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The CEO is important but they are only one person. Rarely do they determine the success of a company. The instances where they seem to are so rare as to almost seem like just random luck. I think they can make a difference, but that they make a significant difference rarely. Steve Jobs seems to have made a huge difference to Apple, for example (and Jeffery Bezos at Amazon – note both of these examples are also founders of the company). Jason Zweig has a good article on Why a New CEO Isn’t Always a Panacea
If you took the CEOs with the best track records and brought them in to run the businesses with the worst performance, how often would those companies become more profitable? According to economist Antoinette Schoar of Massachusetts Institute of Technology’s Sloan School of Management, who has studied the effects of hundreds of management changes, the answer is roughly 60%. That isn’t much better than the flip of a coin.
“Some people,” Prof. Schoar says, “may have this almost blind belief that the manager at the top changes everything. Our results show that managers do matter, but they don’t change everything.”
Since the 1970s, several other studies have measured what happens when companies bring in new bosses. Most of the findings have been consistent: Changes in leadership account for roughly 10% of the variance in corporate profitability on average.
…
a company will be much more inclined to replace the CEO after a run of bad losses—and to bring him in from a firm that has been on a hot streak. That leads to an illusion: “You change the CEO,” Dr. Kahneman says, “then performance reverts to the mean, and you attribute the improvement to the new guy.”
Furthermore, the hot profits at the new CEO’s former company are likely to cool off—by regression to the mean alone. When investors see that, they will mistakenly conclude that he is such a good boss that his old firm can’t thrive without him.
The management system is far more important than one person. Jim Press, Toyota N. American President, Moves to Chrysler (don’t expect much – Sept 2007). We are often fooled by randomness (understanding psychology lets you know this truth and factor it into your thinking): Illusions – Optical and Other, Attributing Random Results to a Special Cause, Seeing Patterns Where None Exists.
CEOs like to think they are royalty and take huge amounts of money from the company’s treasury, as a way, they hope, of providing evidence of this false belief. Don’t be fooled.
Jason Zwieg is the editor of the last few issues of the Intelligent Investor where he adds commentary on Benjamin Graham’s classic.
Related: Narcissistic Cadre of Senior Executives – CEO’s Given Lottery Sized Payouts – Diversification not Dazzling in Investing – Tilting at Ludicrous CEO Pay 2007 Edition
December 15th, 2009 at 6:39 am
I agree that the amount of stock placed in one person is too high. People thing that replacing the CEO will change everything, as people lined up to beat up on Rick Wagoner while I was the rare outlier suggesting not only was he a pretty good choice, that replacing him wouldn’t be the difference maker.
On the other hand, don’t dismiss it entirely. It’s A component, and should be taken seriously. It depends on your role. If you’re inside the company, don’t worry about it, as it’s not a lever you can pull. But if you’re the board of directors, you should put a lot of thought into it because it’s one of your primary levers and areas of responsibility.
One man, or woman, rarely makes THE difference but can make A difference – look at Alan Mulally at Ford. He’s not THE reason Ford is doing well, but he’s adding significant value in righting that ship.
Jamie Flinchbaugh
http://www.jamieflinchbaugh.com
December 16th, 2009 at 11:06 am
Congratulations! This post was selected as one of the five best independent business blog posts of the week in my Three Star Leadership Midweek Review of the Business Blogs.
http://blog.threestarleadership.com/2009/12/16/121609-midweek-look-at-the-independent-business-blogs.aspx
Wally Bock
December 20th, 2009 at 10:33 am
[...] The CEO is Only One Person by John Hunter on Curious Cat Management Improvement Blog [...]
January 4th, 2010 at 1:33 am
“My two favorites are John Hunter’s The CEO is Only One Person and Mark Stelzner’s Common Sense is Not So Common, but there are a lot more that are worth your time…”