charismatic leaders

The American corporation is in crisis. That can hardly be denied. Share prices in blue-chips have been treated as disrespectfully as those of dot.coms. CEOs and finance directors have been handcuffed. Charismatic leaders of erstwhile stock market stars like Disney and Citigroup have been fighting, not only for their reputations, but for their survival. The series of gross financial scandals in both 'New Economy' and old has undermined confidence in all profit reports. Over-reporting and under-expensing have become endemic.

As a result of all this, the hideous escalation of executive rewards - with $3.3 billion paid to bosses of 25 now collapsed firms in three years - has come under a searching and glaring spotlight. The lax and absurd treatment of stock options is the most conspicuously widespread example of under-expensing. One certainty is that accounting standards will change to ensure that the costs of this massive element of remuneration are correctly reflected in corporate accounts. But other matters are less sure - for example, has US laxity already spread significantly to Europe and Asia, and if so, what revelations and upheavals can non-US corporations now expect?

Readers of Letter to Thinking Managers, which has constantly attacked managerial malpractices of this kind, will not be surprised by any of the above. And they will also be quick to recognise a lowest common denominator of the disasters and disgraces. That is the domination of corporate management by one-man bands: chief executives who hold almost untrammelled power over the corporate strategy and expenditures - including the cost of their own lavish financial packages.

THE WELCH EFFECT
Many of these big-time bosses were and are big in one particular way - charisma. People like GE's Jack Welch (now forced to surrender his grotesque retirement perks) became folk heroes. WorldCom was led to its financial doom by the much larger-than-life Bernie Ebbers. At the awful Enron, Jeff Skilling 'claimed the mantle of a charismatic leader...by advancing his audacious vision of transforming the corporation...to an "asset-light" New Economy company'. The words are those of Rakesh Khurana, an assistant professor at Harvard Business School, who has published a withering attack on chief executive charisma in the September edition of the Harvard Business Review.

As the HBR says: 'When companies look for new leaders, the one quality they seek above all others is charisma. The result, more often than not, is disappointment - or even disaster'. Charisma, however, is only one factor in the rise and rise of chief executive power, the most prominent organizational change of the past two decades. That's a strange development, in view of the massive increase in complexity and scale that has beset all businesses, caused by unstoppable processes like globalisation and deregulation for larger companies, and competition, above all, in smaller ones.

A dominant boss can arise just as easily in the lesser firm. Indeed, the managing owner is the archetypal one-man band. Charisma comes in handy as an adjunct to one-man or one-woman rule. As Khurana notes, Skilling's charisma helped in 'converting people to his cause at Enron'. The title and trappings of a top person naturally provide an advantage in impressing others. If that edge is enhanced by a powerful personality, mastery of communication and intensive personal publicity, the impact on lesser mortals must be all but irresisitible.

MODERN THEORY
But modern management theory holds that these others aren't 'lesser': rather, their abilities and experience must be fully harnessed for the corporation's sake as well as their own. Right through society, subservience has become less desirable and harder to obtain. That's for very good reasons - it's inefficient, it's resented, it's inhumane and it's illogical. How can a single person have a monopoly on strategic and operational wisdom? The chief executive as hero no longer seems viable, which implies a number of changes, most long advocated by management gurus. Are you happy to accept...

• a reduction in your authority?
• greater role-sharing?
• reduced operational activity?
• greater regulation?
• scaled-down remuneration?
• shorter tenure?

If the answers are No, you're in the same boat as most CEOs. But changes are already in train. Before Enron triggered the crisis in corporate confidence, CEO tenures had been shortening markedly: and in the aftermath the day of untrammelled stock options (and of non-expensed options in general), not to mention other lavish perks, is plainly ending. That era didn't come about by accident.

The New Yorker magazine (23 September) tells how post-war managements were quick to see that greater size meant fatter rewards - hence, fat companies, built by merger and acquisition. Since these groups tended to be run for the benefit of managers rather than shareholders, some became sitting ducks for aggressive bids from corporate raiders and venture capitalists.

These 'speculators and predators' claimed to act as agents for the investors in unlocking 'shareholder value', which meant chasing a higher price for the stock. CEOs joined the chase enthusiastically, since their reward could be linked to the pursuit, generating pay-offs of unimagined scale. By 1997 nearly half of the top 200 executives in the US, according to Pearl Meyer & Partners, received 'mega-options' averaging $31 million. In this context, charisma achieved a new utility; it helped sell the CEO and his shares to an often gullible public.

The public was gulled by the phoney figures that the option rewards encouraged. The higher the reported results, in theory, the higher the shares. Professor Howard Schlitt spotted as far back as 1993 that firms were thus regularly stooping to seven accounting vices;