|CEOs today must work cooperatively with a variety of stakeholders, including proactive boards, involved investors and other vocal constituencies.|
There has been a dramatic shift over the past decade in the role of the CEO in corporations across the globe. The time of the “authoritarian” CEO, who roamed the corporate landscape not so long ago, has passed, as we enter the era of the “inclusive” chief executive officer.
Whereas Authoritarian CEOs answered only to themselves, the power of today’s CEO is not as absolute: Boards of directors are becoming more critical and more closely involved in setting strategy, and are far more likely to insist that CEOs deliver acceptable shareholder returns and demonstrate ethical conduct. Boards are increasingly prepared to replace CEOs in anticipation of disappointing future performance, instead of merely as punishment for poor past performance. At the same time, large shareholders like private equity firms are taking a more active role in decisions that were once the sole purview of the CEO.
The emergence of this more demanding environment has accelerated CEO turnover. Our recent studies reveal that annual turnover of blue chips’ CEOs across the globe increased by 59% between 1995 and 2006. In those same years, performance-related turnover — cases in which CEOs were fired or pushed out — increased threefold. Whereas, in 1995, only one in eight departing CEOs was forced from office, last year, nearly one in three left involuntarily.
This new era will require new skill sets and impose new responsibilities on both chief executives and board members. Today’s inclusive CEOs must be willing to engage in dialogue with investors, employees, and government; to surround themselves with managers and advisors who complement their own capabilities; and to maintain transparency in their communications about financial results and compensation.
Boards are adapting
The last decade has witnessed two fundamental shifts in the ways corporate boards address CEO selection and oversight: Boards are becoming less tolerant of poor performance, and they are increasingly splitting the roles of CEO and chairman.
Our research shows that CEOs who deliver below-average returns to investors don’t remain in office for long. Last year, a CEO in North America who delivered above-average returns to investors was almost twice as likely as one delivering sub-par returns to remain CEO for more than seven years. In contrast, in 1995, CEOs who delivered substandard returns to investors were just as likely to achieve long tenure — a perverse situation that reflected the durability of the Authoritarian CEO. The Middle East is catching-up fast with global CEO turnover rates as rapid-growing economies are bringing new pressures to corporate management and governance in the region.
The other major trend has been in governance, with both a shift toward separation of the roles of chairman and CEO and a shift toward chairmen who haven’t previously served as a company’s CEO. Splitting the roles of CEO and chairman while the former CEO stays on as chairman is a bad idea for three reasons: First, knowing that the former CEO will remain involved as chairman sometimes leads the board to embrace a candidate who was a great number two, but who’s unlikely to become an effective CEO; second, most chairmen who were CEOs protect their protégés, reducing the likelihood that the new CEO will be fired for poor performance; and third, some chairmen who weren’t really ready to give up their executive responsibilities go to the opposite extreme, firing their successor at the first sign of trouble and reassuming the chief executive position.
Inclusiveness, engagement, and involvement
With the board of directors more deeply engaged and owners actively involved in governance and strategy, inclusiveness is the most critical new attribute for the CEO, starting with the ability to take into account the concerns and suggestions of investors, employees, and government. Given the unrelenting pace of change in global business today, stakeholders may see threats and opportunities sooner than the board and management team do. Listening to stakeholders increases the likelihood that a company will act quickly and effectively.
Transparency about results is another indispensable element of inclusiveness. Several CEOs have been dismissed in the last few years because of inadequate transparency — with regard to both the board and shareholders — about their compensation.
Including board members in the development of strategy — not merely asking them to approve a strategy developed by management — is the best way to gain the board’s confidence and buy-in. It’s an effort well worth making: Board backing is invaluable to CEOs who may face investor challenges while waiting to see if a new strategy will pay off.
The board of directors, in turn, must embrace deeper engagement. Because of intensifying global competition and ever-higher expectations about corporate performance, companies now need the board of directors to proactively offer suggestions, to debate threats and opportunities, to push back aggressively if management is heading in the wrong direction, and to make informed judgments.
Deep engagement requires directors to participate in dialogues with customers, channel partners, suppliers, and employees — not different in concept from the traditional role of the ideal director, but completely different from the usual practice. These dialogues in turn require directors to devote time beyond the quarterly board meetings, probably earning compensation greater than what they receive today.
Involved investors are also becoming the norm. Authoritarian CEOs survived because investors weren’t actively involved in the governance of publicly traded corporations, limiting themselves to selling off stock when they lost confidence in a company’s CEO. Today’s involved investors include not only members of family-controlled businesses, but also private equity buyout firms, raiders, and hedge funds that take a stronger hand in the actual running of the companies they’ve invested in.
New era challenges
Going forward, boards of directors will need to encourage constructive disagreement and debate, abandoning consensus habit as a vestige of the authoritarian age. They must also be proactive in grooming and retaining a sufficient bench of candidates for the chief executive position, and be creative and adaptable in searching for outside CEO candidates when necessary. In addition, they’ll have to address such new-era governance challenges as balancing the interests of active institutional shareholders — hedge funds and buyout firms, for example — against those of other investors.
This new age of corporate governance is still taking shape, with many of the rules of the new era still unclear and some probably yet to be written. What is clear is that all the constituencies interested in the health and welfare of the corporation — CEOs, boards of directors, investors, consultants, regulators, legislators, and the business press — should say goodbye to the era of the authoritarian CEO and prepare for change.
Bahjat El-Darwiche and Rabih Abouchakra are principals at Booz Allen Hamilton