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Outsider CEOs May Not Be Saviors

No matter what messiah some companies bring in, it is not going to solve underlying problems.

September 18, 2003
Related Topics: Retention, Workforce Planning, Recruitment
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After the collapse of several prominent companies, many led by high-pricedoutsider CEOs, some question the assumptions on which executive searches and paypolicies were based in the last decade.

    "It’s now perceived that if a company is doing well, it’s because ofthe CEO, but empirical research shows that who the CEO is doesn’t matter indetermining the performance of a company in terms of long-term stock performanceor financial returns," says Rakesh Khurana, an assistant professor at HarvardBusiness School and author of Searching for a Corporate Savior: The IrrationalQuest for Charismatic CEOs. It was the "war for talent" mind-set that onlythe right CEO can lead a company to prosperity that drove CEO salaries throughthe roof, he says.

    "There’s no empirical support for the war for talent, and it borders onthe irrational to think that just because someone did well at one organization,they will do well at another," says Khurana. For example, he says, GE managersrecruited to other companies have generally not delivered on their originalexpectations, although they did very well during their tenures at GE.

    "John Trani went from GE to being CEO of The Stanley Works, and his onlysolution to that company’s many problems was to pursue financial gymnastics byattempting to move the company’s legal headquarters to Bermuda to avoid payingU.S. income taxes," says Khurana. Gary Wendt went from being CEO of GE CapitalServices to CEO of Conseco, Inc., in June 2000, and by October 2002, Moody’sreported that Conseco was on the edge of bankruptcy. Wendt was removed from hisjob as CEO at that time.

    AT&T, Kodak, Xerox, and Polaroid, says Khurana, all went to the outsideto find "savior CEOs." But none of these companies fared well. "Theproblems of these companies had nothing to do with the CEO," he says, "andno matter what messiah they brought in, it was not going to solve thoseunderlying problems."

    Xerox’s underlying problems had more to do with people sending each othere-mails and not sending each other copies than with its corporate leadership."AT&T was a formerly regulated monopoly with a declining core market.Michael Armstrong was brought in from Hughes Electronics as CEO, and after $162billion in acquisitions that were later divested, AT&T is still a formerlyregulated monopoly in a declining core market," he says.

    "Outsider CEOs," says Khurana, "have actually proven to be quitedestructive to many companies in terms of the pay they expropriated from thefirms they went to and the severance packages they were able to negotiate, whichamounted to ‘heads I win, tails I win.’ " He says the destruction alsoincluded unnecessarily large layoffs and a lack of investment in people.

    There are exceptions to every rule, including this one about outsiders faringpoorly. Outsider Lou Gerstner is generally credited with reviving IBM, whereasinsider Jacques Nasser’s CEO tenure at Ford is viewed by many on Wall Streetas an abysmal failure.

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