Shattering The Myth Of The Super CEO

MANAGING

For someone who is so against charisma in business, Rakesh Khurana doesn't do too badly himself. An Assistant Professor of Business Administration at the Harvard Business School""he teaches Leadership and Organisational Behavior in the MBA programme""Khurana is busy choosing between cover-options for his first book.

Due in September 2002 from Princeton University Press, he holds up his final choice: it's a glossy dust-jacket with a provocative title, ''Searching for a Corporate Savior: The Irrational Quest for Charismatic CEOs.''

Taking on those iconoclastic leaders of corporate America""from Lee Iacocca to Jack Welch""does not faze Khurana. The book analyses the imperfections in the labour market for CEOs based on his research into the hiring and firing of top executives at over 850 large American corporations. Khurana's treatise is not so much about exposing the feet of clay of CEOs that Wall Street has put on a pedestal, but to lift the veil of secrecy over the CEO selection process in corporate America.

What Khurana reveals is not pretty. The rise in the power of institutional investors has led to the creation of an ''external'' market for CEOs, which is wracked with irrational decision-making.

Increasingly, the emphasis is more on bringing in a ruthless outsider to boost the performance of an underperforming company than on grooming leadership within the company. A famous CEO is preferred over a low-profile CEO as the former is seen to boost public confidence""and share prices""fast.

Boards, instead of standing against such external pressures, are quick to buy into the concept of a ''saviour'' for the company's myriad problems. They are equally quick to condemn her when the messiah is unable to deliver results against the unrealistic expectations.

Says Khurana: ''Directors are part-time governors. They meet four times a year for two or three hours. It's pretty hard for them to get an assessment of what the problems of a company are.'' So it's not the candidate who is most suitable for the job who gets selected. Instead, the winner is the most defensible and democratic choice: the charismatic CEO.

The problem with charisma is that it is unstable, says Khurana. ''It's the difference between a cult and a religion. A cult does not survive; a religion does.'' That's not surprising to hear since Khurana wears his strong organisational sociology leanings on his sleeve. He received his bachelor's from Cornell University in Ithaca, New York, and his master's and doctoral degrees in organisation behavior from Harvard University. Subsequently, his research has focused on macro-organisational theory and the dynamics of executive labour markets.

A common thread that stands out in Khurana's body of work is exploring the forces that govern the process of CEO change. He has conducted research in four inter-related areas: factors that lead to vacancies in the CEO position; factors that affect the choice of successor; the role of market intermediaries such as executive search firms in CEO search; and the consequences of CEO succession and selection decisions for subsequent firm performance and strategic choices.

Says Khurana: "I consider myself part of a growing group of scholars who employ the social networks perspective and field-based knowledge to re-frame classical economic and sociological explanations of organisational decisions and market outcomes." Searching for a corporate saviour airs out some of the harsher realities""the glass ceilings, the class-structure, the demographic biases""of the era of the charismatic CEO. In a conversation with Manjari Raman, Rakesh Khurana lays out his case:

That's quite a battle you're waging against charismatic leadership. Are you going to be the bellwether of the end of the charismatic CEO's reign, which might have ended with the exit of GE's Jack Welch?

When everyone sees what's going on with Enron, the escalating CEO pay, which continues to go up despite a dramatic drop in corporate performance, and the issues about how top executives seem to be getting a different kind of deal from employees (then) what I have come up with is going to be received with less of a view that I am some sort of a radical""which I am not!""and more that I am a realist. I believe that these actions fundamentally threaten the integrity of our corporations.

And not just in the US. The rise of the charismatic CEO, escalating pay, and the consequences of Enron or Global Crossing""these have reverberations across the world. It undermines the medium-term and long-term prospects of developing countries who are embracing more of the free enterprise system.

Why are you so against the idea of a charismatic CEO?

People have the belief that the one solution to solving all organisational problems is: "If we could just get the right person in." We need a leader with a capital L. What they then undertake is a search process that is inherently flawed.

Even with the aim of finding someone who is different, who will bring in a different set of cultures and skills, the process by which they undertake the search is not likely to result in that espoused outcome.

The attribution is made that the decline in a firm's performance is because of a leader. And the best way to solve the problems facing the firm is finding the right person and finding a (new) leader.

And you don't agree with that?

The facts don't line up with it. Of the hundreds of studies that have been done using large samples, no one has ever found a CEO effect. If you pick performance as the dependent variable and run the statistics, about 60 per cent of the variance of a firm's performance is affected by what industry the firm is in.

Compare the best performing mining company, which is in a commodity market, to the worst performing pharmaceutical company. Over a five or ten-year period, the mining company will always do less well than the pharmaceutical company.

But there is always the hope that within an industry's performance bandwidth, a dynamic CEO will nudge the firm's performance closer to the maxima...

You are absolutely right. There is variance within an industry. But then you would think it would make a difference in the search for a CEO, it would be someone with a deep understanding of the industry. But if I show you some specification sheets, which describe what firms are looking for, you will not be able to even name the industry for which this specification sheet has been put forth.

Let's pick a sheet at random and check the specifications for the firm's CEO.Here's one. ''Astute intellect, decisive, action-oriented, person with highest integrity and authenticity, can operate in highly flexible, fast-paced environment.'' These don't tell you anything!

These are motherhoods and apple pie. You wouldn't know that this one is for a technology company. Here's another one. ''High energy, consensus builder, team builder, should have ability to communicate.'' This happens to be for an insurance company. ''Individual should have demonstrated effective interaction.''

No one is against consensus building, but this doesn't tell me anything. These specification sheets are very much based on personality and behavior, and very little attention is paid to the criterion one would think people would be selecting on, such as industry skills.

For many CEOs, it is not even a requirement that they have matching industry skills. The belief is that if we can just find the right leader, he""and most often, it is a he""will be able to, regardless of whatever the industry background, come in and rescue the company. All that matters is that we have a good leader.

I would hope that those personalised specifications match the culture of the company at least...

That's interesting too. At one level, one would expect that there would be that kind of consideration. At another level though, given the nature of the market, it's very hard to know within the context of the CEO labour market, especially one that is fraught with confidentiality.

No one is actively on the market. The board members, throughout my research, have assured me that they know a leader when they meet one within two minutes of meeting one of these individuals.

What's their thumb-rule for spotting an effective leader?

The rule of thumb is that they are deluding themselves. The interview is probably the worst context in which to find out what someone is really like. It's a highly stylised situation; everyone is on their best behaviour. They must be remarkable people to be able to judge the entire character of a person in two minutes.

What they also don't realise is they have already judged the candidates. They often find people who are coming from firms that they hold in high regard as more charismatic than those who don't, or associated with people they admire, or who remind them of their favourite person, or remind them of themselves.

So, even those kinds of personalised characterisitics are highly suspect. Until his last day, Enron's Jeff Skilling gave off the image that his was a high-integrity, nothing-matters-more-than-personal-values personality.

What else do boards do wrong when searching for a CEO?

They don't start with the strategy and the problems facing the company. If you don't know where you are going, anyone can take you there! The fact that most search processes start with a flimsy specification sheet means that they really start with ''we don't really know what we want.'' Most firms don't refer back to the specification sheet once the search is undertaken.

Why do you insist that one of the biggest flaws of the search process is the very narrow approach boards take to short-listing candidates?

The search process is very conservative. Directors don't know, ex-ante, who is going to perform well. So they end up focusing on a narrow set of candidates, who are defensible. If you look at the process by which most candidates are sorted into the pile of eligible or ineligible, the first category they see is "has this person been a CEO or a President?" At one level it makes sense in terms of demonstrated ability, but at another level, right away you have narrowed the band down to a fairly small, select group.

The second thing they say is "is this person coming from a high-performing company?" So they make the attribution that firm performance and CEO quality are highly correlated""but that's just not so. If you take a good manager and put him in a bad business, it's the reputation of the business that stays intact. The third thing they ask is" "Does the person come from a similar status company?" As a result, they end up focusing on a narrow group of defensible candidates. Then they complain about a leadership shortage.

And the search for a silver bullet doesn't stop there, does it?

When they meet the candidates, they ask "who is the most charismatic leader?" Again this becomes a highly personalised, impression-managed, artificial situation. This borders on irrationality, as if one person can come in and solve all the problems.

Take companies like Xerox, AT&T, Kodak, Polaroid. All these companies went outside for their CEOs, hired very high-profile managers. But the reality is that the problems facing these companies have very little to do with leadership problems.

The problems facing these companies have to do with being in an underperforming industry and basically of moving from a world of analog to digital. That makes AT&T's long-distance market a commodity. People send emails instead of photocopies, so that declines Xerox' business.

People prefer digital photographs to chemical photographs, so Polaroid and Kodak suffer. So if the board is focused on an individual saviour for the company, while the real problems of the company have to do with much more complicated issues, the board is actually doing a disservice to the company by not addressing the fundamental problems facing the organisation.

Is it so simple? After all, smart, experienced people get invited to sit on boards. Why would the directors go so wrong in the fundamental search process?

I don't want to say this is just the board's problem because they are embedded within a larger system of analysts, institutional investors, et al. They also believe in fast results, they also make the attribute that if a firm is not doing well, it must be because of the CEO, and if it is doing well, it must be because of the CEO.

They live in a society which has always treasured the image of a cowboy, the Lone Ranger, or the prince valiant coming in to rescue the damsel in distress. So in many ways they are just as much embedded in this larger kind of view.

If you look at business magazines, for example, it seems the only explanation you need for GE's performance is Jack Welch. But that would mean the future of American corporations is in cloning. Rather, people should ask: what are the systems by which a company like GE has, for more than a century, produced good managers? Systems like: hiring internally, investing heavily in the training of its people, rotating them, developing them, putting them in challenging assignments. Those are things you can actually do something about. Cloning is not something you can do anything about.

What you're saying is that companies should clone the processes, not the people of high-performing companies

Exactly. Otherwise you will have to ensure that every one of your CEOs has a stutter to overcome like Jack Welch did.

Do executive search firms become part of the problem because they market charismatic CEOs?

That's right. I call it the Unholy Trinity: directors, executive search firms, and leadership consultants. The search firms are responsible in that they perpetuate the idea that we will find the right person for you""if you are willing to pay enough! Their compensation is one-third of the negotiated cash compensation, so it's in their self-interest.

But the last time I read the rules, the board isn't supposed to answer to them, but is supposed to be doing what's in the best interest of the shareholder. Part of this is created largely by this idea that for every complex problem, there is a simple solution. The reality is that it's usually wrong. Complex problems arise from complex causes. Kmart has had five chairmen and three CEOs in six years. At some point, you'd think they'd want to revisit their strategy.

What research does your book share which will make people sit up and want to bust the myth of charismatic CEOs?

The biggest piece of evidence I give is that nobody's ever found a CEO effect. Following 850 firms over 17 years, I still don't see one. Another pause is that the search process tends to be more about finding defensible candidates. For example, 75 per cent of the people have already been presidents or CEOs; 70 per cent are people who come from high performing companies; 80-odd per cent come from status companies.

The fact that there is no heterogeneity in the sample suggests that even if we think we have opened up the system, it's anything but an open system.

What skewed the labour market for CEOs?

There are two big factors which have influenced this. The first is the rise of the institutional investor. Before this, managers were fairly autonomous from shareholders because shareholders were a diffused group.

Institutional investors have gone from owning only 5 per cent of the total outstanding equity to 60 per cent, which is a significant jump and gave them a lot of power. Basically, institutional investors began exerting their muscle, after a very significant decline in corporate performance in the United States, in the 1980s. They started exerting direct pressure on the boards to remove the management of underperforming companies.

By the early 1990s, you saw a further rise in institutional investor power and their willingness to exercise it. As they had become such large percentage holders of equities in the US, they couldn't just quickly sell the shares in their companies, and the only vehicle through which they could exercise their vote was through their voice.

They couldn't exit easily any more because they'd be underbuying their own shares. They started using the reputation of directors to exert influence on underperforming managers. That was one vehicle.

What else made the rise of the charismatic CEO so meteoric?

Around the same time, we began having the changing conception of what a CEO should be like. This was probably most emblematic with Lee Iacocca. Suddenly, every other CEO looked positively bland standing next to this person. So much so that people were lobbying to get him to run for President in 1984.

Suddenly CEOs were no longer about being administrators; they were leaders. What that exactly meant wasn't quite clear but the idea was: vision, motivation, larger than life personalities... An entire "industrial leadership complex" grew up to support that. If you look at the covers of business media, they were now all about personality, featuring CEOs of Fortune 1000 companies.

The notion was that now business was all about having a great vision and needing people who are charismatic. These are terms imported from religion. Charisma is a word from the Bible--people who can speak in many tongues and through whom God could spread his word.

The CEO became a kind of preacher evangelsing a new religion within the organization, one which was defined by things like mission, vision, and value-statements.

Exactly. But if you have a visionary, you have to be able to pay that visionary and show deference to the man. It's as if there is a separate class of people. In fact, this artificial distinction came up: leaders versus managers. Everybody claims they are looking for leaders.

The reality is we have a lot of false prophets. What we often see in business are pseudo-leaders. You have to separate the office from the individual. When I tell you that I am the CEO of a Fortune 1000 company, you will look at me differently.

So much for what's wrong. What are the best practices for a board searching for a leader?

First, start with a strategy. What are the firm's business objectives? Then, carefully pay attention to the structure of the search committee. Ensure that the people who are doing the search are the people who have the best understanding of the problems. Three, don't discount insiders.

We tend to amplify the weaknesses of those we know, and discount their strengths, and amplify the strengths of those we don't know and discount their weaknesses. Rely on a set of skills and guidelines and past behaviors and the information you can get on people in order to make the selection process.

And rather than comparing individuals against each other""it then becomes a contest of personalities""compare each of them to the job that needs to be done. Avoid going into the process of elimination in choosing a candidate because that way, you just end up with a democratic outcome. And we know what kind of leaders that produces!

This article was published in the May 2002 issue of Indian Management