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CEO-Corporation-India
Reuters/Larry Downing
The CEO is a towering figure not only within the company but also in the world outside.
NOT A HERO

Why you should question the cult of the charismatic CEO

By Commentary

Charismatic and domineering CEOs are part of the governance problem in today’s corporations. The checks and balances that are part of corporate governance, such as boards of directors and institutional investors, are of little avail in the face of charismatic CEOs. And yet the cult of the charismatic CEO has only grown stronger over the years. Within the corporation, the CEO looms large over everybody else. The number and range of important decisions that vest with the CEO are mind-boggling. His peers even one level below are seldom heard or seen or even known to the outside world.

A company’s success or failure is laid squarely at the door of the CEO.

The CEO is a towering figure not only within the company but also in the world outside. The media has turned CEOs into celebrities, exalting them when they succeed, and casting them into the ditch when they fail. A company’s success or failure is laid squarely at the door of the CEO. It would be wrong, however, to ascribe the cult of the CEO to the media alone. Harvard Business School professor Rakesh Khurana has written a whole book on how the cult of the charismatic CEO has come into being in the US in recent decades. Khurana places much of the blame for this phenomenon on institutional investors. 

As institutional investors have gained power, they have put pressure on directors to hold CEOs accountable for performance. If a company failed to perform, institutional investors would ask for the CEO to be fired, even if the CEO’s actions were not responsible for underperformance. In other words, institutional investors fostered a CEO-centric view of the corporation which boards were forced to go along with.

When a company failed to meet expectations of performance, boards turned to an outsider to act as saviour. They did so in the belief that those serving under the CEO were just as culpable for poor performance. In hiring an outsider, boards didn’t just look for managers with the requisite skills. They looked for a person with charisma—somebody who could impress institutional investors, analysts and the media. They wanted a messiah who could inspire employees to great heights of performance, somebody who exuded confidence and optimism. Khurana writes:

The rise of the business media and analysts, with their fixation on the CEO, in turn, introduced a new set of informal ground rules to CEO succession: a critical consideration in evaluating a potential CEO today is his or her ability to command attention from the media and stock market analysts in a way that will establish credibility for the firm and inspire confidence in both investors and others . . . Personality and image are now widely believed to be more important not just than particular business abilities but also than firm- and industry-specific knowledge and experience.

We’ve seen a similar glorification and adulation of CEOs in India (including CEOs of Indian origin in the US) in both the print and visual media. When Satya Nadella was appointed CEO of Microsoft, the media went to town with every little bit of biographical detail about him. Reporters laid siege to his father’s house in Hyderabad, seeking every detail of his upbringing. Nadella’s father, a respected former bureaucrat, could barely conceal his irritation. He remarked, ’I don’t know why I should speak about his [Satya’s] childhood. How is that even important . . . All this is necessary hype’.

Given the belief that it’s CEOs who make or unmake companies, others in top management don’t seem to matter. As if to reinforce the CEO’s exalted status, his pay packet is a significant multiple of the amount earned by the executives who follow immediately in the pecking order. The ratio of the CEO’s compensation to the average pay of the two other highest-paid officers of the firm was 1.4:1 prior to 1980. By 2004–05, it had risen to 2.6:1.

Boards seem to have given little thought to the impact of such disparities on the morale and commitment of the rest of the top management team. They seem to have overlooked the elementary truth that it’s the team as a whole that must perform. They have ignored the need to develop others for the CEO’s role—which, of course, means that if a given appointee fails, the board will again look outside for a saviour! Khurana writes:

The turn to charismatic leadership represents an attempt to find an individual who will provide a guiding vision for the organization. Yet the vision of a charismatic leader is a poor organizing principle for contemporary firms, which increasingly depend for their success on the sharing of intelligence and the dispersal of decision- making authority across all levels of the organization. For one thing, charismatic leadership, intentionally or not, necessitates strong, centralized rule. Charismatic authority often professes a love of egalitarianism and empowerment, but such noble-sounding declarations . . . can, and frequently do, turn out to be self-deluding or manipulative.

The myth of the great man who sits in the CEO’s chair has been reinforced by business schools

The myth of the great man who sits in the CEO’s chair has been reinforced by business schools. Khurana says that the way leadership is taught at B-schools, it’s as if ‘a leader has the power to do whatever he or she chooses simply by virtue of holding a formal office’. One might add that alternative ways of looking at leadership don’t quite get the importance they should—for instance, the idea that leaders may come and go, but the institution goes on. Or that leadership can be exercised at all levels of an organization, not just at the top.

It’s partly because a whole cult has been built around the office of the CEO that boards have been weakened. Once it’s accepted that some heroic leader—a person with a halo around his head—is going to deliver, it becomes difficult for the board to act as a check on him. We end up having boards that cower before domineering CEOs. Risk is concentrated in one person. There’s lack of dissent within the company. Since nobody’s infallible, we shouldn’t be surprised at the wrecks that domineering CEOs leave behind.

This is an excerpt from T.T. Ram Mohan’s new book, RETHINC: What’s broke at today’s corporations and how to fix it. Superscripts and references omitted from this excerpt. We welcome your comments at ideas.india@qz.com.