Open Positions, Closed Shops: Learning from the External CEO Succession Process
The influence of external institutions on the CEO search is that capable candidates never make it onto the Directors’ / ESFs’ radars. Thus, the candidate pool consists effectively of the same people, bringing back the oligarchic control.
This leads to unprecedented transfer of wealth from shareholders to CEOs/ex-CEOs regardless of their capabilities or performance.
Consequences of External CEO Succession for Corporations
Even if CEOs are kicked out, they still laugh on their way to the bank, knowing that the newcomer’s success is far from guaranteed, and the whole survival of the firm is at stake.
Many boards are overwhelmed with their preservation instinct and do what will protect themselves, not the organization.
Information asymmetry can’t be reliably reduced by checking the firms from the outside: internal information networks within firms are not visible and/or documented.
Absence of reliable information on what the person would do in a certain situation (even via a case study simulation) leaves many candidates out of the loop.
CEO Pay: the spiralling cost of charisma
Boards try to maintain a balance of short-term and long-term CEO pay, but oftentimes it’s defined by the CEO + their compensation consultant.
Example from the book (circa 2001): 2/3 of CEO comp is stock options, an equivalent of 13% of corporate liabilities.
Many CEOs exercise their options and sell underlying shares as soon as they vest [MK: one of the possible explanations is not greed, but the need to derisk as the disproportional majority of the CEO’s assets are in the company’s stock.]
However, derisking is precisely the wrong motivation for the CEO who’s supposed to have more than just the skin in the game.
CEOs are not very keen on reporting the real cost of their compensation to the firm [MK: and since the equity-settled compensation sits under “adjusted” EBITDA.]
For some reason it’s not obvious to everyone that stock options dilute the share base; the underlying assumption is that the stock price growth more than compensates for this dilution.
The CEO performance myth is self-perpetuating, with each party asking itself: the others can’t be wrong by justifying this insanely high compensation?
The emergence of the “winner-takes-all” markets makes the CEO comp problem worse.
It’s worth mentioning that should the CEO agree to work for less than the other guy, this will likely portray them as somehow deficient as everyone tries to maximize their own utility.
To repeat an earlier statement, it’s naïve to attribute the company performance gains to a single individual.
The Nonmonetary costs of charismatic succession
The vision of a charismatic leader is a poor organizing principle for contemporary firms. The firms need sharing of info, business processes and the dispersal of decision-making authority across all levels of the organization.
Charismatic leadership is manipulative, centralizing power a-la “the Big Brother”.
Charismatic authority discourages criticism. And as such, the feedback loop breaks, and the CEO has no way of knowing if they’re effective – up until the angry call from the Board.
Charismatic CEO’s pay makes unhappy their immediate subordinates who do all the heavylifting. And the whole process implicitly devalues the contributions of the insiders; the huge CEO pay lowers the commitment of their colleagues who will not develop the non-marketable company-specific skills (and the company won’t pay for their education anyway).
As the Board looks for a CEO replacement, they decouple the Chair and the CEO roles, and after finding their star … they couple these roles again!
This is also very obvious when new CEOs remove incumbent execs and replace then with their own team. [MK: there’s a word on the street that this is more or less a given.]
Also another thing that people don’t understand is that in most cases the wounded CEOs (after being ousted) never get back to the privileged top of the mountain, i.e. their golden parachute IS the payback for the risk. They may still become CEOs of smaller companies, but at the cost of reputation and status.