CEO overconfidence is not always a bad thing for companies but depends on the situation, finds research from Mannheim Business School.
According to the study, an overconfident CEO can either help or hinder a firm’s turnaround performance depending on whether they are the incumbent who steered the organisation into dire straits or a successor hired during the decline.
Marc Kowalzick (formerly Mannheim Business School, now Rotterdam School of Management), Jan-Philipp Ahrens (Mannheim Business School), Jochim G. Lauterbach (Technical University of Munich), and Yi Tang (Hong Kong University), analysed data on firms’ turnaround performances and CEO overconfidence at 240 companies in the S&P 1500 index during the fiscal years 1992-2016.
They find that CEOs with an inflated view of their own capabilities may help turnaround performance by formulating bold visions for organisational recovery that reassure stakeholders and invigorate employees in situations that reward vigorous decision-making.
However, overconfident CEOs may also hurt turnaround performance by ignoring opposition to their current strategic orientation or by attempting to ride out organisational decline. The biggest differentiating factor is whether they are a new addition to the firm or responsible for overseeing the start of the decline, the study reveals.
This contradicts prior research by suggesting that the same attribute can play out differently between incumbent and successor CEOs, as CEO turnover seems to shape how certain behaviours and attitudes translate into organisational outcomes, according to the authors.
“Turning a firm around is an arcane managerial art, sometimes even considered ‘black magic,’ because even small deviations from the path to restore organisational health can lead to certain failure,” says Ahrens.
This study was published in the academic Journal of Management Studies.