THE CEO EFFECT

Writing in the May 2009 issue of the Harvard Business Review, Procter & Gamble Chairman A.G. Lafley says that the CEO's job boils down to wearing many hats: "communicator, coach, problem solver. While others in your organization can also fill those roles, there’s one critical job only a CEO can do: link the outside world (society, economy, technology, customers) with the inside world (your organization)." Lafley says this essentially means accomplishing four tasks:

• “Define the meaningful outside.” The chief executive must identify the single outside constituency that matters most. For many companies, this is simple: it’s the consumer.
• “Decide what business you’re in.” These are the core growth businesses in which you are investing.
• “Balance present and future.” Quarter-by-quarter management is getting a makeover. The CEO must make sure the long-term interests of the company and stakeholders are served.
• “Shape values and standards.” Do organizational values place needs of employees ahead of needs of the consumer? That is a value shift that needs to be pushed across the org chart by the chief executive.

A McKinsey Quarterly survey, "Leaders in Crisis," finds that most executives are coping relatively well with the demands and effects of the economic crisis, but talent management problems are looming on the horizon.

According to research from Weber Shandwick and KRC Research, the majority of executives in America’s biggest companies – 66% – believe that the reputation of CEOs today is largely negative. Only 14% give CEOs a positive rating and the remaining 20% are non-committal. Despite CEOs’ low approval rating, approximately one out of two executives (49%) report being interested in becoming CEO one day, virtually unchanged from earlier aspirations. Even those executives who rate CEOs’ reputation poorly are surprisingly upbeat about one day accepting a CEO position (48%).

In The Rising CCO, an annual survey conducted by global executive search firm Spencer Stuart and global public relations firm Weber Shandwick with KRC Research, 58% of global chief communications officers (CCOs) surveyed report to the CEO, compared to 48% a year ago. Not only do more CCOs call the CEO their boss, but 40% of CCOs consider the CEO to be their biggest ally in the organization.

“The data reinforces the fact that when many organizations endure critical times, CEOs are increasingly looking to the CCO for their strategic crisis communications and ability to quickly react to a variety of scenarios,” said George Jamison, who leads Spencer Stuart’s Corporate Communications and Investor Relations Practice.

A Rasmussen Poll found that only 22% of Americans give CEOs a favorable rating. Small business owners have a favorable rating of 92%. (February 2009)

The 2007 Rittenhouse Rankings survey found that top U.S. CEOs issued 21 percent more confusing and misleading statements last year than they did in 2006, and 85 percent more than five years ago.

BNET.com (May 12, 2008) reported on an executive training program at Stanford that claims executives can benefit from learning how to tinker like designers. The claim is based on Work Matters, the blog of book author Bob Sutton. The program claims that the human-centered, prototype-driven process of design advances managers' abiltiy to:

• develop deep consumer insights
• reduce risk and accelerate learning through rapid prototyping
• drive towards innovation, not just incremental growth
• empower employees to be creative

The Financial Times (March 27, 2008) reported that Wall Street Executives have a better chance of rebounding from career setbacks than their counterparts in other industries. Moreover, some of the recently departed may achieve even greater heights at their next position. Why? There is a small pool of people with the experience and skill to run complex securities and banking businesses.

A Pulse on Leaders study by Personnel Decisions International (PDI) analyzed data on a group of CEOs to find out what distinguishes them from other senior executive leaders. The study highlighed several differentiating traits:

• CEOs have a higher ability to understand complex, ambiguous information by analyzing and detecting systematic themes.
• CEOs have higher energy levels.
• CEOs score higher on the desire to be in charge, make decisions, and take leadership responsibility.
• CEOs score higher on ability to persuade.
• CEOs have significantly more experience handling high-visibility and high-risk situations, leadership challenges with a high risk of failure, and experience growing businesses.

One reason extremely busy CEOs serve on boards of other companies is to get an "unrivaled personal education in the corporate issues of the moment." (Knowledge@Wharton, February 6, 2008).

BNET commissioned a survey of 1,500 U.S. business managers and executives to find out what they think of their CEO. The 2007 CEO Report Card shows that CEOs aren't doing as good a job as they think they are: employees gave CEOs a C+ overall and CEOs in the sample gave themselves at B+. CEOs' worst marks from employees were on social skills like ability to inspire, be compassionate, and approachable. CEOs got very high marks for their passion of their business, ethics and intelligence, and for delivering results.

The Wall Street Journal reports that more boards are seeking directors who are not CEOs. Non-CEO executives accounted for 29 percent of of new independent directors on boards of S&P 500 concerns, according to an analysis by executive recruiters SpencerStuart. That's up from 18 percent in 2001. Governance experts cite several reasons for the trend: Many CEOs are curbing outside commitments, investors demand more financial, regulatory and marketing expertise in the boardroom and executives view board stints as good preparation to be CEO. According to Xerox CEO Anne Mulcahy: a directorship is "a learning lab that's called somebody else's company." (December 17, 2007)

McKinsey reports that chief executives worldwide believe that they have a strategic rationale for taking on environmental, social and governance issues. According to a study of CEOs at companies participating in the U.N. Global Compact, more than 90 percent of them are doing more than they did five years ago to incorporate such issues into their core strategies. While pressure from employees, consumers and other stakeholders plays an important part in this trend, some CEOs see the new demands as opportunities to gain a competitive advantage and to address global problems at the same time. (October, 2007)

A study conducted by Heidrick & Struggles International and the Center for Effective Organizations at the University of Southern California's Marshall School of Business found that CEO pay is "too high in most cases" according to one in three directors of U.S.-based public companies. The survey also found widespread unhappiness among directors regarding disclosure rules about executive compensation mandated by the U.S. Securities and Exchange Commission.

Forbes (December 10, 2007) reported on leading executive search and leadership consulting firm Heidrick & Struggles' survey of CEOs at the largest public U.S. and European companies. The research showed that just 33% of CEOs at the 100 largest U.S. companies have lived and worked in another country for at least one year. However, the FTSE 100 CEOs have more than twice that experience, at 67%. Further, CEOs in the U.S. are older, with the average CEO age at 58 compared to 52 in the U.K.

The New York Times (December 12, 2007) reports on a dramatic shift of CEOs hailing from far-flung countries. A decade ago, foreign-born CEOs of Fortune 100 companies hailed primarily from Canada or Europe, and today their countries of origin are more diverse, such as Egypt and India. To some extent, the shift is a result of the focus that companies place on foreign markets for growth.

Chief Executive magazine also reported on the changing profile of the CEO (January, 2005). The eigth annual Route to the Top survey, compiled with executive search firm Spencer Stuart, shows that more and more heads of S&P 500 companies have worn a colorful collection of hats during their careers, often jumping between functions, companies and global locations. See CEO Facts and Figures for some fascinating statistics.

The Wall Street Journal (September 5, 2007) reports on several studies from business academics that delve into the links between corporate performance and the personal lives of CEOs. Some examples of such correlations include:

• reduced profitability following deaths in CEO families (most dramatically if a child dies, least so if a mother-in-law dies)
• poorer stock performance following CEO purchases of lavish homes
• profit and stock underperformance at companies that are led by executives awarded best manager accolades from the business press

While no causal tie is proven in such studies, the authors generally conclude that CEOs do, in fact, matter to their companies' performance.

According to board and senior executive David Nadler, the secret to long-term CEO success is conceiving of a CEO's tenure as a performance with a series of distinct acts. According to Nadler's model, a CEO's tenure follows a natural arc which begins when the CEO takes the stage and has to solve the problems presented. "The problem comes after the CEO solves that first issue; then it is act two and something else is needed." Many CEOs fail during act two because they charge ahead with the old game plan no matter how the context has changed. (Knowledge@Wharton, August 8, 2007)

The ousters of Boeing’s Harry Stonecipher, Hewlett-Packard’s Carly Fioria and American International’s Hank Greenberg “signaled one of the most profound periods of corporate change since the 1930s,” reports The Wall Street Journal. Their replacements, Jim McNerney, Mark Hurd, and Martin Sullivan, represent a new breed of CEOs. As opposed to their authoritarian, “imperial CEO” predecessors, the post-revolution CEOs are on “shorter leashes” with their power shared with the board of directors and other C-suite executives. Their job extends beyond guaranteeing strong financial results to balancing the needs of a wide range of outsiders- regulators, accountants, attorney general, hedge-fund managers, union bosses, proxy-advisory services, trial lawyers, public pension funds and nonprofit activists. Given the new business climate, today’s CEOs rely more on their ability to persuade than their power to command.

The article identifies important New CEO trends:

1. New CEOs focus more on ground-level operations, as opposed to high-level strategy, than their predecessors.
2. New CEOs emphasize the importance of transparency in their organizations.
3. New CEOs embrace corporate citizenship.

Three tips from JetBlue Airways CEO Dave Barger for leading growth:

1. Be patient and visible to the company and its constituents, but not necessarily as an individual. Share the spotlight with the rest of the leadership.
2. Ensure that the management and the entire company are working with the same information and toward the same goals. Alignment across the team is key.
3. Communicate three times more than seems necessary and make sure the message is being trumpeted throughout the organization.

A special report in BusinessWeek describes NYC Mayor Mike Bloomberg’s CEO-style approach to managing a city of eight million residents. Bloomberg has applied his lessons from his business career, using technology, marketing, data analysis, and results-driven incentives. The following sums how his business perspectives shape his management model:

• The city is a brand. Because brands need protection, Bloomberg chose not to cut back on city services such as police, public transportation and sanitation during a fiscal crisis because such actions would send the wrong message to the business community and potential tourists. Instead, Bloomberg boosted New York’s promotional efforts and set long-term goals for tourism volume.
• The voters are customers. “Good companies listen to their customers, No. 1,” he says, “Then they try to satisfy their needs, No. 2. But don’t let [them] drive the internal decisions of the company.”
• The more light, the better. To make his leadership more transparent, he replaced meeting room walls with glass windows and his desk and those of his staff are clustered in a room with no walls. He uses easy-to-follow charts and tables to make budget presentations and makes managerial reports available online.
• Hire smart and delegate. Bloomberg says he recruits his lieutenants based on their ability to set targets and hit them, rather than based on their experience in politics.
• Be bold, be fearless. “In business, you reward people for taking risks. When it doesn’t work out, you promote them because they were willing to try new things…I have always joked that [the difference between] having the courage of your convictions and being pigheaded is in the results.”

The Wall Street Journal interviewed David Zaslav, CEO of Discovery Communications, on leading his company through a time of change. Zaslov identified 5 tips for assuming a leadership position:

1. Get on board and lead.
2. In the toughest times be positive and optimistic.
3. People still want to learn and be inspired.
4. It pays to set a high standard, be patient and do things differently.
5. Take a job you love.

Conde Nast’s new business publication, Portfolio, explains the inextricable link between a CEO’s identity and the corporation’s reputation. In today’s online world, separating the chief’s personal identity from the company’s is simply not an option. Not only do a CEO’s personal issues become the company’s problem, but a company’s poor performance will be attributed to the person in charge. (Portfolio.com, June 6, 2007)

Five Tips for Growth From Kraft Foods CEO Irene Rosenfeld:

1. Instill a mindset of candor, courage and action
2. Face issues head-on
3. Get the team focused on what matters most
4. Give people the tools they need and get out of the way
5. Test and learn. Most big ideas didn’t start that way

A report from Claudia H. Allen, Chair of Corporate Governance Group, Neal, Gerber & Eisenberg, focuses on shareholder activism. "Continuing stockholder dissatisfaction with executive compensation practices, which could be fueled by the enhanced disclosures concerning executive compensation that will appear in proxies for 2007 annual meetings, as well as options-backdating, could make some investors more inclined to exercise their rights to withhold or vote against management candidates."

Allen released a study that takes a look at public company shareholders' involvement in the selection of boards of directors revealed that over 50 percent of the S&P 500 had adopted majority voting standards. Among the findings, the study revealed:

• 52% of the companies in the S&P 500 and 45% of the companies in the Fortune 500 have adopted a majority vote policy, bylaw and/or charter provision.
• While a majority of companies that have taken definitive action have adopted policies, rather than bylaws or charter provisions, the relative percentage of companies adopting policies has declined dramatically since February 2006, while the percentage of companies adopting majority vote bylaws has sharply increased.

The topic of CEO compensation is receiving greater attention. For example, The New York Times has an online section dedicated to executive pay. Other interesting articles about CEO pay include:

• Crain’s New York Business reports on pay-for-performance resolutions. New regulations that require companies to disclose more information about compensation have made it easier for investors to identify executives whose pay is out of line with company results. Sixty companies are targeted in 2007 for review, which is more than double the number last year, according to proxy firm Institutional Shareholder Services. Bill Jones, president of the Association of BellTel Retirees said, “The concept of shame can be a very powerful one when the issue is paying for performance.” On the other side of the coin, many companies argue that aligning pay too closely to performance makes it harder to retain executives and that pay-for-performance may put them at a competitive disadvantage.
• The Wall Street Journal writes that shareholders tolerate excessive compensation because big CEO paychecks are good for corporate performance. The article sites a 1997 study by Harvard that found that every additional dollar paid to a CEO translates to an average return of $3.90 to the company. Additionally, a growing body of academic literature links increased CEO compensation to increased returns, a result which benefits all company employees.

BusinessWeek reported on the partnership of the Wm. Wrigley Jr. Company’s newly appointed CEO from outside the organization, Bill Perez, and executive chairman, Bill Wrigley. Perez is the first outsider to run the company in its 116-year history. In developing their partnership plan, Perez took advice from Starbucks CEO Jim Donald who says his successful partnership with founder and chairman of Starbucks, Howard Schultz, had to do with ensuring easy and constant flow of information.

Here are BusinessWeek’s best practice ideas for jointly running a company:

• ­Set clear expectations. Define distinct roles for the CEO and chairman. In Wrigley’s case, Perez handles operational and financial issues and Wrigley focuses on innovation, long-term strategy and culture ­
• Overcommunicate. The Wrigley heads communicate through email several times a day, meet for lunch and talk on the phone on weekends ­
• Be open to compromise. Wrigley told Perez from the start that he should feel comfortable making changes ­
• Speak with one voice. If the Wrigley heads disagree on an issue, they debate privately and present a united front to employees

CEO Michael Dell announced the formation of a 12-person executive leadership team that reports directly to him. This downscaling from a group of more than 20 is part of Dell’s effort to “speed decision-making, make decisions closer to our customers, and have clear responsibility and accountability,” according to an e-mailed announcement from Dell. Dell anticipates it will take about 18 months until the full results of the company’s turnaround efforts are seen. (Austin American-Statesman)

Ram Charan's new book covers eight leadership qualities needed today. The book is titled Know How and published by Crown Business. Widely respected Charan describes what separates great leaders from good leaders -- 1) knowing how to position the company to perform well financially; 2) connecting the dots between what is happening externally with its impact internally; 3) managing the company's social network to get people to work together; 4) picking and developing talent and the next generation of leaders; 5) shaping a leadership team; 6) selecting and setting the right goals; 7) establishing clear priorities; and 8) effectively managing the unexpected.

According to USA Today article (September 10, 2006), the best CEO golfers often correlate with company poor performance. Using data from Golf Digest's annual rankings of leading CEO golfers, USA Today found that two-thirds of the top 12 ran companies whose stock performance was worse than the S&P 500. Read the Article here

In an article in The Economist (October 25, 2003, “Tough at the Top”), editors reported the following effect of leadership on financial performance:

• Economists Marianne Betrand (Chicago University) and Antoinette Schoar (MIT) researched the impact of a leader on company’s performance. “They found that managers of similar businesses ran their companies in very different ways, which made a big difference to performance.”
• According to Professor Nohria at Harvard Business School, "a leader’s impact explained 14 percent of a firm’s profitability."

Gemini Ernst & Young’s Center for Business Innovation found that nonfinancial factors drive a large 35 percent of buy-sell-hold decisions. Among the top intangibles valued most were strategy execution, management credibility and management credibility.

Burson-Marsteller found that nearly one-half of a company’s reputation is due to CEO reputation. (2006)

According to David Larcker, professor at Wharton and now Stanford, a 10 percent positive change in a CEO’s reputation among CEOs studied in Burson-Marsteller’s study resulted in a 24 percent increase in the company’s market capitalization. The study also found that the top 10 CEOs identified in the 2001 study achieved a median compound annual stock return of 13 percent over a three year period compared to a negative seven percent for the bottom 10 CEOs (as reported in CEO Capital: A Guide to Building CEO Reputation and Company Success by Leslie Gaines-Ross.)

Faculty from Indiana University, Kansas State University and Texas A&M University examined management changes at 116 companies that filed material financial restatements in 1998 and 1999. The professors then compared each company with a peer of comparable size in the same industry that did not restate. As reported in Academy of Management Journal: Nearly 47% of chief executives were gone within two years of their companies issuing big restatements. That survival rate also means more than half survived, of course. But it represented twice the rate of turnover for CEOs at the companies that didn't issue restatements.

Washington University Law School Professor Troy Paredes found that high pay can impact a CEO's overconfidence. This overconfidence then affects the board who is then more likely to be deferential and less apt to notice bad business decisions.