Corporate boards often consist of bold personalities who help push new products and initiatives. But when it comes to groundbreaking technological innovation, a recent study from the WHU—Otto Beisheim School of Management shows that overconfident CEOs need to be balanced by a strong, knowledgeable board of directors.
The researchers focused on U.S. companies in high-tech industries listed in the S&P 1500, as these firms depend heavily on breakthrough innovations—those that create new markets or change existing ones. The study examined two important traits of boards: expertise and power.
Reducing risk
Expertise is already known to improve decision-making in areas like mergers and acquisitions, where experienced boards help firms make better choices. When it comes to innovation, knowledgeable board members can ease concerns about risk, making them more likely to support promising new ideas.
Power, on the other hand, is about the board’s ability to act independently from the CEO. This includes whether the CEO also chairs the board, how long the board members have served compared to the CEO, and whether they hold significant shares in the company. Strong, independent boards are more likely to push back on overconfident CEOs, insisting on clear evidence that an idea is worth pursuing and ensuring all relevant information is considered.
“Powerful boards are necessary to correct some of the misjudgments that can come from CEO overconfidence,” the researchers explain. They stress that the goal is not to block innovation, but to help CEOs make better decisions by picking the right projects, allocating resources wisely, and adjusting to new information as it emerges.
The results were clear: in companies with both high board expertise and power, the relationship between CEO overconfidence and breakthrough innovation was strongest, leading to a 113% increase in such innovations compared to the average. Importantly, boards that lacked expertise, even if powerful, were less able to channel the CEO’s confidence into productive innovation.
“If you want to drive breakthrough innovation, you need to be careful about who you put on your board,” the researchers conclude. “You need people who understand the issues and can offer good advice, but also enough power to balance the CEO’s influence.”
