How Boards Should Think About Handling Visionary CEOs

As we settle into 2024, it is increasingly clear that this year is likely to be a lot more challenging for businesses, particularly start-ups, than those in the immediate past. Not only are interest rates — while not historically high — remaining stubbornly above the levels seen in the long low-inflation period experienced by most leading economies. There is political uncertainty in the shape of elections, not just in the U.S., but also probably in the U.K. and many other places besides. Indeed, it is reckoned that this is the biggest year for elections ever, with about half of the world’s population having a vote. Perhaps even more serious, the war between Russia and Ukraine shows no sign of reaching a conclusion, while conflict in the Middle East, spurred by the Hamas attacks on Israel last October, is intensifying. Caution and consolidation are likely to be watchwords.

However, while the big macroeconomic and geopolitical picture is not attractive, there are other reasons why times could be hard for businesses just starting out. The appetite for investing in start-ups has been somewhat diminished by a few key factors.

The first is that the easy and cheap money that poured into Silicon Valley companies and other start-ups in the wake of the pandemic led to spikes in investment and consequent over-valuations in some cases. Faced with the choice of gaining zero interest in the bank, investors were eager to back start-up companies to help them grow and scale up. There was, says Zahra Yarahmadi, founder and chief executive of BG Financial Consulting, which specializes in helping subscription-based businesses to grow, “a lack of due diligence because of fear of missing out.” Now that it is once more possible to gain interest just from leaving money in banks, supporting speculative businesses looks less attractive.

Alongside this, there has been a shift in attitudes about what a successful start-up looks like. Yarahmadi adds: “Founders were thinking of maximizing the top line and were not worried about profit. They would maximize volume and then get out. Now, everybody is looking for revenue managers.”

This is not to say that the days of the visionary founder are over. There will always be individuals with big ideas looking for backers. And there will continue to be cases where the enthusiasm of the entrepreneur can win over investors one would have expected to be more sceptical. The problem is that this is not necessarily a bad thing, according to new research on how the often tricky relationship between boards and executives can be managed.

In a forthcoming paper, Xu Jiang of Duke University and Volker Laux of the University of Texas describe a model of the board/CEO relationship in which the CEO has a strong belief about the state of the industry the business is in and the strategy they have created. The board, representing shareholders’ interests, gathers information to either confirm the CEO’s plan or recommend a change in direction. But, according to the model, the amount of effort the board puts into gathering that information and whether it uses it to challenge the CEO depends on how strongly the manager believes in the vision. In a post on the Columbia Law School’s blog on corporations and the capital markets, the authors write: “Assuming that founder-CEOs believe strongly in their perspectives, the model predicts that boards will be relatively passive (e.g., meet infrequently, acquire little information, and rubber stamp proposals). The passivity is not a sign of poor corporate governance but is the best response to the visionary CEO’s strong beliefs. While the visionary CEO’s confidence is likely an asset when the firm is in its start-up phase, it can become a liability once the firm is more established. This raises the question of whether shareholders are better off if the board replaces the visionary with an unbiased CEO, who is more receptive to new information. We show that the board will optimally retain the visionary CEO when gathering accurate information about the true state of the world, and hence the firm’s optimal strategic direction is difficult and costly. This result follows because the strong motivation of the visionary CEO then outweighs the disadvantage of not being responsive to board advice. The model therefore predicts that corporate boards are more likely to retain founder-CEOs in environments in which learning about the right course of action is difficult, such as in highly uncertain and innovative industries.”

Nevertheless, investors should perhaps still heed Yarahmadi’s warnings about “red flags” to watch for. She believes that communication from the executives is vital because investors need to know what is happening as it occurs rather than later. Indeed, according to her, a lack of reports is itself a red flag. Pointing out that in the past few years there has been a reaction against experts, she urges investors to not be afraid to ask the “right questions” about such matters as the costs of acquiring and retaining customers and cash flow. “I am not against aggressive growth, so long as you have a plan,” she says.