16 Sep 2002  Research & Ideas

The Irrational Quest for Charismatic CEOs

Companies reflexively look to charismatic CEOs to save them, and that's a bad idea, says HBS professor Rakesh Khurana. In this excerpt from his new book and in an e-mail interview with HBS Working Knowledge, he explains how the CEO cult arose.

 

Editor's Note— The cult of the CEO is complex and persistent—and usually not good for business, says HBS professor Rakesh Khurana. Khurana recently fielded questions from HBS Working Knowledge senior editor Martha Lagace in an e-mail interview about his new book, Searching for a Corporate Savior: The Irrational Quest for Charismatic CEOs(Princeton University Press, 2002).

Lagace: CEOs are suddenly very much in the spotlight, but you have been studying the dynamics of CEO successions for a number of years. What drove you to examine this topic in such depth? What surprised you most in your research?

Khurana: I guess one could have accused me of being opportunistic in writing this book, but the fact is the book was finished last year and is only now getting published. I actually wrote my dissertation in 1998 on this topic.

The common thread that got me started on studying CEOs is evident in my body of work in exploring the forces that govern the process of CEO change. I have conducted research in four interrelated areas: factors that lead to vacancies in the CEO position; factors that affect the choice of successors; the role of market intermediaries such as executive search firms in the CEO search; and the consequences of CEO succession and selection decisions for subsequent firm performance and strategic choices.

Industry wisdom, company relationships, and technological expertise all matter in our new knowledge-based enterprises.
— Rakesh Khurana

What surprised me most was that the CEO labor market is not a market in any traditional sense of the term. Rather, it resembled more of a closed ecosystem in which selection decisions were based on highly stylized criteria that often had little to do with the problems a firm was confronting.

Although I did not at first believe the results, the evidence was overwhelming and not pretty. The rise in the power of institutional investors has led to the creation of an "external" market for CEOs that is wracked with irrational decision making. Increasingly, the emphasis was more on bringing in a ruthless outsider to boost the performance of an under-performing company than on grooming leadership within the company. A famous CEO was preferred over a low-profile CEO, as the former was seen as a boost to public and investor confidence—and share prices—fast.

Q: What consequences do you see in bringing in CEOs from the outside, both to a company itself and to business at large? Which of these strike you as most pernicious?

A: I think several of the consequences are now becoming evident. 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 than employees get, there is a fundamental cynicism about the free enterprise system. The closed CEO labor market and the consequences it has wrought fundamentally threaten the integrity of our corporations.

And not just in the U.S. The rise of the charismatic CEO, escalating pay, and the consequences of Tyco or Global Crossing—these have reverberations across the world. It undermines the medium-term and long-term prospects of countries that are now just embracing a free enterprise system.

Q: What accounts for the social fiction, as you call it, that there are very few qualified CEO candidates available?

A: There are two big factors that 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 percent of the total outstanding equity to 60 percent, 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 under-performing companies.

By the early 1990s, we saw a further rise in institutional investor power and their willingness to exercise it. As they had become such large percentage holders of equity in the U.S., they couldn't just sell the shares in their companies, and the only vehicle through which they could exercise their vote was through their voice. They pressured directors to remove CEOs at under-performing companies. Now, this is a good thing; but very soon this started having some serious unintended consequences, one being the fiction that there is actually a real CEO labor market.

Let me elaborate.

It is natural to wonder why boards routinely bypass thousands of internal candidates for the ninety or so CEO positions that come open in a given year. Certainly the usual reasons have become clichés: Disruptive technologies, emerging global competitors, changing workforce expectations, and heightened investor concerns over immediate stock price have put pressure on boards to find reassuring, battle-tested candidates for top jobs.

Boards reason that a firm in need of transformation may not have the internal talent ready to make the change. Internal candidates are assumed to be part of the problematic old culture. Perhaps most importantly, CEOs have become "branded" like jeans or cola. Investors are reassured when they see management falling to familiar faces.

It's true that sometimes going outside is the right way to go. The strategic transformation at IBM required someone like Lou Gerstner to challenge the complacency. The Home Depot board felt justified in turning to outside CEO Bob Nardelli, assuming that the founders' charismatic influence may not have nourished an internal candidate needed to take the firm past its early, entrepreneurial stage.

The closed CEO labor market and the consequences it has wrought fundamentally threaten the integrity of our corporations.
— Rakesh Khurana

Yet how do other boards justify turning reflexively to sitting CEOs with supposedly proven track records? The pool of these marquee names is limited. Such scarcity naturally drives up wages; the compensation of the ten highest paid CEOs has soared 4,300 percent during the past twenty years, the same period that outside hires grew from 7 percent to 50 percent.

The cost of creating this closed ecosystem of top-tier executives is more than the price of CEO compensation and searches. It is also the cost of the failed messiahs who could not deliver the promised results.

Industry wisdom, company relationships and technological expertise all matter in our new knowledge-based enterprises. Perhaps Apple's John Scully should have remained at Pepsi; Kodak's George Fisher at Motorola; H-P's Carly Fiorina at Lucent; and Xerox's Richard Thoman at IBM. But as boards routinely bypass their internal management, the message to talent is to look elsewhere.

Q: How do you think companies should revamp their thinking and their procedures when they replace a CEO? How hopeful are you that the "closed shop" for CEOs will open up in time?

A: I am not optimistic about the near term. The problem is that the board's selection process is embedded within a larger system of analysts, institutional investors, etc. They also believe in fast results; they also make the attribution 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 that has always treasured the image of a cowboy, the Lone Ranger, or Prince Valiant coming in to clean up the town or rescue the distressed. So, in many ways they are just as much embedded in this larger kind of cultural construct.

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. What I am saying is that companies should clone the processes in developing effective leaders, not hope for a messiah to swoop in and save them.

Crowning Napoleon: The Making of the Charismatic Candidate

Book Cover

by Rakesh Khurana

In 1999 and 2000, respectively, Lew Platt of Hewlett-Packard and Michael Hawley of Gillette joined the ranks of CEOs from Fortune 500 companies forced out of their positions. They were only the newest additions to a nearly decade-old club whose founding members included John Akers of IBM, Paul Lego of Westinghouse, Robert Stempel of General Motors, and Kay Whitmore of Kodak. Hawley and Platt, like many of the other CEOs who had been forced out since the early 1980s, would subsequently be replaced by outsider successors. Like their counterparts on so many other Fortune 500 boards in the era of investor capitalism, the directors of Gillette and H-P turned to outsider CEOs in hopes of restoring firm performance and regaining the confidence of investors, Wall Street analysts, and the business media—each of which had unceasingly criticized their respective companies.

Hawley and Platt, despite their positions at the top of two of America's most celebrated companies, were hardly well known. This is not surprising, because neither was a media figure. They were never on TV flogging their companies' products in the way that some CEOs now do. They did not hire ghostwriters to produce self-congratulatory autobiographies. Their pictures did not appear on many magazine covers. More than a few employees in their companies didn't recognize them when they saw them. Yet they were loyal company men. Both—like their predecessors—had spent almost their entire professional careers with the companies they would lead. Both were flagged early in their careers by their companies' human resources departments as individuals with executive potential. Their supervisors were able to observe them in a variety of situations, and on the basis of these observations, they were promoted to positions of ever-increasing responsibility and scope. They were trustworthy subordinates. They waited for their time to come, and when it did, they were promoted to the CEO position. In short, Hawley and Platt both epitomized the post-World War II career executive—which proved to be their downfall when changing times appeared to demand a different kind of corporate chieftain.

In the cases of both Gillette and H-P, the boards of directors believed that what was needed to improve firm performance was not Hawley or Platt's tested and proven managerial skills, but something else. What this "something else" was is not easily defined. The head of H-P's search committee said that the board was looking for someone with "tremendous leadership ability" and "the power to bring urgency to an organization." A director at Gillette remarked that he and his colleagues were looking for someone to "revitalize the organization" and "restore confidence and order."

When directors, search consultants, and influential outsiders (such as analysts and business journalists) try to describe the elusive quality that more and more large corporations now seek in a CEO, they often use the word charisma. In its ordinary usage, by scholars as well as by participants in the CEO search process, the term has become a synonym for a variety of other traits now associated with corporate leadership. Today, it has become common to speak of the qualifications for the CEO position in relation not to any specific managerial tasks but rather to the ability of certain individuals to rouse others. What is now considered the all-important quality of "leadership" is all about being able to energize people who are lethargic or skeptical. It is about increasing the self-confidence of employees when the company is collectively anxious. It is about unifying an organization's constituencies when self-interest and political alignments divide them from one another. The corporate leader's job is thought to consist, above all, in helping the organization face up to a crisis situation and then taking it into the future with a guiding and motivating vision. To be able to carry out this defining task, it is now almost universally believed, a CEO must have "charisma."

While the concept of charisma has proven seductive for business school professors, consultants, and the business press, it is, in its ordinary usage today, an elusive and imprecise way of discussing leadership. Although biographers and journalists have devoted many a page to measuring the "charisma" of figures such as Jack Welch, Steve Jobs, and Lee Iacocca, the word, as generally used, is as difficult to define as "love" or "art," and few who use it succeed in conveying what they mean by it. Corporate directors and search consultants, for their part, use their own kind of shorthand to describe a candidate's charisma. The words they employ again and again include "chemistry" "executive presence," "articulation," "stature," and "change agent." These overworked terms underscore how difficult directors find it to think in anything but the most conventional terms, even while supposedly seeking a CEO who will overthrow convention. Directors elevate the individuals with whom they associate these charismatic qualities, however vague they may be, and discount those who do not possess them, often citing the lack of one or more of these characteristics as their reason for rejecting a candidate. They also tend to believe that the charisma that they seek in candidates is something that comes through inheritance and early formative experiences and cannot be learned or acquired later in life.

To see these perceptions and judgments in action, consider the situation at a large insurance company in which the CEO search had been narrowed to three candidates, two insiders and one outsider. One director described the criteria he had used to evaluate the candidates by saying, "[I] would look at how they verbalized their thoughts, conceptual abilities, ability to express themselves clearly, talk about other people, how they rationalize their actions, their posture, mannerisms, and way of dress." The search consultant leading the search explained his preference for one candidate in similar terms, while also citing breeding and sex appeal as key factors:

I liked the subtleties of his presence, his inflections, and how he talked to others. I also liked how he was raised. He had good parents, tremendous genetics. All the right things were present: responsibility at early ages ... commitment to community. . . . I also noticed how secretaries blushed and seemed so genuinely glad to see this person, unlike the other ... candidates.

When I asked another director at the same firm why the runner-up candidate was not selected, he stated:

A top executive must have stature and poise. Someone needs to move with focus, crisply and gracefully. They need to make the first move to shake hands (two strong shakes). I know if they are listening if they lean forward when they sit. They should be able to lead with small talk, but quickly get into the heart of the matter. They can't appear to be easily flustered.... I have to have the impression that someone else—a secretary or assistant—is handling the details of their life.... [David] did not display any of this, so he was off my list.

Given their own individual personalities and tastes, members of the same board do differ from one another, of course, when describing which attribute or attributes of a particular candidate they find charismatic. Considering the existence of these individual differences, we might also expect that different board members would exhibit preferences for different candidates. It may therefore seem surprising that directors involved in a given search show a strong tendency to zero in on the same candidate. Yet this tendency toward consensus contains an important clue to the true nature of charisma. For it suggests that the charismatic power that directors attribute to a particular candidate is derived only in part from the individual responses of directors, and to a much greater extent is a social produc—that is, a creation of the social expectations vested in the candidate (although not consciously) by the directors acting as a group.

It is common in many human activities for some individuals to command more attention than others, even at the same apparent level of competence. Historians, journalists, and other observers often write about personal traits that distinguish such persons from others in a given field, but their accounts can be unconvincing. The celebrity of many movie stars and pop musicians, for example, is attributable not to their dramatic or musical skills or accomplishments but rather to the fact that audiences are excited when they appear on the stage. 1 Similarly, in the CEO labor market, stories, gossip, and legends about some executives travel farther than those about others, irrespective of various individuals' abilities or accomplishments.

Indeed, in the case of CEOs, it would sometimes be difficult to maintain the charisma of the leader if the focus were on his or her actions on the job. Whereas, in the past, charisma was attributed to a particular individual because of his or her deeds, this becomes problematic when those deeds include, say, firing tens of thousands of people while reaping multi-million-dollar bonuses. In today's corporate folklore (which mirrors the psychologizing of public language in American society generally), charisma is often found to be rooted not so much in specific actions and accomplishments as in an individual's ability to overcome some personal handicap. Thus, for example, Jack Welch's biographers prominently note that their subject had to overcome a stutter as a young boy, an achievement that supposedly gave him what it takes to run a giant corporation.2 John Chambers' biographers observe that this future CEO had to conquer dyslexia and claim that his ability to do so is, in part, what enabled him to build Cisco Systems. 3

Of course in a society in which any celebrity worthy of the name eventually wants the public to know about some previously unsuspected personal adversity, trauma, weakness, or vice, such tales reveal much more about the audiences that are swayed by them than they do about their protagonists. Charisma, in short, is almost completely in the eyes of the beholders, who fasten on certain leaders out of deeply felt, socially shared needs. Just as the roles of directors and executive search firms in the external CEO search turn out to be comprehensible only when these actors are viewed in relation to the social structures and systems of belief within which they operate, so too with the charismatic candidates who become (or are already) society's charismatic CEOs. To understand the way that the role of CEO candidates is socially constructed, we need to look more closely at the loosely interpreted, often misunderstood concept of charisma.

Excerpted with permission from Searching for a Corporate Savior: The Irrational Quest for Charismatic CEOs, Princeton University Press, 2002.

Footnotes:

1. Goode (19-78) The Celebration of Heroes, chap. 1.

2. This psychologizing of the CEO's leadership abilities is evident in this excerpt from a 1998 Business Week article about Welch:

It had taken him twenty-one hard years and a bruising succession battle to make it to the top. But finally, in 1981, Jack Welch achieved his greatest ambition. At forty-five, the long-shot candidate became the youngest chief executive in General Electric Co.'s (GE) history. The climax to his ascension was his first shareholders' meeting in Phoenix. After holding forth for two hours, the triumphant Welch walked offstage, his blue eyes moist with tears. "I wish my mother had been here," he whispered to GE director and friend Silas S. Cathcart.

Jack Welch, sentimental? In time, he become known as Neutron Jack, the man who cut GE's workforce by more than 100,000 employees in his first five years as CEO. But that moniker suggested a one-dimensional character, failing to shed light on a far more complex and private individual. Welch has always been more: a dutiful son who worshiped an adoring Irish mother, a loyal friend who still returns to Salem, Massachusetts, for high school reunions, and a witty, self-deprecating husband and father of four.

Growing up in Salem, Welch was as he is today: unpretentious, demanding, and feisty, quick to use obscene language when his temper flares, but also remarkably compassionate and caring. His decisions to lay off employees to sharpen GE's competitiveness, say insiders, were painful and anguished.

His force of will in the game of business was just as strong in the scrappy games of hockey and baseball he played as a teenager. "Most people change when they go to work for a big company," says George W. Ryan, a longtime friend and high school buddy. "They are forced to conform to survive. Not Jack. He forced the company to change."

His mother, Grace, whom he strongly resembles, gave him the confidence to refuse to conform. Welch learned much from her—including pure persistence. It took sixteen years before she and husband John Sr. saw the birth of their only child on Nov. 19, 1935, in Peabody, Massachusetts John Sr., a Boston & Maine train conductor and union leader, worked long hours, often leaving for work at 5:30 a.m. and not returning until 7:30 at night.

Welch and his mother would drive to the train station together, sit in the car in the dark, and talk while waiting for his dad to arrive. She convinced him that he didn't speak with a stutter, even though he did. She told him to aim for the sky. She took him to Fenway Park and helped cultivate his near lifelong passion for the Boston Red Sox. She nurtured his competitive instincts in games of blackjack and gin rummy around the kitchen table. And when she beat him, Welch recalls, she'd slam the cards on the table and shout "Gin!" in the loudest voice possible. "I had a pal in my mom, you know," he says. "We had a great relationship. It was a powerful, unique, wonderful, reinforcing experience" (Byrne [1998] "I Had a Pal in My Mom").

3. The following passage from a 2000 profile of Chambers is representative:

John Chambers is the company's third CEO, but today's Cisco bears his indelible stamp. Born and raised in Charleston, WV, the son of two doctors, Chambers and his two sisters [sic] grew up in a tightly knit family. He sang in the church choir, enjoyed fishing with his now retired gynecologist father, Jack, and fondly remembers family vacations spent on Carolina beaches. Chambers married his high school sweetheart, Elaine Prater, and dotes on his two children—son, John, Jr. and daughter, Lindsay. He graduated second in his class at high school despite having mild dyslexia, a learning disability, he persevered to overcome through working harder and tutoring. Even to this day he dislikes lengthy written memos, preferring to communicate verbally. His presentations are almost thoroughly memorized and dynamically delivered underscoring the preacher-like flair with which he addresses audiences. As a West Virginia University undergraduate he played basketball, still his favorite sport—notably an intensive team-spirited one, and later earned a law degree from West Virginia and an M.B.A from Indiana University (Donlon [2000] "Why John Chambers Is the CEO of the Future").

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The Curse of the Superstar CEO, Rakesh Khurana, Harvard Business Review