Beware the leadership myth of the great chief executive
- 8 November 2011
- From the section Business
Do we overestimate the difference individual leaders can make in business?
A business grows 20% in one year. What do we say?
We ask who was in charge. We look, starry-eyed, to the boss. We write profiles. Soon, there will be a new face on the cover of the business magazines. Corporate PR bows to their genius. Pay soars.
The modern chief executive is a visionary, strategist, reformer, inspirational leader - the difference between winning and losing.
On this, all in the world of business surely agree. How can you argue with performance like that?
But people do. Are they mad?
They use phrases like "narcissistic management", making you realise how sceptical some are about the cult of the chief executive, even in the face of figures that seem unarguable. Their claim is that much self-congratulation is vanity.
Chris Dillow writes an economics column for Investors Chronicle.
Citing research by Jonathan Haskel of Imperial College Business School, he says: "Most of the productivity growth in the 1980s occurred through firms entering and exiting the market rather than from individual firms improving their productivity.
"What that tells us is that the ability of managers to make their company more efficient is perhaps not as great as we think and we overestimate the ability of managers to improve their companies," he says.
What is more, very few big firms survive long-term. Taken together, this evidence suggests that the best chief executives money can buy are outdone by newcomers and market forces.
It was Warren Buffett - who else? - who said that when a manager with a great reputation takes over a business with a bad reputation, it is the business that keeps its reputation.
That is a view you would bet they do not teach in the business schools, full of wannabe chief executives.
But you would be wrong. There are sceptics here, too.
Jerker Denrell is professor of strategy and decision making at the Said Business School at Oxford University.
He invites his students - undergraduates and MBAs - to look back at firms with great results in any one year. The tendency, he says, is to assume this reflects on the leadership.
"These seem to be the fast-growing, possibly well-managed firms, whereas some firms were declining by 20%," he says.
"And then you ask them, 'So what's the average growth rate of the firms that grew 20%?', and then of course they realise: well maybe they don't grow 20%, that's sort of exceptional; maybe they grow 15%. And then I show them an empirical answer, which is like 2%."
In other words, the stars usually fall quickly to earth, a phenomenon known as regression to the mean, inviting the question whether it was the star who was responsible for the 20% growth in the first place.
Even where companies soar for a few years in a row, it may be no more than the result of a big gamble that paid off in a world where most big gambles do not, but some are bound to be lucky.
But after the event, with the selective bias of hindsight, we do not see luck, we see inspired business leadership.
Professor Denrell also cites research that suggests the more chief executives and others talk about themselves in communication with shareholders, the more likely they are to engage in acquisitions and the more likely these acquisitions will turn sour.
Which suggests that individuals can at least do harm. But not perhaps as much as supposed.
For if you are not as responsible for the good stuff as you would like to think, you are probably not as responsible for the bad as others allege.
Thus Chris Dillow thinks the villainy of bankers has been overdone, for example. It is not all bad news for business ego.
We did not always have a cult of business leadership, says Professor Denrell. Go back a few decades and we find the idea of the good boss as no more than competent administrator.
"In the 60s, 70s and 80s it changed, and you can track some of the changes by the extent to which CEOs' faces appear on the cover of business magazines like Business Week and Fortune, and that's been steadily increasing since the 80s."
Resistance to the importance of the individual is owned by no political party. It is consistent, for example, with both Marxism and the ideas of a favourite of the right, Friedrich Hayek.
Chris Dillow says: "Hayek said we can't have an efficient centrally-planned economy because no individual can gather together so much dispersed fragmentary knowledge, but exactly the same is true of companies.
"Why should the manager of a multinational company be able to pull together all the knowledge that exists in tens of thousands of employees scattered around the world?
"You know it can't be done, and it can't be done simply because nobody's got that much processing power inside their own mind."
What is more, basic economics teaches that individuals simply respond to incentives.
The argument of the sceptics is not that individuals make no difference, simply that the difference is exaggerated. And most will allow exceptions: General Electric's Jack Welch say, or maybe - some would argue - Apple's Steve Jobs.
But perhaps the very existence of these exceptions, the fact that some are truly great, makes us think greatness the answer.
But by fastening on the individual for an explanation of success or failure, the danger is that we miss the deeper explanations.