A Blog by Jonathan Low


Aug 12, 2013

The Myth of the Moron CEO

Patience may be a virtue but instant gratification is an imperative. At least in this society at this time. We worship convenience and we demand satisfaction.

Which is neither here nor there, unless you are trying to manage a business so that it grows in ways that assuage the needs, wants and desires of multitudinous stakeholders, all of whose criteria for success may be different and, not infrequently, contradict each other.

So, in the spirit of beating down the nail that sticks up the highest, CEOs get a lot of the blame. And they sure have made it easy for their detractors: exorbitant pay packages; sweetheart contracts that insure they win even when customers, investors and employees lose; imperial perquisites and the rest. All of which feeds the insatiable demand for human sacrifice when quarterly estimates are missed or someone wants to convert a lumbering industrial behemoth into a sleek financial gazelle.

But in our haste to jettison anyone or anything not in sync with our hourly mood swing, it is worth remembering that that the perfect is all too frequently the enemy of the good. That quote has been variously attributed to von Clausewitz, Voltaire and Joseph Stalin (who knew a thing or two about running an organization ruthlessly). The point is that we also tend to be a glass-half-full society when it comes to the potential for our own ideas versus those of the recently or soon-to-be deposed.

The primary problem is that for all of the favorable press Schumpeter's gales of creative destruction have received, there is a lot of evidence to suggest that turmoil negatively affects productivity, efficiency, client relationships, employee commitment and a host of other factors that contribute to superior performance over time. Replacing executives is expensive and the more senior the position, the more costly the impact. In addition, despite the notion that good leaders can manage anything, research has demonstrated that it takes most people time to adjust, adapt and deliver their full potential. This rarely is calculated in the equation that leads ineffably to the demand for replacement of whoever is in the bulls eye. HP and JCPenney are recent examples of companies whose CEO revolving doors have resulted in damage rather than damage control.

Ultimately, however, as Greg Satel explains in the article below, if business is ostensibly a fulcrum for the rational application of data to achieve positive results, continuity adds value. For all their many faults, most CEOs got where they are by dint of hard work and successful strategy execution. They are in the position of attempting to achieve positive outcomes by managing a mathematically impossible list of variables. That they occasionally fail is probably less noteworthy than that some actually succeed. The odds are against them, as the data cited below makes clear, but if they were really morons, it is unlikely they would they have been able to win the positions they sought and sign those amazing contracts. Take a lesson. JL

Greg Satel comments in Digital Tonto:

80% of CEO’s of S&P 500 companies end up getting the axe before they reach retirement.  They can’t all be bums.  Many, if not most, are highly competent, dedicated professionals who face an increasingly disruptive marketplace.  If the standard for continued employment is omniscience, no one will measure up.
While median wages are flat or even losing some ground, CEO pay is at an all time high.  The average corporate chief now makes $12.3 million, hundreds of times what the average worker brings home, a ratio that has increased 1000% since 1950.
That makes chief executives an easy target.  As my Forbes colleague Adam Hartung made clear in his article, Oops! Five CEOs Who Should Have Already Been Fired, when things don’t go well, the knives come out, quickly.
I don’t cry for the pampered executives, with their perks and golden parachutes, who can soothe their wounds with a nice bottle of chardonnay by the golf course (while laid off workers face foreclosure instead), but I do think if we’re are going to vilify them we should at least get the story straight.  Too often we don’t and that’s a problem.

The Blockbuster Buffoon

When Netflix’s Reed Hastings and his team went to Dallas to pitch a partnership to Blockbuster in 2000, they were laughed out of the room.  Ten years later, Netflix is a $14 billion dollar company and Blockbuster is bankrupt.  John Antioco, the CEO at the time, is now widely considered a buffoon, a moron, an idiot and worse.
However, take a closer look and the story isn’t so simple.  As Antioco described in a HBR article (and nobody disputes his facts), after initially dismissing Netflix as a niche player, he soon saw the writing on the wall and moved quickly to discontinue late fees and invest heavily in an online platform.
The moves earned him not plaudits, but a proxy fight and before long Carl Icahn was in control of the company.  Antioco was removed as CEO, late fees were reinstated and investments in the online platform were curtailed.
Would Antioco’s plan have worked?  We’ll never know, but what’s clear is that he had an impressive career before Blockbuster, made important contributions to its earlier success and it was not he, but Carl Icahn (who many consider to be a visionary) and a highly credentialed board who presided over Blockbuster’s demise.
The truth is, most CEO’s are neither heroic titans of capitalism nor Monty Burns type villains, lording haughtily over Dickensian sweatshops.  Most of the time, they are just people trying to do the best job they can.

The CEO’s Who Should Supposedly Get The Axe

Hartung lists five companies whose CEO’s he thinks should get the axe: Cisco, GE, WalMart, Sears and Microsoft, three of which (GE, Wal-Mart and Microsoft) are among the top ten businesses in the world in terms of market capitalization.  A fourth, Cisco, was formerly the most valuable company in the world before the dotcom bubble imploded its entire category.
Two of the CEO’s, Ballmer of Microsoft and Immelt of GE, took over from legendary leaders right before hard times hit in 2001, both of whom have had to deal with immense disruptions in the legacy businesses they inherited (PC’s in Microsoft’s case, finance in GE’s).
Also singled out were David Duke of Walmart (the bribery scandal was cited), John Chambers of Cisco and Edward Lampert of Sears (okay, he does seem like a jerk).  Even Jamie Dimon of JPMorgan Chase did not escape the wrath of Mr. Hartung.
It’s a curious perspective, given that all of the companies named (except for Sears) are highly profitable and at or near the top of their respective industries.

A Bias For Shiny Things

Mr. Hartung gives various justifications for meting out his sentences, some more justified than others.  Walmart’s conduct in the Mexican bribery scandal does appear to be outrageous (although, in some markets, the line between a bribe and a mandatory grease payment is often hopelessly blurred).
Others have had missteps as well.  Ballmer’s foolish dismissal of the iPhone was a blunder of the first order.  Dimon’s lack of oversight cost his company billions.  Immelt and Chambers haven’t been able to articulate a clear strategy to the markets and so on.
However, the evidence appears to be selective at best.  If Ballmer is to be blamed for missing mobile, he should be praised for Kinect, the fastest selling consumer device ever, as well as the extraordinary success of the Servers and Tools business.  If Dimon’s full record is to examined, certainly his skillful navigation of the financial crises should be included.
There are other problems with Mr. Hartung’s analysis as well.  He uses stock performance over arbitrary periods (the pre-crisis period of 2000/2001 seems to be a favorite benchmark) and doesn’t index to market or industry factors.  Mostly, his criticism seems to stem from the fact that these CEO’s do things differently than he would.
That seems a bit thin to me.  As a former CEO I can attest, when you hold the job just about everyone thinks they can do the it better than you do.  Moreover, Mr. Hartung’s analysis doesn’t approach the issues as a manager would, with an examination of profitability, competitive position, strategic options, etc.
An Age Of Continued Disruption
As I noted above, I see no reason to feel sorry for CEO’s.  As a group, corporate chieftains tend to be an arrogant, overpaid lot.  However, I also see a problem with pundits whose reaction to every misstep, real or imagined, is to “throw the bums out,” without making a careful, thoughtful business analysis.
We should also consider that average CEO tenure has dropped significantly and outgoing bosses are increasingly replaced by outsiders.  This creates a period of confusion as the new CEO gets up to speed, evaluates the business and puts in a new team.  Perhaps not surprisingly, research suggests that management discontinuity hurts performance.
And that will make it impossible for any public company to maintain any semblance of strategic continuity or long-term thinking.  The rational strategy for any executive would be to juice up earnings for a few years, collect some bonuses and then live out a luxurious existence sitting on boards and playing golf.
Hey, maybe CEO’s aren’t such morons after all…


obelus said...

I am not so sure that we should weep real tears over the precarious situations that CEOs may find themselves in with stakeholders in some instances. Yes, sometimes the knives come out, but the knives aren't real. In fact, they are illusory. A senior administrator being kicked out the door causes more gossip than anything remotely close to pain. It is rare when a CEO faces disillusionment from a board much less a full fledged shareholder revolt. And stakeholders? If this includes employees, well, they are just going to have to suck it up and go along, aren't they? You can achieve a top spot in a firm by dint of having an enormous, insatiable ego and an unparalleled ruthlessness. While that doesn't make you a moran, I believe there too many instances of moronic behavior at the top to rationalize away.

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