The 1990s made chief executive officers into gods. They were saviors heaped with evangelical praise for increasing shareholder value and equally reviled when they failed. But gods don’t need investor relations officers to explain to the masses when their stocks fall. Today’s CEOs do.
Forget for a moment the villains who instigated the ‘Clean up our corporations’ campaign: Kozlowski, Ebbers and Lay. Remember those latter-day superheroes, mythical gods and matinee idols: Lee Iacocca, Warren Buffett, Donald Trump, Bill Gates and Jim Clark. Some conjured images of colorful, brash characters or wowed us with their innovation and sometimes eccentricity. They were the face of corporations, and often the reason those companies were popularly viewed as successes or failures.
From ‘cult of the CEO’ to ‘superstar’, the labels applied to these individuals reflected both the media’s taste for hyperbole and the public’s need for icons to define the times. David Newkirk, senior vice president of Booz Allen Hamilton, traces the beginnings of the iconic status to the decade of personality and excess. ‘It probably dates back to the mid-1980s – the emergence of the CEO as a rock star,’ he explains. ‘Part of that is that we all worshipped money.’
That is only part of the phenomenon, according to Rakesh Khurani, assistant professor of business administration at Harvard University. In his book, Searching for a Corporate Savior: The irrational quest for charismatic CEOs, he blames the small pool of executives that boards and headhunters continually pick from for creating and propelling the beast that is the larger-than-life CEO. After studying 150 companies over a 17-year period and conducting numerous interviews, he concludes that the traditional way of finding CEO talent was faulty: ‘It ignored the very inconvenient truth that in practice the market for CEO talent isn’t a market at all.’
Khurani says ‘market’ suggests competition, which is blatantly lacking in the elite club of top managers. ‘Typically CEOs are hired because they have already been a president of another company. Selection is also made on the erroneous logic that a CEO of a high-performing company will therefore be able to produce similar results at another firm.’
Khurani describes the shaky reasoning: ‘If Al Dunlap has done well at Scott Paper then he’ll do good at Sunbeam. If George Fisch has done well at Motorola, he’ll do great at AT&T.’ Above all, it’s irrational to attribute performance to a single individual when the success of an organization is based on thousands of people.
Reputation can give a false impression – and impressions are easily manipulated. When Carly Fiorina was recruited by Hewlett Packard in 1999, she already had a reputation as a superstar manager. However, Khurani says, many observers have since questioned whether her track record was as impressive as it seemed at the time.
In early November 2002, when her number two, former Compaq head Michael Capellas, left for WorldCom, there was an immediate 10 percent slide in HP’s share price – a telling no-confidence vote in Fiorina’s operational skills at least initially – since Capellas was widely seen as the person who could make the merger work.
Not a man for all seasons
Certainly, investors show little interest in the middle managers and workers of corporations – talented or otherwise. They are looking to the leaders to ensure their investment returns. For his part, Newkirk is ambivalent about CEO stardom: ‘CEOs need to be leaders and if you don’t have a gifted leader in your organization then you better reach outside the organization.’ However, he adds, ‘I don’t believe that a superstar is a superstar anywhere. Anybody who watches soccer knows that a gifted striker is not a gifted defender.’
Booz Allen sees a link between share price and the CEO. Its study, called Why CEOs Fall: The causes and consequences of turnover at the top, looked at the world’s 2,500 largest companies and found that CEO turnover had increased by 53 percent over the last six years. The consultancy surmises the cause is shareholders’ desire for faster returns. Newkirk says the study shows that boards are acting quickly in response to poor performance. ‘There is a meaningful and significant statistical difference in performance between the guys who were asked to leave and the guys who weren’t. That’s correlation not causation, but CEOs are definitely getting booted out if they don’t perform.’
Indeed, rising shareholder activism and changing corporate governance are having a significant impact on the role of the CEO. In North America, the number of chief executives leaving as a result of poor performance rather than mergers increased by 130 percent over the six years of the study.
Leslie Gaines-Ross, chief knowledge and research officer at Burson-Marsteller in New York, is the author of CEO Capital: A guide to building CEO reputation and company success. She looked closely at Fortune magazine’s ranking of the most admired US companies, and writes, ‘If good management directly and positively affected a company’s success, surely the reputation of its most senior executive officer would have a similar, if not far greater, effect.’
After all, she continues, Fortune covers almost always feature the ‘sagacious visages of chief executive officers, not corporate logos.’ Plus, according to Burson-Marsteller’s research, 83 percent of senior executives surveyed believe it’s the CEO’s responsibility to restore credibility.
Gaines-Ross adds that analysts pay attention to the ‘glow’ of a CEO. She cites Tyco’s new CEO, Ed Breen, as an example. His popularity as president at Motorola gave a boost to the beleaguered Tyco.
Another consideration is whether a succession plan is in place. Companies bearing their CEO’s name are especially vulnerable, though any company with a superstar CEO should insulate themselves. A common question when talking about a CEO’s value is what would happen to Microsoft’s share price if Bill Gates disappeared?
Reputation driver
A survey on ethics conducted by Chief Executive magazine in August 2002 found that more than half of CEOs blame themselves for the wave of corporate scandals and financial fraud in US business. When asked to choose the movie that best depicted their job, with the CEO in the starring role, 55 percent saw themselves in the movie Gladiator filling Russell Crowe’s shoes. It seems even CEOs believe the hype.
This type of view of the embattled crusader bearing the weight of the entire company is one that John Mahony of ReputationInc, a new London-based consultancy, holds little truck with. Reputation, he declares, is fast becoming like shareholder value and corporate branding – the next buzzword in management-speak.
According to Mahony, reputation needs to be lifted from the CEO’s shoulders – ‘a foolish place to put it’ – and shifted to the foundation of a company. ‘Reputation is not about trying to create something that an organization is not,’ he advises. ‘If perception and reality do not meet then they’re building on quicksand.’
There are numerous efforts to quantify corporate reputation. Mahony says that in the past tangible assets counted for 78 percent of a company’s value; today the ratio has fallen to 53 percent. The other 47 percent – the intangible – is what companies are now trying to get a handle on. As a result they’re beginning to recognize that many of the elements they thought should remain uncommunicated have become of major value and interest to the Street.
Mahony theorizes that investors have established the link between reputation, responsibility and sustainability and that companies now have to live up to it. But senior executives themselves haven’t caught up with the importance of underpinning company activity with reputation. He complains that reputation is not yet treated as a key component of business models alongside financial, legal and operational aspects.
Reputation does not belong solely within the confines of the board and senior management but also with all significant stakeholders and employees. It’s a thorny issue because, as Mahony points out, ‘If you can’t measure it, you can’t manage it.’ He suggests one promising area of measurement is ‘recovery rate’, or the bounce-back speed after a hit to the share price.
Surprisingly, Ken Janke, chairman of the National Association of Investors Corporation, says experienced individual investors have not lost faith in management despite company scandals. He blames the continued downmarket on the unfortunate confluence of the end of the tech bubble, the general state of the economy, the 9/11 terrorist attacks and the alleged fraud at high-profile companies.
As Janke explains, ‘The experienced investor was not as concerned about the downmarket, and thus did not lose any confidence in management that was running some of the companies.’
It’s a sideways challenge to CEO leadership that investors want perks and pay to truly reflect the CEO’s value. Witness the recent investor-forced board climbdown from the doubling of the compensation package of GlaxoSmithKline’s CEO, Jean-Pierre Garnier. Janke expects to see more hits to senior management pay as companies begin to expense stock options.
He wants companies working on their reputation to shout about it from the rooftops. But he’s disappointed: ‘They are trying but they are not necessarily telling their story well. I hoped that they would.’
Good housekeeping
Poor reputation does not always mean the boot, but it is a rupture that may be hard to stop once started. Martha Stewart’s Omnimedia is a case in point. It started to bleed value when investigations into alleged insider trading of ImClone shares by Martha Stewart were revealed. Indeed, it reported a 42 percent drop in profit during the third quarter last year. Wall Street analysts suggested the scandal was eating away at the business so closely associated with the woman who created it.
The ability to lead, inspire and, when necessary, turn around companies is definitely a skill. As IROs are the conduit between management and the investment community, they have an increasing role to play in shaping the CEO’s image. And Newkirk at Booz Allen adds that companies delivering superior shareholder returns have an ‘unbelievable focus and consistency in their messages, internal and external.’
Mahony says that IROs may not feel they have much to contribute in terms of reputation ‘because they have been corralled into communicating financial performance, not the broader issue of company performance.’ He says IROs, particularly those reporting to the chief financial officer, may leave communication of reputation issues to other departments like the group communications office.
But this has to change. According to Ed Owens, a managing director at Burson-Marsteller, the best way to rebuild credibility with investors is with a strong message about the CEO’s projections and strategy. Gaines-Ross adds that CEOs are working with IROs to develop a stronger speaking role in quarterly conference calls and webcasts. They’re talking longer and participating more in the calls. But she warns, ‘In this environment, too much charisma can be dangerous.’ That’s welcome news to IROs whose CEOs are as unlike Jack Welch or Sandy Weill as a square to a triangle. The best approach is to simply work with what you have.
Beyond the quarterly call, the web is a good forum for reputation rebuilding. WorldCom’s web site is described by Gaines Ross as ‘laudatory’. It has letters posted on the site from its interim CEO about issues the company is facing and, most importantly for a company in Chapter 11, it is giving employees and customers comprehensive information.
Other companies are using quieter channels to get the message of credibility and reputation across. They are doing it face-to-face with top employees. They’re also roping in a broader representation of top managers to join in IR events.
As Thoreau wrote, ‘Every people have gods to suit their circumstances.’ The age of the charismatic CEO may be over, but the quality of senior management is still a strong value driver. CEOs may welcome the chance to become one with the people, sharing the spotlight and the accolades, and, come to think of it, perhaps the blame as well.
