Do CEOs really add value to a business, commensurate with their input?
SkyCity Group chairman Rob Campbell recently argued against the current CEO remuneration structure and suggested the ratio between executive and worker pay has become too wide. He wrote: "The fault lies with directors. It's something we all need to think about. Start with how we think about the job. Then how we think about the real attributes we need. And get off this escalator of rewards which are seldom really fit for purpose."
• Revealed: What New Zealand's top CEOs are paid
• Revealed: What NZ's top executives are paid
• BNZ's Angela Mentis revealed as highest paid NZ bank boss
• Revealed: Fonterra CEO Miles Hurrell's new pay
The 1982 book In Search of Excellence by Tom Peters and Robert H Waterman, Jr highlighted "managing by walking around" (MBWA). This was a recommendation for CEOs to remain in touch with the people who actually performed the daily tasks which ensured the business survived and prospered. It didn't take long for someone to point out that MBWA worked because it stopped the CEO interfering in the fundamentals of the business while sitting behind his desk.
In an entertaining presentation on TED, American author Dan Pink said: "There is a mismatch between what science knows and what business does." What does science know? Pink states "for 21st century tasks, that mechanistic, reward-and-punishment approach doesn't work and often does harm".
He set out three building blocks for what does work. First remuneration needs to be adequate and fair, as he says, "money is off the table". But then, what matters are: "Autonomy: the urge to direct our own lives. Mastery: the desire to get better and better at something that matters. Purpose: the yearning to do what we do in the service of something larger than ourselves."
So, why do we still treat a CEO, as Campbell suggests, like a 19th century piece worker?
The answer lies in the cult of the CEO.
CEOs have revelled in their demigod status supported by the media's treatment of CEOs as "masters of the universe" who are singularly responsible for making companies prosper.
Professional investors Dan Rasmussen and Haonan Li used data from the Stanford Graduate School of Business - a database of approximately 8500 CEOs and their characteristics - and mapped these to company stock performance. In particular, they wanted to determine whether Jensen's philosophy that CEO compensation should be tied to stock performance actually does provide better returns for investors.
Their conclusions, published in Institutional Investor, are revealing:
Company performance is not predicted by the CEO's education background (so much
for MBAs, even those from elite US business schools). And there is almost no persistence in CEO performance – a track record at one company doesn't guarantee success at a subsequent company. Past CEO performance doesn't predict future results.
These findings fly in the face of the popular view of visionary CEOs. Sundry books and business magazine articles encourage the reader to learn the "secrets" of highly successful CEOs.
In the 1980s, I had occasion to study Australian businessman Alan Bond. Once a near-bankrupt, he was advised to seek a cash-generating business to service the debt which financed his growing property portfolio. He bought the Swan Brewery, at that time a virtual monopoly in Western Australia, which gave him the cash flow he needed. And a property bank.
Buying, redeveloping, and selling property at a profit was arguably the one skill Alan Bond had. He financed Australia's 1983 America's Cup victory and the Bond myth snowballed.
Pursued by investment advisors and banks eager to offer him new deals he started to believe his own PR. Feted as one of Australia's great CEOs he acquired company after company. But all at inflated prices.
At a beer convention in the US shortly after he had purchased the Heileman Brewery for a vastly inflated price, I asked many successful US beer wholesalers what they thought. The typical reply was: "Well, he's a very rich man and successful CEO. He must know something we don't."
But he didn't. Within a few years, Bond Corporation collapsed.
Rasmussen and Li conclude their article by asking "how much longer will investors and boards be fooled by randomness and hollow credentialism?" The answer is probably for as long as directors continue to look for a "superman CEO".
In today's VUCA (volatile, uncertain, complex, ambiguous) world, no individual person can be expected to have all the diverse skills and competencies needed by a business to survive and prosper. Companies need to refocus attention away from A-star performers to team contributions.
But, for as long as investors and boards choose not to do their reading and keep up with science - nor have the courage to apply their findings - the Cult of the CEO will continue.
• Ron Ainsbury has more than 30 years of international business experience as coach, consultant, trainer, researcher and, yes, twice as a CEO. A draft of this column was previously published on the author's blog GoJacaranda.