Overconfident CEOs are more apt to pursue breakthrough innovations — but boards with expertise and power are necessary for project success

CEOs who are overconfident notoriously take more risks. While risk-taking can lead to a greater likelihood of breakthrough innovations, it also makes them less likely to consider potential threats associated with risky endeavors. These CEOs also tend to underestimate the resources required to implement new initiatives, and they can often engage in hasty and less comprehensive decision-making activities, thus impeding their ability to foster breakthrough innovations in the end — and costing the firm and shareholders large sums of money along the way.

There’s a need to both harness and put a check on such overconfidence, and new research published in Strategic Management Journal found that the board of directors is an essential mechanism for technological breakthrough innovations. More specifically, boards must have both expertise and power in these environments.

The research team behind the SMJ study — consisting of Priscilla S. Kraft of WHU – Otto Beisheim School of Management, Teresa A. Dickler of IE University in Madrid and University of Marburg, and Michael C. Withers of Texas A&M University — explored the topic by way of a sample of U.S. publicly listed firms within the S&P 1500 that operate in high-tech industries. Previous research has shown that breakthrough innovations — defined as something that significantly alters or creates markets — are especially important in these environments.

They focused on two board qualities: expertise and power. The importance of expertise is well documented in previous studies. Having experience with breakthrough innovations is crucial, as it can help — for example — to ally investment concerns that board members might otherwise have. In other words, these individuals understand from past experiences that financial risks are necessary.

Board power determined by how much independent sway the board has in relation to the CEO. This would be a board where the CEO is not the chair, or where board members have more tenure with the company than the CEO, or when members have a significant stake in the company. These board members are more likely to put pressure on the CEO to prove an idea is worth pursuing, and to ensure all necessary information is provided.

When both board power and expertise were present alongside an overconfident CEO, the results were remarkable, leading to a 113% increase in breakthrough innovations relative to the sample mean. However, researchers cautioned that a powerful board that lacks expertise can be detrimental to harnessing CEO overconfidence.

“We know from research that these overconfident CEOs are not so interested in information that does not conform to their perspective,” Kraft says. “But it’s important to adjust, because sometimes things simply don’t work out. … The powerful board is necessary to make these adjustments or to rectify some misperceptions that may come with this overconfidence. It’s not about stopping these CEOs from being innovative — it’s good that they want to go for innovation — but rather to guide them to really make better decisions in terms of the right projects, making adjustments in terms of resource allocation decisions, and also take into account new information that comes the further you get with a project.”