical when analysing a small sample of qualitative data. In this regard, the objective is to understand the nature of the problem, collect data, analyse and formulate a theory (Easterby-Smith et al. 2008). Given the use of inductive approach, the organisational context is the point of concern.

Figure 2: Inductive research technique.

Referenced: Saunders et al. (2009)

Allwood (2012) argues that any research methodology selection should be carried out with utmost care based on the context of the study to be carried out. In this study, the objective was to outline the relationship between CEO leadership and company performance, a case study of City Rooms. As such, the data is obtained from subjective sources such as managers and employees hence the choice of qualitative approach.

3.3 Sample Selection and Data Collection

In this study, descriptive techniques that include questionnaires and interviews were adopted. The questionnaires were distributed to different City Rooms’ respondents (line managers and employees) to get information about their views on CEO leadership vis-à-vis the performance of the organisation. The use of questionnaires in management or business studies is common given a large amount of data is allows with adequate response time (Saunders et al. 2009). While questionnaires enable the researcher to make a comparison of different responses, there is a need to ensure the accuracy of data to prevent flawed results (Bell 2010; Oppenheim 2000). To confirm the validity of the questions ten pilot tests should be carried out (Fink 2009). The use of questionnaires and interviews aided in collecting primary data. On the other hand, secondary data used in this paper were obtained from the review of past studies. Both data will be used for the analysis section.

Despite the existence of different types of questionnaires, the study uses web-based ones, composed of rating questions and open questions (Saunders et al. 2009). The questions are designed and sent to the intended respondents online. The respondents make up the sample size working for City Rooms for a while and have discrete and adequate knowledge about City Rooms’ context, processes, and CEO leadership. As a result, non-random sampling method was used to identify employees who have worked for City Rooms for over one year