Reducing CEO power can undermine a company’s legitimacy. (2015)

In high power-distance cultures, customers will view a strong CEO as a signal of legitimacy. In low power-distance cultures, a strong CEO is a warning flag.

Published in IdeasForLeaders.com #610

“A separation of power between CEO and a board of directors is often viewed as a sign of good governance. A new study reveals that reducing the power of a CEO may actually diminish rather than reinforce the legitimacy of a company in its foreign markets.

“The ‘legitimacy’ of a company is based on whether outsiders consider that a company takes appropriate actions — and has the governance structures in place to ensure that it continues to take appropriate actions.

“One measure of legitimacy is the balance of power between the CEO and the board of directors.

“In general, investors and regulators view a company as more legitimate if its CEO does not have too much power. The thinking is that a strong board can limit the actions of a CEO and thus prevent potential abuses of power and position.

“A new study reveals, however, that a weakened CEO can hurt rather than help the legitimacy of multinational companies.

“First, customers in a company’s foreign markets determine the legitimacy of the firm in that market – not the company’s home-based investors and regulators.

“Second, in many cultures, authority and power are viewed as positive signals of control and strength. These cultures expect a wide range of power between the bottom and the top of the organization, an attitude known as ‘power distance’.

“In high power distance cultures, customers will view a strong CEO as a signal of legitimacy – a sharp contrast to the common wisdom on CEO power. In low power distance cultures, a strong CEO is a warning flag.

“Multinational companies, however, operate in a variety of countries with a variety of cultures. Which cultural preferences should take precedence?

“The answer lies in the weight or influence that customer opinion carries within the company- a factor that, this study shows, depends on several factors.

Access the IdeasForLeaders article here: Reducing CEO power can undermine a company’s legitimacy

The article is a summary of the academic paper: ‘When in Rome, look like Caesar? Investigating the link between demand-side cultural power distance and CEO power.’ (2015)

R Krause, Texas Christian University
I Filatotchev, Cass Business School, London
G Bruton, Texas Christian University

Published in Academy of Management Journal, amj-2014.

Access the academic paper here: When in Rome, look like Caesar.