What is wrong with company top management? Part two of our series exposes the seamy underbelly of the executive elite. Freek Vermeulen is no less tender towards CEOs and boards than he was towards regular managers.

Book data
Title: Business Exposed
Author: Freek Vermeulen
Pages: 238 pages
Publisher: T Prentice Hall
Price: £14.99

In the first part of our series Freek Vermeulen, professor at London Business School (for full bio click here), illustrated everyone’s management shortcomings. In other words, we all need to struggle to be good managers.

In this second part of our three-part series, we dodge Freek’s barbed arrows aimed at the heads of companies: CEOs and boards of directors. Here again, the book is an entertaining – yet scholarly supported – litany of charges against heads of companies. But we also dodge arrows aimed at us lowly stakeholders, since we seem to acquiesce this state of affairs like muttons going to the chop.

Although the author’s acid is poured mostly on CEOs that deserve such treatment, he again points out that human nature is often at the root of some of the CEO’s leadership shortcomings. We all share the blame.

The two areas that are the worst in CEO behavior are the unbridled urge to grow the topline (more revenues please) and the hanky-panky in the boardroom, namely when it comes to compensation. And where are we, common mortal shareholders, to be blamed? According to Freek, because we tend to idolize leaders.

Grow at any cost?
Alas, CEOs appear to be only human. Like the rest of us they always want more: more food, more drink, more extravagant vacations, and of course fatter pay to afford these extra luxuries. Alas again, unlike many of the rest of us, CEOs have usually displayed tenacious leadership skills to arrive where they are. This ambition carries over into their urge to conquer, and other traits that have lead to many a corporate downfall.

Insert chart here (signpost with Beware of urge to conquer risks)

In this realm, one of Freek’s favorite punching balls is Cees van der Hoeven, the former CEO of Dutch supermarket chain Ahold. (Have you ever noticed how business authors often pick on managers in jail, such as Jeffrey Skilling?)

Indeed, Cees van der Hoeven displayed many of the nasty urge-to-conquer traits that the author deplores. Firstly, he was all too eager to use acquisitions for his company’s growth. Incidentally, one of the research pieces that Freek refers to suggests that CEOs perhaps should stop after their first acquisition if it was success (chapter 3 of the book). Secondly, Ahold never took account of time compression diseconomies: companies, just like human beings, need sufficient time to absorb new acquisitions or learn new tricks. Lastly, Cees van der Hoeven fell victim to CEO hubris, that trap that lures CEOs into the media spotlight. Chief executives bask in positive media coverage for two reasons: it does have a positive correlation on share price, and it does provide a feel-good moment.

Only too human
The second stone that Freek casts at chief executives regards their narcissism. To put it bluntly, chief executives are typically full of themselves. The bad news is that it is our fault. Research (see page 72 of the book) shows that they are usually not born that way, but it is under the public’s influence that they become narcissistic.

Add chart 2 here (Narcissus CEO)

So where are we to blame for our crop of chief executives? The author points out that we lowly humans want to ‘hang the hero’ and have someone other than ourselves to blame if things go wrong. A CEO seems a perfectly acceptable sacrificial lamb. Another issue for us is hero worship: we all love the gather up behind a winner, slap her on the back and transfer our burden of expectations to her shoulders.

And where can the blame be laid on the CEOs themselves? Undeniably their most despicable trait is attribution bias, whereby they take credit for all successes and delegate all failures. Lastly, Freek does give credit where it is due: plain vanilla managers are not the same as rum and raisin leaders. Leaders can also manage difficult situations, and they have vision and the ability to inspire.

The king and his court
Having resigned himself to accepting the existence of a CEO, and rationalized about his usefulness, the author now turns to the court. There are two classes of courtesans that Freek expounds on: investment analysts and the board of directors.

Investment analysts do not rank very high in Freek’s esteem. These lemmings display many troublesome ‘qualities’: herding instincts, a tendency to espouse conflict of interest (namely when the company under analysis is also a client), and blurry ratings categories are but a few of the compliments the author bestows upon the analyst underclass.

Equally troubling is the link between the king and these court jesters. The well-heeled CEO knows how to treat analysts to his best advantage. Showering information and gifts or leaving the analyst out in the cold are standard treatment – and one can easily guess the impact on a company’s rating.

Court jesters are one thing. The king’s closer entourage of counselors, the board of directors, is another matter altogether. After all this elite helps decide some critical matters to the CEO, namely compensation, stock options and approval of strategic decisions, including acquisitions.

Freek is no less tender in his treatment of CEO behavior here. Once again with the backup of research done at many different business schools, the author punches holes into many shortcomings. Among the most notable: boards are often stacked with CEO-clones; the wrath of the chief executive on board measures that limit his power; the built-in risk of relying on stock options in CEO compensation; the virtuous circle between CEO compensation and board member compensation (the more you pay me, the more I pay you), and a few others.

“Usually articles about the characteristics of a good leader or CEO make me feel skeptical, sometimes even nauseous,” writes Freek Vermeulen (page 84). After reading three chapters that do not mince their criticism of CEOs, the reader probably feels enlightened… but equally nauseous.

* Does not rhyme with chic; difficult Dutch pronunciation, somewhat akin to “frake”.

By Chris Fodor, published February 2011.
Our next installment will appear on February 23 and will cover management myths and unintended consequences.