As CEOs Fall Off Their Pedestals, Is a Leadership Crisis Looming?Published: May 22, 2002 in Knowledge@Wharton
GE’s Jack Welch, WorldCom’s Bernie Ebbers, Enron’s Kenneth Lay and Jeffrey Skilling, ABB’s Percy Barnevik.
In recent months, the reputations of these once-soaring corporate captains have crashed to earth. Does their fall, along with the demise of other prominent CEOs, constitute a new crisis in business leadership?
No, says Douglas K. Smith, a management consultant and scheduled speaker at an upcoming June 5 conference entitled "Leading in All Directions." The conference is co-sponsored by Wharton’s Center for Human Resources, directed by Peter Cappelli, and Center for Leadership and Change Management, directed by Michael Useem. The flood of criticism washing over Welch and others springs from forces in play for a decade, Smith argues. "We have had corporate leaders whose celebrity matters, whose celebrity is dependent on shareholder value, and whose [ability to maintain] shareholder value is dependent on taking more and more risks," Smith says. "It’s only a crisis in the sense that pedophilia has (become) a crisis in the Catholic Church."
To Smith and other observers, the rash of high-profile CEO scandals calls attention to the way corporate leadership has turned into a high-wire act thanks to an ever-more turbulent, information-driven economy. Enron’s collapse and the corporate doldrums of the recent recession simply are shining a spotlight on those walking the tightrope. The travails of the top guns have become grounds for reassessing everything from CEO compensation to the diversity of corporate leadership to the philosophy behind today’s business management.
One lesson to be learned, says Michael Useem, is the importance of promoting leadership throughout an organization. It may be a humbling concept to CEOs, but given the unpredictable, fast-moving business world, execs must have all the help they can get, he suggests. "Everybody does need to learn how to lead. There are no excuses."
Former GE CEO Jack Welch is famous for espousing similar views – that all employees ought to contribute ideas in a "boundary-less" company. That philosophy, along with the more than $500 billion in market capitalization growth that Welch oversaw, helped make him one of the most admired corporate leaders on the planet. But warm feelings for the now-retired Welch have cooled considerably in the past several months thanks to a matter that has little to do bottom lines. The Wall Street Journal reported several weeks ago that Welch, a married man, was having an affair with the editor of the Harvard Business Review. The editor subsequently resigned from the publication.
Welch told the Journal that his relationship with the editor was a "friendship." Even so, Welch’s renown ensured that the incident would be widely discussed. And the opinions could be harsh. "Mr. Welch is now widely portrayed not as a star chief executive but as an ageing philanderer," the Economist noted in a recent cover story on “Fallen Idols: The Overthrow of Celebrity CEOs.”
But Welch is by no means alone in coming under fire. Bernie Ebbers, called a "Wall Street conqueror" for transforming WorldCom into a major telecom player by acquiring companies including MCI, also has been tarnished. The fact that Ebbers borrowed millions from WorldCom was criticized in the press, and in March WorldCom announced that the Securities and Exchange Commission had launched an investigation into the company’s accounting and loans to company leaders. With WorldCom’s stock plunging from about $15 at the start of the year to less than $2.50, Ebbers stepped aside as CEO April 30. Even his departure, though, raises eyebrows. Despite the fact that Ebbers owes WorldCom $408.2 million, the company agreed to pay him $1.5 million annually for the rest of his life.
In Europe, Percy Barnevik, who created Zurich-based ABB in 1988, recently came under fire after it was revealed that in 1996 he was given a $78 million severance package without the board’s knowledge. “The secrecy and size of the award … have created a hullabaloo in northern Europe,” says a recent report in BusinessWeek. “Now Barnevik, who always posed as an advocate of strong boards and transparency looks like a hypocrite.” All this comes at a time when the company’s stock has dropped by about 50% in the last year.
Other business leaders dragged into the mud include Oracle CEO Larry Ellison and Jean-Marie Messier, CEO of French media giant Vivendi Universal. Ellison is accused of selling millions of shares of Oracle stock earlier this year, when nervous investors were looking to him for reassurance and a vote of confidence in the company. Messier has faced criticism over his firing of a television executive, the company’s debt ratings have been cut and debate has swirled around the possibility that the trans-Atlantic firm will have to split up. Since January, Messier has watched Vivendi’s stock price drop from $50+ to about $30.
But the biggest leadership tumbles have come from the ranks of failed energy giant Enron. In the wake of Enron’s massive bankruptcy and the collapse of Enron employees’ 401K retirement plans, critics have skewered former CEOs Kenneth Lay and Jeffrey Skilling and former CFO Andrew Fastow. Federal probes have centered on off-the-books partnerships that concealed debt, and questions have dogged both former CEOs about their role in Enron’s bust. An internal company report blasted the company’s leadership and claimed Fastow personally raked in millions through the partnerships.
That Enron’s bankruptcy ranks as the biggest in U.S. history no doubt increases the attentions given to Fastow’s actions. But the scrutiny of his moral choices, and those of Welch and other executives, also arises from the way Americans have come to regard the business world as an exciting arena, Useem suggests. As a result, the public’s interest in corporate leaders has intensified over the past decade. "The life of anybody at the top has been seen as fair game for writers," he says.
It’s a trend driven partly by the constant stream of business information now available through the media, including web sites and stations such as CNBC. Another factor is the "democratization" of the stock market, Smith says. He estimates 50% of households now own stock, making public company news – and CEO choices – more intriguing to the public.
Not only are CEOs more visible, they are on less sure footing. Globalization, ever-faster product cycles and the deregulation of many industries have produced a business climate where the winners often take all and, in the words of Intel chairman Andy Grove, "only the paranoid survive." Consider how the life of a telecom executive has changed from 20 years ago, Useem says. "A wrong choice had little downside consequence (back then). Now, the wrong choice can be catastrophic. Life is much more perilous for a CEO."
But life at the top still pays pretty well. And the high-profile corporate flaps have focused new attention on the often-immense compensation packages corporate leaders are getting even as their firms perform poorly.
Citing research appearing in the New York Times, the AFL-CIO notes that average CEO compensation dropped 8% last year to $15.5 million. But the union blasts a finding that the typical CEO got a raise: median CEO pay rose 7% last year even as profits at the typical company sagged 35%. "The flagging economy and poor corporate performance—including falling stock prices, declining profits and big layoffs—have barely made a dent in executive pay," the union states on its web site. "(CEOs’ 7% median pay hike) is twice the growth of workers’ paychecks."
Also galling to the AFL-CIO is what the union calls a trend toward greater executive job and retirement security even as average workers are "more vulnerable than ever." Jack Welch is one of the corporate leaders singled out as benefiting from a special retirement plan for executives (in addition to stock options or stock appreciation rights worth a total of about $250 million).
It may not be surprising that the AFL-CIO finds fault with CEO pay and benefits, but the union isn’t alone in suggesting the compensation system cries out for reform. BusinessWeek also suggests CEO pay is excessive. "Many CEOs had a terrible year – but were still left with a mountain of wealth," the magazine reported this April. BusinessWeek noted CEO stock option packages have diluted other investors’ shares. What’s more, the magazine found, "the link between pay and performance that options are supposed to provide is often subverted by compensation committees that ladle on more options when the company stock falls or swap the old underwater options for new, more valuable grants."
Beyond compensation questions, the rash of negative CEO headlines raises the issue of what sorts of people are leading today’s corporations, according to Sally Stetson, co-owner of Wayne, Penn.-based executive recruiting firm the Salveson Stetson Group. Stetson is also president of the Forum of Executive Women and another scheduled speaker at the June 5 Wharton conference. The Forum, a Philadelphia-area group advocating for women’s success as business leaders, found that women held just 10.2% of the corporate board seats in the Philadelphia region’s top 111 firms last year. Stetson argues that diverse membership on a board of directors ups the chances that tough questions will be asked. "Additional perspectives are really important for the shareholders and the company at large," she notes. "We’ve relied too long on homogenous boards."
Women on corporate boards will tend to reach out to other female managers in the company, which has two healthy effects, Stetson says. "You really get to know what’s going on (in the firm and) you also encourage that next generation of leaders."
Bringing different voices on a corporate board may help a CEO, but what else can he or she do to navigate today’s stormy waters? Wharton’s Useem has a set of six strategies to guide CEOs. Along with the "leadership in all directions" suggestion, he calls on corporate captains to think strategically, communicate persuasively, act decisively, demonstrate ethical behavior and strong character, and build a sense of momentum for their firm.
By strategic thinking, Useem refers to imagining the future of a business three to five years out – with Jeff Bezos and his vision of online book sales at Amazon.com a case in point. Effective communication has become more important in the wake of the many dot-bombs and Enron’s collapse, as investors, analysts and the financial media have cause to view corporations with a more critical eye. Useem says Hewlett-Packard head honcho Carly Fiorina aced this test when it came to selling HP’s merger with Compaq computer to investors. "She would not have won that (vote) had she not been extremely good at communicating her vision of what these two companies together would be like," he suggested.
Useem’s decisive action advice may seem to conflict with his call for sharing leadership responsibility. But the key, he says, is encouraging strong decision-making in the right context. "You want people in the middle ranks and on the front lines to be thinking as leaders themselves. But you don’t want them to think they have your job."
Strong character – including traits such as honesty and fairness – is the single most important feature of a leader, Useem adds. And with CEOs in the limelight, their personal life choices can haunt their professional careers. "Signs of weakness in character, even if they’re largely in the private domain, can be taken as signs of flaws in your leadership."
In arriving at his "build momentum" suggestion, Useem borrows from U.S. Marine Corp. strategy: In hostile territory, combat teams need to keep taking preemptive actions. Useem says eBay CEO Meg Whitman has earned her stripes on this front. While fighting off challenges from Yahoo and Amazon, Whitman either established a better business model or quickly adopted the best features of her rivals. "Meg Whitman has been very good at pressing her organization to constantly stay ahead of her would-be-competitors."
Creating an ever-advancing organization may be a vital tactic for today’s business climate, but Smith believes CEOs should be thinking about a more fundamental sort of change. In his view, many CEOs operate from a philosophy that prioritizes shareholders too much and employees and customers too little. Corporate leaders talk a good game about balancing the needs of all three stakeholders, but in practice they typically care most about shareholder value. That relegates employees to the status of a means to an end.
Smith suggests the European practice of including workers on executive councils can offer guidance to U.S. firms interested in a more humane approach to business.
But he doubts his vision will be embraced any time soon. In the short run, Smith predicts once-glamorous CEOs will continue to be flogged by the media and the shareholders on whom they have focused so much attention. "Until the economy truly recovers, we’re going to punish business leader after business leader," Smith says, "because that’s what’s going to sell."