fter the collapse of several prominent companies, many led by high-priced
outsider CEOs, some question the assumptions on which executive searches and pay
policies were based in the last decade.
"It’s now perceived that if a company is doing well, it’s because of
the CEO, but empirical research shows that who the CEO is doesn’t matter in
determining the performance of a company in terms of long-term stock performance
or financial returns," says Rakesh Khurana, an assistant professor at Harvard
Business School and author of Searching for a Corporate Savior: The Irrational
Quest for Charismatic CEOs. It was the "war for talent" mind-set that only
the right CEO can lead a company to prosperity that drove CEO salaries through
the roof, he says.
"There’s no empirical support for the war for talent, and it borders on
the 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 managers
recruited to other companies have generally not delivered on their original
expectations, although they did very well during their tenures at GE.
"John Trani went from GE to being CEO of The Stanley Works, and his only
solution to that company’s many problems was to pursue financial gymnastics by
attempting to move the company’s legal headquarters to Bermuda to avoid paying
U.S. income taxes," says Khurana. Gary Wendt went from being CEO of GE Capital
Services to CEO of Conseco, Inc., in June 2000, and by October 2002, Moody’s
reported that Conseco was on the edge of bankruptcy. Wendt was removed from his
job as CEO at that time.
AT&T, Kodak, Xerox, and Polaroid, says Khurana, all went to the outside
to find "savior CEOs." But none of these companies fared well. "The
problems of these companies had nothing to do with the CEO," he says, "and
no matter what messiah they brought in, it was not going to solve those
underlying problems."
Xerox’s underlying problems had more to do with people sending each other
e-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 $162
billion in acquisitions that were later divested, AT&T is still a formerly
regulated monopoly in a declining core market," he says.
"Outsider CEOs," says Khurana, "have actually proven to be quite
destructive to many companies in terms of the pay they expropriated from the
firms they went to and the severance packages they were able to negotiate, which
amounted to ‘heads I win, tails I win.’ " He says the destruction also
included unnecessarily large layoffs and a lack of investment in people.
There are exceptions to every rule, including this one about outsiders faring
poorly. Outsider Lou Gerstner is generally credited with reviving IBM, whereas
insider Jacques Nasser’s CEO tenure at Ford is viewed by many on Wall Street
as an abysmal failure.
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