Overconfident CEOs are at their best alongside experienced board members

Self-confidence is a trait seen near-unanimously among leaders across all walks of professional life. People tend to expect their managers, bosses, and c-level executives to project a certain amount of self-assurance. Akin to a ship with an uncertain captain, nobody wants to work for a leader who emanates doubt more than determination.

At a certain point, however, self-confidence can spill over into cockiness. Overconfidence is as common among CEOs these days as seven figure salaries, but noteworthy new research just published in the Strategic Management Journal reports experienced board members wielding considerable power can help hubristic leaders achieve great success. Let’s take a closer look at the findings.

Foolhardy CEOs balanced out by board members

Cocky CEOS tend to take a lot more risks. While the old saying nothing ventured, nothing gained may continue to hold true today, excessive risk-taking is usually a recipe for bankruptcy. Risk may lead to innovation, but overconfident leaders are less likely to consider potential threats associated with risky choices. They also have a habit of underestimating required resources to implement ambitious new plans, and often engage in snap decision making without thinking everything over. All of these tendencies stand in the way of breakthrough innovations, which ultimately means hubristic CEOs can cost their companies lots of money.

How can companies simultaneously rein in yet also take advantage of such brash c-suite leadership? The authors of this latest study report experienced, powerful board members represent an essential ingredient for technological breakthrough innovations when it comes to balancing out a super confident CEO. In other words, a board of directors that is both experienced and influential is ideal for dealing with arrogant c-suite leaders.

“The powerful board is necessary to make these adjustments or to rectify some misperceptions that may come with this overconfidence,” says study co-author Priscilla S. Kraft of WHU – Otto Beisheim School of Management in a press release.

“It’s not about stopping these CEOs from being innovative—it’s good that they want to go for innovation—but rather to guide them to really make better decisions in terms of the right projects, making adjustments in terms of resource allocation decisions, and also take into account new information that comes the further you get with a project.”

Innovation & technology

The research team, made up of scientists from the Otto Beisheim School of Management, IE University in Madrid, University of Marburg, and Texas A&M University, chose to analyze a sample of publicly listed firms in the S&P 1500 operating specifically in high-tech industries. Why the emphasis on technology? Prior research tells us “breakthrough innovations” (defined as anything that significantly alters an existing market or creates an entirely new market) are key to high-tech businesses.

Study authors chose two qualities in particular among board members (expertise, power). While the importance of experience and expertise is widely recognized in general, specific experience with breakthrough innovations is crucial as well. Expertise, for example, can help ease investment concerns among board members. Put another way, experienced board members know from their past experiences that financial risks are unavoidable. 

Levels of power for board members were determined by gauging how much independent sway a board had in relation to its CEO. A few instances include a board in which the CEO is not the chair, if board members have more tenure with the company than the CEO, or if members have a significant stake in the organization. When board members wield more sway and influence, they are more likely to pressure the CEO to prove an idea is worth spending tons of money and time on, as well as to ensure all necessary information is in order and transparent.

“If you want to push breakthrough innovation in your firm, then you should be careful of the people you hire for your board,” Prof. Kraft explains. “You should be surrounded by people that understand the topic, because they can give you good advice. But the company must also balance the power between the CEO and the board.”

Expertise and power: One doesn’t work without the other

Upon studying scenarios in which powerful, experienced boards of directors were paired with an overconfident CEO, the results were undeniable. Such combinations produced a 113% increase in breakthrough innovations relative to the sample mean. It’s important to note, though, that a powerful board lacking in expertise can still prove ineffective at containing CEO overconfidence. So, both expertise and power appear necessary to balance out foolhardy CEOs.

“We know from research that these overconfident CEOs are not so interested in information that does not conform to their perspective,” Prof. Kraft concludes. “But it’s important to adjust, because sometimes things simply don’t work out.

“The powerful board is necessary to make these adjustments or to rectify some misperceptions that may come with this overconfidence. It’s not about stopping these CEOs from being innovative — it’s good that they want to go for innovation — but rather to guide them to really make better decisions in terms of the right projects, making adjustments in terms of resource allocation decisions, and also take into account new information that comes the further you get with a project.”