That is the reason people give for hiring an outside CEO. Then it almost always fails miserably. Whether that’s because the organization couldn’t actually change direction or because the CEO is an outsider that doesn’t know what they don’t know is up for debate I guess, but there’s really no evidence that hiring outsiders to do a turnaround works even a little bit well that I’ve ever seen.
I don’t know about that, internal vs. external CEO hires have been roughly even for a long time (admittedly this chart is deeper than big companies, so I’m being kind of wishy-washy about whether we’re talking big companies or broader market),
Why do the same 9 guys make the final table every year?
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There are obviously tons of variables and each situation is different but the following are all broadly true:
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Some are better than others, and truly exceptional executives can create immense shareholder value while terrible executives can destroy companies.
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Most CEOs are replacement level.
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No board wants to admit they have an average or below average CEO, so they inevitably hire a compensation consultant who tells them the peer company average, then give their guy more, causing an ever-increasing upward spiral.
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Being on a board is a super fucking easy way to make $75k - $150k for very little work, and you don’t get on the list to be a board member of a publicly traded company by upsetting the apple cart.
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It is a legitimately hard problem! Big publicly traded companies have market capitalization in the tens of billions of dollars on up. Paying a CEO $50 million is obviously obscene on an absolute basis but it is a rounding error to annual P&L and practically irrelevant to enterprise value.
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Its hard to get too worked up about executive compensation for founders who retain their equity. Jeff Bezos is an asshole and nobody should be that rich but, purely from a business perspective, I have no problem with him being outrageously rich. He has generated over a trillion dollars of wealth for shareholders! If you want to tax the shit out of him or his estate or both, great, thats a separate issue.
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There are cases where the literal GOAT can’t save a company. Lots of run good and run bad, which makes it hard to identify who is good at their job amidst very small sample sizes.
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Politics is almost always more important than competence, you have to be a sociopath to get anywhere near these jobs unless you founded the company.
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Billionaires are a policy failure
(Unless they create trillions in shareholder wealth)
We should want people to create wealth. We also should have far more robust regulation and taxation.
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I definitely agree with this, and I think it’s very asymmetric. The potential upside of a great CEO is smaller in magnitude than the potential downside of a terrible CEO. A terrible CEO will drive away the people that really deliver value. A great CEO is still pretty constrained since they can’t literally do everything.
On this we totally agree. CEO’s are like generals in that the very bad ones can do a lot of damage. Also like generals many of the ones people think are good were just fortunate enough to have lousy competition.
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Can you cite on the external CEOs doing poorly? I did a quick skim and google suggested that it was either the other way or debated.
I just skimmed this article and it has some interesting observations:
https://digitalcommons.uri.edu/cgi/viewcontent.cgi?article=1041&context=lrc_paper_series
I got the take from this particular book: https://www.amazon.com/CEO-Pay-Machine-Trashes-America/dp/0735212392
The guy does a very good job of walking through the mechanics of exactly how we decide how much to pay CEO’s and how absolutely stupid it is. He’s also not a fan of the goal of poaching a ‘superstar’ CEO from the outside instead of just promoting the best person you have internally who already understands how everything works.
I’ll admit that there could be some confirmation bias in my acceptance of this take. I see a lot of outside CEO’s at the helm when a company gets absolutely dumpstered. It’s entirely possible that there are so many outside hires that I’m missing all the ones who perform at replacement value or better.
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I dont think there’s any doubt that compensation is stupid. The way that the executive class all sit on each other’s Boards approving each other’s massive comp is a total joke. As George Carlin says, it’s s club and you ain’t in it.
I think CEO’s can affect culture in terms of how they treat their employees. You see this pop up from time to time where certain companies get reputations for having excellent pay and benefits, like Google employees getting free day meals or whatever. But at some point there’s always a regression to the mean. Anytime there’s competition and price pressure, salaries and benefits converge on some mean level and then all corporations in that industry sort of blend together. Maybe there’s an industry where one competitor has stood out from the rest and made paying and treating their employees above market rates a competitive advantage, but I haven’t seen it.
I work in the auto industry and there’s a ton of mobility between companies over here. The joke is that the grass isn’t greener over there, it’s all the same shade of brown. Maybe you have a crappy boss or an unusually shitty job and leaving the company is your best escape route, or job hopping is your only path to salary advancement, but otherwise it’s all the same shit. The industry has sucked any ambition I have right out of me. At this point all I want to do is keep my job with decent pay, not work long hours, and stay out of the spotlight. There’s lead or follow, and I’m getting out of the way.
I don’t think there’s any robust evidence that external CEOs are better or worse than internal CEOs.
The major problem is that there are enormous selection issues:
- Better-managed companies are probably going to have a deeper bench of internal candidates. (Because managing succession is an important aspect of running a company.)
- Firms that are already running well are more likely to promote internally, since they will more or less want to stay on the same path. On the other hand, firms that are performing terribly are going to want to hire externally in order to shake things up.
Because of these selection issues, you’re likely to observe poor performance after hiring an external CEO compared to firms that promote an internal CEO. But that doesn’t mean the internal/external CEO choice had a causal effect on performance.
I generally agree on executive compensation being out of whack. But I’m nowhere near the point of “There’s actually not much variation in CEO quality, and it’s not worth paying substantially more to attract/retain your first choice.” As one of my advisors said in grad school, it’s very strange how many people will marvel at the obvious talent of NFL quarterbacks or brain surgeons or authors, yet be totally convinced that the average person could effectively run a multi-billion dollar corporation.
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I do not miss the car business at all. Do you work for a manufacturer at least and not a dealership? Dealerships are the nut low. Petty monopolists who are rich because their great great granddad signed up for a Chrysler dealership franchise are not good employers.
Here is what I don’t understand about car dealerships:
Auto Nation has a P/E ratio of 22.
You can buy a mom and pop for 5x earnings, maybe 7x or 10x if it is a super awesome brand like BMW or Mercedes or whatever.
Why the ever loving fuck hasn’t an SPAC raised money, bought out a bunch of mom and pops at 10x or less then traded publicly? It seems like an absolute no brainer.
Also, if I’m a good operator / GM, I would much rather work for and receive stock in a highly liquid publicly traded company with professional management then work for some fourth generation failson asshole who probably “loans” me the money to buy highly illiquid stock I can’t sell and have no voting rights with.
You’re greatly underestimating how much leverage a good operator/GM has over that fourth generation failson. There are way way way more dealerships out there than there are good operators/GM’s because the entire system is grossly oversupplied and the poorly run dealerships are essentially subsidized by the manufacturer.
I was on the sidelines for a deal between one of those superstar GM’s and one of those failsons and the superstar GM basically got 60% of the company for putting up <10% of the money and the failson isn’t allowed to step foot on the property. The failson made an absurd amount of money out that deal too.
First thing I thought of was athletes. Of course the best are the best.
An apt analogy to athletes might be imagining that you had to rate baseball players if the only statistic you had available to you was RBIs and the opinions of 1980s style MLB scouts. Some conclusions would be correct but you would also make a lot of mistakes. And for the mistakes, there would be a lot of narrative building by commentators to acclaim the players with the most RBI. Indeed, even with a ton of additional and superior metrics, baseball is still plagued by traditional thinking and mythology about “driving in runs”.
I think that this is a big part of the story with execs as well. Firm performance under a CEO is a bit like RBIs - the CEO is an undeniable factor, but there are very significant factors that are totally outside of the CEO’s control. We should be equally skeptical that CEOs, even those that have good EPS metrics, are the reason for those good outcomes. Some CEOs are going to be Joe Carter.
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To me the biggest problem, which is really hard to address, is that these jobs are almost always handed out on the basis of political skill. And once you’re hired once, now you have “experience,” no matter how mediocre your performance.
Think of any big organization you’ve been a part of. I guarantee there have been very senior people in that organization who aren’t very smart, who are huge douchebags, who inspire eyerolling and worse from everyone below them. This happens at absolutely every single large company, up to and including the CEO.
Making yourself look good by claiming credit for success and blaming others for failure is far more important in advancing your career than competence or strategic vision or whatever. You have to be willing to throw people under the bus, even your friends and co-workers, and be an absolute psycho. People like this are, shock shock, rarely inspiring, visionary leaders.
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