“Visionary” CEOs are confident about what’s best for their companies and how to achieve results. Think Steve Jobs or Elon Musk: These types of leaders are bold with their predictions and laser-focused on the fulfillment of their vision.
Xu Jiang, an associate professor of accounting at Duke University’s Fuqua School of Business, wants to understand what happens when boards and activist investors try to impose changes in a visionary CEO’s strategy.
In a working paper, co-authored with Volker Laux of the University of Texas at Austin, Jiang found board interference can zap the motivation of visionary CEOs and increase the likelihood a board-directed strategy will fail. The researchers used an economic model representing strategic behavior between the CEO and the board. The co-authors were then able to test strategies and implications—and concluded worse outcomes resulted from board interference.
Jiang explains in the following Q&A.
What are the most important findings of your study?
My study provides an explanation on why corporate boards sometimes play a rubber-stamping role and simply agree to whatever the CEO chooses to do. The popular press may argue that this reflects a corporate governance failure as the board fails to rein in the power of the CEO. We argue instead that this may reflect the optimal choice for the board in the presence of a visionary CEO (in particular founder-CEOs). By rubber stamping a visionary CEO, the board provides more motivation for the CEO to work harder in exerting his or her vision. One prominent example is Tesla. Elon Musk is a visionary CEO who truly believes in electric cars being the future of transportation. The board of Tesla rubber stamps Musk’s vision, and Musk pays them back by sleeping in Tesla’s factories to monitor production when Tesla is running short of production targets.
Part of your theory hinges on the effort the CEO puts into implementing the chosen strategy. What motivates CEOs? What are the incentives a board can offer them?
CEO’s compensations are usually structured as pay-for-performance. That is, the bonus and share-based compensation will be more valuable if the firm performs well. That is why, if the CEO believes that the project is less likely to succeed, they will put in less effort, as they do not believe exerting high effort will pay off in the form of better performance and thus better pay. Whereas if you work on something that you're really passionate about, you are going to put more effort into pursuing your goal.
Why is it not optimal to replace the CEO, if the board is convinced that their strategy is the best one for the company?
A new CEO that complies with whatever strategy the board chooses (we call them “unbiased” CEOs) will always be less motivated than a CEO with a strong vision for the company. In innovative industries, where nobody can be really sure what strategy will succeed, let’s assume a 50/50 chance that either the board or the CEO is right. But if the board is right about the best direction of the company, the expected cash flow when they replace the visionary CEO with an unbiased manager is less than the cash flow generated by a visionary CEO who implements his or her successful strategy. The optimal solution, in a situation of uncertainty, is to let the CEO run his or her vision. In fact, when there is not much information, even the board is not super convinced that their strategy is the best for the company, so the board may choose to let the visionary CEO carry out his or her vision as the benefit of the high motivation of the visionary CEO dominates the board’s not-super-convinced strategy.
Based on our work, boards should only intervene if they have sufficient evidence that the CEO’s vision is wrong, and in any situation in which the actions of the manager might put the integrity of the company’s assets at risk—as in cases of mismanagement or fraud, which is not modelled in and not a focus of our paper.
Do you have examples where your model applies?
Meta’s CEO Mark Zuckerberg strongly believes that the Metaverse is the future, so he directs a lot of Meta’s resources to achieve this vision. Some shareholders disagree and think devoting so much resources to the Metaverse is not in the best interest of shareholders. Our model would suggest that, if the board of Meta has sufficient expertise to be able to collect good information regarding the future of the Metaverse, and if that information suggests that the Metaverse is not going to be as great as what Mark Zuckerberg believes, then the board should intervene (not easy in practice, as Zuckerberg has over 50% of voting power – but at least exert a lot of pressure). Otherwise, the board should support Zuckerberg to achieve his mission and ignore those shareholders’ voices.
Activist shareholders often seek board seats and are very critical of companies’ strategies. How could they be convinced to accept a visionary CEO’s strategy?
If activists are not able to collect good information about whether the CEO’s strategy is correct or not (or they are not very sure), then they should let the CEO try to achieve her or his vision. If they are able to collect good information, then they should intervene to fulfill their mission to maximize the shareholders’ interest. If they do not have good information and refuse to accept a visionary CEO, selling their shares to other shareholders who accept the visionary CEO may be the best solution for all parties.