Introduction
Strategic action and decision-making have become increasingly important to businesses in the contemporary environment. To generate value for stakeholders and make profits, business leaders have to develop and implement both short- and long-term strategies that would help the company to stay competitive. Strategic leaders, who are represented by executives and non-executive directors of a company, are thus pivotal to organisational performance and success.
The focus of the present essay is on the extent to which strategic leaders can affect company performance. The paper will introduce the background of strategic leadership and highlight the potential effects of strategic leaders on firm performance based on theory. To show how different strategic leaders to impact firm performance differently, the paper will consider the limitations of strategic leaders, including demographic, individual and organisational characteristics that could impair decision-making or its effects on company performance.
Strategic Leaders
Background
Strategic leadership is a relatively common term in modern business management research, but it has various uses. The most foundational definition of strategic leadership provided by Boal and Hooijberg (2000) views strategic leadership theories as those concerned with leadership “of” organisations, as opposed to supervisory theories which focus on leadership “in” an organisation (p. 517). Based on this definition, strategic leadership is distinguished from various other theories based on its scope and level.
Strategic leaders are persons who occupy the highest positions in the organisational hierarchy and can thus impact the direction, strategy, and orientation of a business (Boal and Hooijberg, 2000). These positions might include top management teams (TMTs), board director, chief executive officer, chief financial officer, chief human resource officer, and non-executive director. While these positions differ in terms of their capacity and roles within an organisation, they can all impact its performance through strategic decision-making, and this differentiates them from middle managers and regular employees.
Firm performance is another concept that should be explained in greater detail. In broad terms, firm performance is used as a measure of company success, and most researchers use financial performance as the primary indicator of firm performance (Park et al., 2018; Wang et al., 2015; Zenger, 2015). Some researchers focus on workforce, operational, and social indicators, including organisational efficiency, employee satisfaction and social contribution (Bachiller, Giorgino and Paternostro, 2015; Berson, Oreg and Dvir, 2008). The theoretical framework of strategic leadership and firm performance implies that strategic leaders have a positive effect on various aspects of firm performance (Finkelstein, Hambrick and Cannella, 2009). However, as will be shown in this paper, the extent of this effect varies greatly depending on different factors, thus explaining why two strategic leaders do not have the same impact on firm performance.
Strategic Leaders and Firm Performance
Strategic leadership is connected to firm performance because it impacts strategy and its implementation. The activities of strategic leaders usually involve actions such as strategy formulation, establishment and design of internal control, development of responses to short-term failures and crises, performance management and related activities. As a result, strategic leaders may impact firm performance through various mechanisms (Boal and Hooijberg 2000; Finkelstein, Hambrick and Cannella, 2009). For instance, they can choose the best alternative for strategic action, which would allow the firm to grow its sales and profits, or make a poor strategic choice leading to losses or even bankruptcy. They can also contribute to operational performance and workforce outcomes through internal policies of performance management and organisational controls (Yuki, 2008). Following the principles of ethical leadership and developing the firm’s corporate social responsibility profile can also define strategic leaders’ impact on the social performance of their company (Bachiller, Giorgino and Paternostro, 2015; Eisenbeiss, van Knippenberg & Fahrbach, 2015; Lin et al., 2020).
Based on research into the topic, it follows that the potential of strategic leaders to impact their companies is mainly based on their position and role in the organisation. Consequently, the magnitude of their effect on firm performance also depends on their power within the organisation. Strategic leaders who face constraints in terms of decision-making due to corporate governance are likely to have a limited impact on firm performance, whereas CEOs and other top leaders who act without significant oversight can impact their companies more, both positively and negatively. The remaining sections of the paper will focus on the factors that were found to determine the impact of strategic leaders, either by limiting their influence or by shaping their decision-making.
Demographic Characteristics
Gender
Studies have shown that gender might play a part in defining the influence of strategic leaders on firm performance. In the context of increasing concerns related to gender inequality in workplaces, research into the effectiveness of female leaders has been particularly enlightening. A study of female directors’ influence on firm performance of listed companies in the United Kingdom by Pasaribu (2017) considered companies of various sizes and analysed their financial performance between 2004 and 2014. The study found that in large and medium enterprises, the directors’ gender did not influence financial performance. However, small companies experienced significant positive effects of female directors on firm performance (Pasaribu, 2017). Thus, while female strategic leaders have a positive influence on performance, their impact may be limited by organisational constraints.
Internationally, studies vary in terms of their conclusions, which may be due to differences in cultural contexts. A study by Jadiyappa et al. (2019) was conducted in India and showed different results. According to researchers, the average return on assets and return on investment, used to determine financial performance, decreased following the appointment of a female CEO due to increased agency costs (Jadiyappa et al., 2019). The research by Marinova, Plantenga and Remery (2016), which was conducted in Denmark and the Netherlands and included 186 companies, found no relationship between the share of female directors on the board and firms’ financial performance. Nevertheless, a large-scale study including over 3,000 companies from 47 different countries found the impact of directors’ gender on firm performance to be significant (Terjesen, Couto and Francisco, 2016). The researchers measured both market performance (Tobin’s Q) and financial performance (ROA), and they also concluded that independent directors only contribute to firm performance when board composition is diverse in terms of gender (Terjesen, Couto and Francisco, 2016). Based on these findings, it appears that female strategic leaders have a more significant impact on firm performance in a variety of international contexts, although the effect of gender here depends on other characteristics of the leader, their company and location.
Age
Age is also considered as a factor that could impact strategic leaders’ effectiveness. In particular, the old age of strategic leaders may pose concerns because people typically experience a decline in cognitive abilities as they age, and might fail to solve complex problems, apply creative thinking and engage in other tasks of strategic leaders (Waelchili and Zeller, 2013). While older leaders often have more experience, they also experience shifts in motivation that prevent them from engaging in leadership (Waelchili and Zeller, 2013). As a result, there may be a relationship between the old age of strategic leaders and their impact on firm performance. Research by Waelchili and Zeller (2013) focused on the age of chairmen and collected evidence from over 1,500 chairmen of Swiss companies.
The results suggested that age has a significant and negative relationship with firm performance. According to the research, “An increase in COB age of one standard deviation (9.6 years) is associated with a decline in ROA of 0.79 percentage points […] this corresponds to a performance decline of 10.3 per cent” (Waelchili and Zeller, 2013, p. 1615). For other measures of firm performance, including ROE and net profit margin, the decline is 11.5 and 9.4 per cent, respectively (Waelchili and Zeller, 2013). This finding explains why older strategic leaders may have a negative impact on the financial performance of their firms.
Individual Characteristics
Values
Leaders’ values have also become a popular topic of study in management research, mainly due to the rising importance of ethical leadership and corporate social responsibility in the contemporary context. A survey of 85 Chinese CEOs was performed by Wang et al. (2015), and the influence of leaderâs social responsibility on firms financial performance (ROA and ROE) was examined. The researchers concluded that leaders who demonstrated social responsibility through values of integrity, morality and stakeholder satisfaction contributed to their companies’ ROE, but not to ROA (Wang et al., 2015).
Another research by Berson, Oreg and Dvir (2008) highlighted the positive yet indirect influence of leaders with high self-directive values on company performance, including sales growth, organisational efficiency index and employee satisfaction scores. The relationship was associated with the impact of self-directive values on innovation-oriented culture in the studied companies (Berson, Oreg and Dvir, 2008). Similarly, a more recent study by Lin et al. (2020) focused on strategic leaders’ ethical values, their contribution to innovation, and the indirect effect on performance. The research found that ethical leadership is connected to the implementation and adoption of technological innovations, which, in turn, can influence firms’ financial performance (Lin et al., 2020).
A different study of ethical leadership by Eisenbeiss, van Knippenberg and Fahrbach (2015) also highlighted the positive relationship. The research confirmed that in companies with an ethics program in place, ethical strategic leaders contributed to organisational performance measured by operational and financial indicators. This is likely because ethical cultures in companies can affect the extent to which leaders’ values support their work. Research of value congruence between leaders and their organisations, however, opposes this view. Hartnell et al. (2016) assessed whether similarities or differences in values between leaders and their organisations prompted higher financial performance. The study included 114 CEOs and 324 TMTs and showed that dissimilarities between leaders’ values and behaviours and their organisation’s culture prompted greater results in terms of ROA (Hartnell et al., 2016). Hence, research findings indicate that ethical values and standards of strategic leaders impact the financial outcomes of their work, regardless of whether they fit into the organisational culture.
Capabilities
A significant body of research has also focused on strategic leaders’ capabilities as a factor predicting their positive or negative influence on firm performance. Zenger (2015) reports on a study of strategic leaders in a variety of organisations, which found leadership competency to be positively related to their effectiveness in improving firm performance. Strategic leaders with higher leadership abilities were thus more likely to bring higher profits to their companies, whereas those lacking leadership abilities could influence profits negatively. Strategic leaders’ capacities for communication collaboration have also been studied in this context, with Bandiera et al. (2020) and Han, Zhang and Han (2015) all concluding that CEOs who could collaborate with primary organisational functions had a positive effect on their firms’ financial performance. Related research by Yuki (2008) found leaders’ adaptiveness to benefit their collaboration with other strategic stakeholders, thus leading to improved financial performance. Boal and Hooijberg (2000) state that adaptive capacity is related to leaders’ strategic flexibility and benefits organisational outcomes in changing environments.
The authors also highlight the importance of learning and managerial wisdom to strategic leaders, as these capabilities improve their decision-making and problem-solving abilities (Boal and Hooijberg, 2000). Thus, research suggests that leaders who possess the identified capabilities and develop them throughout their career would likely have a positive impact on organisational performance, while those who lack them could hurt their companies.
Other Characteristics
Other characteristics were also mentioned in the research as significant in shaping strategic leaders’ impact. First, prior experience can impact the effectiveness of strategic leaders in various positions. Muravyev, Talavera and Weir (2016) found that appointing other firms’ executives as independent directors improved financial performance. Based on the study by Le and Kroll (2017), the international experience of CEOs also had a positive effect on their decision-making and firm performance through improving their knowledge and competencies. Surprisingly, a study of large corporations by Hamori and Koyuncu (2015) found that previous experience in a CEO position had a significant negative impact on CEO performance. This suggests that, while strategic leaders’ prior experience in the industry and their knowledge of local and international markets support them in enhancing firm performance, previous employment in other functions is preferable.
Hubris is commonly viewed as a concept that could explain the negative influence of some CEOs on firm performance. Hubris can cause strategic leaders to make risky or poorly thought-out decisions that could damage performance. Hence, Park et al. (2015) studied its effect on the financial performance of companies and found a negative correlation, which increased with CEOs’ power and decreased with board vigilance. While excessive confidence is evidently damaging to performance, a positive self-concept can have a beneficial impact, particularly when coinciding with an excellent academic and professional background (Wang et al., 2016). This shows that individual psychological characteristics can also mediate strategic leaders’ effects on performance and its strength.
Organisational Characteristics
Board Composition
Board composition has also received significant attention in scholarly research on strategic leadership. Board composition is an essential characteristic of the organisation since it might affect collaboration between critical decision-makers, the insight they have into the company and its market and other important factors that could hinder or drive performance. Consequently, research on board composition and strategic leaders’ impact on firm performance varies significantly. A study by Gordini (2016) focused on the family status of the CFO and its relationship with firm performance. The results were gathered from research into 630 Italian SMEs owned by families and confirm that CFOs with no family ties to the owners had a significant positive effect on firm performance, particularly in cases where the CEO was linked to the owners’ family (Gordini, 2016).
Family and non-family firms were also studied in a broader context by Bachiller, Giorgino and Paternostro (2015). The researchers did not identify any statistically significant relationship between family and non-family companies concerning their actual financial and social performance (Bachiller, Giorgino and Paternostro, 2015). Still, the expected results were positively correlated with the percentage of non-family directors (Bachiller, Giorgino and Paternostro, 2015).
Board composition was also discussed in terms of specific board members. The inclusion of a CFO in the Board of Directors was researched by Duong, Evans and Truong (2020), who concluded that the presence of a CFO on the board was associated with a notable adverse effect on financial performance, particularly in companies with high CEO power. Additionally, in industries where technology and innovation play an essential part in firm success, including CTOs on the board had a positive influence on performance (Mecdof and Lee, 2017).
The article by Chen et al. (2019) also highlights the importance of board diversity to CEOs’ decision-making. Based on research findings, the presence of female board members might reduce the adverse financial effects associated with male CEOs’ decision-making by limiting their overconfidence (Chen et al., 2019). Therefore, results from research suggest that board composition may either restrict or strengthen the effect of CEOs, CFOs, independent directors and other strategic leaders on firm performance.
Leaders’ Power
In the context of this essay, strategic leaders’ power refers to the authority that the leader possesses in decision-making and strategy implementation. Research in this area focuses primarily on CEOs and examines their level of discretion and its influence on firm performance. Studies confirm that there is a positive relationship between managerial discretion and the extent to which strategic leaders can impact firm performance. A survey by Six et al. (2013) showed that CEOs’ managerial discretion moderates the impact of strategic leadership on firm performance. Another study that considered the effect of CEO power on firm performance under challenging conditions had the same result; Han, Nanda and Silveri (2016) found that in these circumstances, more powerful CEOs had a more significant impact on firm performance than their counterparts with less authority, and in most cases, the influence was negative.
This is likely because the lack of oversight forces leaders to act recklessly under pressure and make risky decisions that contribute to the company’s losses. A large-scale study based on a 20-year sample of over 300 firms and their 830 CEOs also concluded that leaders possessing more decision-making authority in their organisations had more significant effects on their performance, both positive and negative (Hambrick and Quigley, 2014). Therefore, research suggests that the extent to which leaders can influence their firm’s performance relies greatly on their managerial discretion. Since this is true for both positive and negative effects of strategic leaders, shareholders and owners should consider strategic leaders’ desired level of authority carefully to avoid substantial losses in performance.
Conclusions
Overall, strategic leadership is vital to organisational success because it shapes strategy formulation and implementation, sets the firm’s orientation and promotes long-term growth. The functions of strategic leaders thus give them the potential to influence firm performance both positively and negatively. Nevertheless, the extent of this influence depends on multiple factors, including demographic features, personal background and characteristics and organisational specifics. The variety of combinations of these factors thus shapes the extent to which strategic leaders might impact firm performance.
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