THE 'BEST OF THE BEST' CEO'S
The Poll Proposition : CEO's - we must search the world and pay what it takes to get 'the best of the best'. Do You agree?
Nearly 75% of respondents voted against the proposition.
Are all these people hopelessly wrong? Surely to goodness to-day's competitive circumstances mean that companies need real stars to lead them?
Surely Vodafone are right when they say in their annual report: The executive talent needed to maximise returns for shareholders in this industry is very scarce and the future success of the group will depend upon its ability to provide remuneration packages which are competitive in actual and prospective value when measured against the best in the industry.
Well, actually the 75% majority are right. What they probably understand is that the proposition has several flaws. These are:
- The Fundamental Attribution Error - except in two special circumstances, which we will come to later, CEO's are nowhere as crucial to corporate success as media hype and management propaganda contends.
All the research and mature experience shows that they are actually not all-powerful beings. They are more at the mercy of their organisations and the external environment than most people realise. And, as Rakesh Kurana says in the Harvard Business Review*: Most estimates, for example, attribute anywhere from 30% to 45% of performance to industry effects and 10% to 20% to year-to-year economic changes.
Superior corporate performance also comes from the combined efforts of many, many people and is the result of a whole stream of past decisions and actions. The immediate, here and now actions of one person, no matter how powerful; are a small drop in a huge ocean.
- The implied assertion that the best corporate leaders will be appointed from outside a business (We must search the world for 'the best of the best'). Actually, there is very strong evidence that the 'best of the best' companies develop their own CEO's from a rich stream of talent that they nurture and grow. Therefore, the search should be from the world inside the organisation, not outside it. Think of Lord Browne of BP and Sir Terry Leahy of Tesco. Also, Margarethe Wiersema's research into external appointments, especially those following the enforced departure of an incumbent CEO, indicates that corporate performance is usually markedly worse after an external appointment than a planned internal succession.**
- That companies need to pay top rates on an international scale to get and retain the best - the implied comparitors are always from the US, where top executive pay practise has now reached ludicrous levels. This is blatant propaganda, as seems to be exemplified by the Vodafone statement. It will be noticed that this is directed at 'shareholders' and makes the case for paying top dollar. It is the investment industry that has been appointed by government as the watchdog of executive pay in quoted companies, so it is quite clear to whom the case must be made. The fact is - the market for executive talent is nowhere as open as the propaganda makes out - top German, French, Dutch, Japanese companies have quite different reward philosophies to the British and seem to develop and retain some pretty good people.
Who puts out the propaganda? The press, large parts of which like to see industry as a sort of soap opera with heroes and villains; managers themselves, to make a case for high pay; executive search companies, for obvious reasons; and the financial markets, which take a short-term, simplistic view of what makes companies perform, and like to have one person to praise or blame.
The two special cases?
- CEO's can be tremendously powerful when it comes to ruining companies, and it needn't take too long! Just one disastrous merger, in fact.
- Major corporate crisis. These are often caused by the unwise or stupid actions of the powerful people referred to above! Crises need strong, direct and high profile leadership, and a high-impact, charismatic leader can often be right for taking the hard decisions needed to save companies.
But, when the crisis is weathered, it is crucial to replace the high-impact 'big hitters', because it is almost certain that they will be quite unsuitable for the patient long-term business and organisation building that should replace the crisis style and is the only foundation for long-term success.
Further Material in this Site.
- Gideon Haigh's book Bad Company, The Strange Cult of the CEO, in the Reading and Research section.
- Leadership profiles in the Change Leadership material in the 'Good Practise and Cases' Section.
- The Practise of Top Management, in the 'Performance' section.
* The Curse of the Superstar CEO, Rakesh Khurana, Harvard Business Review, September 2002.
** Holes at the Top: Why CEO Firings Backfire, Margarethe Wiersema, Harvard Business Review, December 2002.