Shareholders, securities analysts and experts regularly argue that powerful CEOs are bad for companies. But what if customers in certain markets view CEO power as positive, and their perceptions transfer to the success or failure of a company?
In low power distance cultures, such as the U.S., people expect to have a say in decisions regardless of rank or position. But in high power distance cultures, such as Malaysia and Singapore, people expect power to come from the top.
Research by Ryan Krause and Garry Bruton, management professors at the TCU Neeley School of Business, suggests that U.S. companies doing business in these cultures might grant their CEOs more power, especially if they do business with governments.
“While top-down leadership exists everywhere, in some cultures it is a deeply imbedded natural order,” Krause said. “Our research shows that customers expect high CEO power in markets characterized by high cultural power distance. We suggest that firms use CEO-dominated boards to gain legitimacy in these markets.”
Krause and Bruton studied publicly traded U.S. pharmaceutical and semiconductor firms from 2003 to 2012. They focused on these industries because their main customers are large, institutional corporations and/or governments that have significant power over suppliers; therefore, it is important for suppliers to be seen as legitimate.
Krause and Bruton propose that U.S. firms try to match CEO power with the cultural standards dominant to the region in which they compete for sales, even if a high-power CEO contradicts the expectations of investors at home. Shareholders, securities analysts and corporate governance advisors should carefully weigh the potential costs and benefits of board configuration, since potential gains from restraining CEO discretion may not outweigh a loss in legitimacy when competing in certain cultures.
“It brings an important but largely ignored group of external assessors into the discussion of a board’s legitimacy role: customers, people more concerned with products than stock prices,” Krause said. “By introducing customers as grantors of firm legitimacy, we confirm that companies routinely contend with multiple, and often competing, institutional forces.”
“Our research indicates that regulators’ and investors’ evaluations of board effectiveness should move from the predominant consideration of structural characteristics embedded in various codes of good governance, to an approach that takes into account institutional characteristics of the markets in which a firm operates, plus contingencies such as geographic concentration of sales, cultural variance and industry,” Bruton said.
The full research article, “When in Rome, Look Like Caesar? Investigating the Link between Demand-side Cultural Power Distance and CEO Power,” was published in the Academy of Management Journal in 2016.