Discover more from Course Notes: Continuous Business Learning
Searching for a Corporate Saviour 2/10
The CEO Search Market
Who makes it to the shortlist?
Someone who’s been a CEO / President of a high-performing and well-regarded company.
CEO search is not cheap time- and money-wise, so the longer this goes for, the more the Board refuses to accept the sunk costs and insists on an outsider vs an insider.
The mere presence of the outsider CEO is proof to the analysts that the Board knows what it’s doing – a vote of confidence that the existing problems can and will be solved.
Convincing the candidate to join gives him/her an upper hand in the power and compensation arrangements.
Extraordinary focus on the CEO as the source of the company’s problems is one of the reasons for subsequent failures.
Something to think about
There’s no conclusive evidence linking leadership to the organizational performance.
“When a manager with a reputation for brilliance tackles a business with a reputation for bad economics, the reputation of the business remains intact.” © Warren Buffett.
Schools of thought about CEOs and Firm performance
The leadership school
CEOs play a critical role in firm’s performance
Impact via decisions on the mission, strategy, structure and culture.
Very popular in business literature —> indoctrination of the readers
The “constraint” school
CEOs are constrained to make a meaningful impact.
A variety of internal / external constraints inhibit the CEO’s ability to affect firm’s performance. Includes: internal politics, past investments into assets and markets, org norms, the combination of the 5 forces.
CEOs don’t have statistically meaningful impact on firms even when they make major decisions about strategy or structure.
Past successes can be explained by the “survivor bias” and have no predictive power.
The third school: “When does leadership matter?”
The impact of a leader is highly case-sensitive and varying according to individual situations, industries, companies and CEOs.
Even then the industry and macroeconomic conditions [COVID, anyone?] diminish the overall CEO effect.
Personification and the Cult of Meritocracy
Strong social, cultural and psychological forces lead people to believe in the cause-and-effect relationships such as between corporate leadership and performance.
The cultural bias towards individualism discounts external influences and fixates on the personal characteristics of leaders as a shortcut.
Performance outcomes are attributed to the leader image.
CEO’s halo can easily overshadow the visible culture mismatch (sprint vs marathon, for instance).
CEOs from some industries have an advantage of the practice in cutthroat beauty contents for new jobs, which impresses the nomination committees from their targets. Companies with the promotion from approach within are susceptible to this fallacy the most.
CEO search is a very closed process, with most candidates more or less obvious, and with the opinions of outsiders (shareholders, analysts) taken into serious consideration.
Long-term performance effects from hiring star outsiders are no different from promoting an insider.
Smaller board —> easier for an outsider CEO to control. Captive board.