Thinking Managers

Robert Heller of www.thinkingmanagers.com debunks the Cult of the Chief Executive and the Cult of Shareholder Value.

Double Cult Folly

I have consistently attacked the Cult of the Chief Executive and the Cult of Shareholder Value within companies – both dangerous and linked. The intellectual foundation for this double disaster is simple.

The purpose of the corporate economy is to make its owners rich. So, an able chief executive is appointed and girded with all the powers necessary to direct the corporation in the right way in order to create capital gains for the shareholders.  Creating riches will at the same time garner huge rewards to the CEO and his key staff.

The CEO, with wealth as an incentive, will perform as brilliantly as expected, and the share price will dutifully respond.

This formula could be described as the Welch Effect. At General Electric, Jack Welch oversaw sustained success for over 20 years, enormously enriching himself and satisfying the more modest desires of the investors.

Jeff Immelt took the reins in late 2001 and has delivered good results by sticking to the GE tradition of proactive succession.  He has moved the management in various directions, with an emphasis on growth and creativity.  Earnings per share have risen by 22% since 2001. But the Welch Effect has failed to appear. The share price has gone down by 14.9% over the same period – so what's the problem?

The answer is simple: the Double Cults aren't working now because they never have – they were based on false reasoning.  Look at them again and judge whether they are true or not.

  • The purpose of the corporate economy is to make its owners rich.  False: Other parties – particularly the customers – are more significant.  If you don't have customers, you don't have a business.
  • An able chief executive is appointed and girded with all the powers necessary to direct the corporation in the right way in order to create capital gains for the shareholders.  False: The CEO in large and complex companies should be a first among equals. The key to success is the strength of the whole management team, and of its relationship with customers and workforce.  Furthermore, a great deal of lauded strategies, such as mergers and acquisitions, destroy much more wealth than they create.
  • Creating riches will at the same time garner huge rewards to the CEO and his key staff.  False: The rewards might well be huge but they bear little relation to the actual achievements.

Finally, far from the wealth being an incentive, the CEO cannot affect the share price because it is moved by forces beyond any control of management.

The debunking of these theories explains the Immelt Paradox. Business Week says that investors have simply gone off ‘large-cap’ companies. The returns on the S&P 100 stock index have gone down to 2.3% annually with dividends, 0.19% without dividends.

Had you invested in large-cap US stocks five years ago, $10,000 would have grown only to $11,058 - relative peanuts.

However, the same investment in commodities would now be worth $15,150; in energy, $17,537; in small-cap US stocks, $19,997; in gold, $21,400. Emergent markets top the pile, where the $10,000 would have more than doubled - to $21,500.

Clearly, smaller companies have something that large ones almost inevitably lose, as history shows.
Big-time managers and their advisers have spotted the advantages of small-time management and they have tried to replicate them. I have always sung the praises of the flat organisation which keeps its central establishments small, bureaucracy minimal, and staff focused on the new – putting the onus on new ideas and perpetually seeking to equal or surpass the best standards in all significant activities.

Double Cultists have simply been worshipping at the feet of false idols. Maybe they will rise from the dead one day but they will still be false.

About the author
Robert Heller is one of the world’s best selling authors on business management.