‘The Shackled Boss’, Schumpeter column, Economist, January 21st 2012

Once again I visit the Schumpeter column for an insightful and topical contribution.  Schumpeter challenges the conventional view that corporate CEOs are ever more powerful and are paying themselves too much.  The article points out that, in reality, they have never been more powerless and are under increasing pressure.  It is suggested that the developments of the first decade of this century - Enron and similar scandals, the financial crisis - have made CEOs feel ever more embattled by events and public criticism.

The article reveals that the job tenure has been shortening, though I have to confess surprise that it is still so long, apparently down from 8.1 to 6.6 years during the last decade.  There are however many examples of CEOs bringing the average down; for instance, Leo Apotheker stayed only seven months at SAP and ten months at Hewlett Packard; surely, once is unfortunate, twice is incompetent!

These shortening tenures and the pressures involved are seen by Schumpeter as an argument that the much criticised levels of pay for top people are justified by the risk and insecurity that goes with the job.  

Nevertheless the demands to curb these pay levels are increasing, placing yet more pressure on those at the top.  And the article argues that, though there has been criticism that shareholders are not proactive enough in challenging strategies and pay levels, there has in fact been a major increase in shareholder activism in recent years.  There are now far fewer CEOs who also act as Chairman, and the days of appointing friendly, acquiescent non-executive directors to toe the line are largely over; the calibre of the people and the breadth of their experience are much increased.  In many board rooms the CEO is facing a group of adversaries, watching every move.

There is also evidence - which I had not seen before - that companies with active shareholders and challenging Boards of Directors, actually achieve higher operating profits.  The downside is that this may be at the expense of long term growth.  It may also cause the tenures to be even shorter, as embattled CEOs decide to move to the smoother waters of private companies.  This might cause those who insist on cutting pay levels to think again; the large amounts which cause so much criticism will have to be paid to reward and retain those who choose the high risk and high pressure at the top of public companies.

Click here to view the article in full:

http://www.economist.com/node/21543117