Given the scarcity of resources, modern businesses face the challenges of managing resources efficiently and effectively to create wealth for shareholders. However we know that while some firms are better at managing scarce resources; some are finding it difficult to meet these goals. Would it not be insightful to know whether the personal characteristics of top corporate leaders have to do with strategic decisions that drive efficiency? Upper-echelon theory (UET) provides that corporate outcomes (including efficiency in investments) are a reflection of its top management characteristics. This perspective is true, with much research providing evidence of significant associations between CEOs’ characteristics, such as education, experience, and ethics and corporate outcomes.
We drew on UET to understand which CEO characteristics would explain the differences in investment efficiency in firms. We tested whether CEOs with a background in engineering education and experience working in technical operations influence corporate investment efficiency. Utilising a sample of Australian Securities Exchange (ASX) listed firms from 2015 to 2022, the researchers found that CEOs with engineering expertise increase corporate efficiency in investments. This means that firms headed by engineer CEOs maintain optimal resource allocation on investments, which can be traced to sales growth in prior years and are aligned with industry investment benchmarks. This study further reveals that engineering directors on boards facilitate the engineering CEOs to enhance investment efficiency further. The researchers further show that the positive connection between engineer CEOs and investment efficiency is more pronounced in industries requiring technical expertise. For instance, the influence of the engineering expertise of CEOs is more useful in extractive, energy, and information technology industries. Data on engineer CEOs was hand-collected from biographies in corporate annual reports. At the same time, CIE was measured by assessing whether investments were maintained at optimal levels relative to industryyear benchmarks, following the methodologies of Biddle et al. (2009), Chen et al. (2011), and the average values derived from both models.These findings remain robust across various tests, including year and industry fixed effects, propensity score matching, alternative measures of investment efficiency, and robust standard errors. The results also hold for an industry sub-sample, particularly in sectors where engineering expertise is more desirable, such as metals and mining.
The connection between the engineering or science expertise of CEOs and resource allocation efficiency could be viewed through certain perspectives linking to UET. One prominent argument is that leaders with STEM backgrounds are unique in terms of their approach to problem-solving and decision-making; thus, they are likely to shape corporate behaviour distinctly CEOs with other expertise (e.g. accounting, finance and law). This is because their exposure to addressing and solving operational matters through a scientific approach is unique. CEOs with a STEM background are likely equipped with skills such as precise calculations, complex searches of information, risk management, and innovativeness. Thus, they could bring these skills to corporate leadership and strategic decision-making, resulting in more efficiency in resource allocation. Another view is the access to external technical resources. STEM leaders often operate within technical social circles, granting them access to cutting-edge technologies and innovations. This network not only enhances their ability to identify lucrative investment opportunities but also positions their organisations as forward-thinking and adaptive to technological advancements.This could make their investment evaluations and resulting decisions more accurate. The results of the study confirm that this conjecture was correct and that engineer CEOs have a significant influence on optimal resource allocation in firms.
What does this mean for Sri Lankan firms?
Maintaining optimal investment levels delivers multiple benefits to firms, including efficient resource allocation, enhanced future cash flows, improved profitability, and sustained long-term growth.In Sri Lanka, where industries are striving to compete in a globalised market, embracing STEM leadership could catalyse growth and development in key sectors.The adoption of STEM leadership in corporate governance holds transformative potential. This study’s context of ASX-listed firms and their industries share certain similarities with Sri Lankan-listed firms, thus allowing for the lessons to be learned and applied.
Boosting Innovation and Competitiveness:
STEM leaders are better equipped to drive research and development (R&D) initiatives. By fostering a culture of innovation, they can help Sri Lankan companies compete more effectively in international markets. For example, leveraging emerging technologies in IT and telecommunications can position Sri Lanka as a regional hub for tech innovation.
Strengthening Critical Industries:
Industries such as export-oriented manufacturing are pivotal to Sri Lanka’s economy. Leaders with engineering and technical backgrounds can bring innovative solutions to challenges like energy efficiency, sustainable development, and supply chain optimisation, making these sectors more resilient and globally competitive.
Fostering Sustainability:
With the growing emphasis on environmental sustainability, STEM leaders can spearhead green initiatives, such as renewable energy projects and eco-friendly industrial practices. Their technical knowledge enables them to evaluate the feasibility and impact of such initiatives effectively, aligning corporate goals with national and international sustainability objectives.
Attracting Foreign Investment:
The presence of STEM leaders in corporate governance can enhance investor confidence. Demonstrating a commitment to technical excellence and efficient management signals stability and innovationqualities that attract foreign investors seeking opportunities in emerging markets like Sri Lanka.
Challenges and Recommendations
While the benefits of STEM leadership are evident, Sri Lanka faces several challenges in implementing this approach:
* Limited STEM Talent Pipeline: STEM education needs to be strengthened, and pathways must be created for professionals to transition into leadership roles. Public-private partnerships can play a critical role in achieving this. Additionally, introducing STEM subjects into school curriculums from an early age can nurture interest and build foundational skills in these fields.
* Introduce mandatory STEM subjects in primary and secondary school curriculums, including hands-on projects to cultivate interest.
* Partner with universities and technical colleges to ensure alignment between education and industry needs, emphasising leadership pathways in STEM fields.
* Cultural and Structural Barriers: Traditional corporate structures often favour leaders with business or finance backgrounds. Integrating technical experts is crucial for encouraging diversity in leadership.
* Promote awareness campaigns to highlight the value of technical expertise in leadership.
* Provide incentives for organisations that incorporate STEM professionals into leadership roles.
* Resistance to Change: Adopting STEM leadership requires a cultural shift within organisations. Providing training programs for existing leaders and highlighting the success of STEM-led companies can mitigate resistance.
* Offer professional development programs that merge STEM technical skills with business acumen.
* Showcase case studies of successful companies led by STEM professionals to inspire confidence in the approach.
STEM leadership represents a significant opportunity for Sri Lanka to enhance corporate performance and drive economic growth. By leveraging the unique strengths of leaders with technical expertise, the country can tackle inefficiencies, foster innovation, and position itself as a competitive player on the global stage. Furthermore, such initiatives align with the broader objectives of the International Monetary Fund’s (IMF) Extended Fund Facility, which emphasises structural reforms and sustainable economic growth. Investing in STEM education and leadership not only addresses local challenges but also contributes to meeting the conditions set by the IMF for a resilient and forward-looking economy.As Sri Lanka navigates its path toward economic resilience, embracing STEM in corporate leadership is not just an option. It is a necessity.
By: Mrs. Sulochana Dissanayake
Senior Lecturer of Rajarata University of Sri Lanka
PhD Candidate of Queensland University of Technology (QUT)
Dr. Ashesha Weerasinghe Postdoctoral Research Fellow in International Taxation
Queensland University of Technology (QUT)
