NOTES
Chapter One: “Everyone Knew He Was Brilliant”
1. The source for much of the background information on Bank One is Hart and Utyerhoven (1996) “Banc One—1993.”
2. Weber (2000) “The Mess at Bank One.”
3. Hart and Utyerhoven (1996) “Banc One—1993.”
4. In addition to my own interviews with Bank One executives, directors, and the search consultants, I relied extensively on an article by John Engen for Corporate Board Member magazine to corroborate my interviews and enrich the description of this case. See Engen (2000) “Hiring a Celebrity CEO.”
5. Weber (2000) “The Mess at Bank One.”
6. Ibid.
7. Cahill (1999) “CEO McCoy Quits a Flagging Bank One.”
8. Ibid.
9. One director from the former First Chicago described Bank One’s senior management as “those cowboys from Columbus, trying to take over an institution that almost single-handedly financed the growth of Chicago.”
10. Wahl (2000b) “Bank One’s Problems Go Deeper than Ailing Credit-Card Division.”
11. Weber (2000) “The Mess at Bank One.”
12. Ibid.
13. Cahill (1999) “CEO McCoy Quits a Flagging Bank One.”
14. According to a report in Barron’s that appeared months after the search was concluded, one Bank One investor, Bill Miller of Legg Mason Value Trust, submitted his own list of CEO candidates to the search committee, with the eventually successful candidate, Jamie Dimon, at the top of the list. See Laing (2000) “Fixer-Upper.”
15. Engen (2000) “Hiring a Celebrity CEO.”
16. Ibid.
17. Scism, Raghavan, and Siconolfi (1997) “Lost Trust”; and Anonymous (1998) “Finance and Economics: Fall Guy.”
18. Lowenstein (2000) “Alone At The Top.”
19. In addition to newspaper articles and interviews with several of the protagonists, Lowenstein (2000) “Alone at the Top” is the primary source of the background information on Citigroup, Sandy Weill, and the merger between Travelers and Citibank.
20. Ibid.
21. Ibid.
22. Ibid.
23. Ibid.
24. Ibid.
25. Ibid.
26. Ibid.
27. Scism, Raghavan, and Siconolfi (1997) “Lost Trust.”
28. Lowenstein (2000) “Alone At The Top.”
29. Ibid.
30. Ibid.
31. Scism, Raghavan, and Siconolfi (1997) “Lost Trust.”
32. Lowenstein (2000) “Alone At The Top.”
33. Ibid.
34. Ibid.
35. Ibid.
36. Ibid.
37. In my interviews with him, I also found Reed to be studied and precise in his remarks and discussions.
38. Lowenstein (2000) “Alone At The Top.”
39. Ibid.
40. Ibid.
41. Silverman and Nathans Spiro (1999) “Is This Marriage Working?”
42. When Dimon was fired at Citigroup, its stock sank nearly $11 billion. See Loomis (2000) “Dimon Finds His ‘Fat Pitch’; One Bank that Needs Saving.”
43. Beckett and Raghavan (1999) “Former Citigroup President Dimon Gets $30 Million Separation Package.”
44. Engen (2000) “Hiring a Celebrity CEO.”
45. Raghavan (1999) “Deals & Deal Makers”; and Raghavan and Beckett (1999) “Companies Want Dimon To Become ‘Mr. dot.com’.”
46. Interview.
47. Interview.
48. Interview.
49. Interview.
50. Interview; and Engen (2000) “Hiring a Celebrity CEO.”
51. Ibid.
52. Ibid.
53. As reported by ibid. and confirmed to me by Dimon.
54. Ibid.
55. Ibid. Dimon’s employment agreement is available online (as of this writing) at http://tckrs.thecorporatelibrary.net/contracts/ceo_one.htm.
56. Engen (2000) “Hiring a Celebrity CEO”; and http://tckrs.thecorporatelibrary.net/contracts/ceo_one.htm.
57. Feldman (2000) “Has Bank One Found its Savior?”
58. Wahl (2000a) “Bank One Gains Wall Street Credibility.”
59. Hintz (2000) “Boy Wonder.”
60. Fitch (2000) “Dimon Dose a Shot in Arm.”
61. Weiss (2000) “Jamie Dimon: The Wrong Man for the Bank One Job?”
62. Laing (2000) “Fixer-Upper.”
63. In the account of Dimon’s appointment that it published in March, the Wall Street Journal also reported that Dimon had wanted Istock to step down then instead of staying on as president, as the latter did until September 2000. See Raghavan and Sapsford (2000) “Jamie Dimon Takes Top Spot At Bank One.”
64. Brunswick and Hayes (2000) “Dimon in the Rough.”
65. Popper (2001) “Bank One Shares May Be Floating on Thin Air.” The analyst Popper quotes is Tom McCandless of CIBC World Markets.
Chapter Two: A Different Kind of Market
1. Child (1972) “Organizational Structure, Environment and Performance,” finds that the strategic decisions of top executives can have a substantial impact on firm performance. Lawrence and Lorsch (1967) Organization and Environment, study executive decisions about adapting particular organizational structures in response to changes in the technological environment and find that the adoption of the appropriate structures led to improved firm performance. Four more studies—Kotter (1988) The Leadership Factor, Kotter (1990) A Force for Change, Tedlow (2002) Giants of Enterprise, and Tedlow and John (1986) Managing Big Business—also provide well-documented examples of how executives can shape the success and failure of individual firms and even industries. A critique of the scholarship that relies on case-based or small-sample approaches to understanding organizational births and organizational changes can be found in Hannan and Freeman (1989) Organizational Ecology.
2. Resource-dependence scholars argue that much of what affects a firm’s performance is outside the control of the CEO; see, for example, Pfeffer and Salancik (1978) The External Control of Organizations. Population ecologists find that the structure of a firm’s industry, the competitive intensity in that industry, a company’s culture, and sunk investments in existing assets, predict firm performance much more reliably than do managerial intent or actions; see, for example, Hannan and Freeman (1989) Organizational Ecology. Some scholars argue that CEOs take advantage of the fact that a firm’s performance is mostly predicted by external factors when they negotiate pay packages that reflect positive industry trends and protect themselves against negative industry trends; see Bertrand and Mullainathan (2000) “Do CEOs Set Their Own Pay?”
3. For a review of the scores of studies from this perspective on various industries, see Carroll and Hannan (2000) The Demography of Corporations and Industries; and Hannan and Freeman (1989) Organizational Ecology.
4. Carroll and Hannan (2000) The Demography of Corporations and Industries, 6–7.
5. Wasserman, Anand, and Nohria (2001) “When Does Leadership Matter?”; and Hambrick and Finkelstein (1987) “Managerial Discretion.”
6. For two recent examples of how Greenspan has been treated as personally responsible for the recent success of the American economy, see Woodward (2000) Maestro, and Martin (2000) Greenspan. One of the most interesting facets of these works is the considerable attention they give to seemingly trivial details about Greenspan’s personal habits, such as how heavy his briefcase appears when he is walking into a Federal Reserve meeting, or his love of jazz. Perhaps this is because Greenspan’s public utterances are so jargon-laden and contradictory that even professional economists have difficulty decoding what he is saying, so that those who would interpret the man must resort to chewing on more easily digestible details.
7. The mechanism underlying performance-cue effects, in turn, is what social psychologists call the fundamental attribution error, which presents itself when people: (1) underestimate the power of a situation in explaining events; (2) overestimate the impact of a person; (3) attribute personality traits based on an observation of behavior, even in a strong situation. For a review of the concept, see Brown (1986) Social Psychology.
8. Brunswick and Hayes (2000) “Dimon in the Rough.”
9. Eccles and Crane (1988) Doing Deals, 214–221.
10. Ibid.
11. Groysberg (2001) “Can They Take It with Them?”
12. Khurana and Nohria (1996) “Substance and Symbol.”
13. Many corporate governance experts frown on this practice, arguing that it gives the CEO too much control over the agenda of board meetings and over directors’ access to information. Research has also shown that when the CEO and chairman positions are combined, boards are less likely to dismiss poorly performing CEOs. Zelleke (2001) “The British ‘Non-executive’ Chairman” nicely summarizes the point:
The central purpose of corporate governance is to ensure that management is accountable to the proper constituencies, however these may be identified in a particular national context. Boards of directors are charged with monitoring management to ensure that accountability. On that basis alone, an ‘efficient’ governance structure would seem to require that boards be free of the conflict of interest inherent in the board being chaired—and often, in practice, dominated—by the firm’s top manager. The same logic suggests that boards composed of relatively few members of management would be more objective, and therefore effective, as monitors.
14. Merrick (2000) “Bank One Decides to Trim its Board.” In my own research (Khurana 1998) I have found that, contrary to popular belief, larger boards are more likely to dismiss CEOs when performance is poor.
15. See Brunswick and Hayes (2000) “Dimon in the Rough.” While there is nothing extraordinary, after all, about a CEO having power to dismiss members of his team, in this case the dismissals could be interpreted as self-protective or self-indulgent rather than in the best interests of the firm. When John Reed was selected CEO at Citigroup after a heated race with another executive, one of his first actions was to make peace with executives who had supported the other candidate.
16. As we shall see in chapter 4, it is principally on the supply side that scarcity in the external CEO labor market would appear to be artificially created.
17. Crystal (1992) In Search of Excess; and Bok (1993) The Cost of Talent.
18. To pay one’s CEO at or below the median is to implicitly acknowledge that one has, at best, only an average CEO. Rather than admitting that their firms are run by “average” CEOs, most directors simply pay new CEOs as if they were above average. This phenomenon is what Graef Crystal (1992) has referred to as the “Lake Wobegon effect” in executive compensation.
19. Ibid., 222.
20. Marsden (1983) “Restricted Access in Networks and Models of Power.”
21. Baker (1984) “The Social Structure of a National Securities Market.”
22. Swedberg (1994) “Markets as Social Structures.”
23. The 1993 CEO search at the financial services firm American Express (discussed in greater detail in chapter 6) also illustrates some of the more damaging things that can happen when the confidentiality of such a search is breached. Because of news leaks about potential outsider replacements for departing CEO James Robinson, the most desirable candidates for the American Express job publicly disavowed any interest in it. Moreover, the leaks exposed the various factions on the American Express board, each of which was backing a different candidate.
24. The basic idea of adverse selection is laid out in Akerlof’s (1970) classic discussion of lemons in the used car market, “The Market for ‘Lemons’: Qualitative Uncertainty and the Market Mechanism.”
25. For an excellent overview of the literature on agency theory, see Pratt and Zeckhauser (1991) “The Agency Relationship.”
26. Fama and Jensen (1983) “Separation of Ownership and Control.”
27. Jensen (1993) “The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems”; and Baker and Smith (1998) The New Financial Capitalists.
28. Lorsch and MacIver (1989) Pawns and Potentates.
29. Indeed, under such conditions transaction-cost theory predicts that such transactions will take place within the boundaries of the firm; see Williamson (1975) Markets and Hierarchies.
30. There has been a trend, of late, of CEOs refusing to accept a guaranteed bonus when the firm underperforms. Directors often respond to this gesture by granting the CEO more stock options. For a discussion of the unacknowledged liabilities imposed on firms by the practice of making large grants of stock options to senior executives, see chapter 7.
31. Scott (1995) Institutions and Organizations, 170. Most of the contemporary discussion of the issue of legitimacy is contained in institutional theory. In addition to the nice summary of the field contained in Scott, a variety of essays on the topic can be found in Powell and Dimaggio (1983) The New Institutionalism of Organizational Analysis.
32. This situation represents an extreme example, for in most cases the candidate is able to pretty much dictate the compensation terms. The complexity of the negotiation, however, extends to issues such as power-sharing arrangements between the board and the incoming CEO, the provision of a company driver, purchase of a currently owned house, and so on.
33. Viviana Zelizer explores in great detail the importance of this issue in the market for insurance (1978), and how changes in the legal and political structures governing insurance affected the economic value of children (1981).
34. Meyer and Rowan (1977) “Institutionalized Organizations”; and Fligstein (1990) The Transformation of Corporate Control.
35. Fligstein (1990) The Transformation of Corporate Control. For a theoretical overview of the concept of organizational fields, see Scott (1995) Institutions and Organizations.
36. I have found parallels to this aspect of the CEO candidate selection process in both the nonprofit and the public sectors. For a discussion of the importance of legitimacy considerations in the process of presidential candidate selection in public universities, see McLaughlin (1996) Leadership Transitions; and McLaughlin and Riesman (1990) Choosing a College President. For interesting non-fictional and fictional looks, respectively, at the role of legitimacy in selection, see Cramer (1992) What It Takes, and Warren (1946) All the King’s Men.
37. McLaughlin (1985) “From Secrecy to Sunshine.”
38. Zuckerman (1999) “The Categorical Imperative.”
39. The majority of examples in which neoclassical assumptions inform the analysis of the CEO labor market can be found in the CEO compensation literature. See, for example, Jensen and Murphy (1990a) “CEO Incentives,” Jensen and Murphy (1990b) “Performance Pay and Top Management Incentives,” Murphy (1986) “Top Executives Are Worth Every Nickel They Get,” and Rosen (1982) “Contracts and the Market for Executives.” For an excellent review of the research outlining the debate between economists and behavioral social scientists on whether the CEO labor market is efficient, see Murphy (1998) “Executive Compensation.”
40. There are several works of note to cite in this area, and some of them have already been cited. Many of them are built on the foundational theoretical work of Polanyi (1957) The Great Transformation. They include Granovetter (1974) Getting a Job, Granovetter (1985) “Economic Action and Social Structure,” Burt (1992) Structural Holes, and Podolny (1994) “Market Uncertainty and the Social Character of Economic Exchange.”
41. The term social construction of reality was coined by theorists Peter Berger and Thomas Luckmann (1967) in The Social Construction of Reality. Working within the subfield of the sociology of knowledge, Berger and Luckmann addressed the issue of how reality can be known:
It is important to keep in mind that the objectivity of the institutional world, however massive it may appear to the individual, is a humanly produced, constructed objectivity. The process by which the externalized products of human activity attain the character of objectivity is objectivation. The institutional world is objectivated human activity, and so is every single institution. In other words despite the objectivity that marks the social world in human experience, it does not thereby acquire an ontological status apart from the human activity that produced it. The paradox that man is capable of producing a world that he then experiences as something other than a human product will concern us later on. At the moment, it is important to emphasize that the relationship between man, the producer, and the social world, his product, is and remains a dialectical one. That is, man (not of course, in isolation but in his collectivities) and his social world interact with each other. The product acts back upon the producer. Externalization and objectivation are moments in a continuing dialectical process. The third moment in this process, which is internalization (by which the objectivated social world is retrojected into consciousness in the course of socialization), will occupy us in considerable detail later on. It is already possible, however, to see the fundamental relationship of these three dialectical moments in social reality. Each of them corresponds to an essential characterization of the social world. Society is a human product. Society is an objective reality. Man is a social product.
42. McGuire, Granovetter, and Schwartz (1991) “Thomas Edison and the Social Construction of the Early Electricity Industry in America.”
43. Zelizer (1983) Morals and Markets.
44. See Douglas (1986) How Institutions Think.
Any institution that is going to keep its shape needs to gain its legitimacy . . . then [the institution] starts to control the memory of its members; it causes them to forget experiences incompatible with its righteous image, and it brings to their minds events which sustain the view of nature complementary to itself. It provides the categories of their thought, sets the terms for self-knowledge, and fixes identities. (112)
These ideas have also been developed by Charles Tilly (1998), who shows how socially constructed categories can be used to create and maintain inequality in a society. His ideas tie directly back to the concept of the social construction of reality.
45. Powell and Dimaggio (1983) The New Institutionalism of Organizational Analysis.
46. See Goffman (1963a) Behavior in Public Places and (1963b) The Presentation of Self in Everyday Life.
47. White (2002) Markets from Networks.
48. Granovetter (1985) “Economic Action and Social Structure.”
49. I am attempting to summarize a diverse and deep stream of ideas in economic sociology here. For a useful review of this work, see Smelser and Swedberg (1994) The Handbook of Economic Sociology.
50. Logue and Naert (1970) “A Theory of Conglomerate Mergers.”
51. Weston, J. F. (1970a) “Diversification and Merger Trends” and (1970b) “The Nature and Significance of Conglomerate Firms.”
52. Amihud and Lev (1981) “Risk Reduction as a Managerial Motive for Conglomerate Mergers.”
53. Williamson (1975) Markets and Hierarchies; and Rosen (1986) “Prizes and Incentives in Elimination Tournaments.”
54. An exact percentage of outsider CEOs is difficult to report since researchers define outsider CEOs differently. For example, Richard Vancil (1987) defines outsider CEOs as having been with the firm two years or less. For the purposes of this book, I will define outsiders as having no prior affiliation with the firm at all, a more conservative measure. Recent studies suggest that between 20 and 29 percent of CEO successions at large publicly held corporations are outsider successions. Borkovich, Parrino, and Trapani (1996) examine CEO successions from 1969 to 1988 and find that 20 percent of them during this period were outsider successions. Worrell, Davidson, and Glascock (1993), using a 1963–1987 dataset, code 29 percent of all CEO successions as outsider appointments. The panel analysis of 850 firms from 1980 to 1996 used in my own research for this book finds that 27 percent of CEO successions during this period involved outsiders.
55. Williamson (1975) Markets and Hierarchies, and (1981) “The Economics of Organization.”
56. Burt (1992) Structural Holes, 238–251.
57. Weber, Roth, and Wittich (1978) Economy and Society, 341–43.
58. There are several sociologists who have built on the concept of social closure. In particular, Parkin (1974) and Sørensen (1983a) have independently explored Weber’s ideas about closure in trying to explain the processes by which inequality is generated in modern society. Suffice it to say here that my conceptualization of closure is different in some important ways from that of these predecessors—a subject to which I will return in chapter 7.
59. Sørensen (1983b) “Sociological Research on the Labor Market,” and (1998) “Theoretical Mechanisms and the Empirical Study of Social Processes.”
60. Dumont (1980) Homo Hierarchicus.
Chapter Three: The Rise of the Charismatic CEO
1. Berle and Means (1932) The Modern Corporation and Private Property.
2. Chandler (1977) The Visible Hand.
3. Ibid.
4. Ibid.
5. Brandeis, Fraenkel, and Lewis (1965) The Curse of Bigness; Brandeis, Lief, and the U.S. Supreme Court (1930) The Social and Economic Views of Mr. Justice Brandeis; and Brandeis and Poole (1914) Business—A Profession.
6. Fukuyama (1992) The End of History and the Last Man.
7. Chandler was not the first to focus on the link between organizational structure and organizational effectiveness. As his introductory text and references make clear, the topic is one that has interested scholars going back at least to Adam Smith. More recent predecessors to Chandler would include Werner Sombart, James Burnham, Ronald Coase, Douglass North, and Oliver Williamson. But all of these dealt with the problem as part of larger agendas. It was Chandler who, focusing on the explicit links among organizational form, the environment, and organizational performance, in effect created two significant subfields: I/O economics and business history.
8. Fligstein (1990) The Transformation of Corporate Control.
9. Baker and Smith (1998) The New Financial Capitalists. Also see the brief discussion of agency theory in chapter 2.
10. As described by ibid.
11. Burrough and Helyar’s bestseller Barbarians at the Gate (1990) likely dispelled any remaining romantic notions of CEOs as altruistic statesmen in the service of the public good.
12. Baker and Smith (1998) The New Financial Capitalists; and Burrough and Helyar (1990) Barbarians at the Gate.
13. Burrough and Helyar (1990) Barbarians at the Gate.
14. In the era of deregulation, begun under President Jimmy Carter and accelerated under Ronald Reagan, the legal environment regulating pensions, retirement funds, and endowments changed dramatically. The most important of these changes was the elimination of state and federal laws that had previously prevented these funds from investing more than 5 or 10 percent of their capital in equities. As the regulations eased, an increasing number of firms shifted their investments away from fixed-income investments, such as government and corporate bonds, to equity indexes. For a description of this transformation, see Useem (1993) Executive Defense, 33–43, which details the legal and political changes that made possible the collective mobilization of institutional shareholders. Useem also describes the political process that led to a weakening of the SEC rules on joint actions. In particular, several onerous procedures and requirements for jointly voting securities owned by shareholders who controlled more than 5 percent of shares were reduced and/or no longer actively enforced. Useem further notes that by working through LBO funds, institutional investors were able to circumvent most legal and administrative constraints on coordinating their action against particular firms.
15. Much of this discussion of the new role of institutional investors is based on Useem’s (1993) Executive Defense.
16. See, for instance, Boyle (2001) “The Dirty Half-Dozen.”
17. Brown and Swoboda (1992) “Stempel Steps Down As Chairman of GM.”
18. Business Week magazine’s John Byrne (1993), 32, captured the ferocity with which activist investors now went after the CEOs of underperforming companies when he described the newest weapon of institutional shareholders as “humiliation of the hot, blinding variety.”
19. Buffett’s firm, Berkshire Hathaway (of which he owns 31 percent), controlled about 200 million shares, or 8.1 percent of Coca-Cola. Money manager Herbert Allen controlled about 9 million shares. Together, Buffett and Allen, the board’s two most powerful directors, told CEO Douglas Ivester that they had reached an irreversible conclusion: he was no longer the man who should be running Coke. Ivester could conceivably have decided to fight, but it is unlikely that he would have won in the new environment. It is important to note that unlike GM, which had experienced significant losses, Coca-Cola was performing relatively well at the time. Its return on shareholders’ equity was 35 percent, down from the previous year’s figure of 42 percent, but still an enviable level of performance by most financial standards. See Watkins, Knoop, and Reavis (2000) “The Coca-Cola Company (A)”; and Sellers (2000) “What Really Happened at Coke.”
20. The CEO search at Gillette that identified Hawley was supposedly a broad outside search. Conducted as Al Zeien was preparing to step down as CEO in early 1999, it ended where it had begun, with the designation of Michael Hawley, Zeien’s own choice, as the new CEO.
Hawley’s dismissal was summarized in the Boston Globe. Faced with slower than anticipated growth (the firm’s earnings were no longer growing at the double-digit levels that they had since the late 1980s), the board dismissed Hawley in October 2000. Kravis, described by an insider as the “silent assassin,” had good reason to lead the ouster of Hawley. His buyout company, Kohlberg Kravis Roberts & Co. of New York, is one of Gillette’s largest shareholders, a stake that came with the sale of Duracell International, the battery maker, to Gillette in 1996. At the time of Hawley’s firing, Kravis’s 51 million shares of Gillette were down $1.5 billion off their 1999 highs. Ousted after thirty-nine years at the Boston-based razor maker, Hawley is another example of the role that institutional investors have played in enforcing unforgiving standards of performance (Reidy [2000] “Gillette Ousts CEO Hawley after 18 Months”).
21. As I have found in my own research (see chapter 2, note 54), 27 percent of CEO successions at large corporations in 1980–1996 were outsider successions. This is a large number, especially since outsider CEOs were virtually unheard of before this period. Moreover, internal labor market theory—still the dominant paradigm for studies of CEO succession—would predict close to zero outsider CEOs because of requirements for firm-specific skills and information asymmetries with regard to the productivity of individuals. Meanwhile, the search firm Challenger, Gray estimates that close to 50 percent of all CEOs in large, publicly held companies in the year 2000 are outsiders (Challenger, Gray, and Christmas [2001] Annual CEO Turnover Report).
22. “Look at the insiders who have turned around ailing companies and you’ll find that they are, in a sense, outsiders. Jack Welch, who transformed the culture at GE, grew up not in the company’s old line businesses but in plastics, a young, iconoclastic division” (Dumaine [1993] “What’s So Hot about Outsiders?”).
Another example of an insider CEO constructed by the business press and others as an outsider is former Ford Motor Company CEO Jacques Nasser, who was explicitly compared with Welch in a Harvard Business Review article that appeared shortly after Nasser assumed the CEO position at Ford in January 1999 (Wetlaufer [1999] “Driving Change”). Consider also this passage from a Business Week article later that year: “[The CEO position is] a pretty heady place to be for a restless, Lebanese-born ousider. Since starting as a young manager in Australia 31 years ago, he has spent nearly all of his career in the far reaches of the Ford empire. . . . Nasser early on showed the impatience with Ford’s bureaucratic fiefdoms that still fuels him today” (Kerwin with Naughton [1999] “Remaking Ford”).
23. For two examples of such studies, see Pfeffer and Salancik (1978) The External Control of Organizations and Hannan and Freeman (1989) Organizational Ecology.
24. Harvard Business School (1982) “Reginald Jones”; and transcription by Vancil (1987) Passing the Baton.
25. Rosen (1986) and Lazear’s (1995) tournament theory paints executive promotion as a hotbed of competition. Critics have argued that the tournament model ignores that most organizations cannot afford costly executive tournaments in which the losers depart. Moreover, most organizations require a great deal of cooperation between executives, which such “tournaments” would short-circuit. See O’Reilly, Main, and Crystal (1988) “CEO Compensation as Tournament and Social Comparison.”
26. GE continues to use this practice to this day, as illustrated by the process leading to Jeffrey Immelt’s appointment as Jack Welch’s successor.
27. In keeping with this example, several large sample studies have demonstrated a positive effect on a firm’s stock price when an outsider CEO is announced. See, for instance, Hudson, Parrino, and Stark (1997) “The Effectiveness of Internal Monitoring Mechanisms”; and Worrell, Davidson, and Glascock (1993) “Stockholder Reactions to Departures and Appointments of Key Executives Attributable to Firings.”
28. Colvin (1999) “We Hate to Say We Told You So, but . . .”; and Burrows and Elstrom (1999) “The Boss.”
29. Shivdasani and Yermack (1998) “CEO Involvement in the Selection of New Board Members.”
30. For a discussion of the existing research on the relationship between CEOs and firm performance, see chapter 2.
31. For a discussion of the fallacy behind claims that stock options link the CEO’s compensation to firm performance, see chapter 7.
32. The most saccharine of these press releases recounting a sudden CEO departure was the one announcing John Akers’s forced exit from IBM in 1992, a declaration that was so positive that the word “resignation” did not even appear in it. The euphemism employed was that the board of directors had “accepted [Akers’s] recommendation to begin the process of selecting a new chief executive officer for the company.” Later in the same press release, a board member was quoted as saying, somewhat schizophrenically, that “IBM could not have had more effective leadership in these turbulent times” (PR Newswire [1993a] “IBM Chairman John F. Akers Announces CEO Search”). In the press release announcing the resignation of James Robinson III as CEO and chairman of American Express a year later (after shareholders had rebelled against his continuing in the position and Robinson had finally capitulated), the defeated executive came across as a martyr for the AmEx cause. Both Robinson himself and his successor, Harvey Golub, mentioned the departing CEO’s overwhelming devotion to the good of the company as the cause of his act of self-sacrifice (for which Robinson had been paid tens of millions of dollars so that he could continue to live in a company-provided Fifth Avenue apartment and travel on corporate jets) (BusinessWire [1993] “Golub Elected Chief Executive Officer of American Express Company; Robinson to Continue as Chairman, Will also Head Shearson Lehman”; Bleakley, Pae, and Siconolfi [1993] “Robinson Quits At American Express Co.; As Board Support Unravels, Chairman Resigns Post; Successor to Be Named”). Westinghouse Electric’s press release about Paul Lego’s 1993 dismissal was the most typical. After stating that Lego had “elected to retire,” the company “express[ed] its gratitude for Lego’s 37 years of dedicated service” and thanked him for agreeing to serve as a consultant (PR Newswire [1993b] “Westinghouse Chairman Paul Lego to Retire”).
33. PR Newswire (2000) “Lucent Technologies’ Board of Directors Names Henry Schacht Chairman and CEO.”
34. Fligstein (1990) The Transformation of Corporate Control.
35. Mills (1956) The Power Elite; Riesman (1956) The Lonely Crowd; and Whyte (1956) The Organization Man.
36. Porter (1990) The Competitive Advantage of Nations; and Thurow (1992) Head to Head.
37. The CEOs of the era of managerial capitalism had attached extreme importance to keeping both physical and social distance from the factory workers. They dressed differently and spoke differently. They magnified their social distinctions and credentials. Today, by putting on the image of “everyday” people—for instance, by donning casual clothing during the workweek, riding motorcycles, and so on—many CEOs attempt to present themselves as natural leaders who have arisen from among the ordinary employees.
38. For a review, see Glassman and Swatos (1986) Charisma, History, and Social Structure.
39. Shils (1982) “Charisma, Order, and Status.” In this essay, Shils redefines charisma for secular societies, which had traditionally been considered mostly free from charismatic authority, except for the occasionally disruptive personality. In so doing, he makes an explicit connection between the charismatic personality and a society’s cultural values. For Shils, charismatic individuals are those who exercise authority and express the values that are of greatest importance in the society. Thus, in societies in which rational-legal authority is viewed as sacred, those closest to this authority are viewed as charismatic and command deference—for example, Supreme Court justices, other high government officials, and those heading corporate bodies.
40. http://www.philipmorrisusa.com, September 1, 2001.
41. http://www.dupont.com/corp/overview/glance/vision/index.html, September 1, 2001.
42. http://www.fastcompany.com/partners/, September 1, 2001.
43. Pfeffer (1998) Human Equation, 298.
44. O’Reilly and Pfeffer (2000) Hidden Value, and Pfeffer (1994) Competitive Advantage, are examples of management texts that advocate this new human-resource-centered view of organizations. They offer excellent examples of companies that have built competitive advantage through people.
45. Brooks (2000) Bobos in Paradise.
46. There are several examples in these publications, the most recent being a special Harvard Business Review issue dedicated solely to the topic of leadership. According to an editor from the Review, the December 2001 special issue on “Breakthrough Leadership” was the best-selling issue in the publication’s history.
47. Nohria and Green (2002) “Chrysler: Lee Iacocca’s Legacy.”
48. One executive search consultant I interviewed described in glowing terms a CEO who could “sell a drink of water to a fish.” This approving attitude is becoming increasingly prevalent in a culture where, it is scarcely an exaggeration to say, CEOs have become the equivalent of rock stars. (The cover of the September 4, 2000, issue of Business Week features Compaq CEO Mike Capellas dressed in jeans, a guitar slung over his shoulder.) Certainly their celebrity (measured by cover stories in business magazines and visibility in the pages of daily newspapers) and personal wealth confirm our society’s willingness to reward them extravagantly for what used to be considered merely a job, not a role as a cultural icon.
49. Byrne (1999) Chainsaw.
50. In retrospect, questions about the “leadership” abilities of a now notorious “out of the box” thinker, former Enron CEO Jeffrey Skilling, should have been raised by Skilling’s behavior toward a fund manager who, in April 2001—six months before Enron began to collapse under the weight of questions about its use of off-the-balance-sheet partnerships to disguise debt and inflate earnings—asked in a conference call between Skilling and Enron investors to see the company’s balance sheet, only to be answered with what he took to be an evasion. “You’re the only financial institution that can’t come up with balance sheet or cash flow statement [sic] after earnings,” the fund manager then said. Skilling replied, “Well, thank you very much, we appreciate that. Asshole” (Hull [2001]).
51. Shiller (2000) Irrational Exuberance, 35.
52. Serwer (2000) “There’s Something About Cisco.” Serwer (2001) later confessed to having fallen under Chambers’s spell in what he called, referring to the piece quoted here, “a remarkably imperceptive story.”
53. Mehta (2001) “Cisco Fractures Its Own Fairy Tale.”
54. Shiller (2000) Irrational Exuberance.
55. Expectations about future earnings, rather than past performance, largely account for companies’ stock prices. These expectations on the part of shareholders are now the product mostly of analysts’ expectations.
56. Strauss (2000) “There’s No Magic.” “A world class executive,” said Goldman Sachs’s Jack Kelly. He continued: “We certainly think he has the ability to solve Kodak’s problems. He’s also the right age. He’s got lots of vim and vigor left and I think it’s going to work out well” (Jones, Randall, and Hillkirk [1993] “Kodak Snaps Up Chief from Motorola”).
57. By early 1997, Kodak’s stock price had risen 110 percent above its value just before Fisher’s appointment. Yet what analysts and investors counting on Fisher to save the company failed to recognize is that Kodak faced fundamental problems—a technological shift from chemical to digital photography, and a fierce low-cost competitor in Japan—that had very little to do with its executive leadership. Indeed, in the decade before Fisher was brought in, Kodak had been described as having one of the most effective executive teams in corporate America. Today, Kodak stock trades at half of what it did at the time of Fisher’s coronation. Fisher himself, meanwhile, has not fared so poorly, having managed to hang on to the chairman position while allowing others to sit in the CEO hot seat.
58. Strauss (2000) “There’s No Magic.” See chapter 4 for an account of the AT&T succession that resulted in Armstrong’s appointment and the company’s unsuccessful attempts to come to terms with its new industry environment ever since. Meanwhile, two other examples of analysts’ fixation on CEOs seem especially worth noting in light of more recent events. In 1996, when Al Dunlap’s appointment as the new outsider CEO of Sunbeam was announced, a Paine Webber analyst was unusually (though perhaps unwittingly) frank about the wishful thinking involved in this perspective when he wrote, “Al Dunlap is the perfect announcement [sic] to give the Street, because the Street wants to believe he can do for Sunbeam what he did with Scott Paper” (Strauss [2000] “There’s No Magic,” italics added). After news of Dunlap’s selection to lead Sunbeam was announced, the company’s stock jumped 50 percent. Not until later did the world learn how much of Dunlap’s apparent success in his previous positions was owing to accounting trickery. And even when, in 1997, Sunbeam’s receivables began to increase in ways that should have provided an indication that the firm was pushing inventory on its buyers in an effort to demonstrate rapid revenue growth, few analysts were willing to concede that something was amiss, and most remained unwilling to do so until the bitter end. In light of this failure of judgment, it is also interesting to note the reaction of a Prudential Securities analyst to the announcement of Jeffrey Skilling’s appointment as CEO of Enron in December 2000: “This should satisfy any investors who might have been worried that [Skilling] might go elsewhere. . . . There is a huge premium in Enron’s stock related to management quality and Jeff is at the helm” (Davis [2000], “No Ordinary Jeff”).
The attitude toward charismatic CEOs exhibited here has also no doubt played a part in analysts’ reluctance to question the ability of America’s most lionized CEO of recent times, Jack Welch of General Electric, to produce uncannily consistent earnings growth for GE year after year over a period of two decades, even though several financial analysts believe that a critical examination of GE’s accounting practices reveals that Welch often used gains and losses from certain businesses to offset gains and losses in others, whether these were reported for the right quarter or not (see Birger [2000] “Glowing Numbers”; and Kahn [2001] “Accounting in Wonderland”). Also before the Enron debacle focused attention on how little understood many large public companies are by the stock market analysts who cover them, the business journal Barron’s complained that analysts no longer conduct broad and deep research offering proprietary insights into industry fundamentals but instead focus on individual companies and anecdotes about them. As the Barron’s writer put it, these stories tell investors about “the ship, the crew, the [share] price—but they don’t let you know whether it’s in shallow water or is about to be hit by a tidal wave” (Santoli [2001] “The Whole Truth”).
59. Dowd (2001) “Seven Ways to Attract Analysts and Investors.”
60. Mathisen (2001) “What I Look for in a TV Guest.”
Chapter Four: Board Games
1. Hambrick and Jackson (1999) “Outside Directors With a Stake.”
2. Core, Holthausen, and Larcker (1997) “Corporate Governance, CEO Compensation, and Firm Performance,” 32.
3. There are several papers on this topic. For a review, see Mizruchi (1996) “What Do Interlocks Do?” Davis and Greve (1997) “Corporate Elite Networks and Governance Changes in the 1980s” show how directors who reside and work close to one another are more likely to adopt similar anti-takeover defenses. Galaskiewicz and Wasserman (1990) demonstrate the importance of geography and cross-cutting social ties with respect to predicting similarity in corporate behaviors. The original research on this topic was conducted by Michael Useem (1984) and C. Wright Mills (1956).
4. See Geertz (1973) The Interpretation of Cultures, and Kanter (1973) Communes, as separate examples of work describing the social perspectives of small, closed communities.
5. Roethlisberger (1947) Management and the Worker.
6. Whyte (1951) “Small Groups and Large Organizations.”
7. Mills (1956) The Power Elite.
8. Out of the 6,064 board seats in the Fortune 500 in 1998, 671 were held by 471 women (see Catalyst [1998]). Age and occupation data was obtained from the 1999 Directorship database. Class is inferred from the occupational and educational background of the directors, also included in the Directorship data. The status and class finding is one of the most robust in research on elites.
9. The French social theorist Edmond Goblot wrote about how shared work (exemplified by the way that members of the broader community of corporate directors share the same occupation) helps create a sense of group identity: “Nothing stamps a man as much as his occupation. Daily work determines the mode of life; even more than the organs of the body, it constrains our ideas, feelings, and tastes. Habits of the body and mind and habits of language combine to give each one of us his occupational type. People of the same occupation know one another—by necessity and by choice. Consequently, each imitates the other” (Goblot [1925] La Barriére et le Nieveau, chap. III, 38–59).
10. Useem (1984) The Inner Circle. Useem’s work suggests that the primary information that flows through the interlocking directorate is about “the practices and concerns of most large companies, companies that are operating in virtually all major sectors of the economy. . . . The information pursued is generic information about common business practices and the environment” (56). For a similar argument, see also Mizruchi (1982) The American Corporate Network 1904–1974 and (1992a) The Structure of Corporate Political Action.
Mizruchi (1996) “What Do Interlocks Do?” provides an excellent review of the flourishing research on director interlocks. Davis (1991) “Agents without Principles?” furnishes a good example. Building on an agency perspective suggesting that managers would be inclined to adopt anti-takeover defenses in an effort to save their jobs, Davis found that the network position of a firm’s board predicted the likelihood that a firm would adopt a particular type of antitakeover defense. Director interlocks have also been shown to predict acquisition behaviors (Haunschild [1993] “Interorganizational Imitation”), corporate giving (Galaskiewicz and Wasserman [1990] “Mimetic and Normative Processes”), corporate financing (Stearns and Mizruchi [1993] “Corporate Financing”), and political lobbying (Mizruchi [1992] The Structure of Corporate Political Action).
11. Useem (1984) The Inner Circle.
12. See Chandler (1977) The Visible Hand, and (1962) Strategy and Structure.
13. Vancil (1987) Passing the Baton.
14. Ocasio (1999) “Institutionalized Action and Corporate Governance.”
15. Fromson (1990) “The Big Owners Roar.”
16. Russell Reynolds Associates (2001) “CEO Turnover in a Global Economy.”
17. Ocasio (1999) “Institutionalized Action and Corporate Governance.”
18. Festinger (1954) “A Theory of Social Comparison Processes.”
19. Mukul (1997) “Behind the Shuffle at AT&T.”
20. Hopkins, Defterios, and Young (1997) “New AT&T Presidential Search Begins.”
21. AT&T’s market value increased $4 billion on the day of the announcement of Armstrong’s appointment. As of this writing, it is trading at one-third the value it did when John Walters was still president and slotted to be the next CEO.
22. Colvin (2001a) “Changing of the Guard.”
23. Useem (1984) The Inner Circle; and Vancil (1987) Passing the Baton.
24. March and March (1977, 1978) introduced the term social matching to describe the process by which credentials and signals are relied on to sort candidates. Using data on one state’s school superintendents, they found that most of the superintendents were nearly indistinguishable across a range of criteria, including behaviors, career paths, credentials, and prior performance evaluations. Drawing on social psychological research on decision-making under uncertainty, the researchers explained this lack of variation by postulating that when matching individuals to jobs, organizational decision-makers relied on socially defined criteria, or “social matches,” such as certification or adherence to an institutionally legitimate career path. Although I have adopted the Marches’ term, my use of it differs from theirs in some subtle but important ways, since I see legitimacy and defensibility, as well as uncertainty, as important motivators of the social matching process.
25. Douglas (1986) How Institutions Think.
26. Mills (1956) The Power Elite, 127.
27. Young (2001) “Lucent Could Cut Jobs, Take Big Charge.”
28. In conducting my research for this book, I quickly learned not even to raise this issue in conversations with directors. For in the case of three board members whom I interviewed in the early stages of this study, I lost credibility after referring in a casual manner to the sociological school that regards the CEO’s role as largely symbolic, and pointing out that most empirical studies have shown that CEOs have little control over firm performance.
29. Merton (1957) Social Theory and Social Structure, 475–90.
30. Durkheim and Mauss (1963) Primitive Classification.
31. To study the workings of status matching here, I adapted the techniques of mobility analysis of Blau and Duncan (1967), which rely on the use of mobility tables to show the origin and destination states and how people move from one to another. To operationalize firm status I relied on network centrality as measured by firm sales (Mizruchi, Mariolis, Schwartz, and Mintz [1986] “Techniques for Disaggregating Centrality Scores in Social Networks”).
32. Veblen (1973) The Theory of the Leisure Class.
33. Podolny (1994) “Market Uncertainty and the Social Character of Economic Exchange.”
34. Stuart, Hoang, and Hybels (1999) “Interorganizational Endorsements.”
35. Strauss (2000) “There’s No Magic.” The same story can be repeated for Xerox, Eastman Kodak, and Hewlett-Packard, all companies that hired high-status outsider CEOs in recent years only to see their market valuations drop significantly. Although it would be a mistake to hold the CEOs individually responsible for the drop in their company’s stock prices in these cases, the directors who hired them clearly got much less than what they bargained for.
36. For research highlighting the demographic homogeneity of CEOs, see Temin (1997) “The American Business Elite in Historical Perspective,” and (1998) “The Stability of the American Business Elite.”
Chapter Five: The Go-Betweens
1. Revenue figures on the executive search industry are courtesy of Executive Recruiter News and its editor Joseph Daniel McCool. I am referring here only to retained search, not contingency-based search. In retained search, the search firm is paid a fee regardless of whether the position is filled.
2. Russell Reynolds Associates (1994) “Reflections.”
3. Baron, Dobbin, and Jennings (1986) “War and Peace.”
4. Byrne (1986) The Headhunters, 23.
5. Whyte (1956) The Organization Man.
6. Vancil (1987) Passing the Baton.
7. Margolies (1978) “International Paper Says Du Pont’s Gee Will Become Firm’s President on April 1.” While Gee was initially appointed president of International Paper, the company made it clear that he would be given the CEO title within a few months.
8. Grover (1980) “Outsider Chief at International Paper Vows to Develop Inside Succession Line”; and Metz (1979) “International Paper’s Profit Outlook Is Rosy But Some Analysts Are Ambivalent on Stock.”
9. Walsh (2001) “Luring the Best in an Unsettled Time.”
10. Russell Reynolds Associates (1994) “Reflections,” 34–35
11. Ibid., 16 (italics original).
12. Ibid., 50–51.
13. Byrne (1986) The Headhunters, 200–2. I am also grateful to John Byrne for sharing his experiences in researching the industry as well as for providing a sounding board for many of the ideas in this chapter early in my research.
14. Ghemawat (2000) “Egon Zehnder International,” 1
15. Byrne (1986) The Headhunters, discusses job-hopping among search consultants, while Yoshino, Knoop, and Reavis (1998) “Egon Zehnder International: Implementing Practice Groups,” 22, note that Egon Zehnder is alone among executive search firms in not hiring consultants from other firms.
16. Byrne (1986) The Headhunters, 207.
17. The idea of people who accept the values of a group still having marginal status in relation to it is different from what Merton’s discussion of reference-group theory would predict; see Merton (1957) Social Theory and Social Structure, 319. While search consultants adopt the values of a group to which they aspire to belong, this mimetic behavior does not aid them in attaining membership in that group. Indeed, there is no anticipatory socialization, for few search consultants become members of the executive elite.
18. There are some parallels in the plight of search consultants and other such middlemen to Merton’s discussions of the “marginal man.” However, Merton did not discuss the high correlation between marginal status and middleman status (Ibid., 324). The theoretical linkage between the two was developed by Blalock (1967) Toward a Theory of Minority Group Relations.
19. Coughlin (1976) Double Identity; Desai (1963) Indian Immigrants in Britain.
20. Mahajani (1960) The Role of Indian Minorities in Burma and Malaya.
21. Bonacich (1973) “A Theory of Middleman Minorities.”
22. Podolny (1993) “A Status-Based Model of Market Competition”; and Eccles and Crane (1988) Doing Deals: Investment Banks at Work.
23. This is an interesting fact since there are four major firms with the size and prestige to garner most of the business in the field of CEO search. One explanation of the practice of including only three in the shootout might be that there is only enough time to consider three firms. Yet perhaps inviting all of the Big Four to participate would only emphasize that they constitute a kind of cartel, while choosing from among three enhances the appearance of genuine differentiation among the major search firms, with the added benefit of making the shootout look like a real competition.
24. Russell Reynolds Associates Web site.
25. Spencer Stuart Web site.
26. Russell Reynolds Associates Web site.
27. Spencer Stuart Web site.
28. Burt (1992) Structural Holes; Granovetter (1974) Getting a Job; and Granovetter and Tilly (1988) “Inequality and Labor Processes.”
29. Nohria (1992) “Information and Search in the Creation of New Business Ventures.”
30. Geertz (1973) The Interpretation of Cultures.
31. Simmel (1902) The Sociology of Georg Simmel, and (1955) The Web of Group Affiliations.
32. Goffman (1963a) Behavior in Public Places, 96.
33. Ibid., 106
34. One result of this appropriation of the concept of the free market in the external search process was noted by New York Times reporter Judith Dobryzynski (1996) in writing about the 1996 CEO search at AT&T that resulted in the appointment of outsider John Walter. In the new dispensation, Dobryzynski observed, “every executive in the land becomes fair game, thus reinforcing a trend that is turning executives, like professional athletes, into free agents.”
35. The reality is that executive search firms are not necessarily so impartial. In CEO searches where both inside and outside candidates are being considered, the ESFs—which charge retainer-based fees while also receiving the equivalent of one-third of the successful candidate’s negotiated annual cash compensation—are motivated to usher in outsider CEOs for two reasons. First, judging from the cases I studied, compensation is usually higher for outsider CEOs than for insiders. Second, the real returns for the search firm come in subsequent retained searches as the outsider CEO brings in his new, outside management team.
36. The idea that ESFs play a crucial role in signaling the legitimacy of external CEO search to various constituents would not be surprising to researchers studying mediated markets. For example, Ezra Zuckerman (1999) once noted that the legitimating role of securities analysts in financial markets has a significant influence on investors’ demand for a firm’s securities. Zuckerman found that investors look toward analysts’ determinations regarding the legitimacy of a particular firm’s security offerings: those securities that do not obtain recognition for their full industrial participation in a particular sector are discounted by analysts and, as a result, trade at a lower price. Similar observations have been made about other mediated markets in which the underlying quality of the product is uncertain and the process of selection is opaque.
37. Goffman (1967) Interaction Ritual.
Chapter Six: Crowning Napoleon
1. Goode (1978) The Celebration of Heroes, chap. 1.
2. This psychologizing of the CEO’s leadership abilities is evident in this excerpt from a 1998 Business Week article about Welch:
It had taken him 21 hard years and a bruising succession battle to make it to the top. But finally, in 1981, Jack Welch achieved his greatest ambition. At 45, the long-shot candidate became the youngest chief executive in General Electric Co.’s (GE) history. The climax to his ascension was his first shareholders’ meeting in Phoenix. After holding forth for two hours, the triumphant Welch walked offstage, his blue eyes moist with tears. “I wish my mother had been here,” he whispered to GE director and friend Silas S. Cathcart.
Jack Welch, sentimental? In time, he become known as Neutron Jack, the man who cut GE’s workforce by more than 100,000 employees in his first five years as CEO. But that moniker suggested a one-dimensional character, failing to shed light on a far more complex and private individual. Welch has always been more: a dutiful son who worshiped an adoring Irish mother, a loyal friend who still returns to Salem, Mass., for high school reunions, and a witty, self-deprecating husband and father of four.
Growing up in Salem, Welch was as he is today: unpretentious, demanding, and feisty, quick to use obscene language when his temper flares, but also remarkably compassionate and caring. His decisions to lay off employees to sharpen GE’s competitiveness, say insiders, were painful and anguished.
His force of will in the game of business was just as strong in the scrappy games of hockey and baseball he played as a teenager. “Most people change when they go to work for a big company,” says George W. Ryan, a longtime friend and high-school buddy. “They are forced to conform to survive. Not Jack. He forced the company to change.”
His mother, Grace, whom he strongly resembles, gave him the confidence to refuse to conform. Welch learned much from her—including pure persistence. It took 16 years before she and husband John Sr. saw the birth of their only child on Nov. 19, 1935, in Peabody, Mass. John Sr., a Boston & Maine train conductor and union leader, worked long hours, often leaving for work at 5:30 a.m. and not returning until 7:30 at night.
Welch and his mother would drive to the train station together, sit in the car in the dark, and talk while waiting for his dad to arrive. She convinced him that he didn’t speak with a stutter, even though he did. She told him to aim for the sky. She took him to Fenway Park and helped cultivate his near lifelong passion for the Boston Red Sox. She nurtured his competitive instincts in games of blackjack and gin rummy around the kitchen table. And when she beat him, Welch recalls, she’d slam the cards on the table and shout “Gin!” in the loudest voice possible. “I had a pal in my mom, you know,” he says. “We had a great relationship. It was a powerful, unique, wonderful, reinforcing experience” (Byrne [1998] “I Had a Pal in My Mom”).
3. The following passage from a 2000 profile of Chambers is representative:
John Chambers is the company’s third CEO, but today’s Cisco bears his indelible stamp. Born and raised in Charleston, WV, the son of two doctors, Chambers and his two sisters [sic] grew up in a tightly knit family. He sang in the church choir, enjoyed fishing with his now retired gynecologist father, Jack, and fondly remembers family vacations spent on Carolina beaches. Chambers married his high school sweetheart, Elaine Prater and dotes on his two children—son, John, Jr. and daughter, Lindsay. He graduated second in his class at high school despite having mild dyslexia, a learning disability he persevered to overcome through working harder and tutoring. Even to this day he dislikes lengthy written memos, preferring to communicate verbally. His presentations are almost thoroughly memorized and dynamically delivered underscoring the preacher-like flair with which he addresses audiences. As a West Virginia University undergraduate he played basketball, still his favorite sport—notably an intensive team spirited one, and later earned a law degree from West Virginia and an M.B.A from Indiana University (Donlon [2000] “Why John Chambers Is the CEO of the Future”).
4. Keynes (1973) The General Theory of Employment, Interest, and Money, 383–84.
5. The basic source for my whole discussion of Weber, here and below, is Weber (1947) Economy and Society.
6. While this is much less common today among large corporations, it is not totally unheard of. Ford Motor Company, Anheuser-Busch, and Motorola are all currently run by heirs of their respective founders.
7. Weber’s own use of the word “extraordinary” to describe the powers of the charismatic figure has proven to be something of a red herring, as it has focused attention not only on the charismatic individual himself but also on the most subjective and elusive aspects of charisma. Despite decades of research by psychologists that has sought to determine the personal factors associated with charisma, little progress has been made in this area. See the introduction to Glassman and Swatos (1986) Charisma, History, and Social Structure, for a review of this work. Scholars who have done comparative work have studied everything from physical appearances to rhetorical skills to work habits in an attempt find some characteristics that are commonly associated with charismatic personalities. In the end, however, they have had little success in identifying these special qualities. Few personality traits are more subjectively perceived and resistant to precision than those ordinarily thought to give a person charisma. To be charismatic, after all, is to be thought to possess something elusive and mysterious that cannot easily be either explained or defined. What can be defined more precisely—and what Weber and others have defined—are the social processes by which charisma is conferred on or attributed to individuals.
8. “Its [charisma’s] bearer seizes the task for which he is destined and demands that others obey and follow him by virtue of his mission. If those to whom he feels sent do not recognize him, his claim collapses; if they recognize it, he is their master as long as he ‘proves’ himself” (Weber [1947] Economy and Society, 1113).
9. “He [the charismatic] gains and retains [power] solely by proving his powers in practice. He must work miracles, if he wants to be a prophet. He must perform heroic deeds, if he wants to be a warlord. Most of all, his divine mission must prove itself by bringing well-being to his faithful followers; if they do not fare well, he obviously is not the god-sent master” (Ibid., 1114, italics original).
10. Braudy (1986) The Frenzy of Renown. To understand the role of charisma in a broader sense than it was described in chapter 3, we need to see its connection to the history of Western ideas about the relationship between the individual and society. Braudy argues that the idea of charisma is inseparable from the historical and social circumstances within which it is embedded. In traditional societies, the charisma of Julius Caesar and Alexander the Great provided standards by which monarchs were measured for centuries. Socrates, Jesus, and Shakespeare were endowed with a different type of charisma. And yet the word charisma is also used to describe the hold that individuals such as Hitler, Stalin, and various cult leaders in recent history have had over their followers. Thus to loosely call all these people charismatic, as we commonly do, obscures the question about the relation of charisma to the cultural context.
11. Weber (1985) The Protestant Ethic and the Spirit of Capitalism.
12. Braudy (1986) notes that the charismatic appeal of businessmen in the late nineteenth and early twentieth centuries was crucially advanced by a new class of professionals on the American scene, the journalists who provided the material for the country’s new mass-circulation newspapers and magazines. Such journalists almost immediately became critical intermediaries between readers and the world, familiarizing the famous or about-to-be famous to the anonymous masses by describing the former’s habits, accomplishments, and effect on others. In an incessant stream of hyperbole, journalists tended to interpret every situation in personal terms, every triumph as resulting from individual will, and every failure as evidence of a character flaw. In so doing, they became instrumental in creating the notion that whatever happens to the corporation is attributable to the virtues or vices of the individual who sits atop it—an idea that, as we have seen, is at the heart of the contemporary conception of the charismatic CEO.
13. In a popular series of articles on the business practices of John D. Rockefeller, the progressive-era journalist Ida Tarbell (1905) did much to dispel the charismatic aura surrounding her subject by presenting judgments such as the following:
Very often people who admit the facts, are willing to see that Mr. Rockefeller has employed force and fraud to secure his ends, justify him by declaring, “It’s business.” That is, “it’s business” has come to be a legitimate excuse for hard dealing, sly tricks, special privileges. It is a common enough thing to hear men arguing that the ordinary laws of morality do not apply in business. Now, if the Standard Oil Company were the only concern in the country guilty of the practices which have given it monopolistic power, this story would never have been written. Were it alone in these methods, public scorn would long ago have made short work of the Standard Oil Company. But it is simply the most conspicuous type of what can be done by these practices. The methods it employs with such acumen, persistency, and secrecy are employed by all sorts of businessmen, from corner grocers up to bankers. If exposed, they are excused on the ground that this is business. If the point is pushed, frequently the defender of the practice falls back on the Christian doctrine of charity, and points our that we are erring mortals and must allow for each other’s weaknesses!—an excuse which, if carried to its legitimate conclusion, would leave our businessmen weeping on one another’s shoulders over human frailty, while they picked one another’s pockets. One of the most depressing features of the ethical side of the matter is that instead of such methods arousing contempt they are more or less openly admired. And this is logical. Canonize “business success,” and men who make a success like that of the Standard Oil Trust become national heroes! The history of its organization is studied as a practical lesson in money-making. It is the most startling feature of the case to one who would like to feel that it is possible to be a commercial people and yet a race of gentlemen. Of course such practices exclude men by all the codes from the rank of gentlemen, just as such practices would exclude men from the sporting world or athletic field. There is no gaming table in the world where loaded dice are tolerated, no athletic field where men must not start fair. Yet Mr. Rockefeller has systematically played with loaded dice, and it is doubtful if there has ever been a time since 1872 when he has run a race with a competitor and started fair. Business played in this way loses all its sportsmanlike qualities. It is fit only for tricksters.”
14. Jencks (1979) Who Gets Ahead?; Mills (1956) The Power Elite; and Parkin (1971) Class Inequality and Political Order.
15. If managerial capitalism shifted the orientation of the CEO from charismatic to rational authority, investor capitalism returned charismatic orientation to the fore. In this process, the analysts and business journalists who mediate the relationship between the firm and its investors changed the nature of charisma in business organizations. In particular, especially in the largest organizations, analysts and the business media now participate in both the creation of charisma and the diffusion of its authority throughout the organization. They accomplish this through the mass media’s substitution of symbolic social relationships for actual ones within the corporation. The CEO of a large pharmaceutical company informed me, for example, that “what the media writes about me is the most important [sic] in my employees’ perception of me. They feel that they get to know me personally through those profiles. You would be amazed at how every line and sentence is dissected and discussed among employees.”
16. Madsen and Snow (1991) The Charismatic Bond, 12.
17. Although, in the last two decades, the new “leadership” literature has suggested that organizations led by charismatic CEOs are more effective than others, little evidence suggests that this is so. Meanwhile, the argument for more rational organizations was precisely that they were more efficient. We seem to have thrown over a half-century’s work on organizations out the window for no demonstrably valid reason.
18. Chandler (1977) The Visible Hand.
19. Doereinger and Piore (1971) Internal Labor Markets and Manpower Analysis.
20. For another example of such an orderly internal succession process, see Reginald Jones’s account (quoted in chapter 3) of the process that eventually led to the selection of Jack Welch as his successor as CEO of General Electric.
21. Paltrow (1991) “American Express Tries to Head Off More Surprises”; and Sandler (1990) “American Express Dismantles Its Eighties’ Superstore.”
22. Lorsch (1996) “American Express (A).”
23. Morris and Marvick (1953) “Authoritarianism and Political Behavior.”
24. During the tenures of its current CEO, C. Michael Armstrong, and his predecessor John Walter, AT&T has spun off divisions such as NCR and Lucent, acquired new lines of business in cable television and cellular services, attempted to integrate these new businesses, and, when integration has failed, embarked on a strategy of spinning them off again. See Elstrom (2001) “How the ‘Turnaround CEO’ Failed to Deliver.”
25. Simmel (1902) The Sociology of Georg Simmel, 402–8.
26. Jeffrey Pfeffer (1981) has suggested as much in arguing that many actions that CEOs take are taken precisely because the range of more “plausible” actions is constrained.
27. Madsen and Snow (1991) The Charismatic Bond, 19–23.
28. The type of reflected charisma that the Stanley Works directors found in John Trani by virtue of his association with Jack Welch was also a factor in Xerox’s selection of Rick Thoman as CEO in May 1999. Thoman, a former executive at IBM, had been a long-time direct report to that firm’s much-respected CEO, Louis Gerstner. The Xerox directors were aware of the turnaround success that had followed Lou Gerstner at his stints not only at IBM but also at R. J. Reynolds and American Express. Because Xerox was in the midst of an attempted turnaround itself, the directors believed that Thoman would be able to fix Xerox’s problems the way Gerstner had fixed IBM’s.
29. Mauer (1997) “Optimism Over New CEO Boosts Stanley Works’ Stk Again.”
30. It has never actually been clear what Trani meant by the phrase “Coca-Cola of hardware.” Yet Stanley Works today remains a traditional manufacturer trapped in a cyclical industry, with no obvious way out.
31. Goffman (1967) Interaction Ritual.
32. The résumé Dunlap had presented to Sunbeam (and to Scott Paper before that) turned out to have concealed not just his dismissal as president of Nitec Paper Corporation (where he was accused of producing fictitious profits by means of off-the-books expenses, overstated inventory, and nonexistent sales) in 1976 but also his firing, six months before he joined Nitec, by another company that had accused him of behavior damaging to its business, after only seven weeks on the job. As a result of Dunlap’s alleged conduct at Sunbeam, where he served from July 1996 until June 1998, the company was forced to restate financial results for six quarters ending March 31, 1998. Sunbeam filed for bankruptcy protection early in 2001, while Dunlap was targeted in separate lawsuits brought by shareholders and the SEC. Meanwhile, two of the Big Four executive search firms were implicated in Dunlap’s successful misrepresentation of his past, as neither Korn/Ferry (which handled Sunbeam’s CEO search in 1996) nor Spencer Stuart (employed by Scott Paper in the 1994 search that led to Dunlap’s hiring there) had detected the falsifications in his résumé. See Norris (2001) “The Incomplete Résumé”; Greene (2002) “Former Sunbeam Chief Plans To Settle Class-Action Lawsuit”; and Lublin (2001) “Search Firms Have Red Faces In Dunlap Flap.” For an account of Dunlap’s sociopathic management style (from which I have quoted in chapter 3), see Byrne (1999) Chainsaw.
33. The decision as to whether to move or not is akin to the problem that economist Robert Frank (1985) refers to as choosing one’s pond, as candidates consider whether it is better to be a big fish in a small pond or vice versa. While the research often suggests that the former is preferable to the latter in terms of monetary rewards, most CEOs regard status as so important that they are willing to make the jump to the larger pond when given the opportunity. One factor in their decisions is that CEO employment contracts now cushion the economic downside of such gambles considerably. The same cannot be said, however, for the reputational consequences of failure.
Chapter Seven: Open Positions, Closed Shops
1. Colvin (2001b) “The Great CEO Pay Heist.”
2. Institute for Policy Studies (2000) Executive Excess 2000: Seventh Annual CEO Compensation Survey.
3. A 2000 study by the research firm Sanford Bernstein found that companies will have to spend 13 percent of their earnings to pay for existing stock option grants. The figure is close to 50 percent for high-technology companies. See Fox (2001) “The Amazing Stock Option Sleight of Hand,” 88.
4. Perry and Zenner (2000) “CEO Compensation in the 1990s.”
5. Robert Merton and Myron Scholes shared the 1997 Nobel Prize in Economics for their work on the Black-Scholes formula for pricing options.
6. For example, in 1993, the Financial Accounting Standards Board (FASB), which sets the legally recognized standards for financial accounting and reporting, was confident enough in the accuracy of Black-Scholes for estimating the value of a stock option to propose that the cost of options be included in a company’s earnings statements. In response, corporate lobbyists descended on Washington to make the claim that expensing stock options would result in a decrease in the number of options that firms would be willing to grant. Congress and the SEC ended up killing the FASB proposal (Edwards [2002] “Enron Collapse”). In the winter of 2001–02, it appeared possible that one upshot of the Enron scandal would be Federal legislation requiring companies to book stock options as expenses, although corporate opposition to such measures remained as fierce as ever.
7. While many people argue that the amount that a CEO is paid is negligible compared to the total wealth of the firm, one also needs to consider that if the CEO’s pay is out of line, it is likely that the senior executives who are immediately around him are also being overpaid (see table 7.1).
8. Green (2001), 638.
9. Frank and Cook (1995) The Winner-Take-All Society, 640.
10. Bok (1993) The Cost of Talent, 225.
11. See chapter 2 for further discussion of how the work of Bok and Graef Crystal illuminates the link between the peculiar conditions of the external CEO labor market and the ratcheting up of CEO pay.
12. Jensen (1986) “Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers”; Lazear (1995) Personnel Economics; Murphy (1986) “Top Executives Are Worth Every Nickel They Get”; Rosen (1981) “The Economics of Superstars”; Rosen (1986) “Prizes and Incentives in Elimination Tournaments”; and Rosen (1996) “The Winner-Take-All Society.”
13. See chapter 2 for a review of the scholarly literature on the link between the CEO and corporate performance.
14. Michaels, Handfield-Jones, and Axelrod (2001) The War for Talent.
15. Pfeffer (1994) Competitive Advantage.
16. While the combination of the chairman and CEO positions is not necessarily in the best interests of the firm, it remains, of course, the dominant convention in U.S. governance practices. Yet even if the board would like to bestow the chairmanship on a new CEO, it would seem to make sense to wait for a reasonable period to see how the incoming CEO performs. CEOs advocate on behalf of the structures that they perceive to be best for themselves, not necessarily those that are best for the firm. The governance design outcomes most commonly seen reflect the power that charismatic candidates exercise over boards that are bent on hiring a corporate savior at any cost.
17. Bell (1996) The Cultural Contradictions of Capitalism, 77.
18. Weber (1985) The Protestant Ethic and the Spirit of Capitalism, 540.
19. Bell (1996) The Cultural Contradictions of Capitalism, 78. While Bell distinguishes between the “Protestant ethic” and the “Puritan temper” as codes of value, I use the two terms interchangeably.
20. The facts, again, are well known, but some of them are still worth repeating here. Since the 1970s, the top 1 percent of households have doubled their share of the national wealth. In 1997, the top 1 percent of Americans had more wealth than the entire bottom 95 percent. As the wealth gap between the top 10 percent and bottom 10 percent of Americans has increased, the middle class has been the biggest loser over the last quarter-century. Middle-class wealth and earnings are falling as a share of total wealth and earnings in the United States, despite an economy that has dramatically increased per capita GDP. Simply put, the American middle class upon which our whole economic, political, and social system is founded is receding rapidly. The average worker, adjusting for inflation, is now making less than the average worker did during the Nixon administration. Anderson and Cavanaugh (1999) “A Decade of Executive Excess”, 144.
21. As quoted in Bok (1993) The Cost of Talent, 249.
22. “A company that bets its future on its people must remove that lower 10 percent, and keep removing it every year—always raising the bar of performance and increasing the quality of its leadership,” Jack Welch announced to his shareholders early in 2001 (Burrough [2001], 608), later reiterating this assertion in his address to Harvard Business School’s graduating class of that year. This approach reflects a Darwinian view that to improve an organization the weak, rather than be brought up to a higher level of skill and achievement, must be left to perish. It is a low-end tool that should have died out with other statistically discriminating practices, since many of those affected tend to be women, minorities, and other groups that are underrepresented in managerial positions.
23. Temin (1998) “The Stability of the American Business Elite,” 34.
24. Friedman and Selden (1975) Capitalism and Freedom.
25. Sørensen and Tuma (1981) “Labor Market Structures and Job Mobility.”
26. Abbott (1988) The System of Professions.
27. Just as the notion of social closure in external CEO selection as an intentionally discriminatory process is simplistic and misleading, so too are human-capital explanations that would maintain, for example, that legitimated candidates are qualitatively different from those that are excluded by the external CEO selection process. The latter view is unpersuasive, given the difficulty in separating the two groups along any meaningful set of characteristics and the poor quality of available information about candidates’ capabilities. The process of allocating people to the position of CEO is not a black box whose inner workings can be understood only by the application of an abstruse concept such as “human capital.” One can ignore the sociological dimensions within which such allocations take place only at the cost of significant misspecification and error in recounting the process.
28. As an example of explicitly religious faith in the self-regulating power of markets, consider former Enron CEO Kenneth Lay’s declaration in the midst of the recent California power crisis: “I believe in God and I believe in free markets.” Dolbee (2001) “Prophet or Profit?”
29. I know of one firm that has had three CEOs in the space of five years. After three CEO firings during this period, the board, in each case, almost immediately embarked on the search for the next chief executive, believing that it would find someone else to rescue the company despite its having chosen so badly before.
30. Popper (1962) The Open Society and Its Enemies, vol. I, 126 (italics original).
31. Ibid., 135.
32. The structure of contemporary MBA education is a particularly potent means of socializing students, inducing them to internalize certain ideas, values, and norms, and diffusing these ideas, values, and norms throughout the organizations that these individuals later join. As the anthropologist and business school professor John Van Mannen (1983) has noted, the inculcation of a particular set of ideas and attitudes is particularly powerful in fulltime MBA programs, which are often characterized by intense educational and social experiences. To paraphrase his findings, Van Mannen says that the internalization of ideas in these programs is especially thorough because of the elimination of the barriers ordinarily separating social and educational life, and the total absorption of the students in this milieu, so that life within the setting of the program becomes reality itself. In fulltime MBA programs such as those at Harvard Business School or MIT’s Sloan School of Management (which Van Mannen analyzes using Erving Goffman’s concept of the “total institution”), all aspects of student life are conducted in the same building or buildings and under the same single administrative authority, with students having limited contact with anyone or anything outside of the institution. Most of the educational experience is undergone in the immediate company of a large group of socially similar others, all of whom are treated alike and required to read and discuss hundreds of the same case studies. In such a setting, great importance is placed on students’ acquiring the ability to socialize with their peers in ways that allow for the building of trust, the free and easy exchange of information, and so forth. Not surprisingly, such an environment becomes a highly effective medium for transmitting the traditions, beliefs, attitudes, and behaviors that characterize the business elite.
The intense educational and social experiences described above then carry over from the business school environment to the world of business itself, where they form the bases of important professional networks that sustain and reinforce the values and ideas absorbed in business school by those who have directly obtained a professional business degree. Many of the graduates of fulltime MBA programs go on to take high-status positions in organizations as managers and executives, roles in which they are highly visible. Individuals hoping to have their stature reinforced by a resemblance to these high-status individuals then often copy their beliefs, attitudes, and behaviors.
33. In response to the increasing demands made on students in MBA programs, there has been a recent tendency to shorten cases. In the editing process, the sections of a case dealing with the organizational, industry, and macroeconomic context are often the first to be compressed.
34. Cohen, March, and Carnegie Commission on Higher Education (1974) Leadership and Ambiguity.
35. Michael Porter and Linda Hill, both of the Harvard Business School, are now separately suggesting that we need to abandon our traditional conceptions of leadership and equip students and managers with new frameworks, theories, and approaches to this topic. Porter has undertaken a new research project that, in part, seeks to integrate competitive strategy and leadership frameworks. His goal is to highlight that leaders are only one component—albeit a sometimes critical one—of a complex organizational system leading to sustainable competitive advantage, and to bring to the fore the impact of industry structure and competitive dynamics on firm performance. A new initiative of Hill’s departs even more significantly from conventional leadership perspectives. Her work increasingly suggests that leadership is actually a collective property rather than an individual one. That is, leadership behaviors—setting direction, creative problem-solving, and risk-taking—are a consequence of particular organizational structures, such as decentralized decision-making and organizing tasks around teams, and not simply the province of individuals. While such a concept of leadership runs counter to the ethos of American individualism, Hill has begun to accumulate an impressive body of case studies indicating that the most effective organizations are those in which leadership behaviors are diffused throughout the organization, not confined to a few “elect” individuals.
36. Eccles and Nohria with Berkley (1993) Beyond the Hype.
37. Barber (1980) The Pulse of Politics.
38. See chapter 3 on the role of the contemporary business press in the rise of the charismatic CEO.
39. The neglect of social structure, culture, and social institutions in economics today is surprising, given the history of the discipline. Indeed, the great original thinkers in the field—Adam Smith, David Ricardo, and Alfred Marshall, for example—were motivated by the idea of creating social institutions to better the lot of society. The Austrian school of economists, especially von Hayek and Schumpeter, cared deeply about institutions and the nature of the interrelationships between economics and social structure. Commons and Veblen, both leading American economists in the early twentieth century, brought culture and society to the forefront of their analyses, arguing that these were the motors of economic action, not peripheral to it. All of these individuals described the disruptive role of technology in society, the role of political institutions in shaping the relationships between capital and labor, the importance of status in determining consumption patterns, and the tendency of capitalists to find ways to short-circuit competition through a variety of macro-closure mechanisms (e.g., cartels, trade barriers, and price-fixing agreements).
These economic thinkers also repeatedly warned against the application of abstract economic theorizing at the expense of empirical data, and about treating the market as a process distinct from the larger society. These now-unfashionable heretics have largely been forgotten by contemporary economists but are carefully read by those outside of the economics profession. Among those who have learned from them is the political theorist Francis Fukuyama, who has pointed out the critical role of a culture of trust as both a source of social cohesion and a lubricant in the marketplace (see Fukuyama [1995] Trust). Another is the sociologist Diego Gambetta, who has argued that when capitalist markets are superimposed on societies in which state institutions (such as courts, the police, and the enforcement of property rights) are weak, we are likely to see the rise of mafias—which is exactly what has happened in Russia (see Gambetta [1993] The Sicilian Mafia). The concept of social capital as a means of both enabling and constraining market opportunities while also providing the foundations of a civil society is a product of sociology. Yet sociologists are rarely brought into debates about economic policy, in America or abroad. Meanwhile, even though a few intrepid explorers within economics (especially in the emerging fields of behavioral economics and institutional economics) are venturing across the boundaries separating their discipline from others, most economists ignore such fields as psychology, sociology, anthropology, and history. The result is a surprising amount of economic research that seems to ignore the infinite variety of human traits, the historical and environmental factors that help shape them, and the values that underlie them.
40. For almost a quarter-century now, neoclassical assumptions about the market have pervaded, colored, and organized our understanding of all market phenomena, and neoclassical economic explanations of the world—cloaked in mathematical formulas all but impenetrable to outsiders—have been elevated to the highest status. In the meantime, we have lost the ability to think critically about what is, at its core, a social rather than a natural science. The implications of this loss became especially evident in the last decade of the twentieth century, when at the hour of capitalism’s greatest victory—the fall of the Soviet empire—the West could offer Russia nothing better than the free-market nostrums that have taken such a fearsome toll on that long-suffering nation. History now seems to be repeating itself in the case of Argentina. An exploration of how neoclassical economics has come to wield the authority that it does—despite its manifest failure to understand and explain much observable economic reality—might begin by considering the increasing power and prestige of the natural sciences over the last century, and the strategies with which various disciplines in the social sciences and even the humanities have responded to this development.
Appendix: Research Design, Methods, and Sample
1. I took two steps to make sure that my reliance on the two largest search firms for data on CEO searches offered a representative sampling of the broader large-company CEO labor market. First, I compared the firm characteristics of the 100 cases I had collected against a random sample of 100 firms from an 850- firm sample of large corporations. I did not find any statistically significant difference between these two sets of firms along the characteristics of sales, number of employees, sales-growth rates, percentage of outsider board members, and total shareholder return. I also provided the search firms I was studying with a list of 100 firms from my sample that I knew had experienced CEO turnover in the previous five years but were not clients of either of these firms. I asked search consultants at both firms to identify the firms that had conducted the searches for these companies. Again, using the criteria of sales, employees, sales growth, percentage of outsider board members, and total shareholder return, I compared these firms against the 100 cases I had collected. Again, I found no statistical differences between these two groups.
2. I also present ran a simple logit model that considers the choice of insider versus outsider selection conditional on the existing CEO departing. The results are similar.
3. The presence of multi-colinearity means that while the regression estimates retain all their desirable properties, the variances of the regressor estimates of the parameters of co-linear variables are quite large. These high variances arise because in the presence of multi-colinearity the regression-estimating procedure is not given enough independent variation in a variable to calculate with confidence the effect it has on the dependent variables. Having high variances means that the parameter estimates are not precise and hypothesis testing is not powerful because diverse hypotheses about the parameter values between centrality as measured by interlocks, and centrality as measured by Bonacich power, cannot be rejected.