The More CEOs Matter, the More Often They Get Fired

The More CEOs Matter, the More Often They Get Fired

The New Yorker’s James Surowiecki observes that average CEO tenure has fallen in recent decades, driven to a significant extent by boards’ greater willingness to fire CEOs over poor performance. The “embattled CEO,” he writes, appears to have supplanted the “imperial CEO”of yore:

The breakdown of the old order began more than thirty years ago, but things have accelerated since the turn of the century. The Sarbanes-Oxley Act, passed in 2002, required greater disclosure to investors, and increased the independence of corporate boards. “In the old days, boards were often loyal to the C.E.O.,” Charles Elson, a corporate-governance expert at the University of Delaware, told me. “Today, they’re more loyal to the company.” The rise of activist investors—who campaign aggressively for change when they’re not satisfied with performance—has exacerbated the trend. One study found that when activist investors succeed in winning seats on the board of directors the probability that the C.E.O. will be gone within a year doubles. …

The predicament of modern C.E.O.s may seem surprising, given their prominence and lavish compensation. Top executives everywhere are paid more than they used to be, and the U.S. has led the way; American C.E.O.s earn, on average, two to four times as much as European ones and five times as much as Japanese ones. Yet it’s precisely these factors that make C.E.O.s vulnerable, because the expectations for their performance are higher.

Surowiecki also notes that in the age of social media and the insta-scandal, a CEO can create a PR nightmare for their company with just a few poorly chosen words. He points to recent examples of corporate heads rolling over ill-considered public statements, such as the fall of Saatchi & Saatchi executive chairman Kevin Roberts in late July. Directors may also be more sensitive to the risks posed by scandal-prone CEOs in light of recent research finding that such scandals can have an impact on an organization’s reputation long after the offending executive has been shown the door.

But Surowiecki’s broader point is that CEOs are seen as more important today than 20 or 30 years ago, hence their much higher compensation and correspondingly lower job security. At the Harvard Business Review, Tomas Chamorro-Premuzic also tackles the question of how important CEOs really are. After reviewing a number of scientific studies of CEO impact, he concludes that they matter a lot—especially when they’re bad:

Although good CEOs make a big difference, bad CEOs may matter even more. Indeed, the consequences of destructive leadership are well documented, and they are most severe at the top. Jeffrey Skilling’s greed cost Enron shareholders $63 billion. Carly Fiorina lowered HP’s stock price by 50% while firing thousands of employees, paying herself handsomely, and touring the lecturing circuit. Stan O’Neal’s reckless risk-taking sunk Merrill Lynch, yet he still managed to walk out the door with $161.5 million in severance. Although these examples may seem extreme, they are simply bigger and more famous than thousands of other less-known examples.

For instance, narcissistic CEOs pay themselves substantially more (in salaries, bonus, and stocks) even when they fail to boost business performance. Meta-analytic studies suggest that destructive CEOs, who tend to be more antisocial, volatile, and overconfident, generate higher levels of turnover, counterproductive work behaviors (bullying, theft, and cheating), and lower levels of employee engagement. It is difficult to estimate the combined economic cost of these outcomes. In the U.S. alone, the productivity losses of disengagement could amount to $550 million, not to mention the negative effects on employee health and well-being. Clearly, CEOs are not the only determinant of disengagement, but research indicates that leadership is a significant predictor of people’s engagement (both high and low).