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May 7, 2006
The mythical CEO hero lives on
I was roused by a couple of articles that came across my desk this week to think again about the prevailing myth of heroic corporate leadership - particularly heroic CEOs.
First was the following headline in the Australian Financial Review on Wednesday:
Dragon fires up another record. After lifting St George Bank's interim net profit to a new high, CEO Gail Kelly said she was confident the NSW economy would bounce back.
Second was the cover story in this week's BRW:
Kick-Starting WESFARMERS: What CEO Richard Goyder must do.
You have to wonder why these CEOs need to have employees. They never seem to do anything. It's just the CEO. the board sits on its hands and the rest of the senior executive team just turn up once a month to collect their pay and have their car serviced.
You have to wonder how this situation came to be. Without doubt there have been great acts of leadership throughout the ages but in times past these have been regarded for what they are. Courageous acts of leadership that have inspired and given heart to the followers with the result being a resounding victory. Winston Churchill comes to mind. Few would say that Churchill won the war or event that Churchill won the Battle of Britain. He would be regarded as remaining true to his purpose in the face of huge adversity and leading his people to resist the enemy.
Why then do we regard much lesser acts by the leaders of modern corporations as so heroic and why to we attribute success and responsibility solely to the CEO? I am in the process of exploring this phenomenon. Here's what I have come up with so far.
Henry Mintzberg, in his article Beyond Selfishness [payment required] argues that shareholders
have co-opted the chief executives by rewarding them disproportionately for the performance of the entire enterprise. Through options and bonuses, they have bought off tbe cbiefs. According to a recent survey, "Executive Excess 2001," conducted during tbe 1990s hy tbe Institute of Policy Studies, CEO pay rose by 570%, while profits rose by 114%, and average worker pay rose by 37%. barely abead of inflation (wbicb was 32% over this period). Had workers' pay kept pace, they "would have averaged $120,491 instead of $24,668" by tbe end of the decade.'" In 1999, wbile median sbarebolder returns fell by 3.9%, CEO direct compensation rose another 10.8%."
Lee Drutman in Runaway CEO Pay and the Myth of "Shareholder Democracy" argues almost the opposite:
I ask, because at almost all U.S. companies, shareholders have about zero say into who sits on the board of directors and how executive pay is set. The directors are typically nominated by management, and shareholders are given one and only one slate of directors to choose from—a Soviet-style election that virtually guarantees managers will get their trusted friends on the board of directors. So it's no surprise that executive pay packages continue to defy common sense. After all, what's a few million among friends?
I lean towards Drutman's view. I would go as far as to say that the whole process is a conspiracy of the CEO club. It suits those who are and those who aspire to be CEOs for people to believe that the fate of their corporation rests solely in the CEO's hands. I'm not so sure that boards reward CEOs so highly because they are so chummy with them, rather it is because CEOs have held their boards over a barrell with the threat of walking if they are not sufficiently rewarded. The board, fearing retribution from the market for appearing not to be able to manage their key appointments, caves in.
Shareholders are not blameless in the process either. Mintzberg is right when he says it is related to greed. Shareholders have abbrograted their control to "the market" - ie that mass of twenty something year old traders who play the game purely for the thrill of the win. (See Liar's Poker by Michael Lewis for a humourous and insightful account of life as a trader.)
Posted by chriscurnow at 8:13 AM | Comments (0)