The Chief Executive Officer - end of the empire?

The passing of the CEO has been announced. To be more precise, a particular type of chief executive is allegedly dwindling unto death - the type that one non-executive director calls ‘the Imperial CEO’. But since the Imperial (and imperious) description applies to so many top bosses, the distinction hardly matters. What’s really important is (a) whether the dwindling report – carried in Business Week - is correct and (b), if so, what the consequences will to be for managers in businesses and other organisations of all shapes and sizes.

I often use big corporations for illustrative purposes, because their doings, for good or ill, are highly visible, and, anyway, their key faults and virtues are generally those of the small organisation writ large. Thus, for managers who aren’t CEOs and don’t work for major outfits, the Cult of the Imperial Chief Executive still had and has highly important effects. Right down the world’s business ranks - in particular the Anglo-Saxon world - the Cult marked the zenith of a management theory as old as management.

ONLY ONE PERSON

The theory answers a fundamental question for any organisation: ‘Who’s in charge here?’ - or WICH? For short. The Imperial CEO, just like the autocratic boss of a family business, provides the simplest possible answer; only one person is in charge, and you know who that is, don’t you? The issue is obvious and grave.

Can one person truly exercise untrammelled power over all aspects of any organisation without adversely affecting its performance and behaviours?

According to that BW report, though, it’s no longer possible to give that old single answer of a single person in charge. Power has shifted to the ‘watchdogs’, non-executive directors, auditors and lawyers. These people ‘are playing a bigger role in fundamental management decisions about business strategy, acquisitions, succession planning, crisis response and what can be booked as earnings’. So who is in charge? These watchdogs are not players, but referees and linesmen. The work of management can only be done by managers - and in the West that overwhelmingly means a pyramid narrowing all the way to the apex.

It doesn’t have to be so. The answer to the WICH? question can be plural. A group of people can form the top management - partners perhaps, or maybe an executive team, who work collectively at sharing decisions and responsibilities, and combine their workloads to produce effective overall operations. This is the way most businesses begin life. It’s also the basic principle of the manufacturing cell, a key element in modern shop floor management.

There’s no reason why what works in the factory should not prove just as sound in the boardroom - and just as superior to traditional approaches. Moreover, a genuinely plural management provides a better fit for all those watchdogs. And their role is indispensable. You can’t leave top management to be judge and jury over vital questions like these:

• Does management have a robust, doable strategy, supported throughout the company, that promises a high and rising return on capital over the next five years?

• Do all acquisition plans pass the Economic Value Added test (i.e., the yield on the buy will exceed the cost of the capital expended, which includes the cost of equity)?

• Has succession planning put top-class heirs-apparent in place for all key roles, including the summit of that pyramid?

• Is financial performance reported fully and fairly, both within the organisation, and to the outside world?

CROSS-EXAMINATION

Moreover, to fulfil their onerous responsibility, the watchdogs can’t just cross-examine the chief executive (especially an Imperial one).

Health checks are a plural process which tends to encourage plural management. But there’s a catch here; pluralism doesn’t fit with the long-prevailing universal template - the military model. Army commands have single leaders, and their reach is just as imperial as that of any power-hungry corporate czar.

The commitment of mighty forces has always depended for its outcome on the leadership strengths, strategic intelligence and tactical expertise of a clearly appointed supreme leader - who, you hoped, was as mighty as his army.

Where that hope proved to be mistaken, the result was execution of the failed leader (in Stalin’s horrible case, the execution was often literal).

The removal of failed leaders remains a standard piece of management control theory. Indeed, BW’s report on the dwindling power of the top boss is largely based on the toppling of famous figures like Michael Eisner of Walt Disney, Harry Stone cypher of Boeing, Hank Greenberg of the AIG insurance empire, and Carly Fiorina of Hewlett-Packard. The latter’s demise followed five years of an ultimately ruinous career at the top. However, BW ties her forced departure to a very specific issue.

The HP Board wanted the Chief Technology Officer to run the company’s ailing $30 billion corporate computer businesses. Fiorina refused on two grounds. (1) Specific - she didn’t agree with the choice. (2) General - Making such an appointment, she argued, was her role, not the Board’s. She was absolutely right. That’s the heart of the matter. The chief executive’s prime job is to appoint and direct the members of executive management. Nobody can do this from outside the executive.

That rule applies whether the management is plural or singular. True, as noted above, non-executives have an overall duty to see that succession is properly planned. And every important appointment should, of course, be discussed with non-executives before the die is cast. Their objections, if any, should be taken into account as well. But ultimately hiring and firing, and appointment and disappointment, are not their business.

Confronting ineffective management of the executive is a very different matter. This is clearly the business of the Board, but it’s a task which has been honoured in the breach rather than the observance. CEOs (like Fiorina) have been cherished rather than chastised over long periods of mismanagement. Non-executives too easily get seduced by the dynamism and charisma of the Imperial boss. But the issues of failure in strategic management or operations, though, they should predominate, are not generally the cases which cause watchdogs to bark - and bite.

IMPROPER MATTERS

The fatal vices concern matters such as ‘loan sales improperly booked over a technical issue’, ‘accounting problems’, ‘investigation of company financial controls’, ‘a write-down on troubled assets’, ‘transactions with Chairman’, ‘having an affair with another executive’, etc.

These matters definitely reflect impropriety, but they don’t necessarily condemn the executive effectiveness of a company, or impugn the conduct of most of its members.

Improper financial direction is unquestionably a threat; but by far the greatest threat to the health and wealth of the business is simple, non-financial mismanagement. Here the watchdogs have very restricted powers. Not only is it hard to find out what’s going on, but it’s harder still to change it. For instance, is the new man at General Electric, Jeffrey Immelt, right to launch GE on a vast project to change a money machine into a marketing colossus?

Immelt has turned his back on many aspects of the legendary 20-year regime of his predecessor, Jack Welch, in this effort to create a giant corporation far better attuned to the fast-moving, innovation-led markets of the 21st century. But one underpinning of the Welch decades remains firmly in place. Everything hinges on the Man. This is ‘the Immelt Revolution’, according to a lead page that mentions the chief revolutionary eight times. If this isn’t an Imperial regime, it certainly reads that way. But what has Immelt actually done?

• Emphasis on bottom-line results, a GE speciality under Welch, has been downgraded.

• Bonus payments are now also linked to new ideas, customer satisfaction and growth in sales.

• In 18 months $5 billion has been invested in 80 projects under the title ‘Imagination Breakthroughs’; the hope is for $25 billion in revenue by 2007.

• Executives are to be rotated less often, and are now expected to become experts in the industries they serve - not just effective general managers.

• More outsiders are being imported, many of them to beef up sales and marketing.

• Over $60 billion has been spent on new businesses including media content (Universal), biosciences (the UK’s Amersham), security, water and renewable energy (wind farms, etc).

TAKEN ON TRUST

In other words, the new man has done a lot. Most of his plans and decisions, however, have necessarily been taken on trust by GE’s watchdogs. That’s the nature of management, which is an experimental activity. You can’t be sure of the pay-off from buying Amersham, or new linkages for bonus payments, or an ‘Imagination Breakthrough’ by ‘overhauling the brand image of3,000 consumer-finance locations’ (surely neither very imaginative nor much of a breakthrough). Maybe the new initiatives will work, probably some of them won’t. By the time you find out which, it will be too late.

But you can say that Immelt has embarked on a set of interrelated programmes, based on a logical and well-researched interpretation of present and future trends, and all aimed at an ambitious corporate target – a minimum annual organic growth rate of 8%, up from5% in the past decade. Nor is the CEO taking inordinate risks, or ‘betting the company’. At $152 billion of sales, GE is too big to bet. So for now, the boardroom watchdogs can’t do much except clap their hands, but they and Jack Welch (who hand-picked Immelt after years of carefully planning his own succession) do have reason for self-congratulation - so far.

Interestingly, Welch’s role in Immelt’s choice runs counter to an argument put forward by BW in its account of the diminishing powers of the boss: ‘CEOs are losing the power to anoint their successors, a practice that sometimes allowed insecure leaders to make sure they were never threatened by a high-performing No.2’ Actually, the greater risk is that the Imperial wizard will subconsciously look for a weak successor who will never outshine him. As the magazine admits, though, ‘Many of history’s great CEOs...were handpicked by the leaders they replaced’.

To Welch, the risks are worth running to have a chance of finding a super boss like - well, himself. Other directors, he thinks, should stay out of the selection process: ‘There is an increasing desire for boards to take these newfound responsibilities and move into areas where they don’t belong’. So who’s right? Should the outgoing boss decide on the successor or not?

FACT-BASED MANAGEMENT

As I wrote above, management is by its very nature experimental. In experiments, the proof of the pudding is always in the eating. If it works, that’s probably good management. If not, it definitely isn’t. You tip the balance in your favour partly by taking pains (as in ‘fact-based management’ or in Welch’s lengthy process which finally gave the crown to Immelt). And, like any good scientist, you watch the experiment carefully to judge the actions and the results. Which of these ideas are not worth testing - and right now?

• Form a radical, ambitious, achievable plan to achieve greater growth and increased profitability over the next few years

• Decide, in the light of that plan, where you want your managers to concentrate their efforts

• Use financial incentives and all management forums and processes to point those efforts in the desired direction

• Place ‘soft’ targets, like generating new ideas, on a par with ‘hard’ objectives, like meeting budgets

• Launch many new projects, and involve all managers in the planning and success of the business

• Look hard for fixed ideas, traditions, rules and procedures, etc. that block progress - and kill them

• Make sure that you are investing in the growth markets of the future, not the cash cows of the past

If people ignore or dismiss such powerful principles (abstracted from the ‘Immelt Revolution’ at GE, but applicable to any business), you want the watchdogs to ask why - loud and clear - before bad figures show bad consequences. A well conceived and executed policy like the above, however, should make managers immune from watchdog interference - with one key proviso. Once dishonest, unethical conduct comes in, so one day will failure. Managers not only need all the moral reinforcement they can get from outside. They also need to be their own toughest watchdogs.