The last 18 months have been the economic equivalent of the Vietnam War, with waves of bad news and daily casualty reports eroding confidence and hope. Beyond the enormous financial cost of the crisis, the most enduring loss may ultimately be the end of the notion of American economic invincibility. In the same way as the Vietnam conflict diminished our faith in our political leaders, this crisis has shaken our collective trust in some of our most prominent business leaders.
It wasn't that many years ago that business leaders were truly respected, if not revered. Certain CEOs were the rock stars of the 1990s. Not anymore. Today, CEOs are rarely cast in a positive light, with media, financial pundits, lawmakers, and others seemingly lining up to criticize corporate chiefs—sometimes with good reason. But efforts to punish and discourage bad behavior on the part of a few CEOs may actually have some unintended consequences—discouraging chief executives from making tough but necessary decisions, or even keeping qualified candidates from accepting CEO spots.
So how did CEOs as a class go from cultural icons to scapegoats in less than a decade? While CEO prestige was already fraying at the end of the 1990s, the beginning of the end of the era of the so-called imperial CEO can almost certainly be traced to 2001-2002. In the space of a few months we absorbed the start of a recession, the September 11 terrorist attacks, and the uncovering of the misdeeds at Enron, WorldCom, and Tyco. As stock market gains evaporated, so did admiration for business leaders.
Rise of the Short-Term Focus
Actually, many of the factors that led to this shift were in place long before 2001. The rise in significance of institutional investors since World War II has been a primary catalyst. According to Federal Reserve data, the proportion of shares of U.S. public companies held by institutional shareholders has gone from less than 10% in 1950 to well over 60% today. The concentration of equity and the tendency of institutional shareholders to follow the recommendations of a handful of proxy advisory firms amplify their power.
Institutional investor voting power is not simply theoretical. Activist hedge funds have leveraged this growing power to pressure companies to take decisions to achieve short-term gain. Even household names such as Heinz (HNZ), Home Depot (HD), Motorola (MOT), and Office Depot (ODP) have caught the attention of activist hedge funds.
Pressure from institutional shareholders has led to a trend toward majority voting for directors and the elimination of multiyear terms for directors. The relatively rapid departures of Carly Fiorina, Jim Donald, and Chuck Prince were not merely high-profile aberrations, but rather, reflections of this focus on short-term results and the intolerance of failure to deliver those results that rule today's markets. It all adds up to a significant reduction in CEO power.
Most analysts agree that the drive for short-term results led to the increasingly risky behavior that encouraged borrowing and inflated the credit bubble. If we are to move beyond the current financial crisis, we will need business leaders who are permitted to take actions that will have a positive impact beyond the next quarter or next fiscal year. But at a time when businesses need long-term, strategic decision-making the most, the new corporate order actually impedes decisive action.
Getting the Right Things Done
Agreeing on who is a great CEO is a bit like debating who is the Pablo Picasso of our generation; criteria will differ and ultimately history will make the final call. However, there is quick agreement on the proposition that good CEOs are strong leaders who understand competitive challenges, show foresight, evidence courage, and have a willingness to take risks. Limits on executive power, the continual focus on short-term results, and ever-shorter CEO tenures all work to undercut the ability of many chief executives to realize their full leadership potential.
The return of the imperial CEO, supported by an uninformed, lethargic board of directors, is not likely to happen, and any such development would be decidedly unwelcome. Boards and management that understand and act in the interests of the company and its shareholders represent best practice. But a key ingredient for long-term success must not be forgotten for the sake of political correctness: No matter the company, the industry, or the economic environment, businesses can only be successful when their CEOs are empowered to make bold, strategic decisions. It's right there in the acronym: CEOs must be permitted to be effective chief executives.
As management guru Peter Drucker once noted, while most effective CEOs differ in "personalities, strengths, weaknesses, values and beliefs, all they have in common is they get the right things done." Now more than any time since the Great Depression, we need business leaders who can get the "right things done." If Tom Watson or Alfred Sloan or Walter Wriston were CEOs today, would they have the authority to do what is necessary to get the "right things done"? Hopefully yes, but that conclusion is far from certain. We may not know whether their modern counterparts will be allowed to rise to the leadership challenge for some time to come.
Aquila is a partner in the Mergers & Acquisitions Group of Sullivan & Cromwell LLP. .