The CEO as captain of industry: A dying breed?

Author:Sonnenfeld, Jeffrey

From mythic powerhouse to media-driven personality, the model of the CEO is undergoing a modern-day transformation. Here are the forces reconfiguring the influence of the CEO, and the implications for boards, shareholders, and the business community at large.

WE ARE IN TIMES of tremendous uncertainty -- in markets, industries, employment, technologies, etc. Under such conditions, it is understandable that we look to simplify reality by creating heroes. It certainly is not a new phenomenon. The prior turn-of-the-century era was a time when, as now, many CEOs -- John D. Rockefeller and Henry Ford and Luther Burbank -- were literally household names and role models to many. Similarly today, we think of Jack Welch or Bill Gates as household names and role models. Other high-profile CEOs such as Michael Eisner and Jeff Bezos and even Al Dunlap have come to personify the good and bad of corporate life. Their personas are used by the media, financial analysts, and the general public to put seemingly familiar human flesh around complex amorphous institutions.

You might recall how Ralph Waldo Emerson said, "An institution is the length and shadow of but one man." (Today he would have said "one person.") Many subscribe to that "great person" school of thought. Not all do, however. Robert Reich, commenting on this topic, said, "There is an overwhelming tendency in American life either to lionize or pillory the people who stand at the helms of our large institutions, to offer praise or level blame for outcomes over which they may have little control. The tendency is particularly apparent in regard to the performance of large corporations whose legitimacy in our political and economic system continues to be an open question. The current infatuation with successful CEOs offers an illustration. The unfortunate result is that we are distracted from deeper questions about the organization of our economic system. In personalizing these corporations, we overlook the much bigger stories."

Does creating these heroic figures matter? How are boards caught up in it? Is there a misguided conspiracy among boards, the media, and financial analysts to prescribe near-superhuman qualities to these people? Are we still looking at Cornelius Vanderbilt, the tycoon who proclaimed, "Law? Hell, I am the law" as our governance paradigm, or are we looking at some different models of the CEO? Let's let our panel examine the role of the CEO and how it may be changing, and what the forces of change are.

Resist the 'CEO disease'

T.J. Dermot Dunphy: I have in my hand a Business Week article showing CEOs who got fired for poor performance, along with their compensation -- from Jill Barrad of Mattel who got $50 million and Steven Hilbert of Conseco who got $49 million, down to Dirk Jager of Procter & Gamble who got only a miserable $9.5 million for his 17 months of screwing around with one of the world's great companies. When you get that kind of compensation for being a loser, don't tell me that the role of the CEO is in any way diminishing.

Also, when you look at the gap between CEO compensation and the compensation of the lowest paid employee in American companies and how that has grown very dramatically over the last decade, that, to me, is fairly good evidence that the myth of the powerful CEO -- the CEO as a somewhat godlike figure -- is still very much alive.

I think there is a problem with that. I call it the "CEO disease" -- the arrogance, the concept of "all power corrupts and absolute power corrupts absolutely." You get a divergence at the CEO level. There are, in my judgment, about 50% of American CEOs who are really good. After all, to get to the top you have to have some kind of capabilities, some kind of people skills, and some kind of principles. But the trouble is, once you get there, you are very much vulnerable to the CEO disease.

The Robert Reich quote, which has been said many times in different ways, is a human problem we all have -- a fascination with leadership in our various institutions. We look for a parent figure, someone who is going to take care of things.

In the investment community, this fascination is dramatic. While I don't know of any meaningful studies being made of this, I do know from my own experience watching how security analysts respond to CEOs that the personality of the CEO has a significant effect on the price of the stock. Despite all of their wonderful analysis, at the end of the day analysts will say of the CEO, "He is good...he is going to take care of things." And that in many cases is the basis for their recommendation. A CEO can be brilliant, but if you get in front of analysts and appear to be unsure or can't master the questions, they are not going to recommend your stock.

To me, the solution to the CEO disease is not more board process and rules of governance. Processes do matter, so I am not totally contemptuous of some of the forms of corporate governance that exist and recommendations for reform that are introduced.

But at the end of the day, we have to go back to the fundamentals. This is where the institutions and the big shareholders come in. We have to create an atmosphere in which CEOs who believe in shareholder democracy are the norm rather than the exception. The institutions have to help create that environment.

At the risk of sounding pompous -- and having had a little bit of the CEO disease myself -- I can tell you how we at Sealed Air Corp. approach corporate democracy.

We have no employment contracts whatsoever. I never had an employment contract. We have no golden parachutes. We have no shareholder rights plans of any kind. "Shareholder rights" is an obscene euphemism for management protection and for "screw the shareholders." We have no poison pills, no staggered boards -- nothing that you can think of that would inhibit the exercise of shareholder democracy.

We don't just do that because is it is a good principle. It is a good principle. But virtue has its own reward. When you have that kind of a corporate philosophy, you also have an atmosphere of trust throughout the company which is contagious and powerful. It is a virtuous cycle: The employees share an atmosphere of trust which translates into performance and back into shareholder value.

We need backing from institutions on this. It is the owners who are going to call the shots, and the owners have to step up. You get the kind of CEO you deserve. If you don't step up, those of you who are major owners and representatives of owners will continue to get some of the CEOs you have right now.

Sonnenfeld: Dermot, let me ask you this: If you were on a board that received a sizeable vote by the shareholders in favor of some action that the board opposed, what would you do?

Dunphy: I would probably resign. On that point, good boards are responsive to small votes. Somebody said that a 15% vote tells the directors that 85% think the other way. Of course it doesn't. Anybody with any intelligence or knowledge of the voting process knows that what you do is you project out that 15% to cover those who didn't vote, couldn't vote, messed up their ballots, or are just not the kind of people to register an opposing vote. So when you get a 10% or 15% vote for something, it is significant and should not be ignored.

Sonnenfeld: Have you ever received a shareholder proposal at Sealed Air?

Dunphy: No. I guess our shareholders have been pretty well satisfied.

More press, less power for modern-day CEOs

Philip R. Lochner Jr.: When we talk about captains of industry, obviously this isn't a rank somewhere below the rank of general. It is used much more in the sense of a ship captain, and, indeed, a 19th century ship captain was legally permitted to execute any of his sailors. He had total power. We also use the term in the sense of the CEO as the personification of the firm.

I am not sure we know to what extent the great names of the past really personified their firms. We know names like Rockefeller, Carnegie, Morgan, Harriman, Vanderbilt and so forth, but we don't really know too much about how people viewed those folks back in the late 19th and early 20th century.

You have to remember that we had only a partly literate society at that time. Huge waves of immigrants came who were literate in their own languages, but not necessarily in English. There was little or no national media. We...

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