Wednesday, August 11, 2010

Economics: No More CEO's?

TORONTO, ONTARIO - In a recent opinion piece in the Christian Science Monitor, Vineet Nayar proposed the idea of eliminating the Chief Executive Officer (CEO) position as we know it in companies. Rather than having a driving, top-down leader that makes and enforces decisions, he explains a more bottom-up, empowering approach that he has implemented at the company where he is now an unconventional CEO, in India.

I can certainly see his argument. I've seen a number of CEO's, at small and medium sized companies, make decisions that were ill-advised and not supported by the people told to implement them. In a particularly egregious case, I watched as a head of software at a company tried to figure out how he was going to make the outsourcing of work to India be productive, when by his every estimation it wasn't going to save money in the short or long term. The CEO had not given him a choice--a certain percentage of work had to be outsourced. Never mind that the industry this company was in was not one which easily lent itself to software outsourcing, or that intellectual property was a significant issue, or that a small single digit number of hires was going to allow the company to complete all projects internally on-time. Perhaps needless to say, the outsourcing didn't save money, reduced morale internally because of resulting staff reductions (despite some cleverness on the part of the manager to minimize that impact), and was a minor factor in that CEO's eventual firing.

The nominal reason for the all-powerful CEO is that the Board of Directors needs to hold a single individual accountable for the success of the company. However, there's no reason that the Board can't hold a reasonable slate of people, in most cases the Executive Vice Presidents, responsible for the performance of their various assigned areas and the new-style CEO responsible that they worked together. Too many boards (though certainly not all of them) do not earn their pay and truly analyze the performance of the company at any deep level.

A nice side benefit of such a change is that high CEO pay would no longer be justifiable, as responsibility would be distributed. Furthermore, with less absolute power, the CEO job would be less attractive to power-hungry personalities and more attractive to those interested in making teams function. It would represent an enormous change in corporate culture, perhaps the very kind of change needed to make corporations better local and world citizens.

Yet, Nayar's idea suffers from the same problem I often point out on this blog--there's no incentive to make the change. The current CEO's and boards of directors have no incentive to give up the nice scheme they have going. Even a few companies like Nayar's being successful under a different model will not be enough, as there are a thousand reasons to pass off their experiences as not relevant. The only way I ever see it happening is if there is a tax incentive to adopt an alternate structure. That, of course, would require legislation, and unfortunately, I just don't think there will be political incentives for such legislation, in any country, in the foreseeable future.

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