Executive Summary
Research supports the idea that the right CEO can help increase the likelihood of organizational success. But how do we define what “right” means? Is it something unique to the person—their personality or skills? Is it their leadership style? Is it the work practices that get put into place during their tenure? Or, is it some combination of all the above? In short, with apologies to Tolstoy, are all successful CEOs alike, and can we create a formula to help us hire or develop better ones?
In these increasingly competitive times, credit unions need to have the best possible understanding of what a good CEO looks like and how to best develop a leadership approach. After all, the CEO serves as the credit union’s principal representative to a wide range of external stakeholders—suppliers, corporate partners, governmental agencies, and members—and is the key driver of strategic direction within the credit union. Understanding the key variables that separate good from not-so-good CEOs could make a difference across a wide spectrum of areas, including credit union performance.
While anything that involves the nuance and fallibility of human beings certainly can’t be forced into a prescribed formula, there are benefits to attempting to understand what combination of elements could make a difference to credit union success.
What is the Research about?
Our desire to better understand the key elements of CEO selection and development led us to engage Murray Barrick. Barrick studied 94 credit union executive teams as part of a Filene project a decade ago. That study underscored the importance of top management team functioning and leadership to the implementation of organizational goals and objectives and, in turn, their effects on organizational success. Professor Barrick’s other research focus reveals the substantial impact individual attributes (e.g., personality, interests, and ability) of workers and managers have on performance. The stage was set for Filene research examining the effects the CEO has on credit union success.
Barrick used a cross section of employees—ranging from entry level to C-suite—at 84 credit unions across the United States and Canada. At each credit union, his team asked for insights from four senior management, team members, four middle managers, and four entry-level employees, plus the CEO. While most CEO-related research has focused on input from upper- level management, this approach relies on insights from a broad cross section of credit union staff.
Each survey participant evaluated the CEO’s personality, critical executive competencies, leadership behaviors, and performance. The non-CEO participants were also asked to rate their level of work engagement at their credit union. To determine credit union performance, the survey assessed the average of four bottom- line ratios as objective measures of organizational performance: return on assets, net worth to total assets, delinquent loans to total loans, and net charge-offs to average loans.
What are the credit union implications?
Just how important is the CEO to engaged employees and high performance? The results may surprise you:
- CEO personality matters (even more than ability). The research looked at five personality elements—extraversion, conscientious-ness, emotional stability, openness to new experiences, and agreeableness—and, pre- survey, posited that these were listed in order of importance to CEO success based on prior research on lower- level leaders. Perhaps not surprising to anyone who’s read Susan Cain’s Quiet: The Power of Introverts, extraversion, while important, is not the top indicator of CEO success. Another surprise is that agreeableness—or at least perceived agreeableness—is not just “nice to have” but vital. Nevertheless, the two traits that are the best indicators of both employee engagement and credit union success are CEO conscientiousness and emotional stability.
The study confirmed the hypothesis that when it comes to employee engagement and organizational performance, CEO personality is more important than CEO ability. Personality accounts for 47% of the variance in engagement versus 9% for abilities, and for 49% of the variance in firm performance versus 32% for abilities. - Not all abilities are created equal. The study examined three key CEO abilities: strategic change competence, the ability to accomplish tasks, and the capacity to build and nurture relationships. These are listed in order of expected importance, and, again, actual results don’t match up with the hypothesis. Although strategic change competence is the best way to predict a CEO’s ability to be a transformative leader (22% variance vs. 17% for relationship building and 16% for task competency), relationship competence is a better indicator of organizational performance (with relationship competency accounting for 18% in variance vs. 5% for the ability to implement strategic change).
- Smarter hiring can make a difference. Credit unions should recognize the importance of these personality traits and abilities when hiring and factor them into the recruiting process. Use reference checks to delve into the three most critical personality characteristics (agreeableness, conscientiousness, and emotional stability), and consider working with a human resources expert to develop effective processes in this area. Personality testing can also be a valuable resource.
- CEOs can change abilities and temper personality. Although the research shows that it’s not possible to substantially change personality after the age of 25, once someone is aware of personality challenges, there are ways to counter its influence. For instance, a person who is often stressed out (i.e., not emotionally stable) may employ proper exercise, sleep, and other stress management techniques. Leaders can use other techniques to change ability. For example, those who aren’t efficient at task management could benefit from the help of an exceptional administrative assistant. CEOs should receive 360-degree feedback to determine areas of strength and weakness and receive the assistance they need to address problem areas.
- It’s important to engage employees—but more critical to have a good CEO. Employee engagement is valuable and important, and it seems logical to assume that engaged employees lead to an improved bottom line. And while they do—and account for 13% of the variance in organizational performance—the truth is that their engagement isn’t as critical as having an exceptional CEO. Aggregate CEO personality accounts for 49% of bottom- line variance, and CEO skills account for 32% of bottom- line variance.
- High-performance work practices are not as important as you think. Although high- performance work practices are the most critical predictor in the area of employee engagement (explaining 33% of variance in this area and narrowly edging out second-place CEO conscientiousness at 32%), they barely register when it comes to predicting organizational performance. Work practices account for just 1% of the variances in this area, while all factors relating to the individual CEO account for 81% of the variance.