In the “CEO personality, strategic flexibility, and firm performance” article, Nadkarni and Herrmann (2010) are trying to answer the question of how CEO personality affects firm performance through influencing the firm’s adaptability to rapid, impactful, and unexpected changes. The main aim of the study is to extend previous literature that has studied the relationship between CEOs characteristics and firm strategic choices and performance by studying the underlying relationship between different CEOs personalities and strategic flexibility.Theoretical Framework: The article is drawing on the upper echelons (Hambrick and Mason, 1984) and other similar studies that have empirically proved the vital role CEOs play in directing firms’ strategies and performance.
It also builds on literatures studying CEOs characteristics and their effect on CEOs strategic choices. While previous studies have often focused on the demographic characteristics of CEOs, this literature focuses on the link between CEOs psychological traits and firm outcomes.For this purpose, the study has selected the “five-factor model” (McCrae and Costa, 1987) which represents five broad personality constructs being (1) Conscientiousness, (2) Emotional stability, (3) Agreeableness, (4) Extraversion, and (5) Openness. The motive behind selecting this model was the need to study CEOs psychological attributes in the light of a valid and robust psychological framework. The upper echelons, CEO psychology, the five-factor model, and other literatures on strategic flexibility form the foundation of the theoretical framework of this study.The article presents seven hypotheses regarding how each facet of the five-factor model is likely to affect strategic flexibility and how strategic flexibility relates to firm performance.
It hypothesis that CEO emotional stability, extraversion, and openness are positively related to strategic flexibility, while CEO conscientiousness is negatively related to strategic flexibility, and CEO agreeableness has an inverted-U relationship with strategic flexibility.Moreover, it hypothesis that strategic flexibility positively affects firm performance, and that strategic flexibility mediates the relationship between CEO personality and firm performance. Research Method and Design: The article represents an empirical study (University of Leicester, 2011) set in the Indian small and medium business process outsourcing companies, and the research follows a cross-sectional research design (University of Leicester, 2011) . The researchers selected a sample of 427 SME firms from which 217 CEOs agreed to participate in the study.
However, only 195 firms have provided complete data including surveys and financial records. The researchers then tested the theoretical model using structural equation modelling “SEM”. Study Results and Authors Contribution to Knowledge: The analysis results have clearly supported the research theory and the seven hypotheses by two major results “(1) each variable in the five-factor model of personality measured for a firm’s CEO influenced the firm’s strategic flexibility and (2) strategic flexibility mediated the relationship between CEO personality and firm performance. (Nadkarni and Herrmann, 2010, pp. 1064-1065). With these results, the study contributes to the CEO psychology and strategic flexibility literature by identifying the mechanism in which the CEO personality affects firm performance through influencing strategic flexibility.
The study also highlights the importance of using a valid psychological framework –such as the five-factor model- when studying CEO personalities and their effect on firm performance rather than using just demographic characteristics. The results also represent two practical contributions.First, it guides CEOs and TMT members on improving firm performance and strategic flexibility by adopting extraversion, openness, and medium levels of agreeableness. Second, it suggests that the five-factor model is mostly relevant in predicting firm performance in dynamic industries. A Critical Examination: The article presented a very solid empirical study and tried to cover the limitations in previous studies that overlooked the relationship between CEO psychological characteristics and firm performance.However, several limitations were highlighted in the study that limits the results generalizability.
While the researchers have listed six major limitations, the article can still be criticized by falling into other limitations. First, 92 percent of the selected firms were SMEs that were founded by entrepreneurial CEOs. In such firms, CEOs tend to have unique power and influence in directing firm strategies (Daily, et al. , 2002).Moreover, other studies have argued that strategic choices of entrepreneurial firms are likely to follow the priorities of their respective CEOs and their life issues (Kisfalvi, 2002). Such conditions in the studied entrepreneurial firms might limit the results generalizability in other professionally led or large firms.
Second, the study followed a cross-sectional research design by collecting performance data at six and twelve months.This research method combined with the nature of entrepreneurial firms and CEOs creates a type of “confounding” between the CEO and firm as it measures the effect of a specific CEO in a specific firm over a specific period of time (Blettner, Chaddad and Bettis, 2012). Again, this might limit the generalizability and external validity of the study results. Third, it is difficult with a cross-sectional research design to follow the firm strategy and performance development over time since other studies have showed that strategies in entrepreneurial firms tend to be opportunistic and implicit in nature (Kisfalvi, 2002).Fourth, the research only studied the direct simple relationship between each facet of the five-factor model and strategic flexibility apart from any other factors that might affect the CEO performance like CEO demographic characteristics, tenure, and diversification strategy. While the direct relationship study is intended to simplify the results, there is still a need to conduct a CEO performance study that takes all the connected variables related directly or indirectly to CEO performance and his strategic choices in consideration (Blettner, Chaddad and Bettis, 2012).
Fifth, the study has selected the five-factor model as the psychological framework to study CEOs different personalities. While there is a common consensus about the FFM and its validity, several psychological studies have suggested other types of personalities outside of the FFM (Norem, 2010) and several instruments were presented to assess the FFM (Widiger and Trull, 1997). Other studies have suggested that the FFM might not be supported across all different cultures, economies, social lives, etc… (Gurven, et al. , 2013).Conclusion and Directions: While this study by Nadkarni and Herrmann answers valid questions on the relationship among CEO personalities, strategic flexibility, and firm performance. There is still a need to perform a more in depth study with a longitudinal design in SMEs, professional-led, and large firms that takes different variables directly or indirectly connected with the CEO performance in consideration.
The study of this complex matrix of connected variables over an extended period is likely to present more robust and valid results.
