Business Exposed108
Interestingly, Jim and Ed also analyzed what happened to the
compensation packages that rms offered to their CEO, if the
CEO succeeded in selecting more and more people like them.
Guess what? The percentage of his pay that was performance-
related went down, while the total amount of his compensation
went up!
I guess CEOs don’t just like and select people who are just like
them, but those people quite like our CEO too! And reward him
handsomely for it. After all, from their perspective, obviously,
“he does have the most amazing background credentials”.
Boardroom friends
Lately, of course, boards of directors in various countries and
systems have been subject to considerable frowning, loathing,
smirking, and indecent hand gestures. “They’re all part of the
same elite”, “corporate amateurs”, “never really objective”, “not
really independent”, “an old-boys’ network”, and so on. Surely,
it is said, those directors that are pretty much personal friends
of the CEO will be most useless; they will just protect him and
never really be critical, asking the nasty and awkward questions
they should be asking.
Yet, is this necessarily so? Do “friends” make for bad directors?
Professor James Westphal, of the University of Michigan (yes,
him again), became skeptical of the skeptics. He investigated
whether social relations between board members and CEOs
really are as harmful as assumed. He extensively surveyed 243
CEOs and 564 of their outside directors and examined whether
personal friendships and acquaintances made for less effective
board members.
First of all, he found that the boardroom friends hardly ever
engaged in less “monitoring” of the CEO (that is, checking
strategic decisions, formal performance evaluation, etc.) – the
traditional stuff that directors are supposed to do. They were
still quite active in that sense, despite being a personal friend of
the CEO.
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