Experience Stern | News & Events

The New Zealand Herald
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(c) 2012 The New Zealand Herald

EXHAUSTED after a shipwreck, the hero of Gulliver's Travels wakes up on the island of Lilliput to find that he has been tied down by lots of ``slender ligatures''. Gulliver is far stronger than his tiny captors; but by working together the Lilliputians subdue the giant.

The bosses who gathered in Davos this week are more like Gulliver than they imagine. They may feel big, as they hobnob with politicians and stride between soirees. And pundits fret that Davos Men are carving up the world. But when those bosses return to work they will discover the tiny ligatures that non-Davosites have attached to them bind ever more tightly.

Two decades ago bosses were relatively unbound. American chief executives struck heroic poses on the covers of Forbes and Fortune and appointed pliable cronies to their boards. Europeans imported the American CEO cult to the old continent.

But a succession of catastrophes - most notably Enron's 2001 implosion and the financial crisis in 2007-08 - have empowered the critics of over-mighty bosses. In 2010 legal academics Marcel Kahan and Edward Rock published a seminal article on ``Embattled CEOs''. Since then they have become more embattled.

One sign of that is that bosses don't last long these days. Among the world's 2500 biggest public companies, the average job tenure for departing CEOs has fallen from 8.1 years in 2000 to 6.6 years today, according to consultancy firm Booz & Co. The fall would have been steeper but for the generosity of China's state companies. In 2010, CEO turnover worldwide was 11.6 per cent but in China it was half that.

Booz also notes that shareholders give bosses very little time to prove themselves: Leo Apotheker lasted seven months as head of software firm SAP and 10 months as head of computer giant Hewlett-Packard.

Another sign that the Lilliputians are winning is that fewer chief executives now chair their own boards (the corporate equivalent of a schoolboy marking his own exam papers). In Booz's global sample, the proportion of incoming CEOs who doubled as chairmen fell from 48 per cent in 2002 to less than 12 per cent in 2009. Even America is growing wary of imperial bosses: according to the Corporate Library pressure group, the proportion of CEOs of S&P 500 firms who mark their own exams fell from 78 per cent in 2002 to 59 per cent in 2010.

Bosses are still paid handsomely; but this is partly a reaction to rising job insecurity. In much of the world CEO pay is rising more slowly than it did in the 1990s. In America it may even be declining.

Moreover, the Lilliputians are forcing politicians to tie more strings. In 2010 America's Congress passed a say-on-pay law that gives shareholders a right to hold a (non-binding) vote on pay. David Cameron, Britain's Prime Minister, has suggested giving shareholders a binding vote on pay.

The rise of institutional investors has changed the old equation whereby dispersed shareholders confronted concentrated managers. The proportion of stock in America's publicly listed companies held by institutions increased from 19 per cent in 1970 to 50 per cent in 2008. And the scandals of the last decade have reignited shareholder activism.

At the same time, boards of directors have grown more demanding. Gone are the days when a boss could put his golfing buddies on the board. Today most board members are outsiders, leading to a huge improvement in their quality. Consultancy Korn Ferry notes the 95 new directors on the boards of its sample of America's 100 biggest companies are remarkably rich in international experience: 21 per cent hold foreign passports and 12 per cent have worked in Brazil, Russia, India or China.

This has also increased their willingness to act as stern monitors rather than chummy advisers. In his excellent new book Winning Investors Over, Baruch Lev of New York University's Stern School of Business writes that ``the lonely CEO often faces a `team of rivals', sometimes adversaries''.

All this is affecting bosses' behaviour. The latest buzz phrases in the C-suite are ``humble leadership'', ``servant leadership'' and ``bottom-up leadership''. And the academic literature suggests it's improving corporate performance.

John Core and colleagues have shown companies with strong shareholder rights have higher operating profits than those with weak rights. Craig Doidge and colleagues found companies with stronger boards can raise capital more cheaply.

But some CEOs are objecting to the new regime. How can they focus on long-term growth, they ask, if they're constantly second-guessed by a team of rivals? Some are jumping ship for private companies.

Anthony Thompson, formerly in charge of Asda's ``George'' clothing brand, left to join private clothing company Fat Face, rejoicing that: ``I no longer have to slavishly adhere to corporate nonsense and overbearing governance''. Gulliver eventually persuaded his captors to untie him. CEOs will undoubtedly try to do likewise.L

- The Economist Newspaper Ltd, London, 2012