C-suites are filled with strong personalities that can help drive new and exciting offerings. But when it comes to breakthrough technological innovations, a new study published in Strategic Management Journal found it's essential that CEO overconfidence is balanced by a board of directors with expertise and power.
Prior studies have shown that overconfident CEOs are more likely to pursue breakthrough innovations, yet those same qualities make them less likely to consider potential threats associated with risky endeavors. Less was understood about how firms can harness the benefits of overconfident CEOs, and the research team behind the latest SMJ finding — consisting of Priscilla S. Kraft of WHU – Otto Beisheim School of Management, Teresa A. Dickler of IE University in Madrid and University of Marburg, and Michael C. Withers of Texas A&M University — looked to the influence of the organizations' boards as an essential mechanism to successful breakthrough innovation.
To examine their hypotheses, the team used a sample of U.S. publicly listed firms within the S&P 1500 that operate in high-tech industries, as previous research has shown that breakthrough innovations — defined as something that significantly alters or creates markets — are especially important in these environments. They focused on two board qualities: expertise and power. The importance of expertise is well studied in other areas such as acquisitions: Firms with boards that have experience in acquiring businesses make better decisions in this avenue. Having experience with breakthrough innovations is crucial, as it can help — for example — to ally investment concerns that board members might otherwise have.
Board power was measured in relation to how much independent sway the board has in relation to the CEO. This would be a board where the CEO is not the chair, or where board members have more tenure with the company than the CEO, or when members have a significant stake in the company. These board members are more likely to put pressure on the CEO to prove an idea is worth pursuing, and to ensure all necessary information is provided.
"The powerful board is necessary to make these adjustments or to rectify some misperceptions that may come with this overconfidence," Kraft says."It's not about stopping these CEOs from being innovative — it's good that they want to go for innovation — but rather to guide them to really make better decisions in terms of the right projects, making adjustments in terms of resource allocation decisions, and also take into account new information that comes the further you get with a project."
The researchers found 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. Both expertise and power were found to be crucial, as they also discovered that powerful boards that lack expertise may be detrimental to harnessing CEO overconfidence.
"If you want to push breakthrough innovation in your firm, then you should be careful of the people you hire for your board," Kraft says. "You should be surrounded by people that understand the topic, because they can give you good advice. But the company must also balance the power between the CEO and the board."
To read the full context of the study and its methods, access the full paper available in the Strategic Management Journal.
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