RUNNING HEAD: THE ROLE OF CEOs

EMMANUEL A. TURUKA

WESTERN MICHIGAN UNIVERSITY

 “Does leaders matters to a company’s success” Discuss whether or not CEOs really make a difference to their companies’ level of profitability and productivity.

 Issue: 

The company’s main objective is to generate a profit. And the role of the CEO is to make sure that the company makes a profit. With the amount of money that is paid to a CEO, it is important to see a high ROI from the leader. Does the CEO actually make the company more profitable? And does it have any impact on the company?

CEO is a business Chief Executive Officer, with leadership skills and experience necessary to understand and manage a company and has the ability to handle all key business disciplines including sales, marketing, and finance, operational and administrative functions.

Impact of CEO on Profitability: 

· Vision:  The ability to influence change in the organizations toward future goals. In this respect CEO runs the strategy making system in the company; and has unique authority and information, and no other members of the company can take responsibility for these decisions. Decisions related to crises, problems and major opportunities must be overseen and integrated by the CEO.

· Control of Resources:  CEO is the one who controls the resources and make sure that he/she has control of what to produce with these resources.  CEO’s have control of the direction of the firm. This means that the CEO designs the organization, in effect deciding who will do what, and authorizes all important decisions. No major action can be taken without CEO approval; CEO’s influence over resource allocation and utilization may have a great impact on the outcome-which could be negative if misallocated or positive if well allocated. 

·   Inspire Risk: Risk is always there; it can come from both known and unknown factors. It is impossible to bring the risk to zero because of the unknown factors, by definition, can never all be known, i.e. You can never prove that risk does not exist just like you cannot prove any negative. It is the responsibility of the CEO’s to influence the types of operations and jobs that it will peruse regardless of risk. The CEO has the ability to look the possibilities of making some difficult decision about unprogramed decision where others they cannot. This can be done by using problem solving skills and confidence about risk taking so as to continue re-inventing for the company. In doing so CEO also builds the capability of maintaining an innovative culture that drives the company’s growth.

·  Morale:  CEO’s can influence the motivational level and create a high job loyalty.  This will influence efficiencies in production levels.

· Academia: Weiner, N., Mahoney, T.A (1981)  “ A study of 193 companies across 19 years showed that leadership accounted for about 44% of the variance in profits and 47% in stock price.” 

· Reputation: Cooperate reputation is a more important measure of success, but the CEO’s behavior can affect the image of the company and profitability. It plays a significant role in determining how potential customers respond to the company and likewise it maintains confidence in the company because it focuses on good financial performance. Worst CEO’s reputation can result in a series of cooperating scandals like what happened to Enron and Tyco. The CEO must be a positive role model

·  Soft Skills:  The ability to interact and communicate ideas.  Can influence the ability to raise capital for growth and other activities that are detrimental to the company.

· Power:  The ability to influence other people around him (not just employees) to buy into his concept. What the CEO does is to create a climate where power and responsibilities are entrusted to intelligent and more enthusiastic people yet still keeps a close eye on the financial detail.

Substitutes and Neutralizers:  Identifies contingencies that either limits the leader’s ability to influence subordinate or make that leadership style unnecessary and make it impossible for leader behavior to make any difference to follower outcome.

• Economy:  The effect that the economy can have neutralized that with the cooperation. For instance, the risk of collapse of the dollar, raising interest rate, increases the energy prices (gas) etc. These may have a negative impact in the organization despite the fact that the CEO has laid good strategies for company growth but since he/she has no control over them it makes impossible for CEO credibility to have a positive impact in profitability.

·  Motivation:  High motivation of employees by rewards can make leadership functionally unnecessary. This is more applicable on task oriented or people oriented leadership when performance based reward systems keep employees towards organizational goals, therefore reduce the need of leadership or when employees are skilled and experienced leadership is unnecessary.

· Adverse Events:  Unexpected disasters that CEO’s have no control of events in the environment, such as terrorism (September, 11), hurricanes, earthquakes (natural disaster)

Recommendation:

CEO’s do have an impact on the firm’s profitability and productivity.  It leads back to the vision of the CEO and the people that he/she surrounds.  The type of direction, the power that the CEO has and implement can affect the direction of the firm whether it makes a profit or loss. As we can see in several cases for example Enron that the actions of the CEO lead the company to become corrupt and destroyed the company reputation. 

Most factors that have an impact on profitability can be traced back to the CEO and the leadership of the company, because: CEO’s needed to have integrity, vision and act as a positive role model. They must also understand that returns need to exceed their cost of capital. Successful CEO’s identify trends in demand well ahead of their competitors,

The vision that the leaders have impacted the way that business is performed.  They also influence the type of change that can take place in the organization.  The CEO has the control of the resources and makes the decisions on what to manufacture.  This can have devastating effects on a company especially if the CEO is still clinging to core rigidity. For example, the typewriter CEO did not have the vision of the changing environment and has to make a decision of producing or finding a new inventive product.

The decision has to be made by one person.  When you have a group of people you may not be making the best decision for the company because it is an agreed upon decision. There needs to be someone to point a finger at when things go wrong or when things go right.  No one ever wants to take the blame if something goes wrong.  The one point of contact and directions has to come from the CEO. 

Reference:

Weiner, N., Mahoney, T.A (1981). A model of corporate performance as a function of environmental, and leadership influence. Academic of Management Journal 24 (3) 453-470