How perplexing indeed is the board's oversight of substandard CEO performance.
Ed. Note: The following observations by Warren Buffett were first shared with his Berkshire Hathaway investors in 1988, and subsequently included in The Essays of Warren Buffett: Lessons for Corporate America, compiled by Prof. Lawrence W. Cunningham of the Cardozo School of Law. Cunningham has just published a new book, How To Think Like Benjamin Graham and Invest Like Warren Buffett, an excerpt of which appears on page 25.
THE PERFORMANCE of CEOs of investee companies, which we have observed at close range, contrasts vividly with that of many CEOs, which we have fortunately observed from a safe distance. Sometimes these CEOs clearly do not belong in their jobs; their positions, nevertheless, are usually secure. The supreme irony of business management is that it is far easier for an inadequate CEO to keep his job than it is for an inadequate subordinate.
If a secretary, say, is hired for a job that requires typing ability of at least 80 words a minute and turns out to be capable of only 50 words a minute, she will lose her job in no time. There is a logical standard for this job; performance is easily measured; and if you can't make the grade, you're out. Similarly, if new sales people fail to generate sufficient business quickly enough, they will be let go. Excuses will not be accepted as a substitute for orders.
However, a CEO who doesn't perform is frequently carried indefinitely. One reason is that performance standards for his job seldom exist. When they do, they are often fuzzy or they may be waived or explained away, even when the performance shortfalls are major and repeated. At too many companies, the boss shoots the arrow of managerial performance and then hastily paints the bullseye around the spot where it lands.
Another important, but seldom recognized...