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 / Spring 2003 / Issue 30(originally published by Booz & Company)


Finding Sanity with Game Theory

Professor Khurana contends that in the U.S., the trend toward considering outsiders for corporate top jobs began about 25 years ago with the breakdown in so-called managerial capitalism, whose star had risen for the three decades prior to that. At the end of the 19th century, most companies were managed by their owners; by the middle of the 20th century, control was firmly in the hands of a cadre of professional managers with an intimate knowledge of the details of the business.

But by the late 1970s, this model was tired. Critics charged that managers had become risk-averse bureaucrats with little stake in the lackluster businesses they ran. The intensity and passion so characteristic of their founders had drained away; talk of renewal was in the air. Corporate directors increasingly felt that they had to “break the mold,” to hire charismatic outsiders who, although they might have limited industry experience, could cut the Gordian knot that bound the firm to the status quo and reintroduce the excitement and commitment so essential to innovation.

At the same time, Professor Khurana points out, directors sought to limit the dangers of such an inherently risky step by choosing known quantities — candidates who had held similar positions with high-performing, high-status firms. The result of this was closure of the CEO selection process to market dynamics, with a relatively large number of firms chasing a small pool of celebrity candidates: CEO compensation, which averaged 42 times the blue-collar wage in 1980, had rocketed to a multiple of 531 by 2000. As current or former CEOs themselves, directors could regard this development with equanimity. Despite these outlandish rewards, however, the author suggests that the outsider CEOs have not delivered the goods. Indeed, the evidence is that these CEOs have relatively little impact on the performance of the firms they manage.

At the same time as they embarked on this essentially social selection process, corporate boards felt constrained to represent their choice to corporate audiences as rational — in accord with the conventional wisdom about how markets should work. Enter the go-betweens, the executive search firms (ESFs). ESFs, Professor Khurana suggests, are used to buffer the elites from the gritty realities of how things actually get done. He contends that the role of the ESFs is largely theatrical as they use projections of corporate directors’ hopes, desires, fears, interpretations, and solutions (a.k.a. position specifications sheets) and the illusion of a broad search to produce CEO candidates who might have been sent by central casting.

Unlike the child in Andersen’s tale of the emperor’s new clothes, Professor Khurana realizes that to question what he calls the “bizarre” processes by which many CEOs are now selected “…is to leave oneself open to the suspicion that one is a dangerous radical, or simply mad.”

But all managers will have to acknowledge that Professor Khurana shows clearly how deep cultural beliefs about the power of individuals to make a difference, perpetuated by business education and media, have contributed to the irrational search for charismatic leaders.

A Company of Citizens: What the World’s First Democracy Teaches Leaders about Creating Great Organizations
By Brook Manville and Josiah Ober
Harvard Business School Press, 2003
224 pages, $27.50

Peter Drucker has suggested that firms that want to see into the future of work might do well to look at the not-for-profit sector. These organizations have always faced the problem of attracting and retaining entrepreneurial knowledge workers, the people who share the values of the organization and are passionate about their work. Many private-sector companies are only now coming to grips with this challenge.

Brook Manville, chief learning officer at Saba Software, and Josiah Ober, a Princeton University professor, have taken another approach by going back to look at the cradle of knowledge and community values itself: ancient Athens. There the first democracy flourished during the 5th and 4th centuries b.c. amid an extraordinary outpouring of creativity in all fields of knowledge. In A Company of Citizens: What the World’s First Democracy Teaches Leaders about Creating Great Organizations, they examine the dynamic’s of the city-state to understand how its citizens solved the paradox of creating a focused and aligned self-governing community of freedom-seeking, entrepreneurial individuals. They show how the society’s values of individuality, community, and moral reciprocity — participation in the democratic process — were nurtured and sustained by the everyday practices of its citizens and embodied in the formal organizational structures that emerged.

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