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Searching for a Corporate Savior: The Irrational Quest for Charismatic CEOs

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A brutally honest look at what is wrong with how CEOs are chosen in America today. I read an advance copy of this book and could not believe it was allowed to go to press. Dr. Khurana certainly has put his professional aspirations on the line to be so bold, but this is the kind of book that makes a difference in the world.

This book presents what I considered some amazing and enlightening information not normally available to ordinary people. We can read about the stupefying emoluments, titanic disasters, and spectacular firings of CEOs in the popular press, but it is hard to find out the inner workings of how these people got into these positions of influence to begin with. Many of the academic treatises on management I have read seem like distant observations from an ivory tower. Refreshingly, parts of this book sounded to me like the information came from furtive phone calls late at night.

Of course, part of the problem is that the foxes are already in charge of the chicken coop. I, too, would recommend this book to members of corporate boards responsible for the performance of top executives. There are plenty of brilliant executives who should be promoted based upon sound character and true leadership ability. Everyone knows that in many cases this is not happening, but Dr. Khurana has identified the defective process that underlies the problem. It is up to boards of directors to learn about and correct their mistakes.

The final page of the book uses an analogy from the Wizard of Oz about drawing back the curtain to shed light on the inner workings of power, and Dr. Khurana has done a good job of this. His book is to CEO succession as Sinclair Lewis' "The Jungle" was to the meat packing industry--it will turn your stomach and make you cry out for change if you read it.

Charisma and reputation have replaced management experience and industry expertise in the corner office. Certainly that's not news to anyone who has read the business press at any time in the past decade, but the trend is certainly important enough to warrant the comprehensive examination provided by Rakesh Kurana. Starting with an analysis of the increasing power of activist institutional investors, Kurana traces the process through which boards of directors have forsaken mature managers for media darlings in their CEO searches. In light of the spate of embarrassing and enraging CEO scandals, we from getAbstract recommend this book to all readers.

This is an excellent timely book about the culture of corporate executives who have more influence on American life than we previously liked to acknowledge. With CEO's from Enron, Worldcom, GE, and Tyco in the news and affecting our 401k's they are imporant force in our economy that can't be ignored.

Mr. Khurana takes the reader through how these leaders are chosen, what makes them unique including his analysis of the charisma factor, and why everyone should be concerned with this process. He does this in a readable fashion that makes this one of the more enjoyable business books I've read in a couple of years.

The selection of a new CEO can be as mysterious as the election of a new Pope, the opacity raising questions about the efficiency and legitimacy of the decisions reached. Because external CEO searches are generally undertaken by companies in the throes of a real or perceived crisis, stakeholders hope the outside CEO will be their savior. Because single-handedly saving a troubled corporation is no ordinary job, boards bent on finding a corporate messiah are not interested in ordinary qualifications but a person who is thought to possess charisma. Enron's Skilling offers a dramatic and instructive illustration of the perils of charismatic corporate ladership. Corporations would do well to reconsider their models of leadership and ways of choosing leaders.

In the decade following McCoy's appointment as CEO, Chicago's Bank One Corporation acquired over 100 banks, moved from 37th largest bank to fourth, and stock increased 500%. In 1999 Bank One began to falter, the stock fell, integrating First Chicago was more difficult than expected, the conservative style clashed with the entrepreneurial culture and McCoy's management style, which was included in the Harvard Business School's required general management course, was seen to be a liability rather than an asset. A revolt gathered steam and a generous separation agreement was negotiated. Stock jumped 11% on the announcement but became volatile with media coverage of the high-profile search for the best person in the US to lead Bank One back to the top with the leadership as the overriding principle guiding the search. Dimon was top of the short list. "In late February, Dimon flew into Chicago to deliver a two-hour presentation to the Bank One search committee. By this time, he had decided he wanted the job. Dimon's presentation seemed to leave his audience breathless. He talked about his philosophy of management, covering such topics as his leadership style and the importance of clearly articulating to people their roles and responsibilities. He also spoke about the importance of instituting a more extensive stock-option plan to better align the incentives of the executives with those of the shareholders. Dimon's bluntness and self-confidence impressed the committee." He wasn't afraid to lead, he said all the right things, he had a plan, he was prepared to make the tough decisions that others wouldn't make. In one brief appearance that Dimon himself largely orchestrated he met Bank One's high standards of leadership. Dimon was appointed over insider Istock and stock soared 30%.

Bank One's CEO succession process followed a familiar script with little emphasis on the company's strategic position and whether the candidate's background was appropriate. If the new CEO is unable to deliver quickly, the wisdom of the selection is questioned. This is the first thread of irrational behavior in what should be a carefully considered process. The leadership school believes that CEOs play a critical role in a firm's performance, while the constraint school believes that internal and external constraints limit the CEO's ability to affect performance. A third school suggests that the pertinent question to answer is 'When does leadership matter?' rather than 'Does leadership matter?' as the leader's impact is highly case-sensitive. "As the Bank One story illustrates, however, it is not only the criteria directors use in choosing a new CEO that calls into question the efficiency and overall rationality of the external CEO market. So do many other features of the search itself." Not only was the initial boost to the stock price short lived, but the board was questioned on its control over the CEO after five directors, including the internal candidate for CEO, "volunteered" to retire from the board after five months. Whether the benefits would be worth the price agreed by the board would remain an open question for an unforeseeable length of time.

"How are we to account for these remarkable, ultimately disquieting features of the external CEO search: the overestimation of the CEO's role and the fixation on charisma; the somewhat Byzantine nature of the search process itself, simultaneously closed to many presumably qualified candidates and open to the influence of many external actors; and the questionable outcomes that this process often produces? This book is an attempt to answer this very question." Boards seriously underestimate the damage that outside succession entails and if the firm is already in trouble, hiring an outside CEO might threaten the survival of the organization itself. A remarkable feature of the Bank One search was that the board passed up an experienced, highly qualified executive who knew the company and its business well. The airplane interview technique in which the incumbent CEO conducts a surprise interview with successor candidates individually and asks who should lead the company assuming both are killed provides very interesting information about the chemistry of the group. Repeating the process three months later when candidates are better prepared but only the incumbent CEO is killed, provides further valuable information. All information is shared with those involved in the final decision. If the process is initiated early enough, the shortlisted candidates can be moved into testing situations that may help the final decision.

Kurana, Assistant Professor of Organizational Behavior at the Harvard Business School wrote this book based on a study of hiring and firing of CEOs at over 850 of America's largest companies. Anyone who is involved in the selection process of a CEO would be wise to study his findings.

In this important work, Khurana focuses the spotlight on the high-risk dynamics of CEO recruiting - particularly in cases where a company has not been doing well, and its former CEO has been disposed of. He demonstrates that this drama is being played out with increasing frequency in the large corporations which play a major role in our economy.

He finds that a pattern has begun repeating itself in such situations: Boards of directors don't usually take action until a company situation has been deteriorating for a while, so even when they begin the recruiting process, they are already under pressure to take bold and decisive action. This impels them to begin by rejecting any current inside candidates who are felt to be part of the problem, thus incapable of breathing new life into the organization. Underlying this "explanation" is the fear that the press, investors, and the media might not applaud a less-than-spectacular candidate such as any merely competent insider. Such lack of enthusiasm by all these onlookers might well lead to further erosion of stock which has probably already suffered. Thus the directors embark on a quest for some outside candidate who might possess the magic powers to provide salvation. The rejection of inside candidates and the quest for some superstar who can pull a rabbit from the hat are, Khurana asserts, the first steps down a slippery slope that frequently end in tragedy. The book describes the descent and how it has and will affect American business.

This is a fine book that presents a number of fresh insights about a critical issue in the world of large corporations. It is written cogently, with erudition, by an author who is rightfully passionate about his subject. Of the hundreds of management titles published in recent years, this description wouldn't apply to more than a handful.

It is interesting to compare Khurana's findings with those described in the book, "Good to Great" by Jim Collins. Collins reports on a number of companies that outperformed their competitors by huge orders of magnitude. According to Collins the CEOs of these spectacularly performing companies (a) were, with one exception, recruited from within and (b) were definitely non-charismatic leaders, selected for their capabilities with no expectation that they would perform miracles or provide instant cures. These findings certainly lend support to Khurana's assertions. The fact that one of Collins "Good to Great" companies, Gillette, ended up as a Khurana case when its CEO was forced out of his position in 2000 suggests that any generalizations in this field must take into account the rapid changes in the world.

In a final chapter, Khurana attempts a description of some possible solutions to the problems he has identified. His main prescriptions are that the CEO job market be opened up and that some more professional recruiting and evaluation processes be created for CEOs. These are rather weak palliatives for the seemingly intractable trends Khurana has described. The book's strengths lie in its portrayal of the way the CEO labor market is operating, the insights into why it is working that way and its portrayal of implications for the future of large American corporations if the trends continue.

Moreover his findings raise two fundamental issues which, though clearly beyond the scope of this book, must be dealt with in any quest for amelioration.

First issue: When things are going well, boards of directors play very stereotypical and structured roles that rarely include in-depth managerial initiatives. The chances that a board of directors, could, once it becomes evident that a company needs new leadership, mobilize itself into an effective working group and then put in the time and energy to (1) decide why the company is in trouble (2) sketch some of the remedial actions that are needed to cure it (3) set out a rational professional search and bring in new CEO in circumstances in which he or she might succeed and (4) have the patience to permit a new CEO to effect a transformation, is virtually zero. Thus a realistic conclusion from the book's findings is that the chances of success in such a venture are so slight as to be not worthy of the attempt. And if that is the inescapable conclusion, then some solutions more drastic than Khurana's may be called for. One example might be consultants who are dedicated to filling in some sort of CEO role during a transitional year or two in such situations, working with the board to evolve a strategy. I am not recommending such a step - merely suggesting that some new thinking is required.

The second issue -- again assuming that the risks in CEO recruiting will continue to be unacceptably high -- concerns a board's responsibility for making certain that they are never forced to undertake the impossible search. Instead of focusing on what boards have to do to improve their techniques for replacing the CEO, it might be more useful to ask whether it shouldn't be a responsibility of boards to ensure this doesn't happen. What mechanisms need to be built in for boards to assess managerial performance on an ongoing basis and to take prompt action when performance is not satisfactory.

While these are important issues that need to be dealt with, I do not criticize Khurana for not dealing with them in his very fine book. He has done yeoman service in identifying the issues and, in that respect, has hit a bull's eye.

This is one of the best and most important business books I have read in many years. Dr. Khurana's well researched and brilliantly written description of the CEO selection process is both timely and revealing. By exposing the weaknesses and consequences of the "closed" CEO labor market, Dr. Khurana has begun to unravel the "Old Boy Network". Hopefully, others will pick up where he leaves off.

The writing is so good that it is accessible to everyone. If you only read one non-fiction book this year, this should be it.

Rakesh Khurana, author of Searching for a Corporate Savior is clearly a moderate guy. At the end of this book, he blithely offers end-of-history platitudes about the durability of the multinational corporation, and approvingly references Karl Popper and even von Hayek. His `what is to be done' proposals are lukewarm pleas to revise business education and the corporate search process (more about that below).But his lack of an ideological axe to grind makes the indictment of the practices of contemporary American corporate board practices regarding the hiring of CEOs all the more damning. Simply by framing the CEO search process in terms of socially constructed institutions, rather than the efficient meeting of buyers and sellers in the marketplace for this sort of `employee' allows him vivid insights, sometimes almost satirical, but also fiercely relevant to understanding our current predicament. In the end, he condemns contemporary American corporations for creating a `closed shop' in which a homogeneous caste is rewarding itself and working from a highly distorted understanding of the role of leadership in corporations.
Khurana links the rise of `the irrational quest for charismatic CEOs' to the rise of investor capitalism, the little disputed increase in the power of shareholders over the operations of corporations in the last thirty years. Before that time, investors were too dispersed to shape individual companies, so they simply exited firms they were unhappy with and reinvested their capital elsewhere. CEOs were largely promoted internally, typically selected and groomed by the current officeholder. But, on the one hand, the number of well performing companies that they could reinvest in started to dwindle in the seventies, making the exit strategy untenable, and, on the other, the concentration of vast sums to be invested in the hands of pension funds, institutions, mutual funds, etc increased their ability to muscle their way into the boardroom. Based on a selective reading of the evidence of a few well publicized cases, the conviction took hold that a great CEO could turn around a floundering company. Considerations of whether a particular corporation might be in a weakening sector of the economy, or face other problems not easily reversed by an individual at the top, took a back seat to the theory that leadership is what matters. More outsiders on boards--the product of stronger investors--meant less interest in the specifics of the business itself. Compounding this dynamic was the expansion of the business media, which often glorified particular CEOs, turning them into celebrities. And given that the CEO was generally supposed to act as a savior, high tempered, combative individuals were not merely tolerated but sometimes encouraged. Given the vagueness of the qualities of a great CEO (as opposed to the specificity of particular industries), board members often relied on `social matching' (basically, looking for people like themselves in terms of class, gender, etc background and outlook) greatly narrowing the pool. Furthermore, the way the business press responded to CEO hirings turned much of the above into self fulfilling prophecy. If a company failed to land a sufficiently charismatic CEO, negative publicity would cause the stock to tank, at least in the short term. So regardless of the actual impact they might make through the policies they implement, CEOs could have a real impact on the prospects for a company simply by virtue of how much charisma they conveyed. As only a limited number of individuals possess such charisma, their bargaining power becomes immense, further compounded by the fact that the boards are generally from the same class and will benefit by the precedent set by huge salaries and options (all of this reminded me of the way a few charismatic stars circulate through most of the offerings from Hollywood, their massive paychecks often starkly contrasting with the poor writing that sink projects that wind up costing well over 100 million to make and market--just as there is something to be said for the commercial prospects of a resonant story, well staged, even with unknowns, so there is something to be said for simply making sure a company produces something people want to buy and keeps its books in order. In both cases, there are strong interests arguing against a move to towards these common sense precepts). In practice, charismatic CEOs could not simply turn around many ailing companies, notwithstanding often dramatic acts of downsizing which demonstrated they were doing something.
Khurana also devotes a considerable portion of his work to the Executive Search Firms which are inevitably brought in when a CEO is to be hired. Notwithstanding the common sense presumption that a `search firm' might provide information that makes the market function more efficiently, he shows that their function is instead much more like diplomacy--facilitating the delicate dance between a search committee of board members and a candidate who has already been selected. There are, for example, many perils associated with the names of candidates being leaked to the media, or the candidate's current employer learning too early that they are exploring other opportunities. Khurana ends by noting that the meritocratic, anti-racist aspects of capitalist markets (which he takes for granted) have been largely frustrated by the process outlined above. "Today, the most recent studies of the social backgrounds of top executives reveal that they are still, for the most part, male, white, native-born Protestants from socially and economically advantaged families... while every study of the social composition of the executive class, ranging back over several decades, has found this same homogeneity, most have also predicted that this situation would not last". (203)
As noted above, Khurana ends by pleading for improvements in business school education, which should clarify that the role of CEO is not that of a savior, and in search committees, which should take a much closer look at the companies they are trying to fix, rather than obsessing about attracting the most glamorous candidate available. Good suggestions, but unlikely to be implemented or have much of an effect. As Khurana himself notes, the current system benefits many of the players who perpetuate it, making change from within unlikely. Although Harvard Business School may have the good sense to hire Khurana as Assistant Professor of Organizational Behavior, it is very much a part of this system, with numerous members of corporate boards among its faculty. I suspect even a concerted push by relatively enlightened business school professors, as well as the more critical journalists within the business media, and the handful of investors (for example Warren Buffett) who understand some of the problems of the present system would make little impression. One might want to appeal to the government to fix this situation, but as the behavior of the Obama administration makes only too clear, the political parties are themselves also thoroughly entangled in the status quo of bloated, closed off corporate executive power.
The most realistic--although not particularly likely--solution to this problem would be a movement from the outside, based among the many constituencies not well served by the present system (environmentalists, community members, workers, etc) who would demand more power over the corporations. Not unlike the investors circa 1980, this would ultimately mean a place-and real power--within the board room. But at least as likely is the opposite process--that those organizations not dominated by a capitalist logic will adopt a similar mentality of searching for a savior from above. For example, one can already identify plenty of colleges and hospitals that have `searched for a savior' to reverse their troubles. Or consider the parade of saviors of the union movement, including John Sweeney, Andy Stern, or Rich Trumka, who have substituted for a searching, democratic discussion about its present situation and actual alternatives. Khurana sometimes act as if the belief in the power of a charismatic leader is an oddity, given the reality that corporations are complex bureaucracies. But these bureaucracies, like many others (again, government, unions, universities, etc) tend to centralize power, notwithstanding (or even because of) the complexity of their rules. It is not surprising, although it is immensely frustrating, that a search for someone to `fix this mess', rather than a searching discussion of how to reground these organizations on an ethical and democratic basis, is an appealing, if ineffectual, option.

This is one of the best business books I've read, thus far. The 48 Laws of Power was very good, as was The Protestant Ethic and the Spirit of Capitalism, my other favorite was Capitalism: The Unknown Ideal. I would have to say that all of these books are immensely useful, and I have found myself referencing them and recommending them to others. If you'd care to understand why we are undergoing an economic crisis in 2008 and how to prevent future ones then Searching for a Corporate Savior, is definitely the book to read. My next book to read is Money Can Buy Happiness.

This book is well written, based on sound research, and could not be more timely. I wish I could say that about more business books.

I really enjoyed parts of this book, but the broader points he was trying to make fell flat. The thesis, that we should be wary of charisma and value competency more, is welcome to most people-perhaps everyone sufficiently detached-and his anecdotes provide interesting and powerful support.

For example, as a former banker I appreciated the point he made that big NYC bankers tend to be investment bankers, which is different than commercial banking, which is different than retail banking. It may seem like inside baseball to outsiders, but that's exactly the point: if you don't know the difference, you shouldn't be a bank director. Thus my conclusion would be that instead of telling current board members to be less foolish, it would be more practical to focus on reforming the way board members are chosen. In my experience, most bank board members were absolutely incapable of judging competence on the essential technical issues to sound banking (eg, how credit quality, spread, and volume are related), and choosing board members based on some objective criteria would seem to advance the search for a good CEO better than telling the current board members to not fall for the next empty suit.

But more broadly, is the flawed method of picking a CEO worse than before? Khurana's own data suggests that new CEOs don't matter much, which mean they aren't worse either. And the issue of arbitrariness is somewhat overstated, compared to a platonic ideal that has never existed. Picking any manager, such as a head of IT, raises the same example of cliquish, suboptimal groupthink. The same could be said for how collectives choose politicians, pundits or professors. In the words of Flaubert, "our ignorance of history makes us libel our own times. People have always been like this."

Lastly, he relies a lot on outdated sociological treatises (C Wright Mills, Weber, Whyte), and the idea of a WASP closed society. For example, at one point he mentions that in 1950 most CEOs where white, male, and Protestant, and the same is true today. But as pointed out it in Brook's Bobos in Paradise, you would be remiss not to mention the dramatic change over the past 50 years. For example, back then the Kennedy family were considered outside the establishment. Jews are now around 20% of Harvard's undergrad, and 13% of the Fortune 500 CEOs, even though 3% of the US population. The WASP elite have given way to a much more meritocratic elite, and the fact that it extends to the boardroom is partially a result of the new process for choosing CEOs. In predictable sociological fashion his straw man argument is the dopey institution-free economist, that conventional wisdom that Keynes and Galbraith effectively invoked, but which is now a tired parody of current economic thinking. In the end, there is nothing really deep here, just a fun book highlighting the current foibles of specific group of people trying to deal with incomplete information and coalition building.