Influence of Strategic Leaders on Firm Performance

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Strategic leaders are those who take part in strategic decision-making, including all executive and non-executive directors and those people who are involved in strategic planning but are not necessarily sitting on the board. In other words, strategic leaders are all the people in a company who has overall responsibility for an organization, usually the top management team and board members (Simsek et al., 2015). They can facilitate positive impacts on business performance, and many studies indicate that the development of good strategic leaders is one of the driving forces for the success of firms. This critical writing analyses the extent to which a strategic leader influences firm performance. The paper will cover the roles of leaders in a company’s success and the reasons for the differences in their decisions by discussing some major theoretical frameworks, models, and concepts. Next, there will be an explanation of how human limits, psychological characteristics, and individual development influence leaders’ decisions and why good strategic leaders make bad choices. Finally, their power and influence, strategic leadership skills, and CEO succession planning, as well as some other issues, will be discussed.

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Firm Performance

Since the purpose of this paper is to discuss the influence of strategic leaders on firm performance, first of all, it is essential to define strategic leadership as a phenomenon. According to Taouab and Issor (2019, p. 94), “nowadays, firm performance has become a relevant concept in strategic management research and is frequently used as a dependent variable”. Even though in the academic literature, it is a rather common notion, there is no consensus about its measurement and definition. The first definition is that it is a firm’s ability to create value for its clients that influences its performance, which is also the extent to which a company could consider its means and ends (Taouab and Issor, 2019, p. 94). Harrison (1986, p. 51) defines it as the outcome of evaluating the effort. Achieving a high firm performance has always been of vital interest to strategic leaders. Finally, it may be considered as a synonym to organizational effectiveness, and its criteria are institutionalization, conformity, and productivity (Taouab and Issor, 2019, p. 94). The last definition will be used in this paper as the main one.

Key Strategic Leadership Positions and Their Influence on Firm Performance

Strategic leaders can influence performance determinants by using certain leaderships behaviors, and their influence differs significantly. Yukl (2008, p. 711) also notes that strategic leaders make decisions relating to a competitive strategy for the firm that is aided by workforce productivity, and the decisions of every leader are rather different due to a number of reasons. Rahman et al. (2018, p. 1388) say that various leaders may promote firm performance by influencing, for example, the image of the company, its success in taking best positions, and the priorities that guide and coordinate the workers, as CEO does. Strategic leaders’ practices and different choices have to align with the organizational mission and vision of a firm (Finkelstein, Hambrick, and Cannella, 2009, p. 30). Hence, strategic leaders are at the center of companies’ business operations and influence overall firm performance.

Boardroom dynamics, a particular interest of which is in the effectiveness of the directors in the process of making decisions and the actual roles, attitudes, and behavior in the boardroom, may have affected leaders’ influence. Board directors may find it challenging to speak out, particularly in companies where there is a combined chairman and CEO role (Westphal and Bednar, 2005, p. 282). There may be some tension between non-executives and executive management. Different decisions made by CEOs, CTOs, and CFOs may exacerbate this situation.

Chief Executive Officer (CEO)

CEOs play critical roles in an organisation’s success as they build and support administrative philosophies that promote overall firm performance. A study by Berson, Oreg, and Dvir, (2008, p. 615) examines the relationships between CEO values and corporate culture and how the two factors influence firm performance. CEOs utilise organizational values to enhance effectiveness by concentrating on organisational members’ attention, coupled with highlighting priorities that guide and coordinate employees’ conduct towards realising productivity goals. They apply their transformational leadership skills to engage the workforce through employee motivation, and any of their decisions may significantly affect workers’ productivity and, hence, firm performance (Hitt, 1999). Berson, Oreg, and Dvir, (2008, p. 629) conclude that the relationship between CEO values and organisational culture is the key to improving performance.

Key roles of the CEOs as strategic leaders include motivating work design, human resource management practices, and collective organisational engagement. Barrick et al. (2015, p. 117) suggest that the CEO has a strong influence on the overall operations of the business and can motivate members at all levels of the firm. CEOs’ transformation leadership behaviours, including setting challenging goals and expectations, sharing compelling missions and visions, and intelligently thought-provoking followers impact the company as a whole (Sonnenfeld, Kusin and Walton, 2013, p. 100). However, Bich and Thai (2019, p. 2125) notice that inadequate leadership and management skills of CEOs include some of the factors that contribute to organisational failure. These competencies primarily influence the shared psychological availability of workers that facilitates resource utilisation and firm preface.

One of the essential attributes of strategic management is the CEO’s personality and individual development. Herrmann and Nadkarni (2014, p. 1318) apply the five-factor model (FFM) of personality to illustrate two distinct roles of CEO personality in managing strategic change. CEOs often initiate strategic change coupled with determining the performance implications of strategic change implementation. Within organisations, CEOs set strategic directions and plans and guide actions for realisation of those plans.

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CEOs hold disproportionate influence on firm activities, meaning that their personalities have a significant influence on strategic behaviours (Barrick and Mount, 1991). Herrmann and Nadkarni (2014, p. 1319) illustrate that strategic leaders’ psychological characteristics, individual development and human limits shape and outline how CEOs notice, interpret, and respond to stimuli that influence their strategic choices. It is indicated that CEO personality and characteristics can either enhance or hinder the performance impacts of strategic change implementation by influencing individual relationships between CEOs and employees (Barrick and Mount, 1991, p. 10). It can also affect the organisational environment, such as processes and structures, which determines the performance implications on strategic change implementations. Hence, a CEO’s personality impacts the performance of strategic plans implemented. The specified strategical way is likely to entail positive outcomes du to the focus on improvements in the strategic implementation.

Another good strategical way is an international joint venture, and CEO is one of the responsible people who make decisions regarding this process. It may occur when two organisations from two or even more countries decide to form a partnership. It provides a firm that wants to explore international trade without taking risks and full responsibilities with the option of forming a joint venture with a foreign partner.

Corporate governance (CEO power) can have adverse impacts on a company’s corporate financial performance. A study by Park et al. (2018, p. 920) investigates the relationship between CEO hubris, as well as other personality characteristics, and corporate financial performance. Accordingly, CEOs’ influence on corporate governance impacts organisational outcome either on the negative or positive. Based on the concept of hubris, powerful CEOs can save a company by helping top management teams get complex decision-making processes completed on time and efficiently (Salas, Rosen and Granados, 2010, p. 959). On the other hand, hubris CEOs can cause detrimental effects on an organisation due to their extreme level of confidence and conviction. Park et al. (2018, p.921) illustrate that overconfident CEOs tend to use significant amounts of financial resources to invest in different projects and initiatives that should not be invested due to their overestimation of their capacities to yield success. They undertake risky decisions based on their overestimation of their problem-solving competences, whereas, at other times, they underestimate the required resources coupled with uncertainties.

Many studies on CEO hubris and firm performance have yielded mixed findings by presenting two competing views towards a CEO’s psychological characteristics. The first one is the heroic perspective that upholds that dominant CEOs can assist top management teams in decision-making promoting performance (Eres et al., 2015, p. 307). These CEOs often suggest different strategies and tactics to managers that are likely to yield superior performances. Pessimistic perspectives claim that hubristic CEOs are harmful to a company due to their exaggerated level of confidence. As noted early, such leaders overestimate their skills, while underestimating resources available. They are a threat to the company’s performance and often exert pressures that hurt the corporate value. They often make excessive investments by using pressure on organisational performance.

It is possible to analyse a CEO’s roles and influence on firm performance through models, theories and concepts in strategic leadership. For example, the Behavioural Theory of the Firm suggests that a CEO’s choices are rather significantly influenced by his or her natural limitations as a human being (Cyert and March, 1963). In other words, all emotional traumas, interests, fears and negative events have a major impact on decisions made by a CEO, hence, they are different from the choices of other strategic leaders.

Chief financial officers (CFOs)

Not only CEOs but also CFOs hold essential positions in organisations and influence firm performance. Six et al. (2013, p. 83) state that CFOs’ roles include bringing investors’ views into strategic discussions and cultivate partnerships with funding sources to ensure the smooth running of the firm. They are also involved in identifying and monitoring the total risks of the firm. CFOs and CEOs combined represent a company to its relevant stakeholders, such as creditors, investors, and rating agencies (Yasser, Mamun and Rodrigs, 2017, p. 216). The combined efforts of CEOs and CFOs are involved in making decisions related to a corporation’s financial performance meaning that as strategic leaders, they are most directly responsible for its financial health.

Over the last few years, the role of CFOs has substantially changed, and they currently undertake active roles in developing and outlining companies’ strategies. Many firms currently position their CFOs as board members holding director roles and responsibilities (Duong et al., 2020, p. 1). It is suggested that CFOs’ impact on the financial management of a company exceeds that of CEOs. Duong et al. (2020, p. 1) illustrate that CFOs who hold seats in the board of directors often influence the overall performance of an organisation as well as the earnings quality. Many studies emphasize that CFOs are actively involved in the control of abnormal accruals, and companies’ discretionary accruals are often reducing when appointing a new CFO. Duong et al. (2020, p. 4) point out that CFOs tend to hold a more substantial influence on abnormal accruals as compared to CEOs. Thus, they significantly influence a firm’s earnings management and profitability. Creating board membership positions for CFOs increase their power and equips them with the influence to determine company financial dealings.

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The difference between the decisions made by various strategic leaders may also depend on the level and quality of their education. For example, it is possible to assume that leaders will make most of their choices according to what they have learnt in their university (Hambrick and Quigley, 2014, p. 476). Strategic leaders may make decisions based on the behaviours of team members, the trends in the market analysis, and the risks faced by the organization (Simsek et al., 2018). Moreover, since age means experience, usually, the older a leader is, the smarter his or her decisions are since he or she is familiar with most of the situations (Hambrick and Finkelstein, 1987). However, this idea contradicts the thought of Waelchli and Zeller (2013, p. 1612), which will be discussed in one of the following paragraphs.

Gender is another factor that affects the choices of strategic leaders and their influence on firm performance. There are many more men in leadership positions than women. However, female leaders are distinguished by increasing the success of an organisation. Kirsch (2018, p. 346) notices that “appointing women directors tends to make the composition of boards more diverse, which is thought to affect the nature of board processes and outcomes, and by extension, firm outcomes.” This is proof of gender influencing firm success and performance.

Another model that may help in analysing the differences between the decisions of various leaders is the Tripartite Model of Power and Influence on the Board. The ability of leaders to produce intended effects on the board depends on their power sources such as information, expertise and position, the desire of and skills in using these power sources and the wider structure and context (Pettigrew and McNulty, 1995, p. 852). Hence, the more skills and opportunities a strategic leader has, the better he influences firm performance.

Chairmen of The Boards (COBs)

COBs are among the most influential strategic leaders in corporations. Their roles are to provide leadership to the board, take responsibility for the board’s composition and development and ensuring proper information (Roberts, 2002, p. 511). Waelchli and Zeller (2013, p. 1612) examine the impacts of COBs on the firm predominance. The study focusses on COB age and firm performance in which they illustrate a robust negative relation between COBs age and firm performance. Studies indicate that the capacity to make effective managerial decisions declines with age. Therefore, since most COBs are aged 50 and above, their cognitive abilities to make performance-related decisions decline affecting the overall performance of firms (Shen, 2005, p. 85). According to Mui et al. (2018, p. 156), COBs can drive an organisation towards short-term stability and long-term viability. They can also influence the overall effectiveness of the large organisation to a large extent to deal with internal strengths and weakness as well as assess external threats and opportunities that determines a company’s competitive edge.

Their vision shapes the organisational behavioural pattern towards achieving the goals and encompasses the value that the company should concentrate on in regards to improving performance. COBs provide directions that are essential for organisational performance since they are linked with long-term objectives. They are characterized by different core competencies, such as goal-setting, development of vision, building strategic agreements, promoting empowerment, and executive presence, as well as problems-solving. These skills equip them to guide the company towards positive performance. The specified approach is supported by the scientific management theory, which allows seeking different ways of motivating employees.

Another theory is the upper echelons perspective that is related to company governance. It provides an opportunity for additional analysis of differences between decisions made by various strategic leaders (Hambrick, 2007, p. 339). Its key idea states that the personalities, values and experiences of leaders have a great influence on how they interpret the situations they face and make decisions (Hambrick and Mason, 1984, p. 197). Hence, a COB’s background, personality, skills and values may affect all the choices he or she makes for a company.

Chief Technology Officers (CTOs)

Over the last two decades, the power, as well as the number of CTOs, has increased in companies indicating their augmented influence. CTO’s influence forms of R&D expenditure that affect the firm’s performance. Many scholars have studied the roles and functions performed by CTOs within an organisation and how they influence overall firm performance (Medcof and Lee, 2017, p. 1). The most common roles include monitoring and assessing new technologies, leading strategic innovation throughout the firm, and taking part in marketing coupled with media relations related to technology. These functions determine most of a company’s operations and significantly influence the overall firm performance. CTOs are also involved in coordinating technical efforts among business units and representing the technology department with TMT.

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Agency theory is another way to explain the differences between the decisions of strategic leaders. This theory is based on the idea that since CTOs usually act in their own self-interests, the shareholders of any company are likely to face problems (Fama and Jensen, 1983, p. 310). Hence, leaders are so selfish that they forget about other’s benefits and care only about themselves (Campbell et al., 2012, p. 1439). Also, this theory assumes that NEDs are powerful enough to control managers’ behaviour collectively (Eisenhardt, 1989). In opposition to this idea, there is a stewardship theory that supposes that CTOs are the organisation’s stewards (Davis et al., 1997). They are rather trustworthy individuals who will forget about their benefit and will look after the interests of the owners of the company.

Good Strategic Leaders Making Bad Choices (CEO Session)

There are situations when intelligent, skilful, knowledgeable and experienced CEOs make bad decisions. The key reasons are that a strategic leader expected rational response from others and did not understand correctly how others interpret their environment and decide to act (Barton and Wiseman, 2015). Also, according to Epstein (1991, p. 120), rational and intuitive systems may sometimes produce conflicts between each other, so a CEO gets confused, panics and makes a mistake. Campbell et al. (2009, p. 63) notice that biases may influence the process of making a decision. Since they operate subconsciously, the brain cannot realize and correct the errors (Baer, Heiligtag and Samandari, 2017). That is why some CEOs may not spot and safeguard against their own mistakes in choices and judgment, and this is also the reason for leaders making different decisions.

Conclusion

To draw a conclusion, one may say that strategic leaders are highly influential in regards to firm performance. Each undertakes unique roles that determine or influence the level of productivity within a business (Barrick et al.,2015, p. 110). All the strategic leaders make different decisions for their company, and it may be explained with the help of various theories, their psychological characteristics, individual development and human limits. Strategic leadership remains one of the most influential concepts within organisations due to its capacity to augment overall firm productivity.

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