Never a Good Sign

The board of GM asked Fritz Henderson to resign as CEO. I don’t have an opinion on Fritz Henderson. But here’s the worrying bit, from the New York Times article:

“’Fritz was just not enough of a change agent,’ [a person with direct knowledge of the board’s deliberations] said. ‘The board wants a world-class C.E.O. and now they have enough breathing room to find one.’”

Having tried and rejected the inside option (Henderson was a longtime GM executive chosen to replace Rick Wagoner, who was forced out earlier this year), the board is certain to go looking for a superstar CEO from outside the company and probably outside the industry. The phrase “world-class CEO” is always a dead giveaway for delusion.

My favorite source on this is Rakesh Khurana, who wrote a book called Searching for a Corporate Savior: The Irrational Quest for Charismatic CEOs, but since you can’t read a book for free online I’ll quote from a couple of his articles.

The number one pitfall in CEO succession, his research shows, is “missing the chance for organizational introspection.” In other words, it’s important to figure out what’s wrong with your company, not what you didn’t like about your last CEO.

Another common delusion is believing that a superstar CEO can turn around a bad company. As Khurana wrote in an op-ed article several years ago,

“Although we want to believe that a charismatic chief executive will be able to burnish even the most tarnished business, there is no conclusive evidence that a company’s top leadership actually has much impact on its performance at all. Studies show that external factors, such as general industry and economic conditions, have a far greater influence over a company’s results than does its chief executive.”

The basic issue is that the chances that one person will be able to transform a company of one hundred thousand people are pretty low. Yes, it can happen.  It’s also possible that your mutual fund manager can beat the stock market consistently without taking on additional risk. But another pitfall is “equating candidates with their past companies.” To be clear, I think there are many more good CEOs (meaning that they improve their companies) out there than there are good stock mutual fund managers. But having seen them from the inside, CEO searches also suffer from this bias.

Khurana’s op-ed discusses Jack Welch as the prototype of the modern charismatic CEO, and concedes that Welch was a successful CEO. And yes, GE’s stock has plummeted since Welch left. But a lot of that crash has been due to GE Capital, which Welch built up to be the major source of GE’s profits. I haven’t done a minute of research on this, but how much of Welch’s success was due to excessive risk-taking during a boom?

I know I’m a bit of a broken record on this, but it’s probably because of the time I spent in the world of technology startups. It is absolute conventional wisdom among VCs that founder CEOs have to be replaced by “world-class” external CEOs, and that the way to find a world-class CEO is to select among people who have already been CEOs. Yet many promising companies have been killed this way, and when you look at the huge winners, most of what you see are counterexamples — Bill Gates at Microsoft (MSFT), Larry Ellison at Oracle (ORCL), Scott McNeely at Sun (JAVA), Tom Siebel at Siebel, Dave Duffield at Peoplesoft, Steve Jobs at Apple (AAPL) (compared to the outsiders of the 1980s and 1990s), Hasso Plattner at SAP, William Hewlett and David Packard at HP (HPQ), Robert Noyce and Gordon Moore at Intel (INTC), etc.

Khurana also cites Warren Buffett: “Most academic research merely confirms Warren Buffet’s observation that when you bring good management into a bad business, it’s the reputation of the business that stays intact.” Let’s hope that GM proves Buffet wrong — especially since I believe we own most of it.

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