6 The myth of leadership The usual rationale for paying the CEOs of large, global companies ridiculous sums of money is that these organizations are extremely hard to run, and the mix of
Trang 198 BusiNess at a crossroads
exerted very little downward pressure on the obviously excessive
abso-lute level of executive pay
One possible explanation for this curiously relaxed attitude to an
important and growing agency cost is the impact on the vigor with
which institutional investors police agency costs of the emergence of
large, integrated investment banks after the deregulation of financial
services in the 1980s There were supposed to be barriers or “Chinese
Walls,” as they were called, between the activities of integrated
invest-ment banks, but even Chinese Walls have ears
Investment banking is the most profitable activity, and is thus in the
driving seat at integrated banks Notwithstanding the Chinese Walls,
therefore, it’s not in the interests of brokers, securities traders,
invest-ment analysts and fund managers, whose bonuses may be affected by
group results, to do anything or say anything that might damage in any
way the relationships between their investment banking colleagues and
the latter’s CEO clients
The conflict between the duty of fund managers, as agents of their
beneficiaries, and their own interests as colleagues of investment
bankers, may, in other words, be partly responsible for the signal lack of
opposition from investors to soaring CEO pay packets
The cult of leadership
If we reject greed as an adequate explanation for excessive levels of
CEO pay, and we accept asset-skimming as a form of remuneration
unconstrained by a link to value added or time spent working, our
explanation so far for the high absolute levels of executive pay consists
of two components
The first is the inferences drawn, by management theorists, Remcos
and the investment community, about executive rewards from the new
shareholder value performance standard The second is the lack of
opposition to “the sky’s the limit” pay packets from the investors who
pay them, which may itself be a consequence of the integration of
investment banking and fund management under one corporate roof
and the impact this has had on the willingness of fund managers to
object to such pay packets
This is consistent with the description of the CEO market provided
by Harvard Business School professor, Rakesh Khurana, in his brave
book – it is dangerous to bite the hand that feeds you consultancy
work – Searching for a Corporate Savior.6
Trang 25 Not so much greed 99
Khurana argues that the market for “external” CEOs – as opposed
to CEOs appointed from within the company – is not a “market” at all,
in the neoclassical sense, where large numbers of transactions set the
equilibrium price, no single transaction influences the market as a whole
and perfect competition between applicants for jobs and employers for
applicants guarantees both parties the market price He says the CEO
market is a social construction (witness all those conflicts of interests
and of interest and duty) It’s “closed” in Max Weber’s sense,7 in that
CEO positions at large, listed U.S and U.K companies are only open
to people “who fit certain socially defined criteria.”
Three common “social matching” criteria when a board is drawing
up a list of candidates for the CEO job are: the current position of the
candidate, and the performance and stature of the candidate’s company
These automatically exclude from the candidates’ pool the good people
who just miss the cut as far as rank is concerned, the good people who
work for currently underperforming companies, and the good people
who work for smaller, less illustrious companies
When thinning down the long list of those who satisfy these rather
arbitrary tests, the most important criterion for elevation to the short
list is the requirement that the candidates are superstars
Khurana argues that Alfred Chandler’s “managerial capitalism” (see
Chapter 3) was replaced by what he calls “investor capitalism” in the
late 1970s, after the markets of large American companies were
success-fully attacked by more efficient European and Asian (mostly Japanese)
companies Previously supine investors demanded action, and it soon
became apparent that the action most likely to appease them was the
appointment of a high-profile “leader,” unencumbered by allegiance to
the past or the status quo, and capable of taking the drastic action
needed to see off the foreign invaders
It was unfortunate that the merits of this half-baked theory, that all
that was needed to revive an ailing company was a “charismatic leader”
and “change agent,” with a novel “mindset,” and a profound
under-standing of the “paradigm shifts” that were occurring in his economy
and industry, were soon corroborated by the transformation of Chrysler
Corporation under Lee Iacocca’s leadership
Chrysler was on the brink of collapse when Iacocca, recently fired
by Ford (where he had been president) after falling out with Henry
Ford II, was appointed president and CEO in 1978, and chairman
the following year Within three years Chrysler was back in profit
and continued to flourish under Iacocca’s leadership until he retired
in 1992
Trang 3100 BusiNess at a crossroads
So great was his fame by then, his book, Iacocca, an Autobiography
co-written with William Novak (Bantam, 1984) was the best-selling
non-fiction hardback book in both 1984 and 1985 Talking Straight
(Bantam, 1988), a response to Sony founder Akio Morita’s book Made
in Japan (Dutton, 1986) praising American creativity, was likewise a
big seller
Iacocca was in no doubt about the importance of leaders to society
as a whole, as well as to companies In Where Have All the Leaders Gone?
co-written with Catherine Whitney (Simon & Schuster, 2007),
Chrys-ler’s erstwhile leader angrily complains about living in what he sees as
leaderless times:
Am I the only guy in this country who’s fed up with what’s
happening? Where the hell is our outrage? We should be screaming
bloody murder We’ve got a gang of clueless bozos steering our ship
of state right over a cliff, we’ve got corporate gangsters stealing us
blind [WorldCom, Enron, and so on], and we can’t even clean up
after a hurricane [Katrina] much less build a hybrid car But instead
of getting mad, everyone sits around and nods their heads when the
politicians say, “Stay the course.” Stay the course? You’ve got to be
kidding This is America, not the damned Titanic I’ll give you a
sound bite: Throw the bums out!
He, like other charismatic company leaders, knows the power of
the sound bite On his website launched in late 2007 to promote
Where Have All the Leaders Gone?, he invited visitors to rate
candi-dates in the 2008 presidential election by nine qualities beginning
with “c” – curiosity, creativity, communication, character, courage,
conviction, charisma, competence, common sense – which he said all
true leaders possess
Some companies, such as GE in the U.S and ICI in the U.K., were
lucky enough to breed their own superstars GE’s Jack Welch, the
pioneer of “managing for value” and the most stellar of the new
genera-tion of “leaders” (it was no longer enough to be a mere “manager”)
who emerged in the 1980s, joined GE in 1960 when he was 25 He was
CEO from 1981 until 2001, during which time the company’s market
value rose from $14 billion to $410 billion
Welch, whose personal fortune was estimated, by Boston Magazine
in March 2006, to be about $720 million, was affronted by criticisms of
executive pay, and insisted that the market in executive talent was free,
and should not be interfered with After his retirement, Welch followed
Trang 45 Not so much greed 101
Lee Iacocca’s lead and co-wrote with his third wife Suzy Wetlaufer the
best-selling, Winning (HarperCollins, 2005).
John Harvey-Jones (made Sir John in 1985) joined Imperial
Chem-ical Industries (ICI) in 1956, at the age of 32, after a distinguished
career in Naval Intelligence He was appointed CEO in 1982 In his
first two-and-a-half years as leader, ICI’s U.K workforce was pruned by
a third, losses were transformed into £1 billion of profits and the share
price doubled Sir John was the exemplary change agent Among his
best known quotations was “I’m more interested in speed, than in
direction.” After retiring in 1987, Sir John embarked on a new career
as a TV star, in the BBC’s Troubleshooter series, first broadcast in 1990,
in which he advised struggling businesses The ratings were good
enough for five series and several specials, and the series won Sir John a
BAFTA award For a while he was, as one U.K newspaper put it, “the
most famous industrialist since Isambard Kingdom Brunel.” His
oblig-atory book Making it Happen: Reflections on Leadership was published
by Collins in 1988
This cult of personality infected the entire system Institutional
investors demanding change saw the CEO as the crucial variable in
business success and failure, and put pressure on ailing companies less
blessed than GE and ICI with home-grown talent to look beyond the
company for the necessary charisma and box-office qualities
Invest-ment analysts responded to this leader-centric view of their ultimate
clients, exploited investor relations strategies that co-opted CEOs as
their principal marketing assets and substituted for an analysis of the
intrinsic strengths of a company’s business, an assessment of its CEO’s
character, philosophy and management style and detailed examinations
of his or her pronouncements, statements and sound bites
The “CEO as hero” cult was convenient for asset managers and
stock analysts, because having a personification or embodiment to focus
on, and attribute success and failure to, made a detailed analysis of the
large company’s increasingly complicated and geographically dispersed
affairs if not entirely superfluous, at least much less essential Moreover,
the role of a drama critic of superstar CEOs was far more appealing to
many analysts than that of a back-office number cruncher
Investment bankers, whose views on these matters were, for reasons
discussed above, of great interest to their fund manager and stock
analyst colleagues, also found the CEO cult convenient, because it
endowed their celebrity CEO intimates with the power to make major
balance sheet decisions quickly without consulting others This is
an advantage for investment banks, because the economics of
Trang 5asset-102 BusiNess at a crossroads
skimming clearly favor a few large quickly concluded deals, over several
smaller, more protracted ones
Almost the only downside of the CEO cult is the fuss people make
about the enormous pay packets of the CEO superstars
Another downside of the CEO cult for us pedants is what it’s doing
to the language I blame, maybe unfairly (the B-schools have a lot to
answer for, too), the idea that the CEOs of large companies are special
people, endowed with all Iacocca’s nine “c”s (and probably Jack Welch’s
Six Sigmas too), for the import of “management-speak” into daily
usage CEOs doubtless possess many admirable qualities, but a respect
for the language isn’t one of them Ugly neologisms, such as
“commod-itization” and “credentialed,” hijacking innocent nouns, such as “task,”
“source,” “impact,” “critique,” and “access” to serve as verbs (and
occasionally vice versa as in “new hires”), the use of “utilize” when
“use” is fine, additions of superfluous words, such as “in order to,” and
“put in place.” I hope the probable ejection of the CEO, following the
2007–8 crash, from the pantheon of contemporary heroes will lead to
a purification of the English language But I fear it’s too late
The buck and the bucks stop here
The elevation of CEOs into omnipotent superstars with pay packets to
match, is not, thank goodness, an inevitable consequence of the
interac-tion of natural human impulses with the capitalist system
It is, rather, the product of a “market failure” that can and must be
corrected if liberal capitalism is to survive
It’s also the consequence of the characteristic hierarchical shape of
the joint stock company CEOs would not have acquired the power or
the pay they enjoy today if the way companies are organized had not
required one person to occupy the pinnacle position The power of the
CEO is derived, not from the value he or she adds, but from the
topo-graphical fact that he or she is peerless
The argument so far
Large modern companies are not as we would like them to be, partly
because of their hierarchical shape and the omnipotence it assigns to
CEOs But the explosion of CEO pay in recent years associated with
that omnipotence, which is undermining the liberal capitalist consensus,
Trang 65 Not so much greed 103
was not inevitable; it was the consequence of a market inefficiency But
the fact that the CEO market doesn’t work, doesn’t mean that the work
CEOs do is worthless The question we turn to in the next chapter is
“how much is it worth?”
References
1 The Protestant Ethic and the Spirit of Capitalism, Allen & Unwin, 1930.
2 Financial Times, August 4, 2001.
3 The State of Working America, 2008.
4 “Credit crunch halts boom in executive pay,” by David Teather and Julia Finch, Guardian,
Thursday 11 September, 2008.
5 The Free Press, 1986.
6 Searching for a Corporate Savior: The Irrational Quest for Charismatic CEOs, Princeton
University Press, 2002
7 Economy and Society, University of California Press, 1947.
Trang 76 The myth of leadership
The usual rationale for paying the CEOs of large, global companies
ridiculous sums of money is that these organizations are extremely hard
to run, and the mix of skills, abilities and talent needed to run them well
is so rare that the extraordinary people who possess it can command
extraordinary rewards It’s supply and demand Huge CEO pay packets
are just market-clearing prices for skills as rare as hen’s teeth
The stock argument here is the one referred to briefly in the last
chapter; that it is inconsistent to be sanguine about the huge pay packets
of sports stars, but to oppose those of CEOs I pointed out that the pay of
sports stars is not decided by other sports stars, whereas the non-executive
members of RemCos are usually executive directors of other companies
and thus have an interest in ensuring the general level of executive pay
remains high Simon Kuper did a more comprehensive demolition job on
this specious argument in the Financial Times in February 2009.1
He said sportspeople have to pass four stringent tests before they
become high-paid stars The first is genuinely competitive entry; millions
of young men want to play football in the English Premier League and
demonstrable skill is the only criterion for making it The second test is
that, once hired, performance is all; there are no bad professional
foot-ballers Kuper cited a study by economists Stefan Szymanski and Tim
Kuypers that found salary costs explained 92 percent of English football
league success Third, only a few outstanding players are very highly paid
Only 1,000 or so worldwide earn over £1 million a year The fourth test
is that a star’s performance is under constant review on the pitch If you
start to play badly, you’re on the bench or you’re fired
The same sort of tests have been passed by high-earning actors, TV
presenters, musicians, writers and entrepreneurs
CEO pay packets pass none of these tests
But that doesn’t necessarily mean a CEO’s job is easy Perhaps the
social construction that passes for a market in CEOs gets it about right,
despite its inefficiency If a large global company is very hard to run and
someone has to run it, a CEO may be worth what his or her huge pay
packet suggests
Trang 86 The myTh of leadership 105
The CEO system
What does “run” mean in this context? Hard to say It varies Some
CEOs are better at some things than others One may be described, on
his or her appointment, as a “safe pair of hands”; another will be lauded
as “charismatic,” “dynamic,” “inspirational” or “battle-hardened”;
a “brilliant strategist, marketer or financier” and the like But none of
them run everything, or take every decision How could they? The global
company is too large, too complicated, and too polyglot for someone
to run it single-handed It is probable that 99.9 percent of decisions
taken in a global company each day would be taken the same way with
or without a CEO The organization is run day-to-day by the tacit
knowledge embedded in the minds of its employees, and written
down in thousands of processes, procedures, routines and
conven-tions; and by the momentum imparted to a company by being in
business, and dealing regularly with customers, suppliers and other
interested parties
It is the other 0.01 percent of CEO decisions that allegedly make the
difference – timely strategic moves; audacious acquisitions; cleverly
designed procedures; perceptive market diagnoses; the reinvigoration
of a disheartened workforce with an inspiring vision, eloquent mission
statement, or clear and relevant set of corporate values
But the transformation of that three-legged corporate horse into a
Derby winner is never, despite what the CEO’s Long-term Incentive
Plan (Ltip) might suggest, the triumph of one man or woman Other
employees also play their parts and armies of highly paid external
profes-sionals, including investment bankers, coaches, lawyers and
account-ants, and strategy, corporate identity, communications, and IT
consultants, also contribute to corporate performance
Some suggest that Jack Welch is given more credit than he
deserves for GE’s success (see previous chapter); that Gary Wendt,
head of GE Capital, which contributed substantially to GE earnings,
played an important role, and that NBC’s strong profits growth
during the Welch stewardship was the achievement of the network’s
CEO, Robert Wright Wendt and Wright were doubtless also
well-served by groups of able and creative lieutenants, each of whom in
their turn … and so on
I don’t know how much work McKinsey, the market leader in
strategy consulting, did for GE during Welch’s time as CEO, but Welch
must have got to know the firm well during its assignments in the 1970s
from which emerged the McKinsey/GE matrix, a business portfolio
Trang 9106 Business aT a Crossroads
screening tool, familiar to MBA students, which relates “business unit
strength” to “market attractiveness.” McKinsey claims to work for 70
percent of the Fortune 500 (America’s largest companies), and clear
evidence of the firm’s influence in the highest echelons of global
busi-ness is the 70 or so McKinsey alumni who are or have been CEOs of
Fortune 500 companies They include Louis Gerstner, a former CEO
of IBM; James McNerney, CEO of Boeing; Helmut Panke, a former
CEO of BMW; Christopher Sinclair, a former CEO of PepsiCo; Peter
Wuffli, a former CEO of UBS; Stephen Green, chairman of HSBC and
the notorious Jeffrey Skilling, former CEO of Enron
That Skilling was subsequently convicted and imprisoned on charges
relating to Enron’s collapse should not be taken to mean there is
anything sinister or unhealthy about the close links and exchanges of
personnel between large companies and the strategy consultants An
organization the size of McKinsey & Co is bound to hire the odd bad
apple My point here is that some of the achievements the CEOs of
large companies receive material credit for in huge pay packets are more
properly attributed to outsiders
Actual and aspiring CEOs often assemble teams of these counselors
and consultants who follow them, like courtiers following monarchs
from palace to palace, when they move from one CEO position to the
next The allegiance of these people is to the CEO, rather than to the
shareholders who pay their fees They cultivate relationships with
indi-viduals, rather than organizations Their objective is to enhance their
CEO clients’ reputations, by delivering performance improvements
during the CEOs’ periods in office (rarely more than a few years), so
that the CEOs are offered better jobs where their retinues can work
their magic again
Prominent among those who have the ear of the CEO are the
strategy consultants – McKinsey, Bain, Boston Consulting Group, and
so on I am not among those who see strategy consultants as people
who borrow your watch and charge you a large fee to tell you the
time I have met many senior strategy consultants, and have worked
with several on various projects I count some as friends By and large,
I have found them charming, smart, well-informed, perceptive,
thoughtful, creative and tuned in to the management discourse My
impression has been that they can and do add value to the companies
they work at, as well as to the reputations (and market value) of the
CEOs they work for.
Strategy consultants also play a vital role in the development and
dissemination of management ideas
Trang 106 The myTh of leadership 107
The management ideas market
The suppliers of new management ideas and concepts are academics
working at business schools (mostly American) and some consultants and
other business thinkers They develop new ideas, package them in the form
of books, articles, videos, or lectures, and then sell them to the buyers
of management ideas These are of two kinds: distributors, including
management consultants and suppliers of executive education (B-schools,
conference organizers, publishers, and so on), and consumers (companies,
government departments/agencies and other organizations, such as
non-profits)
The value chain isn’t a simple one, however Academics, the main
suppliers, may sell direct to consumers (when they act as gurus to
CEOs, for instance), and many of them have close links with the
consultants, who are the main distributors It is also common for
academics to collaborate with consultants on books and assignments
with clients There’s nothing to object to in this Academics need to
maintain close links with consumers to keep in touch with their concerns
and test their ideas in the real world
The leading strategy consultants make excellent intermediaries for
academics, because their clients are always in the market for new ideas;
they speak both the client’s and academic’s languages; they have plenty
of practical experience, and their feel for the market enables them to
criticize ideas constructively and suggest how and where they might be
tested For their part, consultants are eager to help management
academics test and develop their ideas and will sometimes finance
prom-ising research They are even willing to pay retainers for what amount
to non-exclusive licenses to use the new ideas, because they know
there’s no better way to attract and keep clients, than to be among the
first to offer services based on the latest management fashions
The relationships between management academics and consultants
are sometimes stormy, but often close; somewhat like the relationships
between movie actors and directors The academics are free agents, but
may associate themselves with particular consultancies if they like the
people and enjoy working with their clients They may get wheeled out
to give after dinner talks about their latest ideas to gatherings of clients
and play an important marketing role for the consultants they choose to
associate themselves with And there is much toing and froing between
academe and consulting Consultants may become academics when
they retire and academics often quit the campuses to join consultancies,
or set up their own “boutiques” to consult independently, or act as
subcontractors for larger firms
Trang 11108 Business aT a Crossroads
The intimacy of the relationship between academics and consultants
inevitably means that these two key groups in the management ideas
value chain have come to share a general view about the market
Rational suppliers will tailor their products to suit the needs of their
customers A few management writers earn a lot of money from books
and articles, but they are exceptions, and very few of them write
prima-rily for money Unlike academics in other disciplines, management
academics do not write primarily for kudos either They write to market
themselves and their ideas so that they can charge high rates for speaking
“gigs” and consulting with large companies as personal CEO gurus or
famous brains in teams of consultants
Nothing that management academics do is as lucrative as consulting
for large companies Everything else, from how they plan their own
careers to what they write and how they think is dominated by this fact
For them, success is measured not by how well their books, videos and
lectures are received, but how high a day rate they can charge Some
charge higher day rates than top consultants
There’s nothing to object to here, either I do not share the view
that management consultants, including management academics acting
as consultants, are greedy and grossly overpaid Some of them may be
greedy and some may be overpaid, but the fault in the latter case at
least, lies not in them, but in those who overpay The desire for a high
day rate is no more a sign of greed in a consultant than is the desire for
a high share rating in an entrepreneur
The problem here is that the buyers who set consultants’ day rates
are CEOs of large companies Almost all hirers of consultants work for
large companies, because the client pays, and SMEs (small and
medium-sized enterprises) do not use consultants, partly because they cannot
afford to, and partly because, being still young, they have not acquired
the big company vices that it is the business of consultants to remedy
These close relationships between academics, consultants and large
companies mean that the supply-side of the management ideas market
is focused exclusively on meeting the needs of large company CEOs
Since they are the principal paymasters, the ideas worth most (to an
academic) are those that address their problems and challenges In this
way, the needs and outlooks of the CEOs of large companies dominate
and define the management ideas market Academics tend to ignore the
undergrowth of business, where new kinds of enterprises are most likely
to emerge, because there’s no money in it
Moreover, although in times like the present of retrenchment, the
CEOs of many large companies are busy reducing costs, cutting payrolls