Women and the New Business Leadership by Peninah Thomson and Tom Lloyd_5 pptx

98 BusiNess at a crossroads
exerted very little downward pressure on the obviously excessive abso-
lute level of executive pay.
One possible explanation for this curiously relaxed attitude to an
important and growing agency cost is the impact on the vigor with
which institutional investors police agency costs of the emergence of
large, integrated investment banks after the deregulation of financial
services in the 1980s. There were supposed to be barriers or “Chinese
Walls,” as they were called, between the activities of integrated invest-
ment banks, but even Chinese Walls have ears.
Investment banking is the most profitable activity, and is thus in the
driving seat at integrated banks. Notwithstanding the Chinese Walls,
therefore, it’s not in the interests of brokers, securities traders, invest-
ment analysts and fund managers, whose bonuses may be affected by
group results, to do anything or say anything that might damage in any
way the relationships between their investment banking colleagues and
the latter’s CEO clients.
The conflict between the duty of fund managers, as agents of their
beneficiaries, and their own interests as colleagues of investment
bankers, may, in other words, be partly responsible for the signal lack of
opposition from investors to soaring CEO pay packets.
The cult of leadership
If we reject greed as an adequate explanation for excessive levels of
CEO pay, and we accept asset-skimming as a form of remuneration
unconstrained by a link to value added or time spent working, our
explanation so far for the high absolute levels of executive pay consists
of two components.
The first is the inferences drawn, by management theorists, Remcos
and the investment community, about executive rewards from the new
shareholder value performance standard. The second is the lack of
opposition to “the sky’s the limit” pay packets from the investors who

pay them, which may itself be a consequence of the integration of
investment banking and fund management under one corporate roof
and the impact this has had on the willingness of fund managers to
object to such pay packets.
This is consistent with the description of the CEO market provided
by Harvard Business School professor, Rakesh Khurana, in his brave
book – it is dangerous to bite the hand that feeds you consultancy
work – Searching for a Corporate Savior.
6
9780230_230941_07_cha05.indd 98 09/09/2009 10:01
5 Not so much greed 99
Khurana argues that the market for “external” CEOs – as opposed
to CEOs appointed from within the company – is not a “market” at all,
in the neoclassical sense, where large numbers of transactions set the
equilibrium price, no single transaction influences the market as a whole
and perfect competition between applicants for jobs and employers for
applicants guarantees both parties the market price. He says the CEO
market is a social construction (witness all those conflicts of interests
and of interest and duty). It’s “closed” in Max Weber’s sense,
7
in that
CEO positions at large, listed U.S. and U.K. companies are only open
to people “who fit certain socially defined criteria.”
Three common “social matching” criteria when a board is drawing
up a list of candidates for the CEO job are: the current position of the
candidate, and the performance and stature of the candidate’s company.
These automatically exclude from the candidates’ pool the good people
who just miss the cut as far as rank is concerned, the good people who
work for currently underperforming companies, and the good people
who work for smaller, less illustrious companies.

When thinning down the long list of those who satisfy these rather
arbitrary tests, the most important criterion for elevation to the short
list is the requirement that the candidates are superstars.
Khurana argues that Alfred Chandler’s “managerial capitalism” (see
Chapter 3) was replaced by what he calls “investor capitalism” in the
late 1970s, after the markets of large American companies were success-
fully attacked by more efficient European and Asian (mostly Japanese)
companies. Previously supine investors demanded action, and it soon
became apparent that the action most likely to appease them was the
appointment of a high-profile “leader,” unencumbered by allegiance to
the past or the status quo, and capable of taking the drastic action
needed to see off the foreign invaders.
It was unfortunate that the merits of this half-baked theory, that all
that was needed to revive an ailing company was a “charismatic leader”
and “change agent,” with a novel “mindset,” and a profound under-
standing of the “paradigm shifts” that were occurring in his economy
and industry, were soon corroborated by the transformation of Chrysler
Corporation under Lee Iacocca’s leadership.
Chrysler was on the brink of collapse when Iacocca, recently fired
by Ford (where he had been president) after falling out with Henry
Ford II, was appointed president and CEO in 1978, and chairman
the following year. Within three years Chrysler was back in profit
and continued to flourish under Iacocca’s leadership until he retired
in 1992.
9780230_230941_07_cha05.indd 99 09/09/2009 10:01
100 BusiNess at a crossroads
So great was his fame by then, his book, Iacocca, an Autobiography
co-written with William Novak (Bantam, 1984) was the best-selling
non-fiction hardback book in both 1984 and 1985. Talking Straight
(Bantam, 1988), a response to Sony founder Akio Morita’s book Made

in Japan (Dutton, 1986) praising American creativity, was likewise a
big seller.
Iacocca was in no doubt about the importance of leaders to society
as a whole, as well as to companies. In Where Have All the Leaders Gone?
co-written with Catherine Whitney (Simon & Schuster, 2007), Chrys-
ler’s erstwhile leader angrily complains about living in what he sees as
leaderless times:
Am I the only guy in this country who’s fed up with what’s
happening? Where the hell is our outrage? We should be screaming
bloody murder. We’ve got a gang of clueless bozos steering our ship
of state right over a cliff, we’ve got corporate gangsters stealing us
blind [WorldCom, Enron, and so on], and we can’t even clean up
after a hurricane [Katrina] much less build a hybrid car. But instead
of getting mad, everyone sits around and nods their heads when the
politicians say, “Stay the course.” Stay the course? You’ve got to be
kidding. This is America, not the damned Titanic. I’ll give you a
sound bite: Throw the bums out!
He, like other charismatic company leaders, knows the power of
the sound bite. On his website launched in late 2007 to promote
Where Have All the Leaders Gone?, he invited visitors to rate candi-
dates in the 2008 presidential election by nine qualities beginning
with “c” – curiosity, creativity, communication, character, courage,
conviction, charisma, competence, common sense – which he said all
true leaders possess.
Some companies, such as GE in the U.S. and ICI in the U.K., were
lucky enough to breed their own superstars. GE’s Jack Welch, the
pioneer of “managing for value” and the most stellar of the new genera-
tion of “leaders” (it was no longer enough to be a mere “manager”)
who emerged in the 1980s, joined GE in 1960 when he was 25. He was
CEO from 1981 until 2001, during which time the company’s market

value rose from $14 billion to $410 billion.
Welch, whose personal fortune was estimated, by Boston Magazine
in March 2006, to be about $720 million, was affronted by criticisms of
executive pay, and insisted that the market in executive talent was free,
and should not be interfered with. After his retirement, Welch followed
9780230_230941_07_cha05.indd 100 09/09/2009 10:01
5 Not so much greed 101
Lee Iacocca’s lead and co-wrote with his third wife Suzy Wetlaufer the
best-selling, Winning (HarperCollins, 2005).
John Harvey-Jones (made Sir John in 1985) joined Imperial Chem-
ical Industries (ICI) in 1956, at the age of 32, after a distinguished
career in Naval Intelligence. He was appointed CEO in 1982. In his
first two-and-a-half years as leader, ICI’s U.K. workforce was pruned by
a third, losses were transformed into £1 billion of profits and the share
price doubled. Sir John was the exemplary change agent. Among his
best known quotations was “I’m more interested in speed, than in
direction.” After retiring in 1987, Sir John embarked on a new career
as a TV star, in the BBC’s Troubleshooter series, first broadcast in 1990,
in which he advised struggling businesses. The ratings were good
enough for five series and several specials, and the series won Sir John a
BAFTA award. For a while he was, as one U.K. newspaper put it, “the
most famous industrialist since Isambard Kingdom Brunel.” His oblig-
atory book Making it Happen: Reflections on Leadership was published
by Collins in 1988.
This cult of personality infected the entire system. Institutional
investors demanding change saw the CEO as the crucial variable in
business success and failure, and put pressure on ailing companies less
blessed than GE and ICI with home-grown talent to look beyond the
company for the necessary charisma and box-office qualities. Invest-
ment analysts responded to this leader-centric view of their ultimate

clients, exploited investor relations strategies that co-opted CEOs as
their principal marketing assets and substituted for an analysis of the
intrinsic strengths of a company’s business, an assessment of its CEO’s
character, philosophy and management style and detailed examinations
of his or her pronouncements, statements and sound bites.
The “CEO as hero” cult was convenient for asset managers and
stock analysts, because having a personification or embodiment to focus
on, and attribute success and failure to, made a detailed analysis of the
large company’s increasingly complicated and geographically dispersed
affairs if not entirely superfluous, at least much less essential. Moreover,
the role of a drama critic of superstar CEOs was far more appealing to
many analysts than that of a back-office number cruncher.
Investment bankers, whose views on these matters were, for reasons
discussed above, of great interest to their fund manager and stock
analyst colleagues, also found the CEO cult convenient, because it
endowed their celebrity CEO intimates with the power to make major
balance sheet decisions quickly without consulting others. This is
an advantage for investment banks, because the economics of asset-
9780230_230941_07_cha05.indd 101 09/09/2009 10:01
102 BusiNess at a crossroads
skimming clearly favor a few large quickly concluded deals, over several
smaller, more protracted ones.
Almost the only downside of the CEO cult is the fuss people make
about the enormous pay packets of the CEO superstars.
Another downside of the CEO cult for us pedants is what it’s doing
to the language. I blame, maybe unfairly (the B-schools have a lot to
answer for, too), the idea that the CEOs of large companies are special
people, endowed with all Iacocca’s nine “c”s (and probably Jack Welch’s
Six Sigmas too), for the import of “management-speak” into daily
usage. CEOs doubtless possess many admirable qualities, but a respect

for the language isn’t one of them. Ugly neologisms, such as “commod-
itization” and “credentialed,” hijacking innocent nouns, such as “task,”
“source,” “impact,” “critique,” and “access” to serve as verbs (and
occasionally vice versa as in “new hires”), the use of “utilize” when
“use” is fine, additions of superfluous words, such as “in order to,” and
“put in place.” I hope the probable ejection of the CEO, following the
2007–8 crash, from the pantheon of contemporary heroes will lead to
a purification of the English language. But I fear it’s too late.
The buck and the bucks stop here
The elevation of CEOs into omnipotent superstars with pay packets to
match, is not, thank goodness, an inevitable consequence of the interac-
tion of natural human impulses with the capitalist system.
It is, rather, the product of a “market failure” that can and must be
corrected if liberal capitalism is to survive.
It’s also the consequence of the characteristic hierarchical shape of
the joint stock company. CEOs would not have acquired the power or
the pay they enjoy today if the way companies are organized had not
required one person to occupy the pinnacle position. The power of the
CEO is derived, not from the value he or she adds, but from the topo-
graphical fact that he or she is peerless.
The argument so far
Large modern companies are not as we would like them to be, partly
because of their hierarchical shape and the omnipotence it assigns to
CEOs. But the explosion of CEO pay in recent years associated with
that omnipotence, which is undermining the liberal capitalist consensus,
9780230_230941_07_cha05.indd 102 09/09/2009 10:01
5 Not so much greed 103
was not inevitable; it was the consequence of a market inefficiency. But
the fact that the CEO market doesn’t work, doesn’t mean that the work
CEOs do is worthless. The question we turn to in the next chapter is

“how much is it worth?”
References
1 The Protestant Ethic and the Spirit of Capitalism, Allen & Unwin, 1930.
2 Financial Times, August 4, 2001.
3 The State of Working America, 2008.
4 “Credit crunch halts boom in executive pay,” by David Teather and Julia Finch, Guardian,
Thursday 11 September, 2008.
5 The Free Press, 1986.
6 Searching for a Corporate Savior: The Irrational Quest for Charismatic CEOs, Princeton
University Press, 2002.
7 Economy and Society, University of California Press, 1947.
9780230_230941_07_cha05.indd 103 09/09/2009 10:01
104
6 The myth of leadership
The usual rationale for paying the CEOs of large, global companies
ridiculous sums of money is that these organizations are extremely hard
to run, and the mix of skills, abilities and talent needed to run them well
is so rare that the extraordinary people who possess it can command
extraordinary rewards. It’s supply and demand. Huge CEO pay packets
are just market-clearing prices for skills as rare as hen’s teeth.
The stock argument here is the one referred to briefly in the last
chapter; that it is inconsistent to be sanguine about the huge pay packets
of sports stars, but to oppose those of CEOs. I pointed out that the pay of
sports stars is not decided by other sports stars, whereas the non-executive
members of RemCos are usually executive directors of other companies
and thus have an interest in ensuring the general level of executive pay
remains high. Simon Kuper did a more comprehensive demolition job on
this specious argument in the Financial Times in February 2009.
1
He said sportspeople have to pass four stringent tests before they

become high-paid stars. The first is genuinely competitive entry; millions
of young men want to play football in the English Premier League and
demonstrable skill is the only criterion for making it. The second test is
that, once hired, performance is all; there are no bad professional foot-
ballers. Kuper cited a study by economists Stefan Szymanski and Tim
Kuypers that found salary costs explained 92 percent of English football
league success. Third, only a few outstanding players are very highly paid.
Only 1,000 or so worldwide earn over £1 million a year. The fourth test
is that a star’s performance is under constant review on the pitch. If you
start to play badly, you’re on the bench or you’re fired.
The same sort of tests have been passed by high-earning actors, TV
presenters, musicians, writers and entrepreneurs.
CEO pay packets pass none of these tests.
But that doesn’t necessarily mean a CEO’s job is easy. Perhaps the
social construction that passes for a market in CEOs gets it about right,
despite its inefficiency. If a large global company is very hard to run and
someone has to run it, a CEO may be worth what his or her huge pay
packet suggests.
9780230_230941_08_cha06.indd 104 09/09/2009 10:01
6 THE MYTH OF LEADERSHIP 105
The CEO system
What does “run” mean in this context? Hard to say. It varies. Some
CEOs are better at some things than others. One may be described, on
his or her appointment, as a “safe pair of hands”; another will be lauded
as “charismatic,” “dynamic,” “inspirational” or “battle-hardened”;
a “brilliant strategist, marketer or financier” and the like. But none of
them run everything, or take every decision. How could they? The global
company is too large, too complicated, and too polyglot for someone
to run it single-handed. It is probable that 99.9 percent of decisions
taken in a global company each day would be taken the same way with

or without a CEO. The organization is run day-to-day by the tacit
knowledge embedded in the minds of its employees, and written
down in thousands of processes, procedures, routines and conven-
tions; and by the momentum imparted to a company by being in
business, and dealing regularly with customers, suppliers and other
interested parties.
It is the other 0.01 percent of CEO decisions that allegedly make the
difference – timely strategic moves; audacious acquisitions; cleverly
designed procedures; perceptive market diagnoses; the reinvigoration
of a disheartened workforce with an inspiring vision, eloquent mission
statement, or clear and relevant set of corporate values.
But the transformation of that three-legged corporate horse into a
Derby winner is never, despite what the CEO’s Long-term Incentive
Plan (Ltip) might suggest, the triumph of one man or woman. Other
employees also play their parts and armies of highly paid external profes-
sionals, including investment bankers, coaches, lawyers and account-
ants, and strategy, corporate identity, communications, and IT
consultants, also contribute to corporate performance.
Some suggest that Jack Welch is given more credit than he
deserves for GE’s success (see previous chapter); that Gary Wendt,
head of GE Capital, which contributed substantially to GE earnings,
played an important role, and that NBC’s strong profits growth
during the Welch stewardship was the achievement of the network’s
CEO, Robert Wright. Wendt and Wright were doubtless also well-
served by groups of able and creative lieutenants, each of whom in
their turn … and so on.
I don’t know how much work McKinsey, the market leader in
strategy consulting, did for GE during Welch’s time as CEO, but Welch
must have got to know the firm well during its assignments in the 1970s
from which emerged the McKinsey/GE matrix, a business portfolio

9780230_230941_08_cha06.indd 105 09/09/2009 10:01
106 BUSINESS AT A CROSSROADS
screening tool, familiar to MBA students, which relates “business unit
strength” to “market attractiveness.” McKinsey claims to work for 70
percent of the Fortune 500 (America’s largest companies), and clear
evidence of the firm’s influence in the highest echelons of global busi-
ness is the 70 or so McKinsey alumni who are or have been CEOs of
Fortune 500 companies. They include Louis Gerstner, a former CEO
of IBM; James McNerney, CEO of Boeing; Helmut Panke, a former
CEO of BMW; Christopher Sinclair, a former CEO of PepsiCo; Peter
Wuffli, a former CEO of UBS; Stephen Green, chairman of HSBC and
the notorious Jeffrey Skilling, former CEO of Enron.
That Skilling was subsequently convicted and imprisoned on charges
relating to Enron’s collapse should not be taken to mean there is
anything sinister or unhealthy about the close links and exchanges of
personnel between large companies and the strategy consultants. An
organization the size of McKinsey & Co is bound to hire the odd bad
apple. My point here is that some of the achievements the CEOs of
large companies receive material credit for in huge pay packets are more
properly attributed to outsiders.
Actual and aspiring CEOs often assemble teams of these counselors
and consultants who follow them, like courtiers following monarchs
from palace to palace, when they move from one CEO position to the
next. The allegiance of these people is to the CEO, rather than to the
shareholders who pay their fees. They cultivate relationships with indi-
viduals, rather than organizations. Their objective is to enhance their
CEO clients’ reputations, by delivering performance improvements
during the CEOs’ periods in office (rarely more than a few years), so
that the CEOs are offered better jobs where their retinues can work
their magic again.

Prominent among those who have the ear of the CEO are the
strategy consultants – McKinsey, Bain, Boston Consulting Group, and
so on. I am not among those who see strategy consultants as people
who borrow your watch and charge you a large fee to tell you the
time. I have met many senior strategy consultants, and have worked
with several on various projects. I count some as friends. By and large,
I have found them charming, smart, well-informed, perceptive,
thoughtful, creative and tuned in to the management discourse. My
impression has been that they can and do add value to the companies
they work at, as well as to the reputations (and market value) of the
CEOs they work for.
Strategy consultants also play a vital role in the development and
dissemination of management ideas.
9780230_230941_08_cha06.indd 106 09/09/2009 10:01
6 THE MYTH OF LEADERSHIP 107
The management ideas market
The suppliers of new management ideas and concepts are academics
working at business schools (mostly American) and some consultants and
other business thinkers. They develop new ideas, package them in the form
of books, articles, videos, or lectures, and then sell them to the buyers
of management ideas. These are of two kinds: distributors, including
management consultants and suppliers of executive education (B-schools,
conference organizers, publishers, and so on), and consumers (companies,
government departments/agencies and other organizations, such as
non-profits).
The value chain isn’t a simple one, however. Academics, the main
suppliers, may sell direct to consumers (when they act as gurus to
CEOs, for instance), and many of them have close links with the
consultants, who are the main distributors. It is also common for
academics to collaborate with consultants on books and assignments

with clients. There’s nothing to object to in this. Academics need to
maintain close links with consumers to keep in touch with their concerns
and test their ideas in the real world.
The leading strategy consultants make excellent intermediaries for
academics, because their clients are always in the market for new ideas;
they speak both the client’s and academic’s languages; they have plenty
of practical experience, and their feel for the market enables them to
criticize ideas constructively and suggest how and where they might be
tested. For their part, consultants are eager to help management
academics test and develop their ideas and will sometimes finance prom-
ising research. They are even willing to pay retainers for what amount
to non-exclusive licenses to use the new ideas, because they know
there’s no better way to attract and keep clients, than to be among the
first to offer services based on the latest management fashions.
The relationships between management academics and consultants
are sometimes stormy, but often close; somewhat like the relationships
between movie actors and directors. The academics are free agents, but
may associate themselves with particular consultancies if they like the
people and enjoy working with their clients. They may get wheeled out
to give after dinner talks about their latest ideas to gatherings of clients
and play an important marketing role for the consultants they choose to
associate themselves with. And there is much toing and froing between
academe and consulting. Consultants may become academics when
they retire and academics often quit the campuses to join consultancies,
or set up their own “boutiques” to consult independently, or act as
subcontractors for larger firms.
9780230_230941_08_cha06.indd 107 09/09/2009 10:01
108 BUSINESS AT A CROSSROADS
The intimacy of the relationship between academics and consultants
inevitably means that these two key groups in the management ideas

value chain have come to share a general view about the market.
Rational suppliers will tailor their products to suit the needs of their
customers. A few management writers earn a lot of money from books
and articles, but they are exceptions, and very few of them write prima-
rily for money. Unlike academics in other disciplines, management
academics do not write primarily for kudos either. They write to market
themselves and their ideas so that they can charge high rates for speaking
“gigs” and consulting with large companies as personal CEO gurus or
famous brains in teams of consultants.
Nothing that management academics do is as lucrative as consulting
for large companies. Everything else, from how they plan their own
careers to what they write and how they think is dominated by this fact.
For them, success is measured not by how well their books, videos and
lectures are received, but how high a day rate they can charge. Some
charge higher day rates than top consultants.
There’s nothing to object to here, either. I do not share the view
that management consultants, including management academics acting
as consultants, are greedy and grossly overpaid. Some of them may be
greedy and some may be overpaid, but the fault in the latter case at
least, lies not in them, but in those who overpay. The desire for a high
day rate is no more a sign of greed in a consultant than is the desire for
a high share rating in an entrepreneur.
The problem here is that the buyers who set consultants’ day rates
are CEOs of large companies. Almost all hirers of consultants work for
large companies, because the client pays, and SMEs (small and medium-
sized enterprises) do not use consultants, partly because they cannot
afford to, and partly because, being still young, they have not acquired
the big company vices that it is the business of consultants to remedy.
These close relationships between academics, consultants and large
companies mean that the supply-side of the management ideas market

is focused exclusively on meeting the needs of large company CEOs.
Since they are the principal paymasters, the ideas worth most (to an
academic) are those that address their problems and challenges. In this
way, the needs and outlooks of the CEOs of large companies dominate
and define the management ideas market. Academics tend to ignore the
undergrowth of business, where new kinds of enterprises are most likely
to emerge, because there’s no money in it.
Moreover, although in times like the present of retrenchment, the
CEOs of many large companies are busy reducing costs, cutting payrolls
9780230_230941_08_cha06.indd 108 09/09/2009 10:01
6 THE MYTH OF LEADERSHIP 109
and pruning business portfolios, size is still important to them. Their
ambitions, to become the CEO of a Fortune 500 or FTSE-100
company, were couched in size terms. All their experience and the
moves they’ve made to rise to their elevated positions attest to their
belief that large joint stock companies are now, and will continue to be,
the highest form of business life. This is why demergers are so rare, and
why CEOs embark on them so reluctantly in response to crises, hostile
bids or lobbying by investors eager to release “hidden” value.
So not only is the management ideas market heavily skewed in favor
of large companies; it is also prejudiced in favor of size itself. It is hard
to find new management ideas that address the interests of SMEs and
virtually impossible to find any that don’t assume big is best and that
within every SME there is, or at any rate, should be, a large enterprise
trying to get out.
I shall argue, in the next chapter, that this is a weakness of the
modern management ideas market and creates a danger of ambush. The
point here of this discussion of the market in management ideas is that
the CEOs of large companies are supported, not only by able lieuten-
ants and consultants, but also by a large and sophisticated management

innovation system in the form of B-school academics who focus exclu-
sively on big business.
The CEO as principal and conductor
Some will argue that, to say CEOs are supported by lieutenants and
groups of advisers is to state the obvious, but to infer from this undeni-
able fact that they’re not, therefore, worth the credit they are given or
the money they are paid for success, is to ignore the role they play as the
principals of what I call the “CEO system.”
According to this view, the lieutenants and advisers, however able
and creative, would sit around contemplating their navels without a
CEO. Without a CEO, the best “CEO system” would lack agency. It
could analyze, identify options, plan and prepare, but without the CEO
to choose, decide and press the “go” button, it could not act.
This argument is patronizing. It insults smart people, with plenty of
business experience who know the problems and opportunities the
company faces, and are aware of the need to maximize shareholder
value, to suggest they are incapable of acting without a CEO. It’s also
circular. It is like saying that tyrannies need tyrants. That is undeniable.
But do societies need tyrannies?
9780230_230941_08_cha06.indd 109 09/09/2009 10:01
110 BUSINESS AT A CROSSROADS
The riposte is to modify the argument slightly and to suggest that
a CEO adds substantial value, by selecting the members of the CEO
system, in the first place, assembling them into a team, assigning to
each a role and tasks, organizing, monitoring, and coordinating their
activity, motivating them, and generally giving them purpose and
direction. This is more like it. It amounts to arguing that an orchestra
needs a conductor, and few would question the need for a strong clas-
sical music culture in a civilized society. But does an orchestra really
need a conductor?

The orchestra has been seen (by Peter Drucker, doyen of manage-
ment writers, among others) as a model for business organizations, and
conductors, the celebrities of classical music, as role models for CEOs.
In his book Leadership Ensemble Harvey Seifter, the then executive
director of the New York-based Orpheus Chamber Orchestra, explains
how this unique musical institution became a world leading chamber
orchestra without a conductor.
2
The Orpheus Orchestra uses a demo-
cratic system, known as the “Orpheus process,” which takes all the deci-
sions made in a conventional orchestra by the conductor.
The process is not easy or very efficient in terms of time, but it is very
effective. The Orpheus has won several Grammy awards, and the quality
of its performances allows it to charge higher concert fees than any
other chamber orchestra.
In his foreword to Seifter’s book, Richard Hackman, a professor of
social and organizational psychology at Harvard University, asks:
Rather than relying on a charismatic, visionary leader … might it be
possible for all members to share responsibility for leadership and for
differences and disagreements to be sources of creativity rather than
something that should be suppressed in the interest of uniformity
and social harmony?
CEOs of companies in which the overwhelming priority is attracting
and keeping good people will read the Orpheus labor turnover rate
and go green with envy. The average tenure of Orpheus musicians is
20 years.
We’ll look more closely at the Orpheus process later. It is enough to
note here that the fact that it works well casts doubt on the assumption
that large companies can’t be run effectively without a very expensive
CEO system. (It is often forgotten that the size of the CEO’s pay packet

tends to increase other CEO system costs. Say that a CEO is paid $10
million a year. Assuming 250 working days a year, that amounts to
9780230_230941_08_cha06.indd 110 09/09/2009 10:01
6 THE MYTH OF LEADERSHIP 111
about $38,500 a day or, assuming an eight-hour day, about $5,000 an
hour. Now suppose the CEO travels around the company’s far-flung
offices spreading his or her charisma, and takes six international flights
a month. Waiting at airports for two hours each end costs the company
$120,000 a month of CEO time, which is roughly equivalent to
monthly lease payments on a Cessna Citation Sovereign. “So buy one”
says the CFO. If the CEO was paid a more modest $1 million a year a
company jet, capable of crossing the Atlantic, would make no sense.)
To the direct, ancillary and agency costs, must be added the costs
associated with the risks of the CEO system.
Systemic risks
A dangerous weakness of the CEO system is that concentrating
power in the hands of one person exposes the company, and those
who own and depend on it, to the risks associated with that person’s
human frailties.
Because hierarchy can only select (in the Darwinian sense) for
the ability to climb hierarchies and not for honesty, integrity, fair-
mindedness, wisdom, intelligence, social responsibility, a concern
for the environment, and other desirable human traits, there can be
no guarantee that those who reach the top will possess the latter
qualities. Most CEOs do, because most of them are decent, as well
as able, but hierarchy-selection pressure is more focused on other
qualities, such as decisiveness, toughness, political skill, charm and,
as noted in Chapter 5, charm’s more potent cousin, charisma.
Charisma is a very valuable quality when climbing a hierarchy, but
can be dangerous in a CEO, because, when unfettered by a sense of

right and wrong, it can corrupt others. The CEO appointment system
selects for ambition and hierarchy-climbing skills, not virtue, so it is
inevitable that, from time to time, a power hungry or amoral person
will become the CEO of a large company, and gain power over its
balance sheet. Names such as Enron, Madoff, Maxwell, Parmalat, Stan-
ford, Tyco and WorldCom demonstrate that this is more than a theo-
retical risk, and that the restraints non-executive directors are supposed
to impose on delinquent CEOs cannot always be relied on. Scandals
such as these led to the U.S. Sarbanes-Oxley Act and to similar laws,
regulations, and codes of practice elsewhere.
It is not just that power corrupts and some CEOs will be corrupted
by their power over the balance sheet. There are risks even when a CEO
9780230_230941_08_cha06.indd 111 09/09/2009 10:01
112 BUSINESS AT A CROSSROADS
is incorruptible. As we have seen, CEOs also impose a range of so-called
“agency costs” on shareholders by recklessly overpaying in a takeover
auction, for instance, misjudging demand, misleading capital markets,
and by various kinds of incompetence.The tendency of CEOs (encour-
aged by the close relationship between management consultants and
academics), to jump on bandwagons, such as using derivatives to
manage risks, can help to destabilize the entire system, as it did in 2007,
with destructive consequences we all have to pay for.
Another kind of systemic risk is created by CEO behavior that may
make some weird kind of sense to the coterie of trusted colleagues and
advisers surrounding the CEO, but which, to outsiders, borders on the
truly bizarre.
The Financial Times, no enemy of CEOs, was horrified by reports of
an agreement between Merrill Lynch and Bank of America (BofA) to
bring forward payment of $3.6 billion of discretionary bonuses to
Merrill Lynch executives after the sale of Merrill to BofA was agreed,

just days before the deal – for the digestion of which BofA was seeking
additional TARP funds – was completed. The FT pointed out that banks
were being supported by public money because the economy couldn’t
work without them, not because bankers deserved protection. It warned
of a backlash, in the form of stifling regulation, if bankers continued to
behave in such a way.
3
The backlash the FT editorial had in mind was exemplified the very
next day in a double-page spread in the Sunday Times (January 25). It
carried police mug shots of seven bank bosses (Sir Fred Goodwin and
Sir Tom McKillop, the CEO and chairman of Royal Bank of Scotland
respectively; Adam Applegarth and Dr. Matt Ridley, CEO and chairman
of Northern Rock respectively; Andy Hornby and Lord Stevenson,
CEO and chairman of HBOS respectively; Steven Crawshaw, CEO of
Bradford & Bingley) and of Prime Minister, Gordon Brown, complete
with charge sheets.
Royal Bank of Scotland and Northern Rock had been nationalized
and Brown was in the dock, because the banking sector’s problems
were, the Sunday Times alleged, partly a consequence of his policies as
Chancellor of the Exchequer from 1997 to 2007, before he became
U.K. Prime Minister.
The criminal abuse of CEO power led to the 2002 Sarbanes-Oxley
Act in the U.S. In early 2009 there seemed to be a very grave risk that
legal abuses of CEO power resulting from an inexplicable inability of
banking CEOs to see themselves as others see them would lead to even
tougher regulation.
9780230_230941_08_cha06.indd 112 09/09/2009 10:01
6 THE MYTH OF LEADERSHIP 113
Another risk inherent in the CEO system is that charismatic people
are not necessarily competent. This was shown in a recent study by

Cameron Anderson, associate professor of organizational behavior and
industrial relations at the University of California, Berkeley and doctoral
candidate, Gavin Kilduff.
4
They divided 68 graduate students into four-person teams and asked
each team to organize an imaginary non-profit organization. The group
that did best would win a $400 prize. The work sessions were video-
taped. The members of each group were then asked to rate each other
on their influence on the team and their competence. Kilduff and
Anderson, and a group of independent observers did the same. All three
sets of judges reached the same conclusions. The people who spoke
most were rated highest for desirable qualities, such as “general intelli-
gence,” and “dependable and self-disciplined.” The people who didn’t
speak very much scored higher for less desirable traits, such as “conven-
tional and uncreative.”
“More dominant individuals” Anderson and Kilduff deduced
“achieved influence in their groups in part because they were seen as
more competent by fellow group members.” Maybe they were. To test
this, Anderson and Kilduff ran a second study with other volunteers
also divided into teams and competing for a $400 prize. The task, this
time, was to answer math questions from the Graduate Management
Aptitude Test (GMAT), the standard B-school entrance test. All the
volunteers had taken the GMAT, and had told the researchers – but not
their fellow team members – their scores on the math section. Once
again, those who spoke up more were more likely to be seen by their
peers as leaders and more likely to be rated as competent.
But the putative “leaders” didn’t provide the most correct answers
and hadn’t achieved the highest GMAT scores. “Dominant individuals
behaved in ways that made them appear competent” said Anderson and
Kilduff, “above and beyond their actual competence.” But charisma is

sufficient unto itself, it seems. In 94 percent of cases, other team
members accepted the first answer proposed.
Commenting on the research in a piece entitled “Competence: Is
Your Boss Faking It?” in Time, Jeffrey Kluger said:
None of this comes as much of a shock; at least if you’ve been
watching the news. You don’t have to be a former homeowner
burned by the housing fiasco … to agree that the way we pick our
leaders is often based on something other than merit.
5

9780230_230941_08_cha06.indd 113 09/09/2009 10:01
114 BUSINESS AT A CROSSROADS
The probabilistic cost of all these risks must be added to CEO pay
packets, expense accounts, private jets, and the costs attributable to the
allegiance of the CEO’s retinue of advisers and consultants to the CEO
rather than to the company, before an assessment can be made of the
net value the CEO system adds for shareholders.
Fortunes from good fortune
The superstar CEOs, who rose to prominence in the U.S. and the U.K.
in the late 1970s and early 1980s (see Chapter 5), were fortunate in
assuming the reins of power at the beginning of a 20-year “bull” market,
during which the U.S. S&P 500 and the U.K. FTSE 100 market indices
rose about twelvefold and sevenfold respectively.
Some companies led by superstar CEOs, including GE, did far better
than that, but market value is increased by acquisitions, as well as by
improved performance, even when, as is usually the case, the acquirers’
CEOs overpay and destroy value for shareholders. Given the strong
performance of NBC following GE’s re-acquisition of its parent, RCA,
in 1985, this deal may well have created value for GE shareholders. But
the same cannot be said of GE’s acquisition the following year of the

Kidder, Peabody & Co. investment bank, which was sold to PaineWebber
in 1994.
Although some executive compensation consultants advise clients to
reduce the “performance for free” consequences of rising markets, by
indexing options and stock grants, or deferring them in a Stern Stewart-
style “bonus bank,” CEOs are still rewarded and get credit for
commanding ships on a rising tide. They are also rewarded for being in
the right place at the right time, when, for example, the growth of
internet shopping happens to favor business models they inherited, or
when changes in taste or fashion boost their sectors as whole or their
particular niches, or when their scientists find “blockbuster” drugs soon
after they arrive.
Luck, good and bad, has always played and will continue to play an
important part in business success and failure. Oil-rich countries are
rich because they were lucky, not because their companies were better
run than those of other countries. No one deserves luck of either kind,
but as the system works at present, CEOs benefit more from good luck
than their shareholders and other employees and are better protected,
with golden parachutes, from bad luck.
9780230_230941_08_cha06.indd 114 09/09/2009 10:01
6 THE MYTH OF LEADERSHIP 115
The CEO as ambassador
One CEO role that seems at first (and to some extent second) sight to
be valid and valuable is that of an ambassador to the company’s various
constituencies.
The most important constituency, of course is shareholders. One of
the reasons why superstar CEOs have become de rigueur at large U.S.
and U.K. companies is that the shareholders, in the persons of fund
managers, in the first instance, and stock analysts in the second, are
gluttons for celebrity. They and the financial press are much more likely

to find time to attend a briefing hosted by a CEO with “box office,”
than by an unknown from the “back office.”
The halo effect the appointment of a new superstar CEO has on the
company’s share price encourages Investor Relations (IR) staff to use
their most potent asset as much as they can. In Searching for a Corpo-
rate Savior (see Chapter 5), Khurana cites an article in a closed circula-
tion journal about attracting favorable comment from analysts and the
financial press:
There is no better messenger than your CEO, though the CFO
[Chief Financial Officer] can be a close second. Institutional inves-
tors expect quality time with the top brass … In one form or the
other, they should be spending 40 percent of their time on investor
relations. That means a major commitment to investor conference
calls, presentations at banking and industry conferences, in-person
visits to major shareholders, and last but hardly least, media
appearances.
6

A company needs an ambassador to cultivate good relationships
with investors, equity analysts, and the press. Problems arise, however,
when an IR department with a superstar CEO at its disposal tries to use
the CEO’s charisma to maximize the share price. This is the wrong
objective for an IR department. The goal of an IR department should
be to keep the market price of the company’s stock as close as possible
to the “right,” or intrinsic price, which is the price that fully, but no
more than fully, capitalizes the best available estimate of the company’s
prospective free cash flow.
When CEO charisma is used to elevate the price above the intrinsic
value of the shares, shareholders certainly benefit in the short term, and
the company is able, for a while, to buy other companies at an effective

discount. But an overvalued share price stores up problems in the
9780230_230941_08_cha06.indd 115 09/09/2009 10:01
116 BUSINESS AT A CROSSROADS
future. Although the market (thanks, sometimes, to star-struck analysts
and journalists) might get it wrong from time to time, it will
always correct its mistakes. And such corrections often begin with
over-corrections, which demotivate share-holding and option-owning
employees, and undermine trust in the investment community. Analysts
might be dazzled for a while, but no one likes to be made a fool of, and
a temporary overvaluation that requires management to deliver more
than they are capable of delivering can all too easily be followed by a
hard-to-correct undervaluation.
Ensuring the market price of the shares never strays very far from
their intrinsic value is a less challenging objective than that of maxi-
mizing the market price, but it is better in the long run, and has the
additional merit of not requiring the extremely expensive services of a
superstar CEO to dazzle fund managers, analysts and the financial press
into suspending their disbeliefs in optimistic free cash flow projections.
All that it requires is for the company to open its books, set out the
reasoning behind its free cash flow projections, and assign to an articu-
late, well-briefed spokesperson the task of answering any questions
about them. The CEO may fit the bill for the job, but it scarcely seems
an appropriate use of the time of such an expensive employee.
Leaders and leadership
Two decades ago, during what now seems to be something of a golden
age in management thinking, the Harvard Business School professor,
Rosabeth Moss Kanter, introduced to the business world the idea of
“empowerment.” In her book, When Giants Learn to Dance: Mastering
the Challenge of Strategy, Management, and Careers in the 1990s, she
argued that companies were most productive when employees were

“empowered” to make decisions on their own. She urged companies to
dismantle their hierarchies, and allow employees to “dance” in the fast-
changing business world of the 1990s.
7

The empowerment idea acquired a lot of “traction,” as modern
parlance has it, partly because Moss Kanter was editor of Harvard Busi-
ness Review from 1989 to 1992.
It went quiet after a few years and a decade after Moss Kanter had
introduced it to the management discourse, empowerment was ejected
by another Harvard Business School professor, Chris Argyris, in an
article in the Harvard Business Review entitled: “Empowerment: The
Emperor’s New Clothes.”
8

9780230_230941_08_cha06.indd 116 09/09/2009 10:01
6 THE MYTH OF LEADERSHIP 117
Argyris argued that the purpose of “empowerment” is to improve the
company’s performance, by achieving the “internal,” as opposed to the
“external,” commitment of employees. Only external commitment,
where employees merely comply with the terms of their contracts, is
possible when tasks, and the behavior required to perform them, are set
by others, and performance goals and priorities are set by management.
Internal commitment only becomes possible if employees are empow-
ered to define their own tasks, and how to achieve them, and perform-
ance goals and priorities are set jointly, by employees and management.
The experiment failed, according to Argyris, because although CEOs
paid lip service to the then fashionable idea of empowerment, they were
unwilling, when it came down to it, to surrender enough power to
achieve “internal” commitment. They realized that empowerment is a

subversive idea, as far as the CEO system is concerned, which raises
disturbing questions about the nature of leadership and the role of the
CEO. When employees are empowered, it seems inevitable that, notwith-
standing Moss Kanter’s protestations to the contrary – “by empowering
others” she insisted, “a leader does not decrease his power” – some
others, particularly those with Rawlsian “powers of sovereignty,” must be
correspondingly disempowered.
Cynics will suggest that the fact that, 20 years after Moss Kanter
urged giants to dance, one hears almost nothing about empowerment,
might be because CEOs who yield power to employees will come under
pressure to give up equivalent proportions of their enormous pay
packets. Not being a cynic, I do not believe that empowerment, as a
management approach, was deliberately suppressed by CEOs jealous of
their power and pay. It was simply an uncomfortable idea, which did
not sit well with their view of their role. But if, as Moss Kanter believed,
and Argyris did not deny, shareholders would have benefitted from the
empowerment approach, the decision of CEOs not to adopt it must be
deemed an agency cost.
Embedded in the empowerment idea is the distinction between
leader and leadership. During empowerment’s brief flowering as a
serious management idea, there was a lot of talk about leadership at
every level. The CEO was the leader, but the hierarchical structure left
plenty of roles for lieutenants and “other ranks” to lead at lower levels.
This was sophistry, but it was a only short step from here to detach
leadership from the position and the person entirely and to argue that
leadership is just a role, the baton of which should be passed between
people, depending on who in the circumstances is best qualified to
discharge it.
9780230_230941_08_cha06.indd 117 09/09/2009 10:01
118 BUSINESS AT A CROSSROADS

Something of the sort happens anyway as when, for example, the
CEO “gives the floor” to the CFO in an executive committee meeting,
to deliver the latest cash flow projections. But the CEO remains the
primus inter pares and retains both control of the meeting and the
power to make decisions.
A different kind of leadership is employed by the Nhunggabarra, an
Australian aboriginal people. In their book, Treading Lightly: The
Hidden Wisdom of the World’s Oldest People,
9
Karl-Erik Sveiby and Tex
Skuthorpe call it “context-specific” leadership:
Everyone in society had a leadership role in a specific area of know-
ledge,
and the leader role shifted depending on the context and
who, within that context, was the most knowledgeable. This is a
highly advanced form of leadership, found primarily in high-
performing teams and in knowledge-intensive organisations. It was
unknown to the English military commanders who arrived on the
Australian continent and its significance has not been understood
among other observers until this day.
The Nhunggabarra had no chieftains and their law stories, told and
re-told over tens of thousands of years, include many principles and
rules that seem to have been specifically designed to prevent individuals
from achieving the power of chieftains. The provisions protecting
Nhunggabarra from tyranny and all forms of centralized power are so
strong that Sveiby and Skuthorpe speculate that they may have experi-
enced centralized power at one time long ago, hated it, overthrew it,
and proscribed it permanently.
Those tempted to dismiss these ethnographic speculations about the
serious business of business as “flaky,” the management equivalent of

organic rice and leather sandals, should consider two things.
First, consider the ethnographers Skuthorpe and Sveiby. Skuthorpe
is the storyteller – the contemporary steward of the Nhunggabarra law
stories passed down to him from the “old people.” There was no ques-
tion here of fitting half-remembered tales to suit some half-baked
theory about “empowerment” or corporate democracy. Skuthorpe had
to tell it truly. He was responsible. And Sveiby is no amateur dabbler in
the science of management. He is professor of Knowledge Manage-
ment at Hanken Business School in Helsinki, a pioneer (some would
say the pioneer) of the whole Knowledge Management area, and the
leading authority on valuing and managing intangible assets.
Second, consider the time. The Nhunggabarra developed their
system of context-specific, knowledge-based leadership tens of thou-
9780230_230941_08_cha06.indd 118 09/09/2009 10:01
6 THE MYTH OF LEADERSHIP 119
sands of years ago. It is the creature of many millennia of selection by
trial and error. It has literally stood the test of eons. For the Nhungga-
barra people it may be, to put it in Churchill’s way, a bad leadership
system, but it’s better than all the other systems they have tried from
time to time over the millennia. By comparison the CEO leadership
system is an early experiment in how to run a large business in the age
of industry and the internet.
How would a dispassionate observer judge this experiment so far? I
think a kind judge would say it was like the curate’s egg; good in parts.
Progress report
The CEO system of corporate leadership is far from ideal, and very
unlikely to turn out to be the default to which all other systems would
revert. It is extremely expensive in terms of direct costs and, although it
is hard to be sure one way or the other, it seems inconceivable that the
economic value CEOs add, by themselves, can amount to anything

approaching what shareholders have to pay them.
Moreover, the CEO system also imposes agency costs on share-
holders in addition to direct CEO costs and, as we have seen in previous
chapters, it imposes another kind of agency cost on society as a whole,
in the damage very high, more than fair share levels of CEO pay are
doing to the consensus that sustains liberal capitalism.
If I were a betting man, I wouldn’t back the CEO system to survive
if other systems better suited to the contemporary environment and less
costly for shareholders, and society at large, were to emerge from the
corporate undergrowth and challenge the CEO system.
But the CEO system has the advantage of being the incumbent. It is
safe as long as no serious challengers emerge.
The argument so far
Large modern companies aren’t as we would like them to be, because
they have not adapted to today’s business environment, and because
the power and pay of their CEOs leads to inequality that threatens the
liberal capitalist consensus. Thankfully, very high CEO pay is the result
of market inefficiencies, not of the liberal capitalist system itself. More-
over the CEO system, the costs of which include but aren’t confined to
CEO pay packets, is extremely expensive and very unlikely to be a cost-
9780230_230941_08_cha06.indd 119 09/09/2009 10:01