Searching for a Corporate Saviour 4/10

Part 3.

The Rise of the Charismatic CEO

The shift from managerial to investor capitalism

  • Professionally managed corporations were thinking long-term and refused the requests of shareholders to increase short-term gains at the expense of future disasters.

  • Boards were controlled by CEOs and not the other way around.

  • However, the managerial self-interests got out of control with rising salaries and perks and declining corporate profits as a result.

  • Shareholders could sell the company’s stock but could only buy shares of equally inefficient competitors.

  • Investors first pushed the government for deregulation as if it were the laws that hindered company performance. Obviously, this didn’t work.

  • Most shares are now owned by institutional investors, who can’t just sell their whole blocks of shares —> had to make managers take their concerns more seriously.

  • In managerial capitalism boards rubber-stamped managerial decisions; CEO succession finally became a topic on the Board’s agenda.

The Liability of “Insiderness”

  • Insider candidates may be painted by the Directors as part of the problem why the incumbent CEO was ousted.

  • “Executive tournaments” (of outsiders) – with meritocracy in mind, the would-be CEO are competing for a top job. The idea is that the winner must possess enormous political skills to survive and navigate the environment.

  • Internal candidates, however good they are, still need to be benchmarked against the market candidates.

  • Internal candidates are viewed as suspect and as impediment to org change. Specifically, they’re considered less likely to do redundancies or reversing past strategic decisions they have had a hand in making.

  • An outsider is a change agent, someone [supposedly] capable of executing a different strategy.

  • Directors became more motivated to bring in outsiders, because:

o   Their comp package started including stock options / RSUs —> better aligned incentives and a stronger push to break with the old practices;

o   Move towards an independent [from the CEO] Board also leads to more frequent favouring of external candidates.

  • The focus is less on the CEO managerial skills and more – on the kind of person.

Charismatic Orientation

  • Shareholder capitalism: the belief that the CEO can and should be held responsible for corporate performance, irrespective of his/her job performance.

  • Stock options are an example of this: linking future income to future corporate performance as measured by the stock market. A CEO can be fired for underperformance, but still receive a golden parachute.

  • This also makes Boards more straightforward about the reasons of CEO dismissals (vs saving face).

  • 1980s: new CEOs were portrayed either as entrepreneurs or as corporate saviours: in both cases – very charismatic leaders.

  • Part of the paradigm shift was the changed attitude towards businesses and their social mandate: in the past they were just money-making machines; now they have a social mission, and that employees are the biggest asset of a company. The best way to deliver high shareholder returns is to maximize the efforts and commitment of employees.

  • Job all of a sudden has a meaning to employees. Companies now have values and mission.

  • And the job of a CEO now is to inspire and motivate people to give their best. Display the “can do” attitude and confidence.

  • Old CEOs/Directors are more reserved and politically skilled; new CEOs display self-confidence and appear seductive.

  • Not surprisingly, institutions (business press, financial analysts) have become powerful mediating influences.

The Changing Institutional Context

  • Employee pension plans became geared towards stocks; same is true for mutual funds, too. More money in the stock market —> more analysts and business media.

  • Cult of CEO partially appeared due to the proliferation of this business entertainment.

  • Current media approach personifies corporations and ignores the org and structural / business environment complexities. People are led to believe that corporate leadership is a function of CEO personality.

  • The outcome of analysts’ work is now consumed not only by institutional investors, but also by the entire investment community. And of course, their analysis should be newsworthy to be published —> business media likes personalities more than numbers.

  • The new rules of CEO succession: be media- and analyst-worthy, establish credibility for the firm and inspire confidence in all stakeholders. CEOs must be “star storytellers”. And the contrast is best visible with the outside CEO.

  • CEOs may spend up to 40% of their time on investor relations.

Part 5.