Why CEOs Are Terrible At Management

It stands to reason that many CEOs are not very good managers: the data suggest that they are hired, evaluated and compensated on metrics that have little to do with it.

Financial measures based on management of balance sheet, income statement and stock price performance tend to dominate the issues which dominate CEOs' lives. Those are the factors that shareholders and directors appear to care about most. So the component features of those measures tend to be those with which CEOs are predominantly concerned. And, as countless management tomes have informed us, what gets measured gets managed.

The problem is that the world, and particularly the global economy that drives it, has become a more complicated and nuanced place. What works for selling products and services within one's native country is no longer as cut and dried as it once may have been. But actually running a global company, as opposed to one that merely operates globally, is even more challenging. And that is where the current generation of chief executives and the boards of directors who hire them tend to have trouble.

The skills needed to assuage clients, suppliers, employees, politicians, government policy makers and investors are confined to those acquired while studying for the Certified Public Accountants' exam. The so-called 'soft stuff' that helps develop managers, new markets, prickly scientists, dubious acquirees and a host of others who may be essential to the enterprises future success  but who may not give a fig for the subtleties of LIFO vs FIFO or international vs GAAP accounting conventions. But many current or putative CEOs and their boards were already well into the management pipeline before design, software, mindshare and other relatively new concepts took hold. The cost of replacing employees vs treating them like variable costs retains its pull for those uncomfortable with the messy emotional detritus of organizational behavior.

Even some boards, as the following article explains, do not think their CEOs are necessarily as good as they should be, but the compensation arms race and the embarrassment of being jilted for a competitor by a competent leader are sometimes greater concerns than actually managing well in the present. Which accounts for the fact that 41% think the CEO of the company on whose board they sit is in the top 20% yet virtually all pay negotiations set that compensation standard as the goal for recruitment and retention.

Until management builds mentoring, developing and managing others into basic performance calculations, not just evaluations, the gap between managing and measuring will continue to persist. JL

Susan Adams reports in Forbes:

It makes sense that boards are preoccupied with financial measurements. But the attention given to talent development and mentoring is at rock bottom.
A new study shows that CEOs are doing a lousy job when it comes to people management. The study, a joint project by the Center for Leadership Development and Research at Stanford’s Graduate School of  Business, Stanford’s Rock Center for Corporate Governance and The Miles Group, a consulting firm in New York that focuses on C-suites and corporate boards, found that both CEOs and boards are overly focused on the bottom line, at the expense of mentoring and engaging their boards. The survey polled 160 CEOs and directors of North American public and private companies.
One of the questions to boards of directors: Rank the top weakness of your CEO. “Mentoring skills” and “board engagement” tied for first place. “This signals that directors are clearly concerned about their CEOs’ ability to mentor top talent,” said Stephen Miles, CEO of The Miles Group, in a statement. “Focusing on drivers such as developing the next generation of leadership is essential to planning beyond the next quarter and avoiding the short-term thinking that inhibits growth.”

The survey asked boards and CEOs about the weighting they give to various aspects of CEO performance. The most important thing, rated at 41%, was “accounting, operating or stock price performance.” The weighting given to people performance was incredibly low, with “succession planning” getting just a 5% rating and and “workplace safety” just 2%.
The researchers say that CEOs need to reach beyond numbers and care about people management. Two other statistics from the survey that underline how disengaged CEOs are from concern about employees: When asked about their CEOs’ greatest strengths, 70% rated “decision-making skills” at the top. At the bottom: 27% said “compassion/empathy,” 23% said “mentoring skills/developing internal talent” and just 23% said “listening skills.” The lowest-rated skill was “conflict management.” Likewise, when asked about CEOs’ biggest weaknesses, 24% said “mentoring skills” and 22% said “sharing leadership/delegation skills.”
Also striking is the fact that a sizable majority of directors (83%) and boards (64%) agree that the CEO evaluation process should rely on a balanced approach between financial performance and nonfinancial measurements. “Unfortunately, the truth of the matter is that the CEO evaluation process is not that balanced,” said Stanford’s David Larcker, co-director of the Center for Leadership Development in a statement. “Amid growing calls for integrating reporting and corporate social responsibility, companies are still behind the times when it comes to developing reliable and valid measures of nonfinancial performance metrics.”
More results from the study:
-          Directors don’t rate their CEOs highly. Only 41% of directors say their CEO is in the top 20% of their peers and 17% say their CEO is below the 60^th percentile.
-          A sizable minority, 10%, say they have never evaluated their CEO.
-          CEOs who are evaluated, agree with the marks they get. “Shareholders have to wonder at the objectivity of the evaluation process,” said Larcker. “It’s hard to believe that boards are pushing CEOs on their evaluations if they pretty much agree with their evaluation.”
-          Many directors forgive CEOs for legal and regulatory violations. This is one of the most striking results of the study. When asked about unexpected litigation against the company, a significant minority of directors, 27%, said that it would have no impact on a CEO’s performance evaluation, while 24% said that regulatory problems would have no impact. Shouldn’t CEOs be held accountable for legal and regulatory lapses? At least directors were unforgiving about ethical violations and a failure to be transparent with the board. A full 100% said their CEOs would get worse performance evaluations in the face of ethical problems.
I agree with the study’s authors that in the ideal world, CEOs would care about people management and they would be grooming successors to step in should something go awry. But I also understand boards’ and bosses’ preoccupation with the bottom line.
Also I can think of two recent examples of companies where the CEOs left abruptly under unexpected circumstances and the companies reached outside for replacements who, thus far, have arguably done a good job—better, perhaps, than someone from inside would have done. At Yahoo YHOO -0.15% last year, Scott Thompson had been CEO for just four months when activist investor Daniel Loeb, who opposed Thompson’s appointment, sent a letter to the board revealing that Thompson had lied about his credentials. Thompson, who was an outside hire from PayPayl, had zero time to groom a successor, so Yahoo reached outside again and hired Marissa Mayer from Google. Though she’s been in the post for just a year and may still hit roadblocks in her efforts to revive the struggling company, Yahoo’s stock has risen from $15 when she took the helm to $26.
Another example: Struggling big box retailer Best Buy lost its CEO, Brian Dunn, suddenly last April after his inappropriate relationship with a female subordinate came to light. An insider, director G. Mike Mikan, served as interim CEO for four months. Then the company hired Frenchman Hubert Joly, who had been running a Minneapolis travel company called Carlson. Though Best Buy’s stock fell from $20 when Joly came on board to $11 in January, he has managed to revive the company’s fortunes and bring the share price back up to $26. It’s not clear that an insider could have done a better job.
Maybe I’m guilty, like directors and CEOS, of focusing too much on the bottom line here, but in the end, that’s what shareholders value. Though I agree with the Stanford study authors that in an ideal world, CEOs would channel more of their energy toward listening to the people inside their companies and developing talent from within.