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Life is full of strange coincidences. As the mobile phone rang on Sunday morning with a question from a journalist about Tony Ball turning down a proposed £20 million package to take the hot seat at ITV, I happened to be reading a review of Rakesh Khurana’s 2002 book “The Irrational Quest for Charismatic CEOs”.
The furore about Ball’s proposed deal, and the very public negotiations for a better deal, throws up a number of issues for shareholders. In the first instance the richness of the proposed salary deal (both the rejected and alternative) has clearly upset many shareholders. In the second it resurrects the debate surrounding the advisability of recruiting able and motivated successors from within the organisation (in ITV’s case Peter Fincham) versus buying in said “Charismatic CEO”.
For any one who didn’t catch this the first time round, in September 2002, Rakesh Khurana, an Assistant Professor of Organizational Behaviour at the Harvard Business School, published his analysis of the way US CEOs were being recruited, a project he was prompted to do in the wake of the Enron, Tyco and WorldCom scandals.
In his research – which is based on over 10 years data analysis of over 850 companies – Khurana concludes that when struggling companies look for a new chief executive, the one quality they prize above all others is “charisma.” As his work shows, the widespread belief in the powers of charismatic CEOs has created equally widespread problems. Most worryingly, Khurana states that there is no conclusive evidence that charismatic leadership affects an organization’s performance. Second, the insistence on finding a charismatic leader results in selection processes that are “overly conservative and even irrational”. Nomination committees end up considering only candidates who have already achieved the rank of CEO or president at a high-performing, high-profile company, even if they are not right person for the job and overlooking home-grown talent.This then has a trickle down effect throughout the organisation when it is perceived that there is no chance for internal candidates, no matter how well qualified.
In essence, Khurana concludes that charismatic CEOs seem able to influence their compensation packages and stock prices but not other indicators of long term firm performance. In a lecture to the University of Bath School of Management, Khurana was very clear on the perils of the charismatic CEO: “In monetary terms the cost of CEOs is huge, the pay gap between CEOs and the President of the USA has grown from 2:1 to 62:1 since 1960. If the average pay for factory workers had grown at the same rate as it has for CEOs, 1999 annual earnings would have been $114,035 instead of $23,753. If the US minimum wage had risen as fast as CEO pay it would now be $24.13 per hour instead of $5.15 which is less in real dollars than it was in 1970. The cost is not just financial, there has also been a disinvestment in executive education, with no interest in developing in-house talent. It has also weakened corporate governance. The impact on society is a weakening of the open society and an undermining of trust. This trend is spreading from the USA to the rest of the world.”
On the role of investors he is equally challenging: “Investors also have a responsibility in this process. They need to overturn the current consensus among professional investors and the public at large about the validity of the charismatic CEO model. Investors need to be educated about the organizational realities hidden or distorted by popular myths about heroic corporate saviours. One of the potential silver linings of the Enron disaster is the new awareness on the part of investors as to how seriously they can be, and have been, misled by the spirit of an uncritical age and the blandishments of charismatic corporate leaders.”
That was back in 2002. Seven years on how far have we come in changing perceptions about board succession and the nomination process? Possibly not far enough.