Getting inside the mind of the chief executive officer is a difficult research avenue. Knowledge about how CEOs process information, their cognitive style, has been relatively sparse. Strategy Professor Daniel Zyung of SMU Cox and co-authors unpack the cognitive mechanisms of CEOs in new research — and reveal how and why it matters.
According to Zyung, a CEO's cognitive style is reflected in the important areas of organizational strategy and often times, performance. The research shows a strong relationship between the CEO's cognitive style and their approach to firm growth. "Basically, this is a study about CEOs’ information processing style," Zyung says, "with many important implications, one of which being their firm’s growth strategies."
The findings suggest that CEOs’ "style" can have important implications on growth strategies as manifested in firm acquisitions and innovation. A particular cognitive style, or cognitive complexity, means the extent to which one differentiates and integrates informational stimuli. "Conceptually the research is a revisit of the related literature—in a sense that it suggests that cognitive complexity is more than a cognitive ‘capability’—it’s a ‘style’—but it is also an advance empirically," notes Zyung. "CEOs are hard to survey. So we borrowed some tools from psychology to understand them through more unobtrusive ways."
The study was based on a sample of 3,144 public U.S. firms across industries. The authors obtained quarterly earnings conference call data from 2002 through 2013. Language markers, captured in the calls' transcripts and analyzed for specific content implications, were used as indicators of CEO cognitive styles. An average of 3 transcripts for each CEO annually and 66,024 transcripts in total were analyzed.
Got style
CEOs face high information processing loads. Today, the volumes of information and speed with which they flow can be daunting. In the vernacular of psychology, cognitive complexity is likened to 'the idiosyncratic manner in which individuals think and view informational stimuli—the extent to which they can differentiate and integrate them.'
How does this play out in the mind of the CEO? High complexity CEOs tend to be comfortable interpreting multifaceted situations, tolerant of processing and accepting multiple perspectives, and generating the links between them. They have an understanding of the interplays between multiple factors to make a decision. CEOs with low cognitive complexity tend to draw upon a small number of dimensions in processing information and understanding issues; they have more focused ranges of attention and develop fewer links among select constructs when confronted with multifold situations.
Prior literature on managers’ cognitive complexity has equated it to a cognitive ‘ability' and assumed that higher cognitive complexity is better. "Instead, our findings offer a more balanced view, suggesting that cognitive complexity is a cognitive ‘style’ and various levels of cognitive complexity fit different growth strategies," the authors write. "Past studies tended to place importance on complexity that is high," explains Zyung. "In our research, it's more about the style of thinking and information processing. Being more simple or low in complexity is, indeed, not bad. It can be very helpful sometimes to think in black and white terms and be focused, which can better serve certain circumstances."
Many roads to growth
The results indicate that CEO cognitive style plays out in growth strategies. Firms run by CEOs with low cognitive complexity display greater focus on internal, organic growth by investing more in R&D and introducing more new products, compared to those run by high complexity CEOs. Those leaders with higher cognitive complexity are more aligned with an external acquisitive growth, requiring a wider search scope and complex information processing; these CEOs with an external acquisition's outlook, including unrelated acquisitions, focus less on internal growth approaches.
There are many paths to growth, notes Zyung. "Between acquisitions and organic growth, one approach is not necessarily better than the other," he suggests. "We wanted to determine whether there is a fit between the two different growth modes and style. And interestingly there is a good match between them."
CEOs of low complexity were more oriented toward innovation, Zyung mentioned. Innovation itself is complex — full of novel ideas, unique constructs, and distinctive connections. He explains: "If you think about the job of the CEO and innovative activities at firms, these activities are usually performed outside of the C-suite, with front line management, product development, and R&D teams. CEOs delegate authority to these managers." This way of achieving growth suggests a "fit" with low cognitive complexity. "It's not that the CEO isn't involved, but their role is bring the big picture to the table," Zyung relays.
Further, the differing strategic patterns among high and low cognitive complexity CEOs are more salient when the industry is growing more rapidly. The CEOs’ preferences reveal more distinctive paths when abundant growth opportunities are prevalent, the study found.
In future research, Zyung plans to understand the connection between low complexity decision makers and innovation. "I'm trying to understand what specific type of innovation they are involved in — whether this innovation is far-reaching, explorative or incremental," he offers. "Alternatively, what is it that explains the low volume of innovation related to CEOs with high complexity styles? Perhaps those CEOs with lower cognitive complexity produce more innovation, but they are not necessarily breakthrough, novel inventions; similarly, those with high cognitive complexity show less innovation in volume, but perhaps it is because they are seeking things that are more exploratory and pioneering."
For today, the research sheds light on how the cognitive style of the CEO relates to strategic directions.
The paper, "CEO Cognitive Complexity and Firm Growth Strategies:
Evidence from Acquisitions and Internal Innovations" by Daniel Zyung of Cox School of Business, Southern Methodist University; Yan (Anthea) Zhang of Rice University; and Wei Shi of Indiana University is under review.
Written by Jennifer Warren.