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Aug 28, 2016

Gold-plated CEOs have little incentive to appoint successors

Ian Williams ponders the best way to hire a figurehead

There has been a recent spate of complaints that boards and CEOs are not planning for CEO succession. Why is anyone surprised? Imperial CEOs assume the company will go to Hell in a handbasket as soon as they leave, and if CEOs need their maws stuffed with gold just to deliver good results, why would they care what happens once they have landed with their golden parachute? 

Just how essential are a CEO’s talents for a corporation? Like the divine right of kings, the indispensability of the CEO seems deeply rooted – but rarely investigated – in IR lore. CEOs are surrounded with awe and pomp while in office but, with a few rare exceptions, in reality they are ephemeral shooting stars who are almost instantly forgotten when they go. Carly Fiorina’s inglorious executive career, for example, had been buried in the public subconscious until she chose to resurrect herself as a US presidential candidate, only to see her reputation reburied even more deeply. 

By contrast, we are likely to remember the Fords and the Bacardis and members of the House of Windsor: these bosses’ names evoke historically successful businesses. Dynastic succession does not always work, however. Many years ago I interviewed the bright and optimistic IRO of Seagram – just before perky young heir Edgar Bronfman, Jr took over and destroyed the company. Normally, family members care enough about their operation to keep upstarts on a rein, but young Bronfman was unconstrained. A good CEO might not make much difference to the upside, but a bad one can signpost the road to Hell.

In fact, one reason for lack of succession planning might be that CEOs are taking the Ottoman approach. The first thing a new Sultan would do is murder all the siblings who might threaten his position, and one cannot help but wonder whether CEOs paranoid enough to need golden parachutes and other protective paraphernalia to guarantee safe succession really want to identify potential rivals – other than to exclude them from the equation.

A CEO is indeed a figurehead for a company: the first person investors see. But if we examine the metaphor, the figurehead only appears to be leading the ship. In reality the engine room is below decks, while the vessel is actually steered from much farther back. But figureheads were often decked with gold, so there is indeed a resemblance to the modern CEO.

How necessary is all that gold, though? Ostentatious emoluments – the corporate jets, the golden parachutes, and the rest – are there like Queen Elizabeth II’s privy purse, crown and state coach: so the incumbent can live up to the expectations that employees and shareholders hold of the company. 

The purpose of pretending to try outside recruitment is to boost the myth that there is a market for CEOs, so that the compensation committee the CEO appoints will be trapped in the whirring treadmill, always paying more than the average, and the few who are appointed from outside contribute admirably to the expanding universe of executive pay by doubling their remuneration. 

Above all, however, it is clear that a CEO’s main tasks are to perform for the shareholders and public, and to boost morale in the company. It is not that high pay is necessary to incentivize these executives, for surely they would give their all for the company anyway, out of loyalty? No. 

Preferably, then, the CEO succession should be from within the company so the candidates know its idiosyncrasies. For the pool of CEO candidates, therefore, the line of succession should clearly come from the IR department. IR people need some coaching in the simulation of leadership – acting, voice coaching, deportment and similar skills – but no one can match their knowledge of corporate workings. At last, a figurehead that thinks!

Then again, CEOs should epitomize, not exclude themselves from efficient market theory, which suggests that CEO contracts, like all others should go to the best qualified – and lowest – bidder, which in turn reinforces using the IR department as the recruitment pool – because everyone knows that IROs come cheaper than all others. 

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