That leaders in America have been in decline is beyond dispute. Polls confirm that leaders in every sector are less admired and trusted, and perceived to be less competent, than they used to be. While all leaders have been vulnerable to this trend, some have been more vulnerable than others. The leadership class in Washington has been especially hard hit – executive, legislative, and even judicial approval ratings having steadily gone straight down.
Corporate leaders are not much better off. Big business is in disrepute, and despite the perception that corporate leaders are different, exempt from the downward trend, they are as vulnerable as other leaders to the contextual complexities over which they have little or no control.
We tend to equate wealth with power. As a result, we assume that leaders who earn ginormous sums of money are resistant to the vicissitudes that plague leaders who earn far less. (In 2013 median CEO pay among S&P 500 companies was around $11 million, 700 percent higher than in the 1970s.) The disparity between our perceptions of government and business leaders is especially striking, the assumption being that the former are enfeebled, unable to get much of anything done, whereas the latter are muscular, positioned to call the shots as they see fit.
The truth is more complicated. The truth is that though the earning power of chief executive officers remains sky high, their power and authority generally have been sharply reduced. This means that their room to maneuver, their leeway to lead, are notably less now than they were just a decade or two ago.
There are reasons for this change in their circumstance. The top 10 are:
- 10 – Activist Investors. Nothing threatens chief executive officers as much as shareholder activists with big mouths and deep pockets. But activists with appetites are here to stay. Around since the 1980s, in the last few years they have picked up their pace, the frequency and ferocity of activist attacks on public companies unprecedented. In the last half decade one company in seven on the S&P 500 index of America’s most valuable listed firms has been on the receiving end of an activist attack. Just last year activists mounted 344 campaigns against public companies, some large, some small. Moreover mutual funds and business schools are getting into the act: the former increasingly siding with activists they view as potential change agents; the latter developing new courses and case studies in response to recent student interest in activist campaigns. Of course where you stand on this new fact of corporate life depends on where you sit. While many shareholders think they have reason to rejoice, many CEOs think they have reason to feel beleaguered and besieged. They fear activists who threaten their power. And they loathe activists they perceive as outsiders hell bent on shaking things up and shaking them loose. Of course CEOs have had no choice: they have had to adjust. They have had to assuage the very intruders of whom they are weary and wary. But it’s not easy making nice to someone muscling in on what you think of as your territory.
- 9 – Bossy Boards. In the old days, relationships between chief executive officers and boards of directors tended toward the warm and fuzzy. Board members typically were cronies, the various relationships preceding the current connection. As a result, boards were disposed to leave CEOs more or less alone, feeling no particular pressure to pressure their hired hands. Now though things are different, not dramatically, but substantially. Now boards have more independent directors, and CEOs have less influence on how boards are run. Moreover the pressure on boards to give chief executive officers a hard run for their big money is, if not overwhelming, unrelenting. Experts, activists, journalists, pundits, ordinary shareholders and, occasionally, even the public at large push boards to play a more active role, to monitor more closely their top leaders and managers. Routine recommendations for strengthening public company boards now include: increasing board engagement, increasing the distance between boards and CEOs, and increasing the board’s accountability not so much to company leaders as to company shareholders. By and large both CEOs and their boards have adjusted to the new norm. The selection of chief financial officers used, for example, to be the purview of chief executive officers. No longer. As the cases of Google, McDermott, Avon, and Newell Rubbermaid all testify, boards have become increasingly involved in selecting CFOs.
- 8 – Split Governance. There is nothing that so infuriates people in positions of power and authority as the charge that they have too much power and authority. Yet that’s precisely what CEOs have had to put up with in recent years: the idea that shareholders would benefit from splitting the role of CEO effectively in two, with some powers to be retained by the chief executive, while others are transferred to a newly designated or empowered board chair. While the weight of America’s corporate history is on the side of retaining the current structure, in which the two roles are combined, pressures to give the board an independent chair have grown to where the combined format dropped from almost 75 percent of S&P 500 companies in 2004, to just under 60 percent a decade later. The jury remains out on this one, different companies making different decisions, the exact effects of splitting the roles depending, the evidence suggests, on the circumstances. Coca-Cola, for example, did not name a co-CEO. The title of both chairman and CEO is still being held by Muhtar Kent. However the board did mandate a major change this year: beginning last August it effectively forced Kent to share power with James Quincy, the new president and chief operating officer. It’s clear that the idea of separating the chief from the chair – or finding some other way of dividing governing – has gained traction. Which is precisely why CEOs are leery of the possibility, even the probability, in particular if their performance disappoints.
- 7 – Long Arm of the Law. The literature is replete with complaints that laws intended to reform corporate America have done little or even nothing to bring about change. Notwithstanding the griping, three truths stand out. The first is that just because hardly anyone was sent to jail for misdeeds leading to the financial crisis, does not mean that a law such as the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act is totally toothless. It is not. There have been some significant changes in the area of financial reform, such as regulators requiring banks to hold higher levels of capital than they did previously. The second is that just because individuals by and large have not been prosecuted, does not mean that other sorts of legal agreements have not been reached. Some companies have agreed to institute new management practices. Other companies have agreed to being closely monitored. (Hence the pervasiveness now of huge legal fees, and the ubiquity now of compliance officers.) And still other companies have agreed to implement programs to transform their cultures. Meanwhile, to assure compliance, legal authorities retain the option of prosecution. The third truth is that just because executive pay has continued to climb an average of 12 percent a year – ironically, though Dodd-Frank mandates that companies let investors have a say on pay, shareholder support for current pay practices remains overwhelming – does not mean that there have been no relevant reforms. Supplemental pension plans, for example, which used to reward CEOS no matter how well the company did, are now largely a thing of the past. Now stock awards are more closely tied to CEO performance. Additionally, there is a recent SEC ruling, which mandates that beginning in 2017, most public companies will be obliged to reveal the ratio of the chief executive’s pay to that of the average employee.
- 6 – Small Investors. What? Small investors pose a threat to chief executive officers? No, not immediately, which is precisely why it was recently suggested that annual shareholder meetings are anachronisms: so few people even bother to show up that holding them is a waste of money and time. Of course there are some glaring exceptions to this general rule, such as Warren Buffett’s Berkshire bashes, in which large numbers of small shareholders gleefully participate. But most annual shareholder meetings more closely resemble the last such held by General Motors, which had fewer than three dozen in attendance, while the chair, Tim Solso, reportedly ran the meeting “looking agitated and rushing through the agenda.” Still, there are some situations in which small investors are invited to speak out, as was the case earlier this year when Du Pont faced a proxy battle between CEO Ellen Kullman and activist investor Nelson Peltz (head of Trian Fund Management). Both Kullman and Peltz aggressively courted small investors (at DuPont they hold one third of total shares), acutely aware that they could have determined the outcome. Moreover there are renegades out there, such as New York City comptroller Scott Stringer, who is spearheading a national campaign to empower shareholders at 75 publicly traded companies in which New York City’s pension system invests, asking them to agree to allow certain shareholders to nominate new directors. The point is that small investors constitute a crowd waiting to be organized, online and, or, off, and that someday likely they effectively will be.
- 5 – Shorter Tenures. CEOs in the present are more tenuously tenured than they were in the past. Between 1992 and 2007 the CEO turnover rate was 15.8 percent. Between 2000 and 2011 the CEO turnover rate climbed to 16.8 percent. In 2013 Bloomberg reported that U.S. corporations were changing chief executives at the fastest pace in five years, and in 2014 the pace picked up even further. In January 2014 turnover among U.S. CEOs surged 32 percent from what it was one month earlier, and 15.9 percent from what it was one year earlier. In 2013 Booz & Co. found that more companies than ever before were planning their CEO successions; in fact the numbers were as high as they had been in the 13-year history of the study. In January 2015 The Street reported that more CEOs were fired in 2014 than in any year since the 2008 market crash. (According to CEO Turnover Report, the total number of CEOs who exited in 2014, was 1,341. CEO turnover is higher in healthcare than in any other industry.) While the rate of CEO turnover in 2015 is likely to be lower than it was in 2014, and while the numbers are somwhat erratic, the overall trend is clear. American CEOs are more precariously positioned than they used to be: their average tenure now is only about five years. Some departures are voluntary; others obviously are not. Either way the point is the same. Prolonged periods at the top of the greasy pole are increasingly rare. I might note that corporate leaders are by no means the only leaders so beset. A 2011 survey of college and university presidents, for example, revealed that between 2006 and 2011 their average tenures similarly declined, from 8.5 years to 7.
- 4 – Constant Scrutiny. Technologies have changed leaders’ lives, complicated leaders’ lives, impinged on leaders’ lives by, among other things, increasing exponentially the degree of their scrutiny. We have much more information than we used to. We are much better able to connect with each other than we used to be. We are much more willing and able to act on what we know and think and feel. And we have no remaining compunction about invading the private lives of public figures. CEOs are being watched by old media and new, 24/7, and they are being watched by a range of stakeholders, all of whom are more numerous and clamorous than they used to be. These include in addition to the media, boards, shareholders, employees, clients, customers, and the public at large. CEOs are grist for our collective mill. We are prepared to nail them for sins ranging from personal wrongdoing to professional incompetence. Aggravated subordinates secretly record and then leak what their superiors presumed were private conversations. Social media enable ordinary people to keep tabs on extraordinary people – CEOs who misstate the facts, or stretch the truth, or cover-up their misdeeds, or are simply incompetent. Disgruntled customers can turn on CEOs and the companies they lead when their collective dissatisfaction reaches a tipping point – to wit what happened this year at Whole Foods. And disgruntled customers can register their views by posting them online, a weapon against the high and mighty. (Recent research from the Harvard Business School suggests that shoppers prefer retailers who pay their workers fair wages and rein in the wages of upper management.) Finally, when CEOs are celebrities, the scrutiny is relentless. Yahoo’s Marissa Mayer is an example of a CEO who is considered fair game by anyone with a long lens or sharp tongue.
- 3 – Flatter Hierarchy. Leading in the old days was easier. Chief executive officers sat astride their pyramidal hierarchies, able to command and control their subordinates more or less as they saw fit, no questions asked. Now, not so much. Now hierarchies are less pyramidal, less rigid and more fluid, flatter than they were, necessarily more hospitable to different voices from different places. Now CEOs are expected or even required to work in teams, teams they might lead but teams nonetheless, with the measure of equity this necessarily implies. Now CEOs are required by the exigencies of their circumstances to push the decision making process down, maybe to middle management, maybe even further down to get the work done. Now CEOs have fewer sources of power and authority, and they have much less or even no control over the data to which until recently only they were privy. Certainly in the area of technology, CEOs typically have no choice now but to subsume themselves to subordinates, usually of a younger generation, who are far more adroit than their nominal superiors at securing and interpreting big data. Chubbies is an example of a startup that according to the Wall Street Journal was “practically built on this devolution of power to its employees.” The company does not even have a CEO, at least not a single one. Instead, it has four co-CEOs, who share responsibility. None of this suggests the elimination of the leader, the CEO. But it does suggest the leader has been diminished.
- 2 – Contextual Complexity. The Corporate Research Forum – as well as my own most recent book, Hard Times: Leadership in America – described the context within which leaders now operate as more challenging than ever: more volatile, uncertain, complex, and ambiguous. This would suggest that it is impossible now for any single CEO to be master of the universe – because the universe itself has become impossible to master. Think of it as a simple equation. On the one side is the inordinately complex context. And on the other side is the CEO, limited by the nature of the human condition. Even the smartest and most competent of CEOs are, in other words, constrained by their intelligence, which, however impressive, increasingly pales in comparison to the contextual demands to which they are expected to respond. Some of these demands are internal, from within their organizations and, or industries. But other demands, other challenges, are external. They emanate from outside. Consider this year’s hack attacks on JPMorgan Chase (83 million households and small businesses compromised), and on Sony (large internal data centers wiped essentially clean), and on Target (credit and debit card information stolen from some 70 million customers). Of course hackers from outside – from China? from Russia? from mischief makers elsewhere in the world? – are by no means the only external challenge. Climate change, for instance, will inevitably effect countless leaders of countless companies. But how much control can any single CEO possibly have on a problem as daunting as global warming?
- 1. Changing Ideology. No one doubts who’s ultimately in charge at Facebook – CEO Mark Zuckerberg. Nevertheless what’s interesting is the lengths to which Facebook goes to stress not the status of the superior, or superiors, but of the subordinates. Employees are given wide latitude in what to do and how to do it. And they are encouraged to participate in decision making, which is presumed cooperative and collective rather than hierarchical or unilateral. While some companies go even further toward democratizing the workplace, the real point is that in the second decade of the 21st century even the most hidebound of businesses, large or small, cannot afford to resist altogether the mantra of modern management, which is to decrease workplace hierarchy and increase workplace equity. Buzzwords like “empowerment,” “engagement,” “collaboration”, “participation,” “networks,” “teams,” “Holacracy” and of course the very idea of the flattened hierarchy are all signs and symptoms of the transition to a workplace culture that is expected to be more democratic and less autocratic. Author and psychologist Daniel Goleman typified the trend, when he wrote that democratic leaders are “true collaborators, working as team members rather than top-down leaders.” While to some this ideological shift toward bosses who are more benign, more inclusive than exclusive, might smack of nothing so much as management jargon, a facade for a workplace structure that remains more similar to what it was a generation or two ago than different, it is not, or at least not entirely. There are two reasons why the ideological shift is, to a degree at least, real. The first is self-interest. In order to attract the best workers, particularly but not exclusively in technology, providing them with considerable autonomy is an essential recruiting tool. And second is the larger culture within which CEOs and those in their employ are embedded. Across the board plain people have become increasingly accustomed to demanding their rights, speaking their piece, and thumbing their noses at those in high places. Hence our demand on all leaders and managers – including those most highly paid and placed – that their power, authority, and influence be less narrowly concentrated and more widely distributed.