Charismatic CEO - Harvard Magazine

40 September - October 2002

In 1997, one of the blue-chip icons of corporate America,AT&T, was in trouble and seeking a new leader. The companywas operating in a deregulated industry and facing decliningprofit margins in its core business—long-distance telephone ser-vice. After a three-month search, the board of directors passedover a well-regarded insider, John Zeglis, who was intimately fa-miliar with the complexities of the deregulated business envi-ronment, and instead hired C. Michael Armstrong as CEO. Aftera 31-year career with IBM, Armstrong had headed Hughes Elec-tronics, a defense contractor with interests in satellite television,with great success for four years. Business magazines showed

him astride his Harley Davidson motorcycle, a knight on an ironsteed riding in to save the telecommunications giant.

“The selection of a celebrity CEO can drive up the marketvalue of a company’s stock,” says assistant professor of businessadministration Rakesh Khurana, Ph.D. ’98, whose new book,Searching for a Corporate Savior: The Irrational Quest for CharismaticCEOs (Princeton University Press) explores the messianic maniasurrounding such hires. Indeed, the day Armstrong was se-lected, the market value of AT&T stock went up $4 billion. TheAT&T board also lavished money on Armstrong; in 2000, hiscompensation was reportedly $21.8 million, and perks included

FOCUS ONRESEARCH

The Cult of the Charismatic CEO by CRAIG LAMBERT

RAKESH KHURANA

P h o t o g r a p h b y J o h n S o a r e s

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Harvard Magazine 41

a $10-million guaranteed price on a block of his restricted stock.Armstrong embarked on an aggressive program of acquisi-

tions—cable TV, cellular telephony, and Internet delivery sys-tems—as part of his vision of remaking AT&T into an omni-In-ternet corporation. That strategy has tanked, and AT&T is nowselling o≠ those acquisitions at huge losses. The stock, whichpeaked at about $64 per share in 1999, is currently priced ataround $10. “The company today looks very much like it didwhen Mike Armstrong walked in—a formerly regulated com-pany with declining margins in its core long-distance telephonebusiness,” says Khurana. “Except this: four years ago AT&T had$6.7 billion in debt; today its indebtedness is $67 billion. Its bal-ance sheet, which had been one of the healthiest in the country,is now one of the worst.” (On July 17, AT&T announced thatArmstrong is leaving to become chairman of the corporationformed when Comcast Corporation bought AT&T’s cable-tele-vision business; AT&T took a $13-billion charge for the sale.)

Yet AT&T is far from the worst case. Theunravelings of Enron, Tyco, and WorldComhave raised searching questions about cor-porate leadership and even shaken in-vestors’ faith in corporate America. Thesedebacles have revealed incompetent, uneth-ical, and massively self-serving individualsatop corporations. Is this a group of bad ap-ples who all went rotten at once, or—moreworrisome—do these executives typifyleaders at Fortune 1000 companies? Khu-rana, who earned his doctorate in organiza-tional behavior, studying under a joint pro-gram of the sociology department andHarvard Business School, suggests that acorporate trend toward hiring “charismatic” CEOs, rather thancompetent executives with relevant skills, may help explain theanguish that now a±icts so many firms.

Drawing on interviews with CEOs, board members, and exec-utive search consultants, plus extensive data on the country’s 850largest public corporations, Khurana—who was himself a man-ager with Cambridge Technology Partners for four years—assertsthat the CEO labor market “is not really a market. A genuine mar-ket means many people transacting anonymously and e∞ciently,with the guiding factor that no single actor has enough power toset the terms of the exchange. But CEO jobs are a small-numbersmarket: there are only a few positions, and only a small number ofcandidates perceived to have the skills needed to run a large corpo-ration.” In a typical year, 90 to 140 CEO positions open up in thelargest 850 companies, the vast majority due to normal retire-ments. One-third of new CEOs hired are outsiders.

But the path to the top has changed. In the past, managementcontrolled the succession process: the new top dog was almostalways promoted from within the kennel, typically hand-pickedby the outgoing CEO with a rubber stamp from the board of di-rectors. (In fact, the CEO often chose the membership of theboard, which became a highly self-replicating group.)

Then, gradually, the structure of corporate ownershipchanged, as stock became increasingly concentrated in the handsof institutional investors. In 1950, less than 10 percent of U.S. eq-uities were owned by institutions (such as mutual funds andpension funds), but today, institutions control about 60 percent

of corporate stock. In the 1980s, dismayed by decliningprofitability, these big investors sought to dislodge entrenchedmanagement corps, which were seen as an insular, self-satisfied,underperforming group. These major stockholders financedleveraged buyouts by private equity firms like Kohlberg KravisRoberts (KKR) and threw out previous management. Whenstates passed anti-takeover laws, the investors shifted their focusto boards of directors.

Using the business media, investors pressured boards to moni-tor CEO performance more diligently. They publicized lists of the“Ten Worst Corporate Boards” and took out full-page ads in theWall Street Journal criticizing specific boards and companies. “Themessage was: ‘We will shame you,’ ” says Khurana. “The hot andsearing kind of shame that makes people at the country club lookat you askance.” Investors worked together to elect their own di-rectors, and at places like Kodak, General Motors, and Westing-house, boards began firing CEOs with a vengeance. At the largest

200 to 300 companies, up to 50 percent ofCEOs were discharged.

The trend toward charisma may havestarted when “the idea took root that if afirm was doing poorly or well, it was be-cause of the CEO,” Khurana explains. “Pre-viously, CEOs were about as well-knownas their chau≠eurs. But something hap-pened when Lee Iacocca was credited withsingle-handedly saving an American icon.Most people forgot about the $2-billionfederally guaranteed loan to bail outChrysler, or the United Auto Workers’givebacks. Iacocca made other CEOs lookbland—there was even talk of drafting

him for president. The image of a CEO changed from being a ca-pable administrator to a leader—a motivating, flamboyant leaderwith a new task. In the late 1980s and early ’90s, business triedto redefine itself; it was no longer about the profane task ofmaking money, but concerned with vision, values, mission—es-sentially religious terms.”

This meant “importing the sacred into the profane,” explainsKhurana, who uses the German sociologist Max Weber’s workson charisma as a touchstone. Charismatic leadership, whichgrows from a personal magnetism that inspires devotion, reachesits apotheosis in religious cults. Its ascendance in corporate lifeis “a throwback to an earlier form of authority that proved to bevery unstable,” says Khurana. “Weber said that charisma and ra-tionality cannot coexist. The progress of Western civilizationhas been a movement away from charismatic leadership towardrational authority invested in laws and institutions. After Hitlerand Mussolini, Americans were rightly skeptical of charismaticleaders. Separating the individual from the o∞ce is one of thegreat victories of Western society.”

Yet in corporate America, the personalities of CEOs have beenconflated with the success or failure of the companies where theywork. “The only explanation needed for General Electric’s perfor-mance is Jack Welch,” says Khurana, noting that GE’s 300,000employees in hundreds of divisions within many subsidiary com-panies are omitted from the equation. “Under Jack Welch, GE hada stunning run of profit growth—almost 80 straight quarters,” hecontinues. “Given the complexity of

The trend towardhiring “charismatic”CEOs may help explain the anguishthat now afflictsso many firms.

(please turn to page 97)

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Harvard Magazine 97

business, it is extremely unlikely for thatto happen without taking accounting lib-erties. But to raise that as an issue was almost sacrilege at GE—because it wouldcall into question charismatic authority.”

K h u r a n a ’ s research doesquestion suchauthority; he

finds no evidence for a stable “CEO e≠ect.”It turns out that the person at the top mat-ters less than the relevant business condi-tions. Technological change, for example,has pushed Kodak and Polaroid (now inbankruptcy) into the digital-photographymarket, where profit margins are onlyone-tenth those in their older business ofchemical photography. As Warren Bu≠ettsaid, “When you put a good manager intoa bad business, it’s usually the reputationof the business that remains intact.”

Though not always. In December 2000,after a year when AT&T cut its dividendfor the first time in its history and saw itsstock price nose-dive from $60 per shareto $18, the company’s board asked CEOMike Armstrong to wait outside the roomas they conducted his annual perfor-mance review. Business Week reported thatwhen he returned an hour later, the board“exploded with a standing ovation.”

Yes, charisma can be bulletproof—bydefinition, it is impervious to rationality.

Even so, charismatic authority is a pre-carious, profoundly vulnerable thing,as history has repeatedly proved. And,as Khurana asserts, al legiance tocharismatic leaders is in fact antitheti-cal to an open society. The atavisticcorporate quest for charismatic CEOs,with its deference to the personalityand vision of a particular individual,comes bundled with risks of abuse,misconduct, and incompetence. Theresults are now spread before us, andtheir name is not Legion, but Enron.

Craig A. Lambert ’69, Ph.D. ’78, is deputy edi-tor of this magazine.

CEOs’ Celebrity CompensationWith the average CEO’s pay topping $10 million in 2001, ac-cording to the New York Times (see graphic at left), stock optionshave become an increasingly important form of compensation.They now represent 13 percent of all corporate liabilities. Execu-tives like Al “Chainsaw” Dunlap (formerly of Scott Paper andSunbeam) have argued that CEOs’ far-reaching impact justifiessuch lavish compensation. But Rakesh Khurana’s research findsno evidence for a stable “CEO e≠ect.” The assistant professor ofbusiness administration notes that “CEOs like to compare them-selves to sports stars and celebrities. But unlike sports stars, thevalue of what CEOs produce depends on the e≠orts of tens ofthousands of other individuals.”

CHARISMATIC CEOs(continued from page 41)

I l l u s t r a t i o n b y S t e p h e n A n d e r s o n

CEOs’ BIG PAYDAYIn 1985, the average

CEO’s pay of $1,083,000was about 70 times thatof the average worker’s

$15,553; by 2001CEOs were averaging

$10,457,800, as much as410 times the average

worker’s $25,466

Source:New YorkTimes

students’ ethnic and economic back-grounds. But such measures are highly un-reliable for populations the size of a typicalelementary school, and they are particu-larly unreliable for even smaller sub-groupsof students. Schools are often misclassifiedas low- or high-performing purely becauseof random variation in their test scores, un-related to any educational factor.

The standards and accountabilitymovement is in danger of being trans-formed into the testing and accountabil-ity movement. States without the humanand financial resources to select, admin-ister, and monitor tests are now beingforced to begin testing at all grade levels.Instead of creating academic standardsthat drive the design of an appropriateassessment, low-capacity states willsimply select a test based on its expenseand ease of administration, makingcharges of “teaching to the test” increas-ingly accurate. A test with no externalanchor in standards or expectationsabout student learning becomes a cur-riculum in itself, trivializing the wholeidea of accountability.

The enthusiasm for performance-based accountability plays to the

worst weaknesses of the American educa-tion system. After World War II, most in-dustrialized countries nationalized theireducation systems, but not the UnitedStates. Because decisions about contentand performance were left to states andlocalities for so long, they never developedthe capacity to monitor the quality ofteaching and learning in schools, to sup-port the development of teachers’ and ad-ministrators’ knowledge and skill, or toevolve measures of performance that areuseful to educators and the public.

The di∞cult, uneven, and protractedslog toward clearer expectations and sup-ports for learning has barely begun inmost states and localities. The history offederal involvement in that long e≠ort ismixed at best. The current law repeats allof the strategic errors of the previous law,but with greater federal intervention. Theprognosis is not good.

The best we can hope for is that the ca-pacity problems of states and localitieswill become more visible as a politicalissue, triggering responses that will helpschools overcome the real obstacles they

face in improving the quality and inten-sity of teaching and learning. Similarly,we can hope that the technical failures oftesting will trigger a response that fo-cuses more on broad assessments of stu-dent learning.

The worst that can happen is that test-based accountability will widen the gapbetween schools serving the well-o≠ andthose serving the poor, thus confirmingthe public’s suspicion that expecting highlevels of learning from all children is un-realistic. Performance-based accountabil-ity in education is mutating into a carica-ture of itself.

Richard F. Elmore, Ed.D. ’76, Anrig professor ofeducational leadership at the Harvard GraduateSchool of Education, is completing a study ofschool accountability. Recent publications in-clude “Building a New Structure for School Lead-ership” and “Bridging the Gap between Standardsand Achievement,” both available from www.-shankerinstitute.org. This article is adapted withpermission from an earlier version, titled “Un-warranted Intrusion,” which appeared in theSpring 2002 issue of Education Next (www.-educationnext.org), published by the Hoover In-stitution, Stanford University.

TESTING TRAP (continued from page 37)

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