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 / Summer 2003 / Issue 31(originally published by Booz & Company)


The Leadership Challenge 2003

Pasternack:  The context in which you bring in a CEO is important. Boards and search committees get mesmerized by somebody’s track record and don’t think enough about what it’s going to take to be successful in that particular company.

When we started our organization and leadership practice some years ago, we interviewed a lot of CEOs and asked them what they had done well, and what they would have done differently. One CEO, who had led two different companies, had a very interesting response: “I didn’t understand the difference in how people interpreted what I was saying inside this company and how they would have interpreted it in my other company.”

S+B: Part of the trick that you identified is learning the culture. What can a board do to try to acculturate a new CEO?

Pineau-Valencienne:  Problems are solved well because you have succession within the company. When you get somebody from outside, of a different culture, you increase tremendously the risk of failure. You can be inspired by other cultures; at the same time, you cannot impose another culture on a company.

Neff:  But first, you have to ask the question, Is the culture the right culture? Maybe it needs to be changed, in which case somebody who talks a different language may be necessary.

Boards and CEOs

Khurana: Part of what we’re seeing today is the consequence of a set of governance institutions that were set up in the 1920s and that are no longer appropriate for the complex world we’re living in today. Modern corporate governance structure was really an outgrowth of the second industrial revolution: the separation of ownership and control, the rise of the managerial class and managerial capitalism, strong managers, weak owners. The structure of boards is much more representative of the House of Morgan, in terms of managing more as a financial syndicate, rather than attending to the strategic things we’re asking board members to be involved with now.

Ideally, if one was to start from a blank slate and say, “Okay, we have a $10 billion company; let’s design the governance for it,” I don’t think we would say, “Well, let’s get 12 people who meet four times a year for one day.” It takes people years just to understand their own business internally.

We’ve got to address restructuring these institutions. The question is: Do we want Sarbanes-Oxley to restructure those institutions, or do we want to do it in a way that will result in effective management and effective value creation?

Pineau-Valencienne:  I’m afraid that the regulations will create the opposite of what we want.

Neff: Boards are much better, though, than they used to be. The most important reason is that boards are more independent than they ever were before. The boards, and not the CEOs, are essentially deciding who is going to join the board. Cronyism is over. That is significantly different than what it was five, 10 years ago, when CEOs to a large degree picked their own boards. You can see the change in the turnover: In the U.S., we probably have close to 250 board searches today. Just two years ago, there were only 275 new board additions to the entire S&P 500.

S+B: Isn’t there a conflict here? We’re making more demands, some of them regulatory induced, on board members’ responsibilities. We’re also making more demands on CEOs. We’re also saying we want CEOs to be on boards because they have pattern recognition. But I can’t imagine, under this set of demands, a CEO who would willingly want to serve on somebody else’s board, let alone two or three. Have chief executives grown reluctant to serve?

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