CHAPTER 7

OPEN POSITIONS, CLOSED SHOPS:

LEARNING FROM THE EXTERNAL CEO

SUCCESSION PROCESS

THE EXTERNAL CEO labor market was born in a burst of rhetoric about wresting control of corporations away from a group of self-interested insiders, as senior managers in the era of managerial capitalism had come to be portrayed. Expanding CEO search beyond the confines of the internal labor market—or so the rationale for the practice supposed—would open the CEO position to a broader group of individuals who would bring greater talents and breadth of “vision” than could be found within any one company, and who had little vested interest in the status quo. The proponents of the external CEO market thus expropriated the principles of the market and the logic of competition. They proposed to take a closed system and crack it open.

As we have seen in the foregoing pages, however, the external CEO succession process as it currently operates is anything but an open, competitive system. While today’s CEO labor market is defended as if it were a market in the classical sense, it is in reality nothing of the sort. Far from being the “institution-free” mechanism portrayed by economists and even some sociologists, the external CEO search process is governed at every stage by structural rules and institutions previously thought to be confined to the firm. In the process as it actually unfolds in one large firm after another, external institutions such as socially based categories of eligibility, the evaluations of investors and the media, and third-party intermediaries (i.e., executive search firms), play a central role in controlling access to jobs and facilitating or hindering mobility.

Because the external CEO market deviates in critical ways from the kinds of markets described by neoclassical economics, its outcomes cannot be assumed to be optimal and efficient—as, indeed, they turn out not to be when considered critically. To take just one example: as a result of the influence of external institutions on the external CEO selection process, many individuals who could be CEOs are not even on the radar screens of those who could be tapping them for the position. Thus, the external CEO search process has created a closed ecosystem of top-tier executives for whom the so-called glass ceiling appears perfectly opaque, since it hides those on the lower floors from the view of directors and search firms. This is not only a waste of talent but also, as it turns out, a recipe for returning corporations to the kind of oligarchic control from which external CEO search was supposed to deliver them.

Viewed in the historical context, the rise of the external CEO labor market contains an even keener irony. With the fall of the Soviet empire in the closing years of the last century, markets have come to rule the world, as most alternative systems for organizing an economy have been discredited. Meanwhile, despite a brief period in the 1990s when the Internet and other advances in communications, and the seemingly limitless availability of capital, seemed to threaten the continued dominance of the large, multinational corporation, this form of organization now appears not only safe but, in many ways, more enduring, more potent, and more critical to our wellbeing than at any other time in history. The irony is that in America, the process that determines who will lead these organizations has been walled off, like the East Berlin of old, from the tumultuous discipline of market forces. At the top of the new, supposedly shareholder-centered corporation of today, the organization men of yesteryear have been replaced by a small cadre of individuals insulated from competition by what is, in effect, a closed shop, and now reaping the benefits of an unprecedented transfer of wealth from corporations and their shareholders to CEOs (and ex-CEOs), regardless of the latter’s capabilities or performance.

In other words, today’s cult of the charismatic CEO and the closed succession process that perpetuates it are more than just historical curiosities. They are developments that threaten serious damage both to corporations themselves and to the society that they increasingly dominate. It is time to examine the consequences of the rise of the charismatic CEO for American corporations and American society, and then to begin thinking about how a more rational system of CEO succession might be put in its place.

Consequences of External CEO Succession for Corporations

In seeking a charismatic outsider to be CEO, boards of directors generally ignore, or seriously underestimate, the risks that outside succession entails. Indeed, considering that an external search often represents a quest for a corporate savior for a firm that is in trouble to begin with, hiring an outside CEO can, in some instances, actually threaten the survival of the organization itself. In companies producing everything from copiers to sugared water, from razor blades to ATM machines, corporate boards are sending more CEOs packing than ever. While these fired CEOs undoubtedly have their egos bruised, they emerge from the ordeal considerably richer than before. Yet the same cannot be said for the damaged organizations they leave behind. Xerox flirted with the bankruptcy courts for several months following the brief but disastrous tenure of outsider Rick Thoman. Sunbeam ended up in Chapter 11 less than five years after its hiring of a hoped-for corporate savior, Al Dunlap. In the winter of 2001–02, it appeared that the financial services firm Conseco, after going outside to hire GE Capital’s superstar Gary Wendt and paying him a near-record $45 million signing bonus, was edging toward insolvency.

Part of the risk involved in external succession stems from the fact that boards—having bought into the dominant mythology about the role of the CEO that makes an outside successor seem appealing or even necessary in the first place—feel, and succumb to, pressure to appoint a new CEO as quickly as possible once the position becomes vacant. We have seen numerous examples of the unrelenting pressure that board members feel once firm performance falters. Under this strain, and often with little thought to the consequences, board members cave in, dismiss the CEO, and begin the search for a new CEO who will appease investors, the business media, and Wall Street analysts. Thus directors, as we have seen, rush through a process that ought to be approached with care and deliberation. Search committees are assembled with little thought to their composition. Directors do not stop to ask themselves whether the individuals on the search committee have any deep understanding of the problems facing the company, or whether they might have biases arising from their functional backgrounds or particular interests. Nor, indeed, do they pause to give any serious consideration to the strategic situation and needs of the firm and how these should affect the succession decision. What they focus on, instead, is how analysts and the business media will react to their choice of a new CEO. This approach exemplifies the purely defensive, legitimacy-seeking mentality that characterizes so many business decisions today—even one that directors describe as among the most important that they ever have to make. By allowing themselves to be dominated by the instinct for self-preservation, boards neglect their duty to act in ways that protect the long-term health of the organization.

A second risk inextricably interwoven into external CEO succession arises from the way that the process requires decisions to be based on incomplete and often defective information. The kind of information and knowledge that is critical to making a CEO appointment is not easily transferred across organizational boundaries. Much of it originates in the informal interactions between an executive and his or her peers and subordinates, and circulates through an organization’s informal internal channels. This information and the channels through which it flows, however, are not accessible to an outside firm conducting an external search. While directors attempt to use their contacts in other firms to gather such information, its second-hand quality makes it a poor substitute for the kind that is available within the bounds of a given company.

A third risk arising from the external succession process is that in the absence of high-quality information about how an individual has performed and is likely to perform in actual situations, directors rely on a sorting process—one that I have called social matching—that puts a premium on the defensibility of certain candidates and leaves others out of consideration altogether. The result is that boards, from the outset, seriously reduce their chances of finding the best person for the CEO’s job.

All of these risks are apparent in the kind of careful consideration of the external search process itself that I have tried to present in this book. Yet some of the most tangible, and ultimately most serious, dangers to companies that opt for external succession become evident only after the board has chosen its new outsider CEO. Chief among these is the danger both to the bottom line and, even more profoundly, to the continued social and moral legitimacy of the corporation itself, represented by one of the great economic scandals of our time, what Fortune magazine has recently called “The Great CEO Pay Heist.”¹

CEO PAY: THE SPIRALING COST OF CHARISMA

How much is a charismatic CEO worth? Increasingly, the answer given by boards of directors is whatever he or she has the chutzpah to demand, with no real requirement that pay be tied to “performance” even as conventionally (if questionably) measured in terms of changes to a firm’s stock price. Despite the lack of a convincing link between the CEO and corporate performance, firms continue to buy into the mythology that the key to improving long-term firm performance (over and above whatever short-term boost to the stock price they hope to achieve by this means) is hiring an external savior. To defend their actions, boards create complicated pay schemes with elaborate justifications—almost always buried in the footnotes of the annual report—describing how their pay system, often designed by the CEO himself and legitimated by a compliant executive compensation consultant, links the fortunes of the CEO to the fortunes of the shareholder, even though (as we shall see below) the most common arrangements do not achieve even this questionable objective.

Although the curtain is being pulled back on the subject of CEO pay, the facts are sufficiently disturbing to bear repeating. According to an executive pay survey conducted by the New York Times for the year 2000, the average CEO of a major corporation received a record-breaking $20 million in total compensation that year, including nearly 50 percent more in stock options and 22 percent more in salary and bonus than in 1999. Compare these figures with others from the Standard & Poor’s 500 Index, the primary gauge of the overall stock market, which fell 10 percent in 2000, and the NASDAQ Composite Index, which dropped 39 percent. (During the same year, according to the Department of Labor, the typical hourly worker received a three percent raise, and salaried employees about four percent.) Moreover, the figures for CEO pay in the year 2000 represent but one segment of a significantly longer-term trend. One study that examined CEO pay levels at publicly held corporations found that CEO pay jumped 535 percent in the 1990s, dwarfing the 297 percent rise in the S&P 500, a 116 percent rise in corporate profits, and a 32 percent increase in average worker pay (not adjusted for inflation). To put this into further perspective, this same study found that since 1960 the pay gap between CEOs and the president of the United States has grown from 2:1 to 62:1; if average pay for factory workers had grown at the same rate as it has for CEOs during this boom instead of barely outpacing inflation, their 1999 annual earnings would have been $114,035 instead of $23,753. Finally, if the minimum wage had risen as fast as CEO pay, it would now be $24.13 an hour instead of $5.15, which is less, in real dollars, than it was in 1970.²

Closer examination of the issue of CEO pay reveals even more clearly how little connection exists, in practice, between the financial rewards showered on CEOs and the interests of corporations and their shareholders. For example, almost two-thirds of total CEO compensation is now in the form of stock options, which, in turn, currently represent the equivalent of 13 percent of corporate liabilities.³ These are liabilities because eventually the firm will have to pay the difference between the price of the stock and the price at which the stock option was granted. Enormous grants of stock options to CEOs have been justified on the grounds that they link CEO pay to performance. Yet recent research has shown that one of the first actions that new CEOs typically take is to break this link by exercising their options (and selling their shares) as soon as possible. Indeed, even though the number of option grants to CEOs and other top managers exploded between 1993 and 1995, overall levels of stock ownership by senior executives in their own firms did not increase in these years.⁴ Although investor relations departments increasingly explain executives’ steady sales of stock in the firm as a “routine diversification” of wealth, this practice would seem explicitly to defeat the purpose for which stock options are said to be granted in the first place. Enron’s top executives and directors, for example, apparently reaped over $1 billion from sales of company stock in 2000 and 2001, even as their reckless financing schemes set the stage for disaster.

What is the ultimate cost to corporations and shareholders for the profligacy of directors in compensating CEOs? While boards have, for many years, treated stock options as “costless,” economists and others have convincingly argued otherwise (and indeed a Nobel Prize was awarded to the economists who discovered exactly what options of all types do cost by using what is called the Black-Scholes pricing formula⁵). Yet because expensing the cost of options on a company’s income statement results in lower earnings, CEOs have fought against any attempt to require corporations to provide a truthful accounting in this regard.⁶ The roots of their resistance may well lie in the fact that if companies are required to spell out in clear terms the true costs of executive compensation, executives will stand to make less on their options. This deception, of course, imposes costs on investors generally in the form of the market distortions arising from such faulty information.

In addition to producing misleading earnings reports, stock options also have consequences for the future in the form of diluted ownership. When stock options are exercised, the overall pool of stock in the public market increases, making each share investors own worth a little less than before. One theory that has been used to support the granting of stock options proposes that any loss in terms of dilution is more than compensated for by the growth in the company’s stock price as a result of the incentives that options create for executives. Yet even if the incentive value of stock options can be shown to outweigh these costs (despite the emerging evidence that CEOs divest their ownership as soon as possible), the wisdom of concentrating the majority of a firm’s options in the hands of a few top executives instead of spreading them more widely round the firm is questionable.

In any event, corporate boards, in their pursuit of charismatic CEOs through the external succession process, have transferred literally billions of dollars from organizations and shareholders to the personal control of CEOs and ex-CEOs—too often with little, nothing, or even less than nothing to show in return.⁷ I believe that in the not-too-distant future, we will look back and marvel at the colossal folly of this chapter in American business history. A market in which participants’ actions impose costs that are not taken into account is, in economic terms, inefficient. The kind of glaringly inefficient outcomes represented by CEO pay are a direct result, in turn, of the closed nature of the external CEO market.

Although the full story of the relationship between the turn to the external CEO market and the skyrocketing of CEO pay since the 1980s is still emerging, the outlines are becoming sufficiently clear. The perceived shortage of qualified CEO candidates in the external market is certainly one contributing factor. Another is the very model of the charismatic CEO, which views the chief executive’s position as somehow qualitatively different from other top management posts. As companies began increasingly to look to the external market to fill the CEO’s job, the supposed shortage of qualified candidates, coupled with directors’ desire for a corporate savior, encouraged and enabled monopolistic behavior on the part of CEO candidates. As the external CEO market evolved, CEO compensation came to be less and less consistent with the overall internal policies of organizations, especially when external compensation consultants (generally chosen by the CEO candidate himself) entered the picture and introduced the false yardstick of the compensation packages of other CEOs—small numbers of which were hand-picked by the consultant for purposes of comparison. Search consultants and the business media fanned the flames by promulgating the idea that a CEO’s compensation was a measure of his personal worthiness. Golden parachutes, golden handcuffs, and the whole panoply of mechanisms for lavishly rewarding CEOs without regard to performance—all of which were unheard of before the age of investor capitalism—became standard features of CEO pay packages.⁸

The assertion that stratospheric CEO compensation levels are the result of a closed market would be disputed by those, like the economists Robert H. Frank and Phillip J. Cook, who—although they are critics of high CEO pay—claim that such outcomes result from the intensity of competition in a market. In their book The Winner-Take-All Society, Frank and Cook show how the pay differentials that have long been common in sectors such as entertainment and sports—where a small group of performers walk away with most of the total rewards—have migrated into areas such as law, medicine, and investment banking. They also argue that the greater the intensity of competition, the greater the propensity toward winner-take-all markets. In the CEO labor market, which Frank and Cook consider a “winner-take-all” market, they maintain that competitive forces stemming from technological and other such changes, coupled with new rules facilitating more open competition, have made the top-performing CEOs that much more valuable.⁹ Obviously, this view of the CEO labor market as open and competitive could not be more different from the picture of it that emerges from my own research.

In his discussion of professional pay in his book The Cost of Talent, on the other hand, Derek Bok outlines the implications of closed markets for compensation:

In these circumstances [where uncertainty and the cost of a poor choice are high], vigorous price competition is more the exception than the rule, for price is seldom a prime consideration in deciding which professional to hire. Chief executives do not win their jobs by offering to serve for less than their leading rivals. Nor do surgeons appeal to prospective patients by promising to replace their hips or remove their tumors for lower fees than are customary. Not only is money a secondary matter in choosing such executives and professionals; offering one’s services for unusually low rates may signal some sort of weakness and thus repel clients rather than attract them.¹⁰

As Bok also notes, once there is deviation from the traditional conditions of competitive markets, ordinarily benign market mechanisms can have perverse effects: for example, the effort to publicize CEO pay in the 1980s had the unintended effect of ratcheting it up.¹¹ While I am sympathetic to Bok’s view that spiraling CEO pay is influenced by a variety of market imperfections, his reasoning is still grounded in traditional economic logic in that it attributes the problem to asymmetric information. Bok’s perspective is also, then, ultimately quite different from that presented in this book about the roles of structure, culture, and closure in driving the basic processes of the external CEO market.

Still, Bok, Frank, and Cook represent voices of skepticism that have been largely drowned out by the armies of apologists for today’s inflated CEO pay packages. Economists in particular—including Michael Jensen, Ed Lazear, Kevin Murphy, and Sherwin Rosen—have been resolute defenders of the status quo, pointing to other highly compensated professionals, such as sports stars, when making the case that some lavishly overpaid individuals are merely receiving what their talents and accomplishments deserve.¹² It is true that one superstar’s performance may make all the difference in the fortunes of a basketball or hockey team. Yet the obvious fallacy involved in attributing the performance of any large, complex organization (functioning, as it does, by the interdependent efforts of thousands) to the contribution of any single individual turns the CEO into a kind of demigod compared to mere mortals such as basketball’s Michael Jordan. “For God’s sake, Clemson has created five billion dollars in shareholder value,” people say to defend the compensation awarded to the latest CEO to benefit hugely from this rather simplistic notion of cause and effect. Yet most of what causes a company’s share price to double, as we noted in chapter 2, lies far beyond Clemson’s, or any CEO’s, immediate control.¹³ Giving a CEO full credit for his company’s stock price is only marginally less ludicrous than giving a president credit for a good economy. In the meantime, however, while defenders of the system present their mathematical models and retrospective analyses purporting to demonstrate that CEOs are worth what they receive because their compensation is set by “the market,” the bills presented to shareholders continue to mount rapidly—even when the returns to these investors are stagnant or dwindling. Yet these monetary costs are not the only ones that corporations and their shareholders incur as a result of charismatic succession.

THE NONMONETARY COSTS OF CHARISMATIC SUCCESSION

The turn to charismatic leadership represents an attempt to find an individual who will provide a guiding vision for the organization. Yet the vision of a charismatic leader is a poor organizing principle for contemporary firms, which increasingly depend for their success on the sharing of intelligence and the dispersal of decision-making authority across all levels of the organization. For one thing, charismatic leadership, intentionally or not, necessitates strong centralized rule. Charismatic authority often professes a love of egalitarianism and empowerment, but such noble-sounding declarations—like the dictator’s professions of “love” for his people—can, and frequently do, turn out to be self-deluding or manipulative. Even when a firm is fortunate enough to find an individual with a vision that is appropriate for it, the charismatic leader easily founders when it comes to execution. The problem lies in the fact that charismatic authority discourages criticism. Visionary leaders generally do not respond well to questions or complaints about the measures they have taken (including questions such as the one that the philosopher Isaiah Berlin, responding to a famous saying of Lenin’s, put to them: how many eggs are you willing to break to make your grand omelet?). Without being able to hear any critical, questioning voices, however, the charismatic leader in a large, complex organization has no way even of knowing whether he or she is being effective.

One of the most serious casualties of the apotheosis of the charismatic CEO is often the dedication and loyalty of other top managers. To presume, as the charismatic succession process implicitly does, that a single individual deserves vastly more attention and rewards than are bestowed on anyone else in the organization ignores the reality that organizational performance is driven by more than one person. This is why the ideas behind the “war for talent,” with their emphasis on recruiting and retaining stars and ignoring others in the organization, are so deleterious.¹⁴ As the research of Jeffrey Pfeffer has demonstrated, low expectations amount to a self-fulfilling prophecy.¹⁵ Why might we see such an effect when a CEO is selected from the outside? The external succession process not only places extraordinarily and even excessively high expectations (with commensurate financial rewards) on the incoming CEO but also implicitly devalues the contributions of insiders, who may reasonably conclude that they are not expected to “drive” organizational performance. Seeing the bulk of the rewards for top management going to a single individual not only lowers the commitment of others to the organization but also decreases these individuals’ willingness to invest in skills that will help the organization but are not necessarily marketable outside of it. Corporations, for their part, have also invested less in developing their own managers as they have increasingly looked outside to fill the top slots: a senior partner at the executive search firm Russell Reynolds (who asked to remain anonymous) says that the reason the firm’s business has grown dramatically in recent years is the failure of companies to invest in and develop managers. Meanwhile, the true monetary cost to firms in terms of knowledge, expertise, and sustainable competitive advantage as executives hop from one company to another, is incalculable.

TABLE 7.1

CEO Pay and CEO Differences with Top Five Officers in Companies, 1992–1996

*Note: N is only 648 for 1992; 850 observations for all other years.

Definitional notes:

Total compensation is the sum of salary, bonus, stock options, stock grants, and other income.

Where option values are missing, they are assumed to be zero.

Where CEO dummy data is missing and at least one individual in that year is listed as CEO, its value is assumed to be zero.

All comparisons use the top five executives (by salary) in a corporation in a given year.

Where data exists on fewer than five executives, firms are excluded.

I have used the larger firms by sales in each year. Hence, the exact composition of the list changes across years.

All figures are in inflation-adjusted 1994 dollars.

While eroding the commitment to the organization of senior managers other than the CEO, charismatic succession can also result in weakened corporate governance. In the process of recruiting a savior from outside the firm, boards, as we have seen, often relinquish their own power. Many external CEO searches take place after the board has wrested power from the incumbent CEO—a task that is all the more difficult when, as is so often the case, the CEO also occupies the position of chairman. A chairman and CEO wields a great deal of control over the board’s agenda as well as over the information that the board receives regarding the performance of the firm. The chairman also exercises both formal and informal authority in shaping board committees, including the compensation and appointments committees. After a forced CEO turnover (as, for example, in the Bank One board’s decision to oust John McCoy), it is common for the board to separate the chairman and CEO positions while conducting a CEO search. However, after making this separation—one applauded by many corporate governance experts—most boards that hire external successors end up combining the positions again at the behest of the incoming CEO. In almost all the cases I examined, in fact, the preferred candidates made it a condition of their accepting the CEO position that they be given both titles.¹⁶ At the same time, a new outsider CEO will often take other steps to build his own power base in ways that may be detrimental to the health of the organization—for example, by removing incumbent executives and replacing them with others whom he already knows. Such consequences of the external succession process are especially perilous in that, as we have seen, once a new CEO has been appointed, the decision is not easily reversed.

For these and other reasons, charismatic CEO succession is a well-paved route to disappointment—and not just for corporations but for CEOs themselves. By creating expectations that cannot be met, and privileging the most myopic demands of investors, analysts, and the business press over the genuine needs of the firm itself, the charismatic succession process sets up many a new CEO for likely failure. These individuals, of course, still walk away with enormous monetary rewards to salve their wounded egos, but they also give up their careers and reputations as part of the exchange. Companies, in the meantime, pay out in several ways for the rapid churning of chief executives that we see today—not just in expensive severance packages but also in turmoil and lost opportunities. For both firms and the individuals who lead them, charismatic succession too often amounts to an exercise in futility and waste.

One potentially even more far-reaching issue remains for corporate directors who are willing to learn from the deep flaws in the charismatic succession process. This concerns not just the profitability of corporations but also their continued social and moral legitimacy in a nation whose citizens, for a growing list of compelling reasons, are increasingly suspicious of corporate power and conduct. As the sociologist Daniel Bell has observed (restating an insight of Max Weber’s), “The ultimate support for any social system is the acceptance by the population of a moral justification of authority.”¹⁷ The justification for the old system of managerial capitalism lay in its supposed efficiency. When that system broke down and was replaced by the shareholder capitalism that reigns today, the overthrow of the old managerial elite was justified on the grounds that corporations were important social creations that could not be guided solely by a self-interested class of insiders. Yet the new system, presided over by the charismatic CEO, quickly became disconnected from any moral moorings and has adopted an orientation that is incongruent with its original justification. To bring the corporation and its social environment back into alignment, directors—and indeed all corporate stakeholders, which in some sense now includes all citizens—would do well to ponder the effects of external, charismatic succession on American society at large.

Consequences of External CEO Succession for Society

Large private corporations are now a dominant, if not the dominant, force in American life, and indeed are among the most powerful institutions on the planet. As all but their most extreme opponents and defenders must agree, large corporations both confer social benefits and impose social costs through a wide variety of activities. They confer social benefits when they earn profits for a broad base of shareholders, contribute some of those profits to social or humanitarian efforts, pay a fair share of taxes, provide employment for large numbers of people, and create products and services that improve our lives. They impose social costs when, for example, they eliminate jobs in communities that critically depend on them, market sex and violence to youth, damage the natural environment, deceive investors about their financial condition, or purchase the compliance of politicians whose duty it is to mitigate or oppose their harmful acts. These kinds of activities are, or eventually become, more or less visible—unlike the still mostly hidden process by which large, publicly held corporations select their CEOs. Yet the current system of external CEO search, I would argue, imposes social costs just as surely as do many more salient corporate actions.

To begin with, society pays a price when firms allocate to individuals an inordinate amount of resources that could otherwise be distributed to a broader base of shareholders or reinvested in the enterprise itself. A supposedly open society also suffers, socially as well as economically, when the top jobs in its large corporations are allocated on the basis of social attributes rather than demonstrated ability for performing the tasks of the job. Such social costs of external succession are not easy to quantify, but that does not make them any less real. Indeed, the closer we look at just these two consequences of the external succession process—excessive CEO pay and limited mobility into the CEO position—the more serious and potentially far-reaching their implications appear to be.

CEO PAY AND THE DEMISE OF THE PROTESTANT ETHIC

Max Weber, that keen observer of human social systems, once described the uniqueness of America as its ability to restrain itself in the midst of natural abundance and wealth.¹⁸ The Puritans who settled New England expected themselves and one another to be economically self-sufficient, and indeed regarded the material prosperity that many of them achieved as evidence of divine election. Yet even while laboring to store up riches for himself, the Puritan was supposed to subordinate his personal interests to the needs of the community. Moreover, wealth—while a divinely conferred blessing—was also seen as a powerful temptation to the sin of pride. Thus the cardinal virtues in Puritan society were self-denial, delayed gratification, and self-restraint, which eventually came to be viewed as characteristics distinguishing Americans from their decadent cousins in Europe.

Seventy years after Weber published the first version of his classic work The Protestant Ethic and the Spirit of Capitalism, Daniel Bell reflected on the demise of the Protestant ethic in the twentieth century in his book The Cultural Contradictions of Capitalism. What Bell called the “Puritan temper” in America had been subverted, he said, by the hedonistic, consumption-oriented capitalism that emerged in the 1920s and eventually proved impossible to reconcile with traditional Protestant virtues. Writing in the 1970s, Bell described the “split character” of the “new capitalism” by observing in the present tense that “[capitalism’s] values derive from the traditionalist past, and its language is the archaism of the Protestant ethic” (even if, as Bell proceeded to state the contradiction, capitalism’s “technology and dynamism . . . derive from the spirit of modernity”).¹⁹ It is interesting to note that Bell was making these observations just before the era of shareholder capitalism was born in the 1980s, giving rise to today’s charismatic CEOs with their multi-million-dollar compensation and severance packages. For while it is possible to debate whether American capitalist culture today retains any of the values of the “traditionalist past” or pays more than lip service to the Protestant ethic, the rocketing of CEO pay since the early 1990s at least suggests that the leaders of corporate America no longer feel bound to maintain even so much as the appearance of traditional Protestant virtue.

While this phenomenon is arguably an effect of a much larger, more long-term societal crisis, it is also one that generates actual and potential consequences of its own. To bring these consequences into focus, consider a dimension of the problem that has garnered much attention and created justifiable alarm of late: the now-yawning chasm between CEO compensation and the wages of corporate America’s lower-paid workers. As most Americans now know, the earnings gap between blue-collar workers and corporate CEOs is at an all-time high. Whereas in 1980 the average CEO made 42 times as much as the average blue-collar worker, by 1990 this same CEO made 85 times more, and by 2000 he was earning (if that is the word) a staggering 531 times the annual wages of a factory worker. Such figures—while sufficiently troubling on their own—also represent a small but symbolically significant part of an even larger, more disturbing story that is also, by now, familiar to all: the growing disparity in wealth between the small number of those at the top of the American economic heap and virtually everyone else.²⁰

While the compensation packages for CEOs are only one small contributing factor to the high level of economic inequality in the United States today, they have a symbolic import that, it can be argued, eats away at the very foundations of American society. A century ago, as what was left of Calvinist theology in America was morphing into the equally dark and severe creed of Social Darwinism, the political and social scientist William Graham Sumner opined: “The millionaires are a product of natural selection. . . . They may fairly be regarded as the naturally selected agents of society for certain work. They get high wages and live in luxury, but the bargain is a good one for society.”²¹ Today, we can find many reasons for questioning whether the “bargain” that Americans have made with CEOs—or rather that CEOs and directors have made with and for themselves—is such a good one for anyone but its immediate beneficiaries. Not the least of these reasons, perhaps, is the way that outsized, unearned rewards for those at the top of the system devalue work itself. In the process, they send a clear message to the rest of society: playing by the rules that have traditionally pertained in America is only for those unable to make up new rules for themselves.

EXTERNAL CEO SEARCH AND THE BLOCKING OF MOBILITY

In a development directly related to growing economic inequality, a profound unease and insecurity dogs the American middle class today. Although we live in a time of unprecedented material prosperity, more and more individuals feel that their own economic circumstances have never been so precarious. The promise of America to every previous generation has been that the lives of one’s children would be better than one’s own. Yet this may no longer be the case, as the prospect of significantly improving one’s economic circumstances seems increasingly to be becoming a monopoly of the few.

One major cause of the economic insecurity of American workers today is a significant change in the social contract between corporations and the workforce with respect to employment. In an illustration of this change, Jack Welch used to say proudly that GE didn’t guarantee anyone continued employment, and that the only way for an individual to remain employed in the company was to remain competitive in terms of his or her own skills and performance. (GE still uses a “forced curve” grading system in its performance reviews for employees.)²² Yet to be hired as CEO in many large corporations today, an executive, as we have seen, need not meet any rigorous standard of skills or performance but only be the right sort of person from the right sort of company. And even though shareholders employ their own grading systems that increasingly cause directors to fire CEOs, these same directors see to it that cashiered chief executives will not be buffeted by economic insecurity.

As in the matter of excessive CEO pay, the system of external CEO succession and the way that it parcels out its rewards to a privileged few serves as a potent symbol, as well as symptom, of a much larger social problem. In 1900, the leaders of American corporations were an extremely homogenous group. They were male, white, mostly native-born Protestants from “good” families. Today, the most recent studies of the social backgrounds of top executives reveal that they are still, for the most part, male, white, native-born Protestants from socially and economically advantaged families. In a survey of work on this topic, the economist Peter Temin has noted that while every study of the social composition of the executive class, ranging back over several decades, has found this same homogeneity, most have also predicted that this situation would not last. Researchers in the 1950s, 1960s, and 1970s, Temin says, “portray [the subjects of ] their study as the last generation for which their observations would be true. Conditions have been changing, and the expectations of these various authors may have been rational. But the composition of the American business elite has not changed.”²³ Given the dramatic changes in American society in the last century—particularly the integration of women and ethnic minorities into the work force over the last thirty years—the persistent homogeneity of the American corporate elite is troubling.

In this book I have sought to provide an explanation for this phenomenon by focusing on the process by which CEOs are selected in external searches. Imagine for a moment a society that is completely open, one in which an individual’s talents and efforts determine that person’s station in life. This would be a dynamic society in which competition would determine economic outcomes, and in which an individual’s social characteristics have little bearing on his or her present or future. Now imagine the opposite, a society in which an individual’s status and prospects are predetermined by a set of well understood and accepted traditions. Our society is supposed to more closely approximate the former condition than the latter, but it is the second, closed type of system that the external CEO labor market most resembles—so much so that when a woman or an African-American becomes a CEO of a Fortune 500 company, it is worthy of a cover story in a business magazine. Most people still expect a CEO to be a white male of a certain age and, often, of a certain educational and class background.

American democracy has always drawn its underlying strength from the ethos of meritocracy. The greatness of America that Alexis de Tocqueville remarked upon in the early nineteenth century was a result of the thread of social equality running through every American institution. Because the United States did not have a rigid class system based on birth, it could take full advantage of its people’s talents and, at the same time, generate social cohesion across a range of physical space and a variety of ethnicities impossible to hold together in any other country. The progressive-era historian Frederick Jackson Turner argued that the openness of America was what guaranteed the distinctive quality of American society, which was opportunity for all. While America would certainly have inequality, Turner argued, it would be a dynamic inequality, not a static one in which birth rather than merit determined one’s place in the social hierarchy. Even Milton Friedman, one of the gurus of today’s neoclassical, “free market” economists, has argued that mechanisms that inhibit economic opportunity and social mobility pose a threat to democratic institutions.²⁴ Meanwhile, at the very pinnacle of corporate America, boards of directors maintain a closed system of CEO succession that restricts access to opportunity based on socially derived criteria and, once again, flies in the face of fundamental American values. That they do not set out consciously to block mobility in this way—an important point to which I will return momentarily—hardly mitigates the corrosive effect of their actions on the traditional American social compact.

SOCIAL CLOSURE AND THE UNDERMINING OF TRUST

The central concept I have used for understanding how the external CEO labor market arrives at results such as excessive CEO pay and the blockage of mobility into the CEO position is that of closure. In developing my description of how closure works in external CEO succession, I have built on Max Weber’s description of social processes that lead to a restriction to a limited set of individuals of access to resources and opportunities. The social closure process, as Weber describes it, operates by fixing on a certain set of attributes that are intended to justify a focus on a narrow group of individuals.

Previous scholars who have developed the concept of social closure have argued that closure comes about through an intentional act of social exclusion. Aage Sørensen, for example, wrote about the development of labor unions and internal labor markets as intentional means of creating a social closure process to limit the competition for particular jobs.²⁵ Andrew Abbott writes about the professionalizing of occupations through licensing or accreditation as a means of securing a monopoly over the type of work being performed.²⁶ In contrast to such approaches, I argue that social closure does not require intentional collective action. Rather, the process works by relying on a set of legitimated criteria that give rise to a social category of eligible individuals.²⁷ While Weber argued that almost any observed characteristic—race, gender, or social origin, for example—could be seized upon to effect closure, I argue that the attributes fastened on in the CEO labor market are associated with three particular socially defined and legitimated characteristics: previous position, performance of an individual’s previous firm, and status of that previous firm. The mechanism through which closure operates at the board level is the social matching process, which results in closure by keeping those who do not fulfill its criteria from being considered for the position. In other words, closure generates an artificial scarcity of candidates who are considered for the CEO job. The function of closure is not only to limit the competitive field in this way but also to set the terms of competition and to assign the rewards for work done in accordance with these limits. It creates the rules of the game, constituting the boundaries by which people will be judged and criticized.

At its core, then, the external CEO labor “market” operates as a circulation of elites within a single, sealed-off system relying on socially legitimated criteria that—contrary to conventional economic wisdom—are not to be confused with relevant skills for the CEO position. Relying on legitimated criteria, meanwhile, has created a new process of stratification that operates even more powerfully than sets of criteria based on, say, property, educational credentials, or inherited titles, because it is legitimated by the larger cultural system (as discrimination based on race, gender, or religion, for example, would not be). Judged against the more optimistic claims for markets and the mobility and fluidity for which they supposedly allow, my findings are a strong reminder of the persistent influence of closure processes in markets. They therefore fundamentally challenge neoclassical economic accounts of the CEO labor market. For precisely this reason, current celebrations of how the “market” has reformed processes of corporate control are, in reality, premature. Restricting the CEO labor market to a select set of candidates and then pretending that the outcomes can be justified as a consequence of the market process is a self-serving conceit.

What is wrong with closed markets? Along with the more particular problems that they create (such as paying some individuals excessive amounts and blocking access to positions for talented potential candidates), closed markets undermine the faith in an open market system on which financial markets rest, a faith that would be monumentally expensive for society to replace through enforcement mechanisms. Nor is it just the financial markets whose smooth operation depends on the maintenance of trust in the basic fairness of the market system, but also all of the interlocking economic, social, and political institutions of which our society consists.

While some would argue that closed markets are ultimately unsustainable, my findings about the external CEO market point to a set of factors tending to strongly reinforce and replicate its processes. Moreover, despite the widespread view that corporations are undertaking radical change in their systems of leadership and breaking open their organizational structures, the reality is that such reversals are rare and almost assuredly cannot happen quickly. The face of power may change—a new CEO arrives, only to be replaced two or three years later by another—but the routes of ascent to power remain the same. Nor are the factors inhibiting change confined within the corporation. There are powerful forces in our society dedicated to the perpetuation of a set of myths about the efficacy of the charismatic CEO and the self-regulating capacity of markets, and the ideological commitment of those who subscribe to and promulgate these myths can have an almost religious intensity.²⁸ Challenging the ideology of the charismatic CEO is thus one step that can be taken to establish the CEO selection process on a more rational basis. Challenging prevalent misconceptions about markets is another.

Opening the External CEO Labor Market

One of the fundamental premises of this book is that the external CEO labor market is a social institution. It is an institution not in the narrow sense of a formal organization, but rather in the broader, sociological sense of a set of socially habituated behaviors that constrain and direct action along a particular trajectory. The external CEO market is a social institution because it is in continuous, dynamic interaction with a more comprehensive social system from which it receives its core organizing principles. It is when these core organizing principles are shared and reinforced within a society or group that a market assumes the form of a full-fledged institution. It follows from this that the way we think about the external CEO market is, to a great extent, what accounts for its particular characteristics.

Although the closed nature of the external CEO market suggests that it would be difficult to change, we could, in truth, change it in significant ways by beginning to think differently about critical issues. This is all the more true because of the relatively small size of this market, and because, as I have argued, the perceptions of the actors involved directly affect its operations and outcomes. The first step in reorienting our thinking about CEOs and how they should be chosen is to realize the arbitrariness and even irrationality of many of our current ideas and attitudes. Thus, for example, the assumption that bringing in an outsider as CEO is the best way to bring about change in a faltering organization could be subjected to the critical scrutiny that it has so far largely been spared. Without pretending that it is possible or even desirable to return to the safety and stability of the era of managerial capitalism and the internal CEO succession process that then obtained, we might think about ways that the best features of the old succession system might be adapted so as to combine merit-based competition with the ability to bring in new blood.

Perhaps the most fundamental—and fundamentally irrational—attitude underlying the closed external CEO market is the belief in charismatic authority itself. The attraction of charismatic leaders is that they promise a solution to all of our problems if only we follow the leader with unwavering certitude. Whereas rational authority is logical, temperate, and even-handed in its recognition of the constraints on leaders, charismatic leadership is all about passion and the smashing of limits. Rational authority recognizes that organizational problems are finegrained and complex, while charismatic authority dissolves particulars and complexities in the blinding light of “vision.” Because it is rooted in sentiment rather than reason, charismatic authority is ultimately weak and unsustainable—a truth that has been demonstrated throughout history.

Yet for all of its manifest defects, charismatic authority has always been alluring for the simple reason that it avoids accountability and responsibility for outcomes. So, for example, charismatic authority has proven seductive for boards of directors that prefer to avoid wrestling with the complex interactions of environmental factors and corporate strategies and operations that largely determine a firm’s performance. Although outwardly sober citizens, and while being charged in reality with the stewardship of vast conglomerations of society’s resources, many corporate directors today discharge—or rather shun—one of their most important duties with what amounts to a belief in magic.

THE RESPONSIBILITY OF CORPORATE BOARDS

The process by which boards hire a new CEO is often directed at finding a charismatic leader and then tailoring the job to his skills. A more deliberative and rational process would entail evaluating the current strategic challenges facing the firm and the skills that a new CEO must have to help the organization meet them. To try to find the “right person” and then adapt the job to him is to put the cart before the horse. This belief that there is one right person for the job is at the core of the whole process of charismatic succession. It is also a dodging of responsibility, an act of evasion that begins with directors’ unwillingness to face the fact that choosing a CEO is difficult.

The myth of the charismatic CEO disguises this inconvenient reality. The charismatic illusion is fostered by tales of white knights, lone rangers, and other such heroic figures whose origins lie in the fairy tales that serve a child’s need to feel protected from the world’s dangers. When we meet this extraordinary man (and it is almost always a man) who is going to save the day, we expect to be able to recognize him. The charismatic leader is easily identified by the feelings of awe that he inspires in others. There is no need to look hard at the leader himself, let alone to question whether he is really right for the task at hand.

Corporate directors today complain more or less incessantly about the seriousness of their organizational problems, the failed strategies of their CEOs, and the difficulties they have in finding adequate “leaders.” Sometimes they voice these complaints publicly, at other times anonymously or in whispered conversations with fellow tribesmen. They talk as if their inability to find a CEO who can solve all their organizations’ problems is the result of a curse placed on the board. Conversely, one rarely hears directors actually taking responsibility for poor decisions made in hiring a CEO. Instead of facing the possibility that their own flawed search and selection processes are responsible for such failures, most directors seek to avoid the pain this would entail by blaming their poor decisions on bad advice from their search consultants, or on candidates who misled them about their skills, or on circumstances supposedly beyond their control, such as pressure from analysts, investors, and the business media.

The lengths to which boards go to avoid assuming responsibility for choosing a CEO is ironic given that, as noted in chapter 4, many directors describe this as one of their most important decisions. Perhaps the most damaging result of the quest for a corporate savior is the dependency that it creates in directors, who not only surrender inordinate power to charismatic candidates but may even repeat this behavior again and again.²⁹ This is especially tragic because, as much of the literature on organizations and strategy maintains, CEO turnover potentially offers a unique opportunity to improve an organization’s performance. Although boards are unlikely to take advantage of this opportunity if they operate on the assumption that the “talent” of the CEO is the key to competitive success, executive succession can, in fact, create a foundation for organizational renewal. But the first step in making this happen must be for directors to start acknowledging and accepting the complexity and difficulty of the succession decision, and abandoning the search for simple answers.

No single individual can save an organization. One reason that directors cling to the belief in corporate saviors is that, like the rest of us, they find it painful to abandon familiar, long-cherished ideas. Herein lies another major challenge for corporate boards. For if they are to find an alternative to charismatic succession, board members must let go of old beliefs and faulty theories about leadership and organizations. Given the relationship between the structures and beliefs now governing the external CEO succession process and the social systems in which this process is embedded, directors must take a critical attitude toward existing social ideas—including many that are deeply ingrained—about the efficacy of charisma and the nature of “leadership” itself.

There are two commonly followed ways of thinking about organizational leadership. One—which has become dominant in the age of the charismatic CEO—is to say that leaders should be chosen for their personal characteristics and then held personally responsible for their decisions. A second, which was actually practiced in the age of managerial capitalism, is to deny the importance of personality altogether and to attempt to construct impersonal institutions. Yet there is an alternative to this either/or choice, one that recognizes that institutions and the individuals who lead them reflect and influence one another—indeed, that they are inextricably interwoven. As the philosopher Karl Popper wrote in his great work The Open Society and Its Enemies, “The principle of leadership does not replace institutional problems by problems of personnel, it only creates new institutional problems. . . . [I]t even burdens the institutions with a task which goes beyond what can be reasonably demanded from a mere institution, namely, with the task of selecting the future leaders.”³⁰

The latter observation points to one of the key contradictions within the idea of charismatic organizational leadership. For even granting for the sake of argument the validity of the whole notion, it is impossible to devise institutional processes for finding leaders who will really “break the mold” in the way that all CEOs are now, at least in theory, supposed to. As Popper pointed out, institutional processes for selecting leaders—whether they be formal or informal, explicit or implicit—never work well because they “always tend to eliminate initiative and originality, and, more generally, qualities which are unusual and unexpected.” It is simply not efficacious, he went on to observe, to “burden” institutions with the “impossible task of selecting the best.”³¹ Such an approach to succession also transforms the process into a race or contest, thus turning the system into one that emphasizes individual gain at the expense of organizational excellence.

The futility of trying to use institutional processes for selecting “leaders” (as opposed to managers) is well illustrated by the process of social matching that lies at the heart of external CEO succession. Although there is no demonstrable validity to the categories used in the social matching process to sort candidates for the job of CEO, directors continue using them, to a great extent because they are legitimated by society at large, thus offering a path of least resistance when difficult decisions might otherwise have to be made. It will thus take no small measure of intellectual independence and courage for directors to begin examining their received ideas about who is qualified to be a CEO, and then to stand up to outsiders—particularly analysts, investors, and business journalists—who stand ready to demand that the new CEO conform to their favored image.

The fiercest resistance to change, however, that any directors bold enough to question the conventional wisdom will have to face will come from their own peers in the boardroom. After all, as everyone knows, most corporate directors are CEOs themselves, and thus the direct beneficiaries of a way of thinking that creates an artificial scarcity of “talent” and thereby justifies paying CEOs with boundless extravagance. Being only human, directors naturally use the rules of the social institutions within which they operate to pursue their own advantage. For this reason, it is incumbent on the rest of society to own up to its own role in maintaining the various fictions on which the reign of the charismatic CEO depends, and to face its own responsibility for introducing some rationality into the way that CEOs are chosen, evaluated, and rewarded.

INSTITUTIONAL INVESTORS, BUSINESS SCHOOLS, AND THE BUSINESS PRESS

If phenomena such as the closed nature of the external CEO labor market and today’s excessive CEO pay packages truly represent, as I believe they do, the breakdown of a system, the good news is that this failure presents a genuine opportunity to create a better one—not by tearing down structures in the vain hope that a “free” market will spontaneously emerge in their place and rectify the situation, but rather by reforming underlying structures and altering beliefs. So, for example, because the vast majority of corporate equity is held by institutions acting as the agents of individual shareholders, investors have significant leverage in pushing for reform. And because the external CEO market, as a socially constructed institution, is constituted to a great extent by widely shared beliefs, its present way of operating could be changed by bringing those beliefs into greater congruence with observable social and organizational reality. The more the present system and its underpinnings are questioned, the more susceptible to change it will become—although, as sociology tells us, it is no small undertaking to induce people to question the kinds of fundamental beliefs that create and support such institutions.

For society at large, as well as for corporate directors, unquestioning belief in the desirability of charismatic authority itself is one of the key obstacles to reforming the present system of CEO search. In the age of investor capitalism, faith in charismatic authority has become an increasingly crucial element in the subjugation of critical thinking. Within many organizations, the shift from rational to charismatic succession has come to be taken for granted so that nobody now remembers that succession was ever handled in any other way. In the larger society, as we have noted, faith in the efficacy of charismatic authority is bound up with the sacrosanct individualism that characterizes American culture. So strong are the beliefs that sustain the existing external CEO labor market that the bizarre processes by which many CEOs are now selected and compensated have come to appear part of the natural order of things. To question such beliefs is to leave oneself open to the suspicion that one is a dangerous radical, or simply mad.

Ultimately, then, long-term change in the CEO labor market will require overturning the current consensus among professional investors and the public at large about the validity of the charismatic CEO model. Institutional investors, in particular, will need to be educated about the organizational realities hidden or distorted by popular myths about heroic corporate saviors. (One of the potential silver linings to the Enron disaster is investors’ new awareness of how seriously they can be, and have been, misled by the spirit of an uncritical age and the blandishments of charismatic corporate leaders.) Organizational theory points to two institutions that can play a role in affecting the support and legitimacy that the charismatic CEO model now commands: professional business education and the business media. In their present forms, these two institutions tacitly support the orientation toward charismatic leadership on the part of executives, investors, and other corporate constituents by the way that they shape and reinforce existing thought and discourse on the relationship between the CEO and firm performance. Without changes to these institutions, I believe that any changes to the existing order will likely be incremental and have little substantive impact.

Business education has come to exercise enormous influence as business itself has become thoroughly dependent on professionally trained individuals—so much so that it is increasingly rare to find a management consultant, professional director, investment banker, analyst, venture capitalist, or executive who does not have some professional business training through either an MBA or an executive education program. The formal educational process in business schools is one powerful means through which new ideas are promulgated, legitimated, and diffused throughout organizations. The professional networks that this process produces as a second-order effect are another. Thus both the content of business education and the networks that it creates and maintains can be used to dislodge prevalent misconceptions about the role of the CEO in affecting corporate performance.³²

The purpose of business education is to train and develop professionals with the skills to analyze and deal effectively with the complex problems of business. Professional business education ultimately seeks to inculcate both an understanding of the fundamentals of business and the ability to respond to the demands of actual business situations. The case method of instruction is central to this objective. In the case method—rooted in the Socratic tradition of active discussion—learning occurs not just through the students’ mastery of the substantive content of a case but also through an interaction in which students and instructor explore the full complexity of the case situation. The power of effective case instruction is well known. The emotional drama that develops when those with differing perspectives seek both to advance their ideas and to better understand the ideas of others creates a powerful learning experience.

To understand the relevance of the case method to what business school students learn about the role of the CEO, it is important to note that the case approach puts students in the shoes of a protagonist facing a complex, multifaceted, real-life business problem. In recent years, the field of organizational behavior has used this aspect of the case method quite effectively to teach students about leadership. In contrast to research that has muted the importance of individual agency and indirectly encouraged other-directed leadership behaviors, we have made significant strides in encouraging students to be more inner-directed and to rely on their own individual talents, intuitions, skills, and experiences to become more effective organizational actors. We have provided students with a number of frameworks for understanding how those in leadership positions can better motivate others and align the interests of organizational members with those of the organization. We have taught them that they do not have to accept the status quo and can be active in changing their companies’ environments. We have provided them with a set of tools, grounded in our understanding of how to affect human behavior, that lets them tap into the basic drives of human beings to acquire material goods, do well at their jobs, and feel that their lives are purposeful and meaningful.

Yet despite these achievements, the leadership model currently taught in business schools stands in need of further development. Written from the point of view of a single CEO protagonist—as are many leadership cases with which I am familiar—our pedagogical tools can subtly reinforce the charismatic orientation that dominates contemporary discussions of leadership, particularly the assumptions that leadership exists primarily at the CEO level and that individual corporate leaders, especially those at the top of the organizational hierarchy, exercise more control over organizational outcomes than they actually do. Students, understandably, have an easier time identifying with an individual’s perspective on a situation than gaining a more comprehensive view of it. (An increased emphasis on cases involving non-CEO leaders, and drawing on the perspectives of multiple protagonists, might be one way of counteracting the idea that a single individual’s actions can solve the complex problems with which leaders are usually faced.) Yet they need to learn not just about the possibilities but also about the constraints facing organizational leaders.

By pointing out that leaders are constrained in their decision-making by many stubborn factors, we can teach our students that these individuals often find themselves in positions in which they have only limited control over events.³³ As Michael Cohen and James March have argued, we do our leaders a disservice when we overemphasize their power to affect their situations and downplay the limitations placed on them by the force of circumstance.³⁴ We put competent people in untenable positions when their constituents tend to assume that a leader has the power to do whatever he or she chooses simply by virtue of holding a formal office. By expanding our teaching of leadership to consider the constraints that leaders face, we can not only help them to do their jobs better but also reduce the temptation for them to attribute all good outcomes to themselves. If we can teach future leaders to think of themselves less as heroes and more as people who face difficult decisions, and to recognize the tradeoffs involved in making their choices, we will be more likely to see them ask for help from others and seek social support for their judgment rather than feeling as if they must have all the answers all the time.³⁵

While the business education process and the networks it creates have a profound impact on how members of the business elite think about the role of the CEO, another influential institution—the contemporary business press—has driven a trend toward the popularization of management theories. In the last decade, mass media, especially newspapers and magazines, have increased their coverage of both management ideas and business firms. Yet the business media’s role has come to extend beyond simply conveying information and opinion. The business press is now a kind of stepchild of the business education establishment, having itself become a producer and legitimator of management ideas. Because most corporate managers have an aversion to management “theory,” especially when it is described as such, many of their ideas about business are increasingly influenced by what they read in the daily newspapers, management magazines, and industry journals as well as by what they watch on CNN and CNBC. Whether individual journalists acknowledge it or not, the business media have become a critical power broker in the construction of management ideas. Like the Internet (once it had evolved from an obscure communications protocol into a phenomenon sui generis), the loose-jointed business press of today is all the more powerful because its influence is pervasive, indirect, and atmospheric. In this new form, it occupies an important intermediary role among investors, board members, analysts, the general public, and the firm. It has become part of the very process by which these actors understand and interpret reality, telling people both what to think about and how to think about it in the realm of business.

Management scholars who study the role of the media in business have uncovered a general pattern through which the business press has become a source of new management theories. These scholars find that what often start out as nuanced academic ideas are turned into fads once they have been filtered through the mass media, which ground these often complex concepts in ideology, rhetoric, symbols, and illustrations that endow them with popular appeal. Through their expertise in storytelling and adroit use of symbolic tools such as dramatization, the media have even begun to influence the very way that people make inferences about cause and effect. As Robert Eccles and Nitin Nohria have shown in Beyond the Hype, the ability to convey an idea through a dramatic story increases the legitimacy of the idea and the rapidity with which it is diffused.³⁶ The political scientist James Barber, for his part, describes journalists as the mythmakers of our age:

The painters of those [ journalistic] pictures, when they can get them believed, exercise a power that is nothing less than the power to set a course of civilization. In modern politics, lacking grander visions, we make do with glimpses of possibility and shades of meaning—a kaleidoscope of fact and metaphor and judgment. Journalism, our composite Homer, delivers those partial sightings, which substitute for heroic myth. If it is the default of the political parties that burdens journalism with sorting out candidates, it is the default of the contemporary intellectuals that leaves to journalists the task of composing our ruling ideas.³⁷

While Barber’s focus is on the role of the media in contemporary electoral politics, his ideas have important implications for the phenomenon of the charismatic CEO. As we have seen, the relationship between CEOs and firms is often constructed in the form of legends and myths about the spectacular (positive or negative) effects a CEO can have on firm performance. Dramatizations of the impact that a “good” CEO like Jack Welch can have on a firm create a powerful narrative that serves to reinforce the cult of the charismatic CEO. Even boards of directors, as we have also noted, are often guided in their strategic decision-making by the legends of successful CEOs, frequently related by the business press in coarse-grained, over-simplified stories that attribute far too much influence to individuals than is warranted by any realistic view of large organizations in complex environments.³⁸

While the business media have participated in the construction and legitimization of the charismatic CEO model, this same institution can also help to change that model. Because the media can focus attention on a subject and put it on the public agenda, they can actively shape a more balanced account of the role of CEOs in corporations, educating directors, investors, analysts, and the lay public about the main factors affecting firm performance. Journalists need to focus less on the personality of the individual CEO and more on questions of strategy, industry conditions, and other real determinants of corporate success or failure. They also need to become more skeptical. The steep rise and spectacular fall of Enron and its onetime CEO, Jeffrey Skilling, offers a particularly telling illustration of the dangers of shining the spotlight on a charismatic CEO while neglecting to subject his more visionary claims to careful scrutiny. It at least seems plausible that more hardheaded coverage of Enron by the business press might have raised some red flags before belated revelations about the company’s finances abruptly shattered investors’ trust and sent the firm into a tailspin.

FAREWELL TO OZ: EXTERNAL CEO SEARCH AND THE MYTH
OF THE SELF-REGULATING MARKET

While a more realistic view of the nature of, and requirements for, the CEO position would go a long way toward opening up the closed process that external CEO succession has become, this particular shift in viewpoint is not all that is needed. The problem is more recalcitrant than that. All closed social systems are difficult to break open because the breakdown of closure creates strain. This strain is most evident in situations where the privileges conferred by closure begin to disappear, as illustrated, for example, by the birth of the civil rights movement or the end of apartheid in South Africa. The closed society resists opening. To its ruling members, caste and the distinction between leaders and followers are natural in the sense of being both taken for granted and unquestionable. When a social system begins to open up, this certitude disappears. Those who benefit from the system fight to maintain their privileges amid the turmoil that arises as previously submerged problems of class and social status come to the surface.

In the modern world, one of the most powerful forces for breaking down closed social and political systems has been the capitalist economic system, at least in those times and places where capitalism has been introduced in such a way as to foster genuine competition. Real competition tends to undermine the privileges of closure; conversely, closure is effectively the restraint of competition. Examining the relevance of these truths to the closed system that is the external CEO labor market today, we arrive at the supreme irony that—to the extent that capitalism is a system based on openness and competition—corporate directors, when they come to choose a new CEO, can be some of the fiercest opponents of capitalism anywhere. How can we have been so slow to perceive such a gigantic contradiction?

In all human societies, from the most primitive to the most advanced, magical or otherwise irrational attitudes toward the customs of social life endow these customs with the robustness that they need to survive and reproduce themselves. No one has discussed this phenomenon more perceptively than the sociologist Emile Durkheim, who showed how societies attempt to erase the distinction between the customary or conventional regularities of social life and the regularities found in the natural world. Often this is accomplished through the belief that both social customs and natural laws are enforced by a larger, supernatural will. Taboos then serve to protect customs, institutions, and ideas from becoming objects of critical consideration. As actors assume their postures and play their roles, the entire social spectacle takes on an appearance of objectivity, thereby gaining the complicity of a society’s members. Society is thus, in Durkheim’s words, a sui generis. All the subsystems of a society, such as its economic and cultural elements, are part of a structurally interrelated whole, unified by a set of inner rules and principles. For Durkheim, the governing principle at the heart of society was the sacred and the unspoken. For Marx—and, ironically, for most of today’s economic conservatives—it is the system of economic relations that determines everything else.

For most traditional societies, it is true, the larger, supernatural will believed to govern the visible world and establish its customs has been that of a god or godlike figure. In today’s secular societies, this supernatural will is increasingly conceived of as the “invisible hand” of the market. In economic terms, certainly nothing represents the ethos of American society over the last two decades so well as the belief in open, competitive markets and the related conviction that, as part of the natural order, markets are not to be subjected to human manipulation. There is, indeed, much to be said for competition. As the economist Friedrich von Hayek noted, there are few systems for organizing an economy so effectively as the competitive market and pricing system. The disadvantages of closed and bureaucratically organized economic activity have been demonstrated clearly in numerous experiments conducted around the world. If competition is so effective a way of ordering a process of allocation, however, why is there so little of it in the external CEO labor market? How can a closed market persist in the very citadels of American capitalism, the boardrooms and CEO suites of the nation’s largest corporations? To a great extent, this is because of the claim—made despite all evidence to the contrary—that the external CEO market is open and competitive. In our society, primary responsibility for this form of mystification can be laid directly at the feet of the practitioners of today’s neoclassical economics, a school of thought that, during the twenty-year period that has seen the rise of investor capitalism and of the charismatic CEO, has in many ways assumed the character of a charismatic discipline.

Markets—as the case of the external CEO market makes clear—are not natural phenomena. They are constituted, set in motion, and reproduced by the interaction of social and cultural values and structures, which can and do severely limit their self-regulating capacities. These values and structures, however, are not even of empirical interest to any but a relative handful of economists.³⁹ For mainstream practitioners of economics, society and culture are (to borrow W. B. Yeats’s summary of the Platonic view of nature) “but a spume that plays / Upon a ghostly paradigm of things.” Moreover, just as charismatic CEO candidates dazzle corporate directors by their affiliations and status rather than their abilities, neoclassical economics derives much of its power and mystique from similarly extraneous sources.⁴⁰

When contemplating such phenomena as the intellectual hegemony of neoclassical economics or the flawed economic and social outcomes that the ideology of the self-regulating market is used to explain and justify, it is always tempting to blame them on conspiracies. Indeed, the way that sociologists and other students of society have traditionally sought to explain how certain individuals, groups, and organizations maintain their privileged positions is to talk about how they manipulate the social structure for their own advantage. While such uses of power are a fact of social life, conspiracy theories offer little hope of doing anything to restrain them. Besides being frequently difficult to prove, conspiracy hypotheses ignore the fact that members of groups can and do cooperate with one another to preserve their own advantages without having designed (or even reflected on) the social structure as a whole. Moreover, to the extent that flawed social structures are maintained by ideas and beliefs, we all help keep them in place by refusing responsibility for thinking critically about the world around us.

This is not a new or particularly radical idea in America. In one of the most enduringly popular expressions of the traditional American ideals of self-reliance and self-determination, The Wizard of Oz, we are taught an important lesson: by pulling back the veil with which power masks its inner workings, we learn not only how the illusions that dominate us are manufactured but also how their maintenance depends on our ignorance of our own powers and abdication of responsibility for ourselves. Along with much else that can be said about them, the cult of the charismatic CEO, the succession process that keeps it going, and the cultural beliefs that contribute to both, all depend on mystifications fully equal in their power to enchant to any of the wonders of Oz. We need to start looking behind the veil to become a more mature, self-aware, and responsible society.