The limited (but real) impact of the CEO
Do CEOs really matter? Back in 1972, an article by Stanley Lieberson and James O'Connor in the American Sociological Review contended that the identity of the chief executive mattered far less to corporate performance than which company he ran and which industry it happened to be in.
Ever since then, management scholars have been arguing about whether Lieberson and O'Connor were right. I think it's fair to say that the consensus now is that they weren't--CEOs do matter. Two interesting recent papers on the topic available online, for those of you who like footnotes and advanced statistics, are "The Good, The Bad, and the Lucky: CEO Pay and Skill," by Robert Daines, Vinay B. Nair, and Lewis Kornhauser, and "How Much Do CEOs Influence Firm Performance--Really?" by Alison Mackey. But it's also fair to say that academic research does not reveal CEOs to be the corporate superheroes we often portray them as in the business media. Consider the recent study of "superstar CEOs" by Ulrike Malmendier of the University of California at Berkeley and Geoffrey Tate of the University of Pennsylvania's Wharton School, who found that companies run by top executives who won awards handed out by the business press between 1975 and 2002 consistently underperformed the market after being honored. Malmendier and Tate argue, in part, that CEOs who are anointed as superstars neglect their jobs. I got into this subject while working on a story for the latest Fortune on "The CEO Stats That Matter." My initial faint hope was that maybe there was a Bill James of corporate statistics out there who had figured out what we should and shouldn't be focusing on. The closest thing is probably Jim Collins, whose statistic of choice is shareholder return, measured a decade or two after the CEO in question has retired. Using that standard, Collins identified 11 CEOs in his book Good to Great who steered their corporations to sustained leaps in stock performance. They were all self-effacing insiders who put their companies ahead of themselves and focused most of their early efforts on surrounding themselves with good people. That seems to be where leaders really can have an impact, by making incremental changes in the functioning of an organization. At least, that's how they can have a positive impact. "Good leaders can make a small positive difference," Stanford Business School's Jeffrey Pfeffer told me. "Bad leaders can make a huge negative difference-because they drive people out. If you said to me, 'Who can fix GM?' I don't know. But there's no question that someone could make an enormous difference on the downside." Pfeffer thinks the business media does a great disservice by portraying CEOs as "all-powerful deities" (his new book with Robert I. Sutton, Hard Facts, Dangerous Half-Truths, and Total Nonsense: Profiting from Evidence-Based Management, which includes a nice review of academic work on CEO impact, disapprovingly cites a couple of Fortune articles on this count). I think we're just trying to find ways to tell compelling stories that readers will finish, but of course he has a point. Large corporations are vast and complex entities, with customs and attitudes that are hard for any one leader to change. So why do we talk as if the CEOs are truly in charge--and more importantly, why do we pay them that way? This is nonsense. The leaders do matter if they are doing what they are supposed to do. Consider HP (pre-texting scandal aside), Mark Hurd has done a terrific job of realigning org-charts, fixing reporting structures, hiring on deputies focused on strategic goals, and making hard but important decisions. This brand of leadership is rare, but it makes a HUGE difference in results. The proof is in the pudding.
The answer to the question why we pay them so much is quite easy. The BOD's think it's needed to keep good talent and the shareholders never challenge them on it. Until some shareholders (i.e. the owners in case you forgot) challenge this absurd assumption that CEO are so important we'll keep seeing huge comp packages and they'll rise higher than wage aves.
The issue is what the CEO adds above and beyond the industry effects. Too often the media just embrace "right time, right place" and attribute brilliance to the current occupant when the real work was done by the predecessor.
My question is why do people care so much about how much money another person is making. I don't believe in general care and concern for what's right in the world. Mostly, I see it as envy and greed, which could be the reason why CEO's are paid so much in the first place. No one ever focuses, however, on the good that could come of it. For instance, perhaps CEO's are being overpaid under the assumption that they are superstars and are worth it. The boards then are overpaying, but if I know anything about markets its that inefficiency is not sustainable in the long run and thus the practice should die out on its own. But in the mean time, really talented people are going to be drawn to corporations and away from other areas such as ancient Egyptian wall drawings. This will mean that our most talented people will be gaining the knowledge and experience it takes to run these monster organizations and in the future if pay does become more efficient, we can be sure that those receiving the compensation are more qualified than ever. Indeed, it will always be true that where there is a light, there will be a moth drawn to it. And I don't know about you, but I still love the light on, baby. It keeps me awake but I don't mind.
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