The media is full of stories about super successful CEOs, such as Jeff Bezos, Richard Branson or Oprah Winfrey. They are however, the exception, not the norm. A large number of CEOs and senior executives has less than stellar careers, and an alarming number were outright failures. These failures had a significant negative impact on their organizations and their industries.
The question remains. What were the causes of these failures and derailments? This article will examine that question and propose some solutions.
I use the term failure or derailment in a leadership or executive role is defined as being involuntarily plateaued, demoted or fired below the level of expected achievement or reaching that level but unexpectedly failing. This article will use the terms leader, executive and CEO interchangeably.
In the past two decades, 30% of Fortune 500 CEOs have lasted less than 3 years. Top executive failure rates are as high as 75% and rarely less than 30%. Chief executives now are lasting 7.6 years on a global average down from 9.5 years in 1995. According to the Harvard Business Review, 2 out of 5 new CEOs fail in their first 18 months on the job. It appears that the major reason for the failure has nothing to do with competence, or knowledge, or experience, but rather with hubris and ego and a leadership style out of touch with modern times. While the average tenure of HBR’s global top 100 CEOs is 17 years, the average tenure of S&P 500 CEOs is now around five years, a dropof 20 percent since 2013. Most such leaders tend to fail or get pushed out of the job long before the likes of the global top 100 even start to wobble. Long-lasting iconic leaders are the exception rather than the rule.
Booz Allen Hamilton concluded what they believe to be the most comprehensive study of CEOs. It reportedfor example, from 1995 to 2001:
- Turnover of the CEOs of major corporations increased by 53 percent.
- The number of CEOs departing because of the company’s poor financial performance increased by 130 percent.
- The average tenure of CEOs declined from 9.5 years to 7.3 years.
- In Europe, where corporate chiefs are presumed to be more protected by intimate relationships among senior management, boards, governments, and financial institutions. In the Asia/Pacific region, where such relationships also are presumed to exist, changes in CEO careers and CEO turnover have been minimal.
CEO Performance Issues
Leadership has been a heavily researched topic for over 50 years. As a result, over 15,000 articles and books have been published on this topic. We know a lot about the characteristics of successful leaders. And based on this knowledge, organizations spend an estimated $50 billion a year on the development of leaders (Fulmer and Conger, 2004).
In spite of this knowledge and investment, most organizations feel they have a shortage of effective leaders. It has been estimated that between 50 and 75 percent of leaders are not performing well (Hogan and Hogan, 2001). The number of leaders that get fired for failing to perform has increased over the past decade and the tenure of organizational leaders has steadily dropped (Hogan, 1999).
The American based Institute for Policy Studies who publish annual “Executive Excess” reports (based on 241 CEOs in the 25 highest paying jobs over 25 years) called Bailed Out, Booted and Busted found that 22% had been Bailed Out (ceased to exist or received taxpayer bailouts), 8% were sacked (lost their jobs involuntarily) and 8% Busted (paying significant fines or settlements).In other words, 38% were seriously poor performers.
CEO Compensation Issues
The American dream is one of upward mobility. U.S. citizens believe that if one works hard, and plays by the rules, they can ensure themselves the quality of life that they desire. In reality, the dream toward upward mobility has been limited to a select class of corporate executives who have received record levels of compensation in recent years. Today, American CEOs of large corporations are paid outrageously large amounts of money compared to foreign CEOs, and the gap between those salaries and that of the average worker is widening dramatically.
According to the 2010 Wall Street Journal analysis of CEO compensation, Larry Ellison, CEO of Oracle Corp. received $1.84 billion and Barry Diller, CEO of Interactive/Expedia.com received $1.14 billion, and another 6 CEOs received at least $500 million in total pay. The average CEO of a major corporation in the U.S. was paid $15 million in 2005, and the figure has climbed dramatically since then.
The average U.S. worker’s salary in 2005 was $40,000 and it has actually declined during the recession to approximately $34,000.00 Susanna Kim writing an ABC News article, said the average CEO pay increased 14 percent to $12.9 million in 2011, 380 times that of the average worker, following a 22.8 percent rise in 2010.The U.S. stands out compared to other areas in the world regarding CEO compensation. For example, the CEO compensation as a multiple of the average employee compensation in the U.S. is a multiplier of 531 as of the year 2000, and much higher now. In comparison, the multiplier was 21 for Canada, 11 for Germany and Switzerland, 25 for Britain, 10 for Japan and 22 for Australia.In the U.S. CEOs earn from 400 to 500 times the median salary for workers. For CEOs in the U.K., the ratio is 22; in France, it’s 15; and in Germany it’s 12. According to another report, leaders of S&P 500 companies made about 347 times more than their employees in 2016, up from 41-to-1 in 1983.
Recent legislation enacted in the U.S. has circumscribed some aspects of executive compensation, particularly the provisions allowing shareholders to have vote on compensation plans, although it is non-binding, but it remains to be seen whether the continuing widening gap between top executives, out of step with the rest of the world, will continue. According to a recent Reuters news release “Days after being rebuked by shareholders, Citigroup Inc. Chief Executive Officer Vikram Pandit and the bank’s directors have bee sued by a shareholder accusing them of awarding outsized pay to top executives.” The suit said the directors breached their fiduciary duties by awarding more than $54 million of compensation in 2011 to the executives, including $15 million to Pandit, though the bank’s performance did not justify it. Fifty-five percent of the shareholders participating in an advisory vote rejected Pandit’s pay package, the first time that investors had rejected a compensation plan at a major U.S. bank. Citigroup became the fourth company this year joining FirstMerit Copr, Actuant Corp and International Game Technology to have a failed vote from shareholders about executive compensation.
The compensation for CEOs has raised serious questions about the ethical implications of such pay. One concern is that executives are encouraged to make business decisions that benefit themselves rather than the organization in order to meet performance goals necessary to receive incentive pay. This is particularly likely if the incentives are short-term in nature
For example, an executive may drive up short-term profits that cannot be sustained, only to collect a large bonus and leave the company before long-term financial problems are revealed. One study compared CEO compensation for the 20 worst performing companies in 2000-2001 to the 20 best, measuring return on equity. The results? The companies with the lowest CEO compensation levels had better business results than the companies with the higher CEO compensation levels.
What are the reasons for what appears to be exorbitant CEO salaries? Many reasons have been given: CEOs have too much power; the inattention of boards of directors; conflicts of interest by compensation consultants; and the reliance on stock options. Whatever the reasons, there are widespread expressions of discontent. Stock options push executives to make risky moves that lift the stock price in the short run, but ultimately hurt the company, critics argue.
The Golden Parachute
Along with what some term to be exhorbitant CEO compensation, the severance packages for CEOs have increased dramatically.
A golden parachute is an agreement between a company and an employee (usually upper executive) specifying that the employee will receive certain significant benefits if employment is terminated. Most definitions specify the employment termination is as a result of a merger or takeover, also known as “Change-in-control benefits”, but more recently the term has been used to describe perceived excessive CEO (and other executives) severance packages unrelated to change in ownership (also known as a golden handshake). The benefits may include severance pay, cash bonuses, stock options, or other benefits.
On June 24, 2013, The Wall Street Journal reported that McKesson Corporation Chairman and CEO John Hammergren’s pension benefits of $159 million had set a record for “the largest pension on file for a current executive of a public company, and almost certainly the largest ever in corporate America.” A study in 2012 by GMI Ratings, which tracks executive pay, found that 60% of CEOs at S&P 500 companies have pensions, and their value averages $11.5 million.
Chart Golden Parachutes 2017
The Effectiveness of CEO pay-for-performance
A study released by the investment research firm MSCI, reported in the Wall Street Journal, raises questions that could seem like sacrilege in the CEO pay world. It found that 61 per cent of the large public companies it studied had 10-year shareholder returns that were, to use the name of the report, “out of whack” with the pay CEOs took home over the same period.
From 2006 through 2015, 23 of the 423 companies in the study had underpaid CEOs who delivered high performance, the report says, while 18 companies overpaid their CEOs for below-average returns. Only 163 of the companies, or about a third, had shareholder returns that were “generally well aligned” with CEO pay. The report summarized this way: “These findings suggest that the 40-year-old approach of using equity compensation to align the interests of CEOs with shareholders may be broken.”
According to a studyChandra S. Mishra and colleagues, firm performance has diminishing relationship with the level of CEO pay-for-performance sensitivity to stock returns, consistent with the tradeoffs between incentives and risk sharing that underlie the use of pay-for-performance. The authors say “our results support the notion that CEO risk aversion limits the benefits from incentive pay, and that when too much risk is placed on the CEO, firm performance suffers. Compensation managers should take these results into account when making changes in CEO pay-for-performance plans.”
What are the causes of CEO Failure?
Studies show CEOs with MBAs more likely to fail. McGill Management Professor Henry Mintzberg, on his blog, says there’s significant evidence that MBA CEOs are not as effective as counterparts without the degree. Prof. Mintzberg has long been a critic of the degree that most people in business consider an important prerequisite for success. He has refused to teach MBA students, arguing teaching MBAs involves teaching the wrong people the wrong things at the wrong time, and has written a book critical of such programs. With Joseph Lampel of Manchester Business School, he studied 19 Harvard Business School alumni who had been considered business superstars in 1990 – top performers with a lustrous MBA education.
Looking at how they fared in ensuing years, he found that a majority, 10, seemed to have clearly failed — their company went bankrupt, they were forced out of the CEO chair, a major merger backfired, or some similar significant setback occurred. Four others had questionable performance, meaning that 14 out of 19 stars had failed to shine. “Some of these 14 CEOs built up or turned around businesses, prominently and dramatically, only to see them weaken or collapse just as dramatically,” he writes.
Of course, that was just one sample and one study. But now he notes two other business professors — Danny Miller of Montreal’s HEC business school and Xiaowei Xu of the University of Rhode Island – have completed studies with much larger samples and even more troubling results. In the first, they studied 444 CEOs who had been celebrated on the covers of Business Week, Fortune and Forbes from 1970 to 2008. They compared the subsequent performance of those companies that were headed by MBAs – one quarter of the sample – with those that weren’t. Both sets of companies declined in performance after hitting the cover. “It’s hard to stay on top,” Prof. Miller has noted. But the ones headed by MBAs declined more quickly and the performance gap remained significant even seven years after the cover story.
The research suggests an association between the MBA degree and a desire to achieve growth via acquisitions, leading to reduced cash flows and inferior return on assets. But if the companies suffered financially, the CEOs with MBAs didn’t — their compensation increased about 15 per cent faster than the others. “Apparently they had learned how to play the ‘self-serving’ game, which Miller referred to in a later interview as ‘costly rapid growth,'” Prof Mintzberg says.
The second study was broader and more recent, looking at 5,004 CEOs of major United States public corporations from 2003 to 2013. The results were much the same. The researchers report, “MBA CEOs are more apt than their non-MBA counterparts to engage in short-term strategic expedients such as positive earnings management and suppression of R&D, which in turn are followed by compromised firm market valuations.” And again, they were well-rewarded for this non-performance.
Prof Mintzberg notes that business schools are centers of inter-disciplinary work, and their MBA programs “do well in training for the business functions, such as finance and marketing, if not for management.” Something in their training may be leading to the poor results. Still, with so many of their graduates getting to the top – if not necessarily staying there – the incentive to change is small. But he argues the problems the studies point to are significant: “Too many of their graduates are corrupting the economy.”
According to Michael Jarrett, INSEAD Professor of Organizaitonal Behavior, writing in the INSEAD publication, “the prevailing arguments used to explain success or failure mostly concern the CEOs’ personalities, especially transformational leadership characteristics, such as passion, risk-taking and tenacity. The failures are believed to be due to simple incompetence, rigidity, hubris or narcissism, traits that made the CEOs deaf to the changing world around them.” He goes on to say that a string of success or a good early start can fuel CEO narcissism and hubris.
According to Sydney Finkelstein, author of Why Smart Executives Fail, researched several spectacular failures during a six year period. He concluded that these CEOs had similar deadly habits:
- Habit 1: They see themselves and their companies as dominating their environment. Warning sign: A lack of respect for others .
- Habit 2: They identify too closely with the company, losing the boundary between personal and corporate interests. Warning sign: They define themselves by their job.
- Habit 3: They think they are the only ones that have all the right answers. Warning Sign. They have few followers.
- Habit 4: They ruthlessly eliminate anyone who isn’t completely supportive. Warning Sign: A lot of subordinates are either fired or quit.
- Habit 5: They are obsessed with photos, speeches, appearances and publications in which they represent the company. Warning Sign: They blatantly seek out media.
- Habit 6: The underestimate obstacles. Warning Sign: Excessive hype and little substance.
- Habit 7: They stubbornly rely on past achievements and successes. Warning sign: They consistently refer to what worked for them in the past.
Finkelstein goes on to say “executives often learn the wrong lessons from history. The costs associated with such misdirected learning are significant, and often tally in the hundreds of millions to billions in losses. These mistakes are seldom due to managerial incompetence or random events, but rather are driven by common patterns of managerial behavior.”
David Dotlich and Peter C. Cairo, in their book,Why CEOs Fail: The 11 Behaviors That Can Derail Your Climb To The Top And How To Manage Them, present 11 cogent reasons why CEOs fail, most of which have to do with hubris, ego and a lack of emotional intelligence. These are:
- Arrogance—they think that they’re right, and everyone else is wrong.
- Melodrama—they need to be the center of attention.
- Volatility—they’re subject to mood swings.
- Excessive Caution—they’re afraid to make decisions.
- Habitual Distrust—they focus on the negatives.
- Aloofness—they’re disengaged and disconnected.
- Mischievousness—they believe that rules are made to be broken.
- Eccentricity—they try to be different just for the sake of it.
- Passive Resistance—what they say is not what they really believe.
- Perfectionism—they get the little things right and the big things wrong.
- Eagerness to Please—they try to win the popularity contest.
Dotlitch and Cairo show that even great leaders can derail their careers by exhibiting flawed behaviors which are often closely related to the factors that made them successful so far. They say leadership failure is primarily a behavioral issue. Leaders fail because of who they are and how they act, particularly when they are under stress. All leaders are vulnerable to the eleven derailment factors; these are deeply ingrained personality traits that affect their leadership style and behaviors. But identifying and managing these derailers is possible and failure can be prevented Dotlitch and Cairo argue.
Barbara Kellerman, in Bad leadership: what it is, how it happens, why it matters focused on two basic categories of bad leadership, ineffective and unethical, identifying seven types of bad leaders that are most common:
- Incompetent – lack will or skill to create effective action or positive change.
- Rigid – stiff, unyielding, unable or willing to adapt to the new.
- Intemperate – lacking in self-control.
- Callous – uncaring, unkind, ignoring the needs of others
- Corrupt – lies, cheats, steals, places self-interest first.
- Insular – ignores the needs and welfare of those outside the group.
- Evil – does psychological or physical harm to others.
Kellerman says the first three types of bad leaders are incompetent; the last four types are unethical. Incompetent leaders are the least problematic (damaging) while unethical or amoral leaders are the most problematic (damaging). Ineffective leaders fail to achieve the desired results or to bring about positive changes due to the means falling short. Unethical leaders fail to distinguish between right and wrong. Ethical leaders put followers needs before their own, exhibit private virtues (courage, temperance) and serve the interests of the common good. Kellerman argues that the unethical leaders have caused the most damage to organizations.
Joyce Hogan and Robert Hogan have written extensively on leadership failure. They conclude, based on a review of the work of others and their own research, that when leaders fail they do so because they are unable to understand other people’s perspectives. They lack socio-political intelligence. This produces an insensitivity to others which limits their abilities to get work done through others. Work colleagues do not like or do not trust (or both) the leader.
Researchers Cynthia McCally and Michael Lombardo identified the ten most common causes of leadership derailment:
- An insensitive, abrasive, or bullying style.
- Aloofness or arrogance.
- Betrayal of personal trust.
- Self-centered ambition.
- Failure to constructively address an obvious problem.
- Inability to select good subordinates.
- Inability to take a long-term perspective.
- Inability to adapt to a boss with a different style; and
- Overdependence on a mentor.
In their book Why Leaders Fail: And the 7 Prescriptions for Success authors Peter B. Stark and Mary C. Kelly argue that the defining factor of a strong leader is rooted in the relationship they built with followers
M.L. Najjar et al., using Hogan and Hogan’s Hogan Development Survey, examined the relationship of leaders dysfunctional interpersonal tendencies and multi-rater evaluations. The sample included 295 high potential senior executives from a Fortune 500 company. Raters included immediate supervisors and a composite group of peers and others familiar with the individual’s job performance. Criteria included four leadership factors (business results, people, self) and eleven interpersonal factors (e.g. trusting, resilient, dependable). Four broad hypotheses were considered:
- characteristics associated with arrogance will be associated with lower peer ratings;
- characteristics associated with cautiousness will be associated with lower supervisor and peer ratings;
- characteristics associated with excitability will be associated with lower supervisor and peer ratings; and
- characteristics associated with skepticism and distrust will be associated with lower peer ratings.
Their results showed that dysfunctional behaviors associated with arrogance, cautiousness, volatility, and skepticism negatively affected performance ratings the most.
Thomas Chidester and colleagues examined the personality characteristics of more and less effective commercial airline flight crew. Effectiveness was defined by the number and severity of errors made by the crew. Captains of crews with the fewest errors were described as warm, friendly, self confident and coped well with pressure. Captains of crews with the most errors were described as arrogant, hostile, boastful, egotistical, dictatorial and passive aggressive.
The psychological literature on leadership derailment and failing leadership borrows many ideas from psychiatry and psychoanalysis. Seventy-five years ago the German born Freudian Karen Horney argued that children develop three normal and spontaneous patterns of relating to others. The three trends have been labelled moving away from others, moving against others, and moving toward others. The moving away trend consists of coping mechanisms characterized by isolation and pulling away from others to avoid situations that provoke basic anxiety.
The moving against trend has a basic hostility and mistrustfulness at its center. People, she argued, characterized by this trend cope with their basic anxiety by seeking power and control over others. The third trend of moving toward others is characterized by inhibition of own needs to appease others at almost any cost. Horney’s theory explains why individuals consistently act in accordance with the derailment tendencies, even when it has obvious negative consequences.
Many aspiring CEOs rejoice in their tough image: a person who “kicks ass”, get things done and isn’t swayed by sentimentality. Many shareholders warm to the idea of a no-nonsense boss happy to take-on the many “people problems” in the organization.
The second pattern that Horney identified is arrogance: hubristic, self-centered, pompous. We all want in our leader self-confidence and a person “comfortable” in their own skin. We admire people with self-belief who is is not held back by self-doubt and dithering.
The third pattern is theatricality: varying expressions of emotionality, dramatic, show offs. The media likes the expression of passion; the boss who can appear totally committed to their business. They also like quirky expressions of special clothes and personal styles.
The data suggest that these three characteristics, in moderation, are extremely helpful in a business career. Of course, one needs to be bright, hard-working, ambitious etc, but these three characteristics give one a boost.
Indeed, there are studies from Britain, Denmark and New Zealand, all of which correlate with these ideas.
The story goes like this. If an executive has an optimal amount of these factors often called tough, self-confident and passionate, they can be rewarded by success. We learn little from success except to keep doing what we did. Failure is a good teacher. So being promoted and being initially successful tends to push the potentially derailing executive over the limit where confidence turns into narcissism; toughness into psychopathy and theatricality into hysteria.
My Experience as an Executive Coach
I’ve had the opportunity over the last two decades to work with C-Suite leaders including CEOs in a coaching capacity. Most were very self-aware, had exceptional relationships with other, and a high level of emotional intelligence. Some however, ere deficient in those areas, and my work with them amounted to “remedial” work, usually as a result of a superior’s or the Board’s insistence. I can say with some satisfaction that I was able to help those individuals change behaviours, and become better leaders. Others I was less successful with, and in all those cases, the prime cause for their failure was hubris, a self-serving bias, and lack of empathy and compassion for others.
What to Do About the Problem
Hogan et al. (1994) believe that dark side characteristics can be changed but that this requires more intensive development than currently found in most leader training programs. They cite evidence from the Coaching for Effectiveness Program at Personnel Decisions Inc. (Peterson, 1993; Peterson and Hicks, 1993), based on work with 370 managers over a five year period which showed that most managers were able to change a number of targeted behaviors.
There needs to be a rigorous culture of open and transparent feedback about the CEO’s performance, and the CEO needs to be encouraging that to happen. All to often, the CEO is neither open to nor receives critical feedback and receives only the positive or self-serving comments from employees.
The Board of Directors and particularly the Chairman of the Board also need to take their responsibility of oversight of the firm and supervision of the CEO more seriously.
There are no universal ways to prevent failures, except perhaps to be alert for the warning signs. We live in a celebrity culture where executives are expected to be perfect, and larger than life. We don’t like to admit they have flaws. We crave heroes and contribute to their heroic myth when we can’t see their flaws.
Good leaders make people around them successful. They are passionate and committed, authentic, courageous, honest and reliable. But in today’s high-pressure environment, leaders need a confidante, a mentor, or someone they can trust to tell the truth about their behavior. They rarely get that from employees or board members.
Professional executive coaches can help leaders reduce or eliminate their blind spots and be open to constructive feedback, not only reducing the likelihood of failure, and premature burnout but also provide an atmosphere in which the executive can express fears, failures and dreams.
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