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Ideas for Leaders #753

Promotion-Focus CEOs and CFOs Drive Strategic Growth

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Key Concept

CEOs and CFOs with a high promotion focus, who are afraid to miss opportunities and willing to experiment, are more likely to lead a company to growth than low promotion-focused CEOs and CFOs, who are more aware of potential risks. The best strategic decisions, however, seem to come when the two executives have clashing levels of promotion focus. 

Idea Summary

In the language of psychology, individuals who are more afraid of missing opportunities than taking risks are considered promotion-focused. Their counterparts are individuals who are more afraid of taking risks than missing opportunities; these are prevention-focused individuals. 

A study of U.S CEOs and CFOs (the latter considered the second most influential executive in strategic decisions) describes in detail how promotion focus impacts a firm’s strategic growth initiatives — that is, efforts to expand the company’s activities vertically, horizontally or geographically through acquisitions, alliances or internal development. The research focuses on promotion focus exclusively since growth initiatives were tied more directly to promotion focus than prevention focus. (The study’s results, however, reflect a statistical adjustment that kept prevention focus equal for both CEO and CFO.)

Based on extensive date from more than 2,000 U.S. firms, the study shows that the higher the promotion focus of the CEO, the more likely the firm will pursue growth initiatives. Likewise, the higher the promotion focus of the CFO, the more growth initiatives for the firm. If both executives have a high promotion focus, the impact of the CEO’s promotion focus on the firm’s strategies is amplified as there is within the top management team little pushback to the CEOs ambitions.

What happens, however, in the case of misalignment — that is, one of the two executives has a high promotion focus and the other a low promotion focus? According to the study, if the CEO is the executive with the high promotion focus, the company will pursue growth opportunities despite the CFO’s low promotion focus, reflecting the fact that it is the CEO who ultimately makes the strategic direction decisions. For the same reason, if the attitudes are reversed — the CFO exhibits high promotion focus in contrast to the CEO’s low promotion focus — the company continues to reflect the CEO’s propensities: the firm does not pursue growth opportunities with the same vigour as other firms with growth-minded CEOs. 

The study also shows that the more powerful the CEO (factors such as leadership quality, tenure, board support or equity ownership adds to the inherent power of the CEO), the more likely a CEO’s high promotion focus prevails over a CFO’s low promotion focus.

Despite the dominance of the CEO’s position, the study reveals a surprising fact about firms in which the CEOs and CFOs are misaligned: they tend to perform better than firms in which the top strategists are aligned. This holds true no matter which of the two executives has the higher promotion focus, and which has the lower. 

The reason, the researchers believe, is that the disagreement between the CEO and CFO on whether the firm should grow — or how it should grow — leads to consideration of a range of growth ideas, some less aggressive, some more. With a broader range of ideas and initiatives on the table, the firm has a greater chance of making the best choice. In addition, the misalignment of promotion focus translates into pushback from one of the executives, requiring the top management team to scrutinize more carefully the actual merits of the growth initiatives and challenge the assumptions that favour the move — a process that leads to better decisions than the potential groupthink of aligned top management teams.

The study is based on extensive data on more than 2,000 U.S. firms. The data was culled from a variety of sources, including a database of conference call transcripts between 2002 and 2013, which was linguistically analysed to identify the regulatory focus of the CEOs and CFOs on the calls. The data also included details on more than 56,000 corporate strategic initiatives undertaken by the firms studied.

Business Application

This study highlights the impact of individual regulatory focus on a CEO’s strategic decisions — a factor for boards to consider when hiring a new CEO. If they want a more aggressive, less risk-averse approach to corporate growth, they should look for evidence of a promotion focus in both the CEOs and CFOs they hire (or approve).

Perhaps the most interesting facet of this research, however, is in the description of the interplay between CEOs and CFOs. Corporate decision-makers should note that a misaligned promotion focus can lead to better decisions. Boards may thus seek to put in place a CEO and CFO tandem that complement each other rather than reinforce the other’s tendencies. 

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Authors

Institutions

Source

Idea conceived

  • August 2018

Idea posted

  • October 2019

DOI number

10.13007/753

Subject

Real Time Analytics