Source: The Economist: Schumpeter
Corporate bosses are much less powerful than they used to be
EXHAUSTED after a shipwreck, the hero of “Gulliver’s Travels” wakes up on the island of Lilliput to find that he has been tied down by lots of “slender ligatures”. Gulliver is far stronger than his tiny captors; but by working together the Lilliputians subdue the giant.
The bosses who will gather in Davos on January 25th-29th are more like Gulliver than they care to imagine. They may feel big, as they hobnob with politicians and stride from one soirée to another (in sensible shoes, to avoid slipping on the Swiss resort’s icy pavements). And pundits will fret, as they always do, that Davos Men are carving up the world. But when those bosses return to work they will discover that the tiny ligatures that non-Davosites have attached to them bind ever more tightly.
Two decades ago bosses were relatively unbound. American chief executives struck heroic poses on the covers of Forbes and Fortune and appointed pliable cronies to their boards. Europeans such as Percy Barnevik, the boss of ASEA Brown Boveri, a Swedish-Swiss conglomerate, imported the American cult of the CEO to the old continent. But since then a succession of catastrophes—most notably the implosion of Enron in 2001 and the financial crisis in 2007-08—have empowered the critics of over-mighty bosses. In 2010 two legal academics, Marcel Kahan and Edward Rock, published a seminal article on “Embattled CEOs”. Since then they have become ever more embattled.
One sign is that bosses don’t last long these days. Among the world’s 2,500 biggest public companies, the average job tenure for departing CEOs has fallen from 8.1 years in 2000 to 6.6 years today, according to Booz & Company, a consultancy. The fall would have been steeper but for the generosity of China’s state companies. In 2010 CEO turnover worldwide was 11.6%, but in China it was half that. Booz also notes that shareholders give bosses very little time to prove themselves: Léo Apotheker lasted for seven months as the head of SAP (a software firm) and ten months as head of Hewlett-Packard (a computer giant).
Another sign that the Lilliputians are winning is that fewer chief executives now chair their own boards (the corporate equivalent of a schoolboy marking his own exam papers). In Booz’s global sample the proportion of incoming CEOs who doubled as chairmen fell from 48% in 2002 to less than 12% in 2009. Even America is growing wary of imperial bosses: according to the Corporate Library, a pressure group, the proportion of CEOs of S&P 500 firms who mark their own exams fell from 78% in 2002 to 59% in 2010.
Bosses are still paid handsomely; but this is partly a reaction to rising job insecurity. And in much of the world CEO pay is rising more slowly than it did in the 1990s. In America it may even be declining. Moreover, the Lilliputians are forcing politicians to tie more strings. In 2010 America’s Congress passed a say-on-pay law that gives shareholders a right to hold a (non-binding) vote on pay. David Cameron, Britain’s prime minister, has suggested giving shareholders a binding vote on pay.
The rise of institutional investors (notably mutual funds) has changed the old equation whereby dispersed shareholders confronted concentrated managers. The proportion of stock in America’s publicly listed companies that is held by institutions increased from 19% in 1970 to 50% in 2008. And the scandals of the 2000s have reignited shareholder activism.
To assess the bosses who work for them, shareholders have powerful new tools. For example, outfits such as RiskMetrics offer advice on proxy battles. Shareholders also have powerful new allies. Hedge funds intervene aggressively in corporate decision-making, browbeating such giants as McDonald’s, Time Warner and Deutsche Börse.
At the same time boards of directors have grown more demanding. Gone are the days when a boss could put his golfing buddies on the board. (“A big glob of nothing” was how one observer described boards in the 1960s.) Today the vast majority of board members are outsiders. This has led to a huge improvement in their quality. Korn Ferry, a consultancy, notes that the 95 new directors who won seats on the boards of its sample of America’s 100 biggest companies are remarkably rich in international experience: 21% hold foreign passports and 12% have worked in Brazil, Russia, India or China. It has also increased their willingness to act as stern monitors rather than chummy advisers. In his excellent new book “Winning Investors Over”, Baruch Lev of New York University’s Stern School of Business writes that in this new world “the lonely CEO now often faces a ‘team of rivals’, sometimes adversaries.”
A proposal for modesty
All this is affecting bosses’ behaviour. The latest buzz phrases in the C-suite are “humble leadership”, “servant leadership” and “bottom-up leadership”. But is it actually improving corporate performance? The academic literature suggests that it is. John Core and his colleagues have shown that companies with strong shareholder rights have higher operating profits than those with weak rights. Craig Doidge and his colleagues have shown that companies with stronger boards can raise capital more cheaply.
However, some CEOs are raising objections to the new regime. How can they focus on long-term growth, they ask, if they are constantly second-guessed by a team of rivals? Some are jumping ship for private companies. Anthony Thompson, formerly in charge of Asda’s “George” brand of clothes, left to join Fat Face, a private clothing company, rejoicing that: “I no longer have to slavishly adhere to corporate nonsense and overbearing governance.” Gulliver eventually persuaded his captors to untie him. CEOs will undoubtedly try to do likewise.