Background Information
The underlying factor that distinguishes successful from unsuccessful organizations is their
performance. Often, the success story of any business establishment is pegged on a number of
parameters including profitability, size of the business, number of employees, geographical
coverage and even stock performance for the listed companies. With the success or failure of a
business being dependent on different factors, I always wondered whether the individual
characteristics of the organizational leader, the CEO in particular, could be responsible for its
performance. Often, organizations select their CEOs on the basis of their academic qualifications
and prior work experience. However, personal attributes and qualities are seldom put in
consideration in settling for the successful candidate, an issue that leaves me wondering whether
some successful organizations could perform better if they were led by persons of sound
character. This though sparked my interest in the subject, and I found it important to focus my
attention on this area of research.
There are many metrics against which the performance of an organization can be
measured. These may be long term market performance measures or other non-market based
measures including cash flow growth, sales growth, dividend growth, earnings per share (EPS),
economic value added (EVA), and market value added (MVA) (Abdullah, 2014 p. 33; Coles,
McWilliams, and Sen, 2001 p.44). However, I believe that social and cultural issues must be put
into consideration too. Organizations thrive within communities and therefore their values and
practices must be in line with societal values. This means that issues like ethics, community
social responsibility and sustainability are critical measures against which the performance of an
organization should be measured. Besides, organizational culture is a fundamental issue that
affects productivity and ultimately, the overall performance of a firm. The qualities of the CEO
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are critical in determining the social and cultural basis of the organization. This study will
uncover whether the individual qualities of a CEO can successfully promote the cultural or social
elements in an organization that would further enhance stock performance.
Motivation and Justification
The need for organizations to make the right hiring decisions when choosing an individual to
hold the position of CEO is the major motivation behind this research project. This is due to the
fact that over time, large and profitable businesses have been run down to the ground by
wayward leadership for gross misconduct, and sometimes involuntary mismanagement of the
organization. To be safe from this, there is an increasing need to learn of the need to vet
individuals before they can be engaged into the company for this top-most position of running
the organization. Developing an understanding of individual qualities of Chief Executive
Officers and their general effectiveness significantly enhances the chances of predicting a
successful assessment process for the right executive candidate. With the key roles of the CEO
being championing the strategy of the organization they head, evangelizing the company’s vision
to ensure its success and bringing together all teams to ensure that they authentically live and
own the organization, the Chief Executive Officer are also charged with maximizing market
capitalization as well as shareholder value. This means that an able and competent candidate
with the appropriate qualities must be selected for the job of CEO.
Evidently, research proves that 35-50 percent of all company executives get replaced
within the initial five years of their appointment. To say the least, this is an extremely costly
affair for any organization, because the loss is always accompanied by other losses such as
direction, identity, and often financial related losses, sometimes caused by loss in stock value.
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This is according to Clayton, Hartzell and Rosenberg (2005, p. 1780) who further affirm that
CEO changes have the ability to alter the direction of the firm as well as its performance.
Basically, CEO turnover results in volatility in the equity-return of an organization. Based on
this, it is critical for stakeholders to be aware of the qualities of a potential CEO because this is
likely to affect the performance of the organization.
Aims of the Research
The main purpose of the study is to determine the existence of a relationship between the
qualities of a CEO and the performance of the stocks of the organization. The researcher will
critically assess the individual traits and qualities of the CEOs under study to establish whether
those leading successful organizations possess better and stronger qualities compared to those
leading less successful organizations. Based on the results of the research, future employers and
other critical stakeholders will be in a position to be aware of the qualities of a potential CEO
because this is likely to affect the performance of the organization. The results will be critical in
helping them to understand whether the qualities of the CEOs they choose for their firms will be
instrumental in the success of their organization, particularly the stock performance.
To successfully establish this, the researcher shall be guided by the following research questions;
1. What are the key roles of the CEO in an organization?
2. What are the personal, leadership, and professional qualities of CEOs in the most
outstanding organizations?
3. What are the personal, leadership, and professional qualities of CEOs in the less
outstanding and the less successful organizations?
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4. Is there an existing relationship between the qualities of the CEO and the stock
performance of their individual companies?
Literature Review
Unlike any other, the job of a Chief Executive is like no other. Considered as infinite due to their
responsibility for every decision and action made in the organization, there has been intense
interest into how executives perform their jobs. With investigators focusing on issues such as
activities, behaviors and attitudes as being significant elements determining the performance of
Chief Executive Officers rather than academic proficiency, the subject has continued to elicit
much interest among scholars.
An earlier study conducted by Pillai and Meindl (1991) to look into the perceptions of the
effectiveness of executives in relation to external organizational factors found that the CEO was
viewed most charismatic when the organization went through a crisis turnaround, in spite of the
same description of personality under study. In support of this line of thought, two significant
research studies conducted in the 1970s but centered on executive succession (Salancik and
Pfeffer, 1977) established that the qualities of leaders do not in any way influence the
performance of an organization. According to the findings of the researchers, the top leadership
in any firm only accounts for a meager 10 percent of the organization’s performance.
Consequently, a large number of researchers came to the conclusion that differences in
leadership which are characterized by varying qualities are inconsequential to the performance of
a company. Being a relatively ancient research, it set a basis against which later studies were
conducted.
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Subsequent research has however painted a different picture, with scholars proving that
the earlier findings had been influenced by criterion contamination. With the earlier findings
refuted, more recent research work has continually pointed to the fact that the impact of
leadership on the performance of an organization may be greater than originally postulated
(Thomas, 1988, p.34). As one of the original opponents, Thomas (1988, p.45) conducted an
evaluation on earlier findings by Lierson and O’Connor (1972) and discovered that ridding the
various differences in the criterion of organizational performance such as industry and size of the
organization showed that a bigger relationship existed between organizational performance and
the leadership quality. Another such study was conducted by Olsen, Sisodiya and Swisher (2014,
p. 800), with the aim of establishing whether there existed a relationship between the
performance of a company’s stock and the characteristics of its Chief Executive Officer.
Approaching the topic in a more different manner, the dependent variable applied for this study
was the alphas concept. Developed by the Fama-French three-factor model, the alpha was found
to have a significant positive relationship to the specific CEO qualities under evaluation. The
Fama and French model is applied in the pricing of an asset, developing onto the CAPM (capital
asset pricing model) by adding value and size risks. According to this model, the value and
small-cap stocks regularly outperform markets. By adding the two factors, the Fama-French
model adapts to this tendency to outperform, a factor that makes it a better evaluation tool for
manager performance (Blanco, 2012, p. 60). This study was crucial for the present project
because it proved that there was a significant relationship between the CEO qualities and the
performance of the firms they headed.
Contrary to the belief that effective performance is largely attributed to outside factors,
Peterson et al (2003) demonstrated the existence of a relationship between the personality traits
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of a leader and the performance of an organization. The group of researchers used empirical
evidence to show the CEOs’ personality impact on performance through the intervention of
group dynamics of top company executives. In particular, variations in their personalities were
significantly associated with the group dynamics of the team, which in turn was interrelated to
the performance of the organization. In 1998, a review of Fortune 500 companies by Conger,
Finegold and Lawler to gauge the relationship of the two variables found out that the
organizations which failed to take individual traits and qualities into consideration of their
potential CEOs during the recruitment process soon ran into problems. According to the findings
of the review, such companies eventually “bled red ink” resulting from poor financial,
operational, as well as strategic decisions made during their tenure. This study was crucial for the
present project because it proved that there was a significant relationship between the CEO
qualities and the performance of the firms they headed.
Fahlenbrach (2004) introduced a twist to the entire argument by differentiating between
founder-CEOs and successor-CEOs. According to the findings of the report, there exist extensive
disparities in the managerial qualities between the two groups, with founder CEOs deemed to be
more engaged and focused on the business than their successor counterparts. The reason behind
this was cited as being that they have created their organizations since commencement, and
therefore the impact of differences in managerial qualities on behavior and performance are
expected to be stronger in firms led by founder CEOs. For the analysis, the investigator used a
sample of 2327 big and publicly listed American companies from which he identified 361
organizations which were under the leadership of founder-CEOs, either the original or co-
founder. The analysis was based on multiple parameters being investment decisions, valuation of
the firm, accounting performance, and stock market returns. Since the study is focusing on the
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relationship between CEO qualities and stock performance, these organizations were found to
have excess stock market performance, unexpected abnormal accounting performance, an
implicit target premium, and a corporate governance premium. The strong indicators of success
were attributed to the behavior and qualities of founder-CEOs who were found to differ from
successor-CEOs. Based on their interest in the company, a founder CEO’s intrinsic motivation
will push them to pursue optimal shareholder-value maximizing strategies as opposed to
focusing on short-term goals of living the quiet life often characteristic of successor CEOs.
Founder CEOs are also likely to possess more organization-specific skills and the added
likelihood of having more decision making power. Of all these, the difference in attitude towards
taking risk is the ground breaker that helps founder-CEOs in making sound investment decisions.
This study was critical in differentiating the types of CEOs in existence, rather than putting them
under a blanket title of CEO.
Inspired by an earlier qualitative study conducted by Piotrowski and Armstrong (1989) to
help understand the common traits for success in the position of CEO, Amanda (2005) designed
a study to develop further understanding of attributes necessary for this infinite position of
leadership through well-defined subjective criterion. The previous research had been plagued by
methodological difficulties though the more recent one used its hypothesized traits to conduct its
research. These included persuasion, competition, abstract and theoretical. With Amanda’s
(2005) study, the focus was also on the unique nature of the CEO profile which was found to
comprise the qualities of ambition, persuasion, and independence in larger volume compared to
the average leader or manager. Evidently, the successful CEO with the above traits will create a
successful organization whose stock market performance will be above par. This study was
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crucial for the present project because it proved that there was a significant relationship between
the CEO qualities and the performance of the firms they headed.
Research Design and Methodology
This segment discusses the specific techniques and procedures used in identifying, selecting,
processing, and analyzing information regarding the topic at hand. The method of collecting and
analyzing the data wholly depends on the type of research the investigator chooses to conduct.
For instance empirical studies base their research on the actual and objective experimentation
and observations. Analytical research, on the other hand, makes use of existing or already
available information and facts. They then go ahead to make a critical assessment of the material
to test the hypothesis, specify and interpret relationships between the parameters being analyzed
to make recommendations and conclusions.
Based on the amount of research conducted on this topic as well as the nature of potential
participants, the chosen methodology for this project is the analytical research methodology.
Besides, information regarding the leadership and stock performance of the large organizations
that are listed in the stock market is also publicly available. On this basis, the information needed
to prove the hypothesis and draw conclusions will be sufficiently provided by already existing
media including newspapers, journals, organizational profiles, company documents, publicly
published financial statements, interviews, and write ups. Content analysis will be more
appropriate compared to surveys, interviews, and questionnaires being administered to the CEOs
of interest.
Ethical Considerations
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Based on the guidelines of the University of Tasmania, the present study is classified as human
research because it involves human beings through access to their information (in individually
identifiable, re-identifiable or non-identifiable form) as an existing published or unpublished
source or database. As the researcher, I will be required to seek the approval of the UTAS Ethics
Committee by first submitting an application for ethical approval in accordance with the
procedures and guidelines of the committee.
Once the HREC has considered the application, they will then notify me of their response
through email. The decision may be a definite approval, a definite decline, or an approval
awaiting my response to their comments. Basically, the latter requires the application to be taken
presented back to the executive officer, the chair, or the committee for their further indulgence
before they can make their final definite decision (Utas.edu).
Expectation on Findings
Based on prior studies and investigative research, it has been established that there exists a very
strong relationship between stock performance and CEO qualities. Good and strong professional,
leadership, personal, and business-related qualities ensure that the Chief Executive Officer puts
the right people in the rightful jobs, motivates them to work towards the goals and objectives of
the organization, and puts the right strategies in place. With this, the organization improves its
performance in terms of profitability and productivity, thereby gaining favor in the public eye.
As a result, the stock performance of the organization improves drastically, all thanks to the
qualities of its CEO.
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Reference List
Amanda LJ, 2005, Identifying the Traits that Differentiate Chief Executive Officer Performance
Levels, Graduate College of Bowling Green
Bandiera O, Hansen S, Prat A and Sadun R, 2017, CEO Behavior and Firm Performance,
Working Paper 17-083, Harvard Business School
Blanco B, 2012, The use of CAPM and Fama and French Three Factor Model: Portfolios
Selection. Public and Municipal Finance, vol 2, no 2; pp. 60-70
Coles JW, McWilliams VB and Sen N, 2001, An Examination of the Relationship of
Governance Mechanisms to Performance, Journal Of Management, vol 27, no 1; pp. 23-
50
Conger J, Finegold D and Lawler EE, 1998, CEO Appraisals: Holding corporate leadership
accountale. Organizational Dynamics, vol. 27 no. 1, pp. 7-20
Farkas Cm and Wetlaufer S, 1996, The Way Chief Executive Officers Lead. Available at
https://hbr.org/1996/05/the-ways-chief-executive-officers-lead [Accessed 20th September
2018]
Gonzalez FP, 2006, Inherited Control and Firm Performance, The American Economic Review,
vol.96, no. 5, pp. 1559-1588
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Olsen BC, Sisodiya SR, and Swisher J, 2014, Anote on assessing the relation between CEO
characteristicsand stock performance: Alpha above replacement. Accounting and
Finance, vol. 56, no.3; pp.787-802
Peterson RS, Smith DB and Martorana PV, 2003, The Impact of Chief Executive Officer
Personality on Top Management Dynamics: One Mechanism by which Leadership
Affects Organizational Performance. Journal of Applied Psychology, vol. 88 (5); pp. 795-
808
Piotrowski C and Armstrong TR, 1989, the CEO: An Analysis of the CNN telecast “Pinnacle,”
Psychological Reports, vol. 65 (); pp. 435-438
Steinberg RM, 2012, Truly Effective Boards. National Association of Corporate Directors. Book
Excerpt, Pennsylvania Ave, NW, Suite 500 Washington, DC
Thomas AB, 1988, Does Leadership make a difference to organizational performance?
Administrative Science Quarterly, vol. 33 (); pp. 388-400
Vasanthakumar NB, 2012, The Retail Productivity and Corporate Governance. New York, Pace
University