The downsides of a bully boss seem obvious: employees leave the company, they are less engaged with the company's success, and they are less willing to put in extra effort. Nevertheless, the problem persists. The reason appears to be that bully bosses are effective.
First, senior leaders promote people whom they see as dynamic and aggressive at delivering. Our culture puts value on the hard-driving leader who gets the impossible job done. Second, the bullying boss really does get people to work harder, faster and longer. Fear gets results. If you look at the heads of many successful companies, you see plenty of tyrants.
All this is true with a short-term focus. Many people will endure a bullying boss so long as the company is growing quickly. As soon as there are better opportunities elsewhere, they will leave as quickly as they can. Finally, consider the impact of bullying even in a growing company. People stop giving the company their all, which reduces the magnitude of success. And, while people may work harder, faster and longer, that doesn't say much of anything about whether they are working better or delivering more value.