CHAPTER 3

THE RISE OF THE CHARISMATIC CEO

NOT THE LEAST remarkable feature of the search that culminated in Bank One’s hiring of its star CEO, Jamie Dimon, was the way in which, by choosing Dimon, the board passed up an experienced, highly qualified executive who knew the company and its business well. Verne Istock, a University of Michigan graduate and MBA, was a highly regarded banker who had spent thirty-seven years working his way up the ladder at NBD Bancorp, of which he became chairman and CEO in 1994. NBD Bancorp was considered one of the best-managed regional banks in the country, and after one year at the helm, Istock engineered a successful merger between NBD and First Chicago to create one of the largest banks in the country. After the merger, Istock served as CEO and chairman of the new entity. The combination of the two banks was very successful, and a great deal of credit for this success was given to Istock’s willingness to share power with, and delegate decision-making to, the executives from First Chicago.

It is not at all unusual today for companies to pass up CEO candidates of the caliber of a Verne Istock. For even strong insider candidates are now routinely dismissed as unequal to the role of corporate savior or (in the preferred lingo of the boardroom) “change agent,” a figure now seen as the key to reviving troubled companies. Indeed, the preference for glamorous external candidates over qualified insiders has now become so common that we need to be reminded that things were not always so. The star CEO of today is, on one level, but another incarnation of the kinds of charismatic leaders that have arisen from time to time throughout history and in every corner of the globe. On another level, however, he is the product of a particular, and fairly recent, set of developments in the history of American capitalism.

The Shift from Managerial to Investor Capitalism

The emergence of the external CEO labor market, and of the charismatic CEOs who are the most visible consequence of it, is intimately tied to historical changes in the ownership and control of large corporations in the United States in the twentieth century. The traditional nineteenth-century manufacturing firm had been a personal or familial operation producing piecework, assisted by local merchants who both supplied it with tools and raw materials and distributed and marketed its products—that is, the shop writ large.¹ Ownership and control rested in the same hands. The founder and the chief executive of the firm were one and the same. At the beginning of the twentieth century, as a result of revolutions in communications and transportation and the development of mass markets, firms grew larger and larger. The management intensity of these large organizations, many of which spanned the North American continent, overwhelmed the traditional owner-manager-led organizational structure.² To finance the growth of these firms, founders had to sell an increasing portion of the company to investors and shareholders. As a matter of expediency, founders also had to delegate the day-to-day management of the firm to nonfounders. This “managerial innovation” led to a distinct separation of ownership and control, in which control shifted away from owner-founders to professional managers while stock ownership became increasingly diffused among thousands of anonymous stockholders who were not involved in the day-to-day management of the firm.³

In his book The Visible Hand, a title that was carefully chosen, the historian Alfred Chandler argued that this new professionally managed corporation was economically superior to the stockholder-controlled corporation.⁴ Because of the sheer complexity of large corporations, market forces, particularly the stock market, were no longer effective in guiding organizational activity. Instead, managerial capitalism’s cadre of professionally trained executives with firm-specific experience and know-how were better stewards for the nation’s private assets than were the egocentric founder or short-term-oriented stockholder.⁵ Professionals preferred long-term stability and growth to short-term gains. The result, as Chandler described it, was a virtuous cycle: As businesses grew, the very system by which they were structured evolved, allowing them to become even larger and therefore more efficient, profitable, and powerful.

For several decades, the rise of managerial capitalism described in Chandler’s thesis seemed like one of those “end of history” moments, such as political theorist Francis Fukuyama saw in the end of the Cold War.⁶ The superiority of managerial capitalism over owner-based capitalism as an economic arrangement was almost a given in any treatment of the modern corporation.⁷ The steady, visible hand of the professionally trained manager guiding the corporation toward stability and long-term growth was seen as superior to that of the jumpy manager continually reacting to the unpredictable and fickle “invisible” hand of the market. To be sure, there were portents of risk and danger around the edges of Chandler’s thesis—for example, the gradual decline of U.S. manufacturing during the late 1960s and 1970s, when higher prices were accompanied by poorer quality—but these were viewed as temporary aberrations rather than as a harbinger of a changing landscape for U.S. corporations. To the extent that any constraint was placed on managerial authority, it came from the federal government’s ability to regulate through antitrust enforcement or the regulatory agencies.⁸ Corporate directors, although legally responsible to shareholders, in fact felt more beholden to the CEOs who invited them to serve on their companies’ boards.

With the exception of a few vocal academics, most of whom were marginalized in their own fields of study and exiled to second-tier institutions, few saw the insulation from market forces as having a negative impact on corporations. Like any human construction when left unchecked, however, this system showed a natural tendency to accumulate inefficiency as a result of bureaucratic inertia and entropy. Whereas the strength of managerial capitalism was the discretion it afforded professional executives to determine the strategies of the firm, its weakness lay in the temptation it afforded these same professionals to take inefficient actions such as negotiating stronger employment contracts, increasing their own salaries and perquisites, weakening the monitoring power of the board, and ultimately diversifying the firm to reduce their personal risk.⁹ In U.S. corporations, this inefficiency manifested itself in the form of a steady decline in U.S. corporate profits beginning in the late 1970s.¹⁰

FIGURE 3.1 Corporate Profitability, 1959–1996. Rate of return equals pretax income plus interest divided by tangible assets. Source: Poterba (1997) as cited in Baker and Smith (1998)

Because share ownership of large corporations was dispersed, shareholders were still relatively powerless at this point to exercise any control over management. Thus, if a shareholder was unhappy with the way a particular firm was being run, he or she responded by selling the shares of one company to purchase the shares of another (a maneuver sometimes known as the “Wall Street walk”). This was true even for the largest shareholders, such as pension funds, mutual funds, banks, and insurance companies, which were legally prevented from either owning significant blocks of stock or engaging in collective action to influence management, despite their financial capacity to do so. Exit from holdings in a particular firm, however, increasingly became an ineffective option because of the almost uniform decline in the performance of large corporations. When it came to investing in the stock market, investors had few alternatives. Internationally, for instance, the concerns of shareholders were even more marginal than in the United States.

Investors initially responded to the general decline in corporate performance by siding with incumbent management. Thus, when business executives blamed lower corporate performance on burdensome federal regulations, investors, particularly the increasingly visible institutional investors, joined in the call to roll back government regulation in the areas of the environment, unionization, and occupational safety. Investor loyalty was induced by the belief that deregulation would give existing managers time to restructure and respond to their concerns. Yet despite the significant deregulation of business that began under President Jimmy Carter and accelerated after the arrival of the Reagan administration in 1981, overall U.S. corporate performance continued to underperform. Moreover, the credibility of U.S. executives started to suffer as the business press began to highlight embarrassing examples of senior managers enjoying perks such as fleets of corporate jets, limousine services, executive dining rooms, and so forth, while simultaneously laying off thousands of workers and cutting corporate dividends. The public image of corporate executives began shifting from one of enlightened corporate statesmen who balanced the competing concerns of corporate constituents to that of a self-interested managerial class whose primary interest was taking advantage of weak shareholders.¹¹ After nearly a half-century of unchallenged supremacy, senior management at many corporations faced a threat to its authority.

Initially, the counterrevolution to the managerial “revolution” was led by outside raiders and private investment groups in the form of leveraged buyout organizations. Taking advantage of financial innovations such as junk bonds and buyout financing, these outsiders began buying poorly performing firms and restructuring them, often by removing incumbent management.¹² Corporate executives, for their part, fought back by adopting a range of defensive measures with exotic names such as poison pills, golden parachutes, fair-price requirements, and supermajority votes. They also turned to the government in an effort to get anti-takeover legislation passed. Although corporate lobbyists such as the Business Roundtable made little headway either with Congress or with the laissez-faire Reagan administration, appeals to state and local governments proved much more successful. In the end, a majority of the more heavily industrialized states adopted anti-takeover legislation that protected incumbent management against unwanted acquisitions. The strongest of these new provisions allowed directors to consider non-financial factors in accepting or rejecting a takeover. This limited the ability of outsiders to litigate board decisions (such as the adoption of an anti-takeover provision) and—by once again giving managers the upper hand—significantly tempered activity in the takeover markets. Table 3.1 shows that by the late 1980s, hostile takeover activity had declined significantly. However, this did not turn the clock back to the era of managerial capitalism.

TABLE 3.1

Characteristics and Descriptive Statistics of Mergers by Decade, 1973–98

Many of the raiders and LBO firms were not self-financed but instead were bankrolled by a set of moneyed actors who enjoyed much greater legitimacy than the greedy takeover artists epitomized by T. Boone Pickens or the “barbarians” of Kohlberg Kravis Roberts.¹³ This new set of actors—institutional investors—had almost imperceptibly become the dominant class of shareholders in the United States. Institutional shareholdings, which in 1955 represented 15 percent of the outstanding shares of companies listed on the NYSE, were by the mid-1980s in excess of 50 percent. Today, institutions control some $20 trillion worth of stock.¹⁴

Whereas exit from unprofitable market positions was the preferred mechanism when institutional investors owned only a small number of shares in the equity market, it was not a real option at this scale of ownership.¹⁵ Institutional shareholders disappointed in a company’s performance could not easily sell their block of shares to any investor other than another institution. Moreover, selling even in small increments could significantly damage the price of a holding if it became public that a major shareholder was beginning to exit. While in the past institutional investors had simply sold their shares in one company and invested in another or had loyally supported incumbent managers, they now shifted to a more vocal strategy to force managers to take their concerns more seriously.

FIGURE 3.2 Institutional Ownership of U.S. Equities from 1950–97. Institutional ownership is defined as private pension funds, open-end mutual funds, state-local government retirement funds, and insurance companies. Sources: Data for 1950–80 is from Friedman (1995); data for 1987–97 is from Institutional Investment Report (1998).

The target of most institutional shareholder activities aimed at voicing the views of shareholders became corporate directors. Because directors are at the interface between a particular firm’s CEO and its investors, they are the natural targets on which to apply pressure to affect the firm’s activities. In 1991, institutional investors such as the College Retirements Equity Fund (CREF), the California Public Employees’ Retirement System (CalPERS), and the Teamsters increasingly began to send targeted letters to directors urging them to act to improve performance at a particular firm. Many of these efforts were channeled through intermediary organizations such as the Council of Institutional Investors (CII) and Institutional Shareholder Services, which coordinate and publicize shareholder proxy votes, including those electing directors. If “quiet” pressure did not work, these institutional investors were willing to employ stronger tactics against individual directors. The Teamsters, for example, began to publicly shame directors by publishing an annual list of the worst directors in America. The list, compiled by aggregating data on directors’ attendance at board meetings and the number of boards a director sits on, was (and still is) often picked up by the business media and published in outlets such as Business Week and Fortune magazines.¹⁶ CII puts together a list of “director turkeys” that names board members who serve on the boards of more than one underperforming company. Several pension funds, including CREF, CalPERS, and the Teamsters, now scrutinize the composition of boards to identify directors who are most likely to respond to shareholder concerns.

One of the most awe-inspiring examples of institutional investors’ new power over directors was the removal of an entire tier of senior management at General Motors in 1992. The dismissal of Robert Stempel and his top lieutenants that year had no parallel in the history of great corporations. Wholesale removal of executives after takeovers had been known, of course, but boards of directors had usually settled for a single head—and even then with reluctance. As recently as the mid-1980s, not even the constant haranguing of Ross Perot had been able to persuade the GM board to shift gears or change direction. Despite the evidence that GM’s market share was rapidly deteriorating and that the company was one of the world’s highest-cost car producers in a market with substantial excess capacity, the board had complacently supported CEO Roger Smith and the failed strategy it had approved for over a decade. “I did everything I could to get General Motors to face its problems,” Perot later said in the 1992 presidential debates. “They just wouldn’t do it.”¹⁷ The reason for this was that GM had, in Perot’s words, “a Pet Rock board of directors.” Rather than heed Perot’s calls to cut executive perks and streamline the bureaucracy, the GM board had eventually spent $750 million to buy out his stock and silence him. Even when Smith finally retired in 1990 because of GM’s forced retirement policy, the board had agreed to appoint Stempel, his handpicked successor, as CEO, and to keep Smith himself on the board. Thus it is all the more remarkable—and a telling sign of the shift of power from management to investors—that this same supine board, faced with increased pressure from institutional investors, finally dismissed not only Stempel but most of his senior management team.

Encouraged by the corporate upheaval that they helped spur at General Motors, activist investors subsequently zeroed in on other firms.¹⁸ Using new power granted by changes in federal proxy rules in 1992, CII could now solicit proxy votes for shareholder resolutions and against directors. While pension funds exerted pressure through these means, other large shareholders, such as Berkshire Hathaway and KKR, exerted direct pressure through their participation as corporate directors. Although public pension funds were often prohibited by charter and state law from having a board seat on a company they had invested in, Warren Buffett, the chairman of Berkshire Hathaway, and Henry Kravis, the chairman of KKR, did not face any such restrictions. The clearest example of the role of these large shareholders can be found in the recent dismissals of CEOs at two of America’s largest consumer product companies, Coca-Cola and Gillette. Insider accounts reveal that the firing of Douglas Ivester at Coke in 2000 was coordinated by two of the company’s directors: Warren Buffett and Herbert Allen.¹⁹ At Gillette, where Michael Hawley was ousted as CEO that same year after only eighteen months on the job, accounts from those familiar with the situation highlighted that it was buyout legend Henry Kravis who led the movement for Hawley’s dismissal.²⁰

These dramatic stories do raise the question of whether such investordriven dismissals of CEOs were isolated examples, not indicative of any general trend. In response, one could point to tales that have unfolded in the past decade at Apple Computer, Xerox, Lucent, and IBM—all firms in which institutional investors played a role in dismissing what were regarded as underperforming CEOs (that is, CEOs of firms that were underperforming). One could also consider a wider sample of firms. Figure 3.3 examines the rate of CEO dismissals for the 850 largest companies in the United States between 1980 and 1996. Using a statistical technique called hazard-rate analysis, the figure highlights that for the same level of corporate performance, a CEO appointed between 1990 and 1996 is three times more likely to be fired than a CEO appointed before 1980.

FIGURE 3.3 CEO Dismissal Rates over Time. Hazard rate for CEO dismissals, 1980–96. Note only cohorts for 1975–80 contain complete observation for 1980–96. Subsequent cohorts use both actual data and then predicted values. See the appendix for data sources and model.

Even when they have not sought outright dismissal, institutional investors have sought ways to hold CEOs more accountable for poor corporate performance: for example, by actively campaigning against the adoption of anti-takeover defenses or in favor of tighter alignment of CEO incentives with stock performance. All of the forms of pressure applied by investors, via corporate directors, to CEOs—but especially those aimed at achieving CEO dismissals—have revealed a distinctly CEO-centered view of the corporation that, as we shall see, has been another product of the overall shift from managerial to investor capitalism.

In any event, the shift from managerial to investor capitalism has altered the form and boundaries of CEO succession. In particular, CEO tenure has shifted from a time-determined event to a performance-affected event. At the same time, choosing a successor has shifted from a CEO-dominated process to a board-dominated process. As CEOs were held to higher performance standards and the turnover at the top increased to unprecedented levels, boards were now more accountable for the selection decision. Whereas under managerial capitalism, boards typically rubber-stamped the outgoing CEO’s choice even when the firm was performing poorly, the search for a CEO successor was now considered the directors’ most important job. The job was made all the more challenging by the fact that, in increasing numbers of cases, there was no clear heir apparent. And even when there was, it was now not at all clear to directors whether he or she was the best candidate for the job.

The Liability of “Insiderness”

Particularly in cases in which corporate performance has been mediocre toward the end of a CEO’s tenure, or in which the board is forced to remove a CEO, boards now show a strong tendency to assert themselves—and to attempt to reassure investors and other outsiders—by rushing to find a corporate savior from outside the organization.²¹ The value of internal candidates is discounted by a belief that such candidates lack the necessary skills to improve organizational performance, if they are not actually seen as part of the problem at hand. Internal candidates, about whom the board knows more than it possibly can about external ones, are considered blemished while external candidates are easily idealized. Directors also tend to believe (mistakenly, as we shall see in chapters 6 and 7) that an insider CEO will be more difficult to control because he or she will be attached to the status quo. By contrast, directors and the external constituencies whom they desire to please view hiring an outsider CEO as a progressive and positive action. The belief in the superiority of outsiders has become so engrained that it was fashionable to portray the legendary Jack Welch—a consummate insider who had spent his entire career at GE before being named the company’s CEO—as a de facto outsider. Other such faux outsiders in the ranks of recent CEOs include former Ford chief executive Jacques Nasser and American Express’s Harvey Golub.²²

Things were very different in the era of managerial capitalism, when the board played an essentially passive role in CEO succession, and it was comparatively rare for corporations to hire outsiders. In those days, as now, the choice of a new CEO was influenced by a variety of factors. Many studies of CEO succession have pointed to these influences, which include the strategic direction of the firm, the nature of the regulatory environment, and the performance of the firm.²³ But in the era of managerial capitalism, these factors were all overwhelmed by one critical one: the preferences of the outgoing CEO, as determined by his evaluation of a field of internal candidates.

The importance of the outgoing CEO’s preferences in the CEO succession process before the advent of investor capitalism is highlighted in an account by Reginald Jones—Jack Welch’s predecessor as CEO of General Electric, who retired in 1981—of how he went about evaluating his potential successors. Jones’s account is worth quoting at some length for the insight it provides into not only the process of CEO succession in his day but also the criteria he applied to CEO candidates.

One technique that I used is what may be called the airplane interview. My predecessor, Fred Borch, used this technique in a somewhat similar situation, but it had impressed me as most helpful, and I had learned much from his effective use of this approach.

I sat down for a couple of hours, unannounced, with each of these seven or eight candidates. They didn’t know the purpose of the meeting, and I made sure they didn’t tell the others, so that everybody came in surprised. And they wouldn’t tell, once they went through the experience, because they wouldn’t want the other guy to have the advantage of knowing what this was all about.

You call a fellow in, close the door, get out your pipe, and try to get him relaxed. Then you say to him, “Well, look now, Bill, you and I are flying in one of the company planes and this plane crashes. (Pause) Who should be the next chairman of the General Electric Company?”

Well, some of them try to climb out of the wreckage, but you say, “No, no, you and I are killed. (Pause) Who should be the chairman of General Electric Company?” And boy, this really catches them cold. They fumble around for a while and fumble around, and you have a two hour conversation. And you learn a great deal from that meeting.

When you’ve done that seven or eight times, once with each of the leading competitors to replace you, it’s amazing what you learn about the chemistry among that group—who will work with whom, who just despises the other guy—and things come out, because this is a totally confidential session you’re having with them, totally confidential. Because they’ve not had any warning that this was going to strike, they blurt things out that you damned well better remember, because sometimes those are more important than the studied comments that you get at a later date.

Now, having done that across the field of candidates, the next thing I did was to call them back three months later, and do it all over again. This time they knew it was coming, and they had been through the experience. Now they came in with sheaves of notes, studied comments; they were statesmen developing, you see, in this process. And we went through the whole thing again—it took a couple of hours.

While I was holding these interviews, I also did the same thing with those senior officers with whom I could talk. These were the ones who were not contenders, the ones who were going to retire before me or with me, whose opinion I valued. They were generally staff people. And you get their reactions as to who should be running the company, what teams will work together, what individuals don’t fit, and so on. I shared all this with the five members of the Management Development and Compensation Committee of the board, in depth, and of course with the senior vice president of executive manpower, who was intimately familiar with all these people.

Now, in the next series of interviews—again two in number and again the first one unannounced—you call the fellow in and say, “Remember our airplane conversations . . . ?” “Oh, yeah . . . ,” and he starts to sweat a little bit. “Now,” you say, “this time, we’re out there together, we’re flying in a plane and the plane crashes. I’m done, but you live. Now who should be the chairman of General Electric?”

And again, you get a very interesting set of responses. Some don’t want any part of it: “Here’s the guy you should pick.” Others: “I’m your man.” And you say, “Okay, if you’re the man, what do you see ahead as the major challenges facing GE, what sort of environment do you visualize, what programs would you mount, and who should be the other members of the Corporate Executive office?” Now you’re getting very specific about the chemistry, about interpersonal relationships. And then you do that again on an announced basis, just as you did the first time; the second time they come in, they’re really ready for you. They’ve got all their notes and you have a very informed discussion.

Now, that was the way we developed the information, which we shared again with the Management Development and Compensation Committee of the board and, finally, the full board. And the full board, having known these people intimately and been very much involved in the entire succession process, arrived at a set of conclusions as to the three candidates that we should move up to vice chairmen.

We then ran with a Corporate Executive Office of myself and these three new vice chairmen for a period of about fifteen months. . . . Remember, they were attending every board meeting and they were seeing board members in social as well as business situations.²⁴

GE’s succession process, as portrayed in Jones’s account, in many ways bears out the view of CEO succession generally that has become common among economists, inspired largely by Sherwin Rosen and Edward Lazear’s theories of “executive tournaments.” An executive tournament is an overt contest among internal candidates based on the idea that, given the company’s meritocracy, ability largely determines who will be the next CEO of the corporation.²⁵ Yet GE’s process, as Jones describes it, also demonstrates that the abilities required to become the CEO of such an organization go well beyond administrative ones. A successful candidate at GE would also need to have tremendous political skills to navigate a competitive corporate hierarchy in which numerous executives were in competition for the top position.²⁶

Within the closed circle of corporate management in the era of managerial capitalism, CEO succession could remain limited largely to internal candidates, almost all of whom had spent their entire careers inside a single firm. Yet a confluence of business trends, coinciding with the rise of investor capitalism in the late 1980s and early 1990s, eventually made it more difficult to simply promote a CEO from within without at least benchmarking an internal CEO candidate against outsiders.

As investors became increasingly restive, the traditional advantages of promoting from within—industry-specific experience and knowledge about a particular firm’s culture and political terrain, for instance—were no longer always perceived as advantages. Insider CEO candidates were viewed as suspect and as impediments to organizational change. Analysts and the business media often questioned whether insiders would be willing to make difficult decisions such as downsizing or reversing past strategic decisions that they may have had a hand in making. (GM’s Robert Stempel, who had always seconded the plans of his predecessor, Roger Smith, is an example of an inside successor who was now considered compromised by his past as a loyal corporate soldier.) Directors also adopted this more skeptical stance toward insiders. Henry Wendt, a director and former CEO of SmithKline Beecham, describes the change by saying, “The emphasis on reinventing the corporation, on reengineering and restructuring accelerates the pace of change. So the balance has shifted to recruiting from the outside for a change agent.” A knowledgeable insider involved with the 1993 selection of Lou Gerstner, IBM’s recently retired outsider CEO, states the rationale for bringing in an outsider when the company needs to change in unusually blunt terms.

The person coming from the outside has a clear mandate, particularly if he is coming into a troubled situation. He is not beholden to anyone. There are so many constraints on the internally-promoted individual. There is so much baggage! Organizational boxes, the people in the boxes, probably half the businesses that were bought now should be chucked, commitments to people on what their future will be. [As an insider], you are part of the process. Now that you are on top, you cannot be a Magnum Prick. You turn to an outsider and then you can watch the blood spray. You don’t see many examples of internal candidates getting to the top of the system and then laying waste to the existing culture.

As the shift to investor capitalism gathered steam, a rapidly changing technological environment, continuing deregulation, and industry consolidation also fueled the perception that insiders might not have the right skills to manage in the new milieu. Moreover, choosing an outsider became a way of demonstrating to Wall Street the board’s commitment to change. For example, when computer maker Compaq announced in July 2000 that an insider, Michael Capellas, would become CEO, its stock price immediately dropped 4 percent. By contrast, computer maker Hewlett-Packard’s shares jumped 2 percent when it was announced in July 1999 that an outsider, Carly Fiorina, would become the next CEO.²⁷ According to a search consultant with knowledge of the H-P search, business analysts believed that the H-P culture had grown too soft, with too much emphasis on consensus decision-making, and H-P’s board had increasingly adopted this view. The directors wanted someone to shake up the traditional culture, which worked to the detriment of inside candidate Ann Livermore (the CEO of H-P’s $14 billion Enterprise Computing division), who was said to be the outgoing CEO’s choice.²⁸

At the level of the board, changes in board practices have also contributed to the increasing willingness of directors to break from past succession policies and bring in outsiders. Two shifts have been particularly important here. The first of these has involved changes in the ways in which board members are compensated. In recent years, almost all the Fortune 500 firms have adopted some form of stock options for directors. The idea is that if directors are paid in stock, they will act in the best interests of shareholders and thus will be more willing to break with past organizational practices such as hiring insider candidates. The second shift leading to a more independent board has been a change in the way that directors are elected. Traditionally, the CEO of a firm selected a firm’s directors. This was usually accomplished by the CEO’s serving on the board’s nominating committee. In recent years, however, the practice of a CEO serving on a nominating committee has been frowned upon. In a study of corporate boards, Anil Shivdasani and David Yermack have found that when the CEO serves on the nominating committee or no nominating committee exists, firms appoint fewer independent outside directors and more gray outsiders (such as personal attorneys or corporate consultants) with conflicts of interest. Their study has also found a trend of companies removing CEOs from involvement in director selection, leading to the creation of more independent boards.²⁹

Impatient investors, an increasingly turbulent business environment, changes in the way that corporate directors are selected and compensated—all of these factors have influenced the turn from inside to outside candidates in the CEO succession process. An equally important consequence of these developments, however, has been a dramatic change both in the way that the CEO position itself is conceived and in the qualities directors seek in a CEO candidate. In the era of investor capitalism, it is no longer enough—or even of the first importance—that a CEO candidate have particular skills as a manager. What matters much more is that a candidate have a particular kind of person.

Charismatic Orientation

Along with the many other changes that the decline of managerial capitalism and the rise, in its place, of the more Darwinian system of investor capitalism have brought for corporations and those who are affected by their actions, these events have led to a greater focus on the individual CEO. As we have seen, the pressures brought to bear by investors, via boards of directors, on CEOs—including demands for their dismissals—have been premised on the belief that the CEO can and should be held responsible for corporate performance, irrespective of his or her job performance, or indeed of the many other factors that more decisively influence firm performance.³⁰

Corporate directors’ adoption of this belief can be seen in, for example, the trend toward making stock options an increasingly important part of CEO compensation packages. Indeed, by supposedly tying CEO pay more closely to corporate performance as measured by the stock market,³¹ these new compensation packages have indirectly reinforced the idea that an unsatisfactory stock price is a legitimate basis for dismissing the CEO—even if dismissal becomes, as it does in many cases, an occasion to provide the outgoing CEO with generous financial rewards for failure. The belief that the CEO is individually responsible for the firm’s financial performance is also reflected in the increasingly frank way that boards of directors have become willing to discuss CEO dismissals. Of the twenty-two Fortune 500 CEOs who suddenly resigned in 1992 and 1993, only two—or so the press releases from those years would have us believe—were actually forced out. The rest, we are meant to conclude, either retired voluntarily or went on to pursue other opportunities.³² Less than a decade later, the press releases announcing the forced departures of Al Dunlap from Sunbeam, Michael Hawley from Gillette, and Richard McGinn from Lucent struck an entirely different note. In its account of McGinn’s firing, Lucent’s press release flatly announced, “In a meeting this weekend, the board reviewed Lucent’s recent performance and outlook for the current quarter and determined that an immediate change in leadership was necessary.”³³

In embracing the belief that a company’s fortunes depend on who occupies the CEO suite, corporate directors have not, of course, been operating in a cultural vacuum. In what is ultimately the most significant development for CEO succession resulting from the advent of investor capitalism, a distinctly American cult of the CEO has replaced attention and deference to the complex organizations that the CEOs of large companies head. Like corporate boards’ assumption of the task of choosing a new CEO, or the growing tendency for companies to turn to outside successors, this development—and the type of corporate leader it has exalted—represents a sharp break with the circumstances that preceded it. For when the era of managerial capitalism ended in the 1980s, the Organization Man, and the business culture that had once sustained him, died with it.

During the era of managerial capitalism, American business was very much conducted within a set of generally accepted rules that maintained an ordered, stable business environment.³⁴ The government regulated many industries, including trucking, communications, and airlines. A few giant companies dominated many markets, such as for automobiles, steel, and consumer electronics, while foreign trade was relatively slight and foreign competitors were not considered a threat. In this period, corporations were run by a professional class of conforming managers, who were willing to sublimate their individuality in exchange for the security of corporate hierarchy and steady promotions. Their uniformity was perceptively captured in classic texts such as William H. Whyte’s The Organization Man, C. Wright Mills’s The Power Elite, and David Riesman’s The Lonely Crowd.³⁵ These men shared a common bureaucratic culture and viewed business as having reached a détente or rapprochement with government and labor.

This world changed during the 1970s and early 1980s, as a radically different business environment came into being. The country was on the brink of what some have called the third industrial revolution. Smokestack industries were being replaced by services. Technology began to move from the back office to the boardroom. Chips were products made from sand instead of from potatoes. Foreign competition, first from Japan and then from Europe, landed on the shores of North America with a ferocity and strength so completely unexpected as to raise fundamental questions regarding the organization of the American economy.³⁶ Moreover, the deregulation that corporate chieftains had literally begged Congress for had once again opened the American market to the war of all against all that characterizes unbridled capitalism, but meanwhile failed to boost corporate profits. The gentleman’s capitalism that had characterized the era of managerial capitalism was gone, and a new type of leadership seemed called for.

The new corporate leadership that began emerging in the 1980s was in many ways a throwback to the swashbuckling Robber Barons of the late nineteenth century. This group, however, tended to be more public-relations savvy and psychologically attuned to the zeitgeist, thus avoiding being vilified as the Robber Barons had been. The new CEOs were portrayed as entrepreneurial. Like Steve Jobs and Bill Gates, they founded new companies. Or, like Jack Welch and Lou Gerstner, they rejuvenated old-line firms. These new members of the business elite were no longer defined as professional managers but instead as leaders, whose ability to lead consisted in their personal characteristics or, more simply, their charisma.³⁷

The turn toward charismatic authority in business, while in part a reaction to a rapidly changing economic and business environment, was also reinforced by a changing cultural context. The term charisma was introduced into the common lexicon by the sociologist Max Weber, who transferred it from its original religious context to the examination of political regimes. Political scientists have found that a turn toward charismatic leadership is most likely at times of dramatic changes in the social or economic order. Such major disruptions are said to create a cultic milieu favoring the appearance of leaders who can give a society a new vision while providing an outlet for the expression of the anger and frustration generated by the collapse of an old order.³⁸ Sociologists, meanwhile, have pointed to the role of more subtle cultural factors that increase the predisposition toward charismatic authority.³⁹ In the case of the business world in the era of investor capitalism, the turn toward charismatic CEOs has been partly rooted in a changing conception of business and its role in society.

Over the last twenty years, business has been elevated in American society into an activity transcending the profane task of making money. Business is now portrayed as having a moral dimension. The change can be seen in the publicity materials of companies such as the cigarette manufacturer Philip Morris, which claims to be motivated by higher purposes than a mere desire to sell cigarettes. Instead, Philip Morris is supposedly guided by the values of “Integrity, trust, passion, creativity, quality and sharing,” as well as by a “belief in adult choice.”⁴⁰ DuPont doesn’t just produce chemicals anymore, but has instead dedicated itself to “the work of improving life on our planet.”⁴¹ While one might argue that the social criticism directed for many years against industries such as tobacco and chemicals is the cause of this emphasis on mission, companies in other, seemingly much less socially and ethically questionable industries also now tout themselves in such high-flown terms. Fast Company, the business magazine created for the “New Economy,” describes itself as not just a magazine but “a movement . . . [striving] to help people in the new economy discover the tools, techniques, and tactics they need to succeed at work and life.”⁴² ServiceMaster, which is in the business of industrial cleaning and facilities management, described its mission thus in its 1995 annual report:

At ServiceMaster, the task before us is to train and motivate people to serve so that they will do a more effective job, be more productive in their work, and, yes, even be better people. . . . It is more than a job, a means to earn a living. It is, in fact, our mission. . . . [I]f we focused exclusively on profit, we would be a firm that had failed to nurture its soul.⁴³

Couched in psychological and humanistic terms, this new orientation has adopted the mantra that employees are the most important resource of the company—an idea that companies can now embrace for solidly self-interested reasons. One distinguishing feature of today’s business landscape is that the best way to achieve high returns for shareholders is to maximize the efforts and commitment of employees.⁴⁴ In the new ideology created to serve the corporation’s ends in this changed environment, employees are no longer subordinates or workers, but rather “partners,” “owners,” and “associates.” Whatever the euphemism, the purpose of this terminology is to create the impression that employees are participants in a grand social experiment in which each and every individual makes a difference. In the 1960s, the sociologists David Riesman and Nathan Glazer foresaw this transformation in which a job is no longer about economic sustenance but is said also to be a source of meaning. More recently, the social commentator David Brooks has provided important insight into the new counter-cultural capitalist ethos in which work has been transformed into an intellectual and spiritual calling.⁴⁵ In business schools, meanwhile, the advice given to students is that they need to be “passionate” and “ecstatic” about their jobs. The corporation, commitment to the job, and teamwork have become substitutes for the increasingly fractured and transient communities in which many people now live. Their significance has become quasi-religious, as suggested by the importation of terms such as mission and values into the contemporary corporate lexicon.

This changing definition of business has also changed the definition of an effective CEO from that of competent manager to charismatic leader. Given the new conception of the corporation and its role in society, a CEO must now inspire. To motivate employees to devote long hours to the company, the CEO must convince them that the firm is not simply a profit-making enterprise but that it fulfills a larger, more exalted mission. The new CEO’s role has been portrayed in a variety of ways: visionary, evangelist, role model, coach. Whatever the precise job description, the charismatic CEO stands in stark contrast to the professional Organization Man who toiled in anonymity during the era of managerial capitalism. The pages of Business Week, Fortune, and Harvard Business Review are now filled with stories about heroic leadership, the habits of successful people, and the personal characteristics displayed by leaders.⁴⁶ Becoming a CEO is now about communicating an essential optimism, confidence, and can-do attitude. In the process, individuality has become a desired attribute, not a liability. (One need only look at the books of management gurus such as Tom Peters or Stephen Covey to see this transformation.)

Future scholars of organizations may well date the advent of this new breed of corporate leader to September 1979, when Lee Iacocca was elected chairman and CEO of Chrysler Corporation. Not since the heyday of the Robber Barons, when Rockefellers, Fords, and Carnegies ruled the business world, had a CEO so captivated the nation. Before Iacocca ascended to the leadership of Chrysler, the company had appeared doomed. Yet within a few short years, under Iacocca’s leadership and with the help of $1.2 billion of government-guaranteed loans, the company appeared vigorous again.⁴⁷ Its K-car was a bestseller and the Chrysler minivan would forever change the landscape of suburban driveways. Chrysler’s profits were so large, the company hardly knew what to do with the money. In 1984, Iacocca’s autobiography became the best selling business biography of all time. Two years later, standing at the base of the newly refurbished Statue of Liberty on a warm Fourth of July evening, Iacocca received more cheers than the man he was standing next to, President Ronald Reagan. Indeed, at that moment, many influential political people had initiated a movement to recruit Iacocca to run for president in 1988. Certainly his rhetorical powers were magnificent, and any other corporate chief appeared positively bland standing next to this son of Italian immigrants and personification of the American dream.

Today, with corporations’ need for “vision” and “leadership” having become axiomatic, more and more CEOs pattern themselves on charismatic leaders such as Iacocca. Some play the role naturally; others are still rehearsing. Yet comparing today’s new CEOs with the directors who appoint them—many of the latter retired CEOs who rose through the corporate ranks during the heyday of managerial capitalism—one discerns clear differences. Whereas most of the older, former executives are quiet, politically skilled, and studied in their comments, the new CEOs are more verbal, controlling, and abrasive. The new CEOs also display a brash self-confidence and even flamboyance that can be very seductive and inspiring.⁴⁸

It is also clear that at least some of today’s celebrity CEOs would not have succeeded in the world of managerial capitalism. The tantrums and tirades John Byrne described in Chainsaw, his book on the supposed turnaround master Al Dunlap, for example, would surely not have been tolerated in that earlier era:

In Dunlap’s presence, knees trembled and stomachs churned. Underlings feared the torrential harangue that Dunlap could unleash at any moment. At his worst, he became viciously profane, even violent. Executives said he would throw papers or furniture, bang his hands on his desk, and shout so ferociously that a manager’s hair would be blown back by the stream of air that rushed from Dunlap’s mouth. “Hair spray day” became a code phrase among execs, signifying a potential tantrum.⁴⁹

In more skeptical and socialized conditions, such people were often described as eccentric, unstable, and unpredictable, rather than as the “out of the box” or “emotional” thinkers who are so venerated today.⁵⁰

Although this startling transformation in the type of person now entrusted with the job of running America’s major corporations is primarily cultural in origin, the cultural influences at work have been powerfully reinforced by institutional changes in American society and American business coinciding with the rise of investor capitalism. In particular, institutions such as the business press and financial analysts have become powerful mediating influences that command great attention and increasingly arbitrate, shape, diffuse, filter, and focus attention to business organizations. They have acquired this power owing to the same changes in the ownership of American corporations that created investor capitalism in the first place. An account of these structural changes forms the last part of the story of the rise of the charismatic CEO.

The Changing Institutional Context

CEOs could afford to be bland and colorless when they were less visible in society, and they became more visible as investors both became more demanding and came to represent a broader swath of the American public. As the economist Robert Shiller has argued, changes over the past two decades in the nature of employee pension plans have encouraged people to learn about and accept stocks as investments. The most revolutionary change, according to Shiller, has been the expansion of defined contribution plans; the most common of these, 401(k) plans, are weighted heavily in favor of stocks. The second vehicle through which the broader American populace has invested in the stock market is mutual funds, which began to enjoy wide popularity in the early 1980s. In 1982, Shiller has found, there were only 340 equity mutual funds in the United States; by the end of 1998 there were 3,513—more mutual funds than stocks listed on the New York Stock Exchange. And whereas there were only 6.2 million equity-mutualfund shareholder accounts in the United States in 1982 (one for every ten U.S. families), by 1998 there were 119.8 (nearly two accounts per family).⁵¹ (Between 1990 and 1996 alone, assets in equity-based mutual funds grew from $249 billion to $1.7 trillion.) In less than two decades, investing had become America’s most popular participatory sport.

As ordinary Americans have become investors, there has been a corresponding explosion in the numbers of stock market analysts and business media, which now serve as the primary source of news about corporations for most investors. These developments (which have made following business and the stock market into another form of mediabased entertainment), coupled with the individualistic bias of American culture, have given a strong impetus to the cult of the CEO in American business and society.

Consider, for example, how the American business press now filters and transmits information on organizational performance and strategy. With an eye to a national audience, the business media focus not on the complexities of organizations or on rapid changes in the business environment, but rather on the actors involved. This approach personifies the corporation, making much of winners and losers, of who is up and who is down, of who is a good CEO and who is not. The press has thereby turned CEOs—once as unknown to the American public as their secretaries, chauffeurs, and shoe-shiners—into a new category of American celebrity. Many business articles now emphasize the personal habits and attributes of individual CEOs, often going into more depth about these matters than about details of a firm’s strategy or finances. Whether portraying CEOs as “magnetic” personalities or “bland” bureaucrats, they powerfully reinforce not only the myth that the CEO is the hinge on which the entire organization turns but also the concept of corporate leadership as a function of personality. And whether their judgments about particular individuals are taken at face value or not, these portrayals—once they have been complacently reproduced by business news channels such as CNBC and MSNBC—serve by their very ubiquity to increase the attention paid to individual CEOs and their personal traits. (Figure 3.4 presents a simple count of the number of CEOs who have appeared on the cover of Business Week over the past twenty years.)

To take an example of this new tendency (and how it mirrors attitudes in the corporate world itself ), Fortune magazine in its May 2000 issue asked rhetorically if John Chambers, CEO of the then high-flying Cisco Systems, was the greatest CEO ever, and whether it was too late to purchase Cisco stock. The author described Chambers in almost reverential terms: “Chambers has an open face and looks you in the eye when he speaks. His accent isn’t the pinched Appalachian you might expect but more a gentle Piedmont.” The article then went on to describe a speech that Chambers had recently given:

FIGURE 3.4 Number of Business Week Covers Featuring CEOs from the Fortune 1000 from 1980–2000. Excludes covers in which multiple CEOs appeared.

On this early April evening, big wheels from a group called the Financial Services Roundtable, including Dick Kovacevich of Wells Fargo, Allen Wheat of CSFB, and Robert Herres of USAA, seem to be actually intrigued by the program’s pre-dinner speaker. The execs have donned their blue blazers (and brought their spouses too!) and are rapidly filling the Casa Grande Ballroom. The speaker is John Chambers, and when he gets going the group hangs on his every word, because they believe Chambers can explain how to harness the power of the Internet.

It’s powerful stuff. The Internet will become completely pervasive, says Chambers, working the room like a preacher. “Your franchises are under attack. Prices will fall. Margins will decline. You must get on the Net and find new ways to add value.” You can almost see the mental note taking in the audience: “Monday: Ramp up Internet effort. Ask IT guys about Cisco.” It’s a wake-up call, but the crowd seems to love the messenger. Chambers gets a big hand. Afterwards, execs press forward to soak in some Net karma.⁵²

Less than a year later, Fortune had turned against Cisco’s charismatic leader. It appeared that, despite having up-to-the-minute forecasts, Chambers had failed to warn Wall Street about a dramatic fall-off in revenue and earnings. (By May 2001, Cisco had lost over $400 billion in market value.) Fortune now described the company as arrogant, accusing Chambers himself of being naive and believing too much in his own fairy tale. “Those looking for someone to blame can start with a CEO who didn’t seem able to turn off the spigot of his own optimism,” the writer opined.⁵³

Stock market analysts, too, have contributed to the increased focus on the individual CEO and—by virtue of the very real influence that they wield—have made a certain kind of personality part of the new CEO job description. Once largely ignored by CEOs and corporate boards, analysts have become an important part of the way financial markets work, and their numbers have increased markedly (see figure 3.5).

FIGURE 3.5 Total Number of Equity Analysts Employed in the United States from 1980–98. Source: Groysenberg (2001)

Although analysts have traditionally been portrayed as orienting their research and opinions toward institutional investors, Robert Shiller has argued that their recommendations are now consumed by the entire investment community.⁵⁴ Analysts have therefore emerged as important intermediaries between investors and the firm. A particular analyst’s recommendations can dramatically affect short-term trading volume and the price of a stock.⁵⁵ This is especially true when his or her voice can be amplified by the business press, which has stoked competition among analysts to make headlines with their upgrades and downgrades.

Analysts, that is to say, now compete actively to be interviewed on CNBC and quoted in the Wall Street Journal. One consequence has been that analysts, bowing to the media’s biases as to what makes for interesting reading or viewing, have increasingly replaced technical analysis of a company with focus on the person running it. In the business press, statements about a particular firm’s prospects that are grounded in narratives of success and failure and managerial legend and myth are more compelling than technical analysis. By focusing on the individual running the corporation, analysts and media rely on a type of shorthand that simplifies communications about complicated subjects such as financial statements, business strategies, or industry conditions. Given this orientation, what a CEO says in a CNBC briefing or a meeting with analysts becomes part of a story that is quickly diffused and can affect evaluations of a company’s future prospects.

To see how this substitution of personalization for analysis is effected in practice, consider the reaction of stock market analysts in 1993 to Eastman Kodak’s appointment of the first outsider CEO in its history, George Fisher. Fisher had been president of Motorola, for whose strong performance at the time he was widely credited even though—in light of Motorola’s problems today—it is apparent that much of the company’s earlier success was actually due to telecommunications deregulation’s having increased competition in local cellular markets and lowered prices for consumers, leading to a more rapid adoption of the technology. Fisher had reportedly been courted by IBM for its top job, but had declined. When the announcement of his appointment by Kodak was made, a CS First Boston analyst told Dow Jones Newswires: “We’re psyched. The stock is going higher and we think it is an excellent choice.”⁵⁶ Investors then responded to Fisher’s selection by immediately bidding up Kodak’s stock 15 percent.⁵⁷ A similar response from analysts (and subsequently from investors) occurred when AT&T brought in C. Michael Armstrong from Hughes Electronics in 1997 and a Dillon Read analyst enthused: “AT&T appears to have gotten the superstar CEO it needs to firmly guide the company through the transition from the current long-distance oligopoly environment to a fully competitive U.S. and global telecommunications world.”⁵⁸

The rise of the business media and analysts, with their fixation on the CEO, has, in turn, introduced a new set of informal ground rules to CEO succession: a critical consideration in evaluating a potential CEO today is his or her ability to command attention from the media and stock market analysts in a way that will establish credibility for the firm and inspire confidence in both investors and others. How analysts are likely to react to a new CEO has become a principal concern of directors conducting a search. In a reflection of this trend, the closed-circulation magazine Corporate Board Member devoted the cover story of its Spring 2001 issue to the subject of attracting favorable attention from analysts and the business media. The story argued that directors now have to think of the CEO as the most visible symbol of the firm and its “star storyteller”:

There is no better messenger than your CEO, though the CFO can be a close second. Institutional investors expect quality time with the top brass. . . . In one form or the other, they should be spending 40 percent of their time on investor relations. That means a major commitment to investor conference calls, presentations at banking and industry conferences, in-person visits to major shareholders, and last but hardly least, media appearances.⁵⁹

In such an environment, directors need to consider how effective CEOs will be in conveying confidence to analysts and attracting attention from business media outlets such as MSNBC. In a sidebar in the Corporate Board Member article, Tyler Mathisen, host of CNBC’s Marketwatch, described the characteristics he looks for in a guest, and offered advice to executives on how to handle themselves in an appearance on television:

Remember that television tends to “bland out” even the most energetic speaker. So be animated; wave your hands if that is your wont. Never forget that your voice is a musical instrument. It is meant to be played, loud as well as slow. Your tone matters. It is no coincidence that many of the CEOs who come across best on TV are the ones whose companies are in the communications business. Think Michael Eisner of Disney, Barry Diller of USA Networks, Sumner Redstone of Viacom, Ted Turner of AOL Time Warner. These men not only know their businesses cold, they also know the value of a compelling performance. And they don’t shrink from an opportunity to be provocative, even combative, if the occasion warrants.⁶⁰

As the emphasis on image-projection and image-reception has become so prevalent, directors have come to place correspondingly less emphasis on individuals’ particular experiences or training when evaluating candidates for the CEO job. Personality and image are now widely believed to be more important not just than particular business abilities but also than firm- and industry-specific knowledge and experience. The result has been to reinforce directors’ tendencies to actively pursue outsider CEOs who possess the elusive characteristics of charisma that have become so highly valued, rather than the concrete experience that inside candidates would be more likely to possess. In this sense, the emergence of the ideal of the charismatic CEO, like the circumstances that began to make CEO tenure more unstable in the 1990s, has been a precipitating factor in the very development of an external CEO labor market.

Viewed in this cultural and historical context, the external CEO market turns out to be truly inseparable from a variety of influences not normally associated with markets. Structural influences such as the major shift in the ownership of major American corporations over the last generation have combined with culturally conditioned beliefs about the nature of leadership in organizations to create a market for CEO candidates with particular personal traits, drawn from a pool of external candidates—a market that simply did not exist before. Besides creating the elementary conditions of this new market considered in chapter 2 (small numbers of buyers and sellers, high risk to participants, and concerns about legitimacy), these structures and beliefs influence the behavior of the major actors in the market—directors, executive search consultants, and candidates—at every step of the process of external CEO search. It is to the roles of each of these actors that we must now turn our attention.