The Curse of the Superstar CEO Rakesh Khurana

I decided on this article from HBR because I thought it caught the zeitgeist of todays Business and Political World. We have much to learn from it!

The secret to being a successful CEO today, it’s almost universally assumed, is leadership. Such qualities as strategic thinking, industry knowledge, and political persuasiveness, though desirable, no longer seem essential. Particularly when a company is struggling, directors in the market for a new CEO—as well as the investors, analysts, and business journalists who are watching their every move—will not be satisfied with an executive who is merely talented and experienced. Companies now want leaders.

But what makes a successful leader? When people describe the qualities that enable a CEO to lead, the word they use most often is “charisma.” Biographers and journalists have spilled much ink trying to deconstruct the charisma of superstar CEOs such as Lee Iacocca, Jack Welch, and Steve Jobs. Nevertheless, charisma remains as difficult to define as art or love. Few who advocate it are able to convey what they mean by the term. Fewer still are aware that the concept is borrowed from Christianity. In a passage from the New Testament, the apostle Paul lists the various charisms, or gifts of the Holy Spirit, that Christians may possess. According to Paul, those gifted with charisma in this sense include “good leaders.” They also include church members with extraordinary endowments, such as the power to speak in tongues or work miracles.

Of course, the meaning of charisma has changed since Saint Paul’s time, but there is a lingering sense of admiration—even worship—for the few who are thought to possess uncommon inspirational powers. We now think of charisma as a set of personal qualities that inspire awe and submission in others. Jeffrey Garten, dean of the Yale School of Management, vividly captured the aura of the charismatic leader in his book The Mind of the CEO. Describing his first meeting with C. Michael Armstrong, now the CEO of AT&T, Garten effused that Armstrong “radiated the confidence, enthusiasm, and energy of a seasoned politician… You had the sense that if you were making a movie and said, ‘Get me a CEO,’ to the casting director, he’d give you Michael Armstrong.”

In researching CEO successions in large U.S. companies over the last half dozen years, I have found that such rapt responses play a surprisingly significant role in determining who is considered qualified to lead America’s great corporations. And I have concluded that the widespread quasi-religious belief in the powers of charismatic leaders is problematic for a number of reasons. First, faith exaggerates the impact that CEOs have on companies. Second, the idea that CEOs must have charisma leads companies to overlook many promising candidates and to consider others who are unsuited for the job. Finally, charismatic leaders can destabilize organizations in dangerous ways. Before taking a closer look at each of these dangers, let’s untangle the paradox of just how charismatic leadership has come to be the ideal for American business in an era we like to celebrate as being rational and enlightened.

The Pull of Charisma

Charisma wasn’t always as important in business as it is today. For the three decades following World War II—in what has been called the era of managerial capitalism—the typical CEO was an “organization man” who worked his way up the ranks and was no better known to the general public than his secretary or his dentist. All that started to change in the 1980s, when a long-standing decline in corporate profits ushered in today’s era of investor capitalism. Senior managers—once viewed as enlightened corporate statesmen—began to be portrayed by disgruntled investors as an insulated, self-interested elite, ill prepared to face the challenges of global competition and rapid technological change. Investors were suddenly looking for CEOs who could shake things up and put an end to business as usual.

This important change coincided with two other shifts. The first was the emergence of an almost religious conception of business, exemplified by the appearance of words such as “mission,” “vision,” and “values” in the corporate lexicon. The second shift was the rise of so-called populist capitalism, whereby ordinary Americans made investing the country’s most popular participatory sport. To serve the public’s growing appetite for business news, the mass media greatly expanded coverage of corporate doings, focusing—as always—on personalities and easily comprehensible narratives.

In this environment, a new breed of corporate leader—today’s charismatic CEO—began to appear. Lee Iacocca, who was elected chairman and CEO of Chrysler in 1979, will probably go down in history as the first modern example of a charismatic business leader. Soon after Iacocca’s turnaround of Chrysler made him a celebrity and even a national hero, Steve Jobs, the New Age wunderkind of Apple Computer, gave a more contemporary spin to Iacocca’s brand of inspirational leadership. Revered for his success in introducing people to the personal computer—which he dubbed the Star Wars—like “force” that could guarantee our “freedom”—Jobs created a corporate culture that has become widespread. In this new organization, employees were supposed to work ceaselessly, uncomplainingly, and even for relatively low pay not just to produce and sell a product but to realize the vision of the messianic leader.

What made these chief executives different from their predecessors, apart from their celebrity status and exaggerated self-importance? For a start, the charismatic CEO was typically—though not invariably—either an entrepreneurial founder or someone who had been brought into the company from the outside. Far from being a predictable organization man, he was expected to offer a vision of a radically different future and to attract and motivate followers for a journey to the new promised land. In keeping with the religious conception of the CEO’s role, the charismatic leader was also supposed to have the “gift of tongues,” with which he could inspire employees to work harder and gain the confidence of investors, analysts, and the ever skeptical business press. Finally, in all too many cases, the charismatic leader was supposed to have the power to perform miracles—to bring a dying company back to life, for instance, or to vanquish much larger, more powerful foes.

The charismatic leader was supposed to have the power to perform miracles—to bring a dying company back to life, for instance, or to vanquish much larger, more powerful foes.

It can, of course, be quite exhilarating for an organization when such a leader appears. Whatever else they may be, charismatic CEOs are not dull. But as many companies have found, there’s a downside to superstar CEOs. Like its close relative, romantic love, charisma can be blinding. And the consequences of that blindness can be severe.

The White Knight Trap

Our fervent and often irrational faith in the power of charismatic leaders seems to be a part of our human nature. The charismatic illusion is fostered by tales of white knights, lone rangers, and other heroic figures who rescue us from danger. Major events are easier to understand when we can attribute them to the actions of prominent individuals rather than having to consider the interplay of social, economic, and other impersonal forces that shape and constrain even the most heroic individual efforts. Sociologists and social psychologists refer to this common tendency to overestimate the impact of individuals as the “fundamental attribution error,” and American society, with its mythology of frontier heroes, pioneering inventors, and other “rugged individuals,” has always been beleaguered by it.

Consider George Washington, America’s first charismatic political leader. He had to suppress a movement to name him king—as if he had won the Revolution single-handedly. More recently, Ronald Reagan has been credited with winning the Cold War, and many people believe that Alan Greenspan controls the U. S. economy. Tracing the performance of vast business organizations to the quality and actions of CEOs is yet another example of the magical thinking evident in the fundamental attribution error.

What makes today’s profound faith in the charismatic CEO so troubling is the lack of any conclusive evidence linking leadership to organizational performance. In fact, most academic research that has sought to measure the impact of CEOs confirms Warren Buffett’s observation that when you bring good management into a bad business, it’s the reputation of the business that stays intact. Studies show that various internal and external constraints inhibit an executive’s ability to affect a company’s performance. Most estimates, for example, attribute anywhere from 30% to 45% of performance to industry effects and 10% to 20% to year-to-year economic changes. Thus, the best anyone can say about the effect of a CEO on a company’s performance is that it depends greatly on circumstances.

The misguided assumption that CEOs are all-powerful is the main reason that the tenure of business leaders has grown ever briefer in recent years. If a CEO is responsible for a company’s successes, after all, he must also be responsible for its failures. My research clearly shows that directors automatically blame the incumbent CEO when a company performs poorly. Scapegoating is as old as human nature, of course, but my interviews strongly suggest that when corporate performance falters, directors come under enormous pressure to fire the CEO and hire a savior. This finding is consistent with the larger historical truth that while charismatic leaders (whether in religion, politics, or elsewhere) may appear at any time, they most often emerge—or are called into existence—during a crisis.

While charismatic leaders (whether in religion, politics, or elsewhere) may appear at any time, they most often emerge—or are called into existence—during a crisis.

For an example of how a struggling company can misdiagnose its problems by attributing them all to the CEO—and then pin its hopes on a charismatic successor—consider the case of Kodak over the last decade. In the early 1990s, Kodak’s then CEO, Kay Whitmore, was intensely criticized for failing to improve the company’s performance. Institutional investors, such as Robert Monks’s Lens Investment Management, blamed Whitmore for the company’s decline, and Wall Street analysts and the media jumped on the bandwagon to demand that Kodak’s board depose Whitmore. In August 1993, the company’s directors delivered the beleaguered CEO’s head in a highly publicized firing. Two months later, the board announced the appointment of the first outsider chief executive in Kodak’s history, George Fisher, who was then CEO of high-flying Motorola.

Kodak’s new CEO was greeted with much fanfare and high hopes. After all, Fisher was widely credited with Motorola’s strong performance during his tenure. But how much of Motorola’s success can truly be attributed to him? In light of the company’s problems today, it is apparent that much of its earlier success was due to telecommunications deregulation: Increased competition in local cellular markets and lower retail prices led to a more rapid adoption of Motorola’s phones and related technology. And if Motorola’s successes were largely the result of broad trends, so were Kodak’s failings. The analysts and investors counting on Fisher failed to recognize that Kodak’s fundamental problems—most notably, missing the shift from chemical to digital photography—had little to do with the company’s executive leadership. Indeed, in the decade before Fisher was brought in, Kodak had been described as having one of the most effective executive teams in the United States.

Nevertheless, when Fisher was signed on, he was hailed as a savior. On the day his hiring was announced, Kodak’s stock rose $4.87, to $63.62. But after several years of acquisitions and divestitures, significant investments in Internet technologies and digital photography, and a wholesale turnover of executives, the Kodak of today looks much like the Kodak of 1994: a business that derives most of its profits from chemical film manufacturing and processing, a horse-and-buggy operation in the world of digital photography.

Meanwhile, the company’s stock has declined by two-thirds since Fisher was brought in. According to analysts, the reason for the company’s continued decline is that Fisher and his recent successor, Daniel Carp, have bungled their opportunities. Certainly, they have made some mistakes—as all chief executives do. Yet Kodak’s CEO, or even the rest of the company’s senior management, is not the main problem. For all the excitement and optimism that are generated by superstar CEOs, the truth remains that the factors affecting corporate performance are varied, highly nuanced, almost frighteningly complex, and certainly beyond the power of even the most charismatic leader to influence single-handedly. To pretend otherwise is to grossly oversimplify reality in the hope of finding easy answers.

Look Bold, but Play It Safe

Kodak’s story is a familiar one in business today: When performance fails, directors feel compelled to oust the CEO and bring in a corporate savior, even if the company’s poor performance cannot be attributed to the incumbent. In their search for a new chief executive, directors brush up against a stubborn paradox. On the one hand, they need (or believe they need) to find a dynamic leader who will shatter precedent and take the company in a daring new direction. On the other hand, given the elusive, ultimately undefinable nature of charisma—not to mention the possibility that they may make an unwise choice—they also feel a powerful urge to play it safe.

I have found that when directors narrow the initial pool of candidates (which already consists principally of top executives they already know), they try to resolve their conflicting requirements by focusing on candidates whom outsiders will consider acceptable. As a result, candidates who make it to the final round generally have already achieved the rank of CEO or president and come from high-performing, high-status companies.

To appreciate the conservative—even irrational—nature of this selection process, consider how the board of tool and hardware manufacturer Stanley Works chose its current CEO, John Trani. When I asked various Stanley directors to explain their reasons for hiring Trani, the factor I heard most often was that he had come from General Electric and had worked for Jack Welch. Several directors discussed GE’s track record in developing ex-ecutives. All of them pointed to other former GE executives who were now leading U.S. companies that had improved their performance. The almost sublime illogic of their arguments is captured perfectly in one director’s comment: “I can’t think of a company of comparable size that has created more value than GE during Welch’s tenure.” Not one of the directors made any explicit connection between Trani’s experiences at GE and the problems facing Stanley. In their eyes, Trani had been imbued with charisma simply through his association with GE and Welch.

There’s an important point here: Charisma is commonly assumed to be inherent, not borrowed from other people or conferred by the social milieu. But the reality is very different. Whether in religious, governmental, or business contexts, charisma is much more a social product than an individual trait. In primitive societies, leaders often wore special clothing, masks, and ornaments that conferred on them a larger-than-life appearance that helped create perceptions of their charisma. In monarchies, kings and queens assume charisma through their family heritage, buttressing it with such potent symbols as palaces, robes, and crowns. Large offices, private planes, expensive suits, and other trappings of corporate power perform the same function for CEOs.

In addition to relying on such external markers, charismatic CEOs acquire their hold over others by meeting certain socially constructed criteria about what constitutes a great leader. One of the most powerful of these constructs is the idea that outsiders are particularly well qualified to lead. One director I interviewed made this point in bluntly stating the rationale for recruiting an outsider CEO: “The person coming from the outside has a clear mandate, particularly if he is coming into a troubled situation. He is not beholden to anyone. There are so many constraints on the internally promoted individual. There is so much baggage. Organizational boxes, the people in the boxes, probably half the businesses that were bought now should be chucked… [As an insider], you are part of the process… You turn to an outsider and then you can watch the blood spray. You don’t see many examples of internal candidates getting to the top of the system and then laying waste to the existing culture.”

The belief in the superiority of outsiders further constrains corporate boards in hiring CEOs. Consider the search that led to the March 2000 appointment of Jamie Dimon as CEO of Bank One. In 1999, Bank One was stumbling in the wake of its recent acquisition of First Chicago NBD. Many of Bank One’s problems stemmed directly from the difficulty of melding the operations and cultures of the two banks. As performance declined, a revolt led by board members from the former First Chicago ended with the firing of John McCoy, Bank One’s illustrious CEO. Although the former First Chicago directors favored appointing Verne Istock, who had been CEO of First Chicago, other board members wanted someone with greater presence to impress Wall Street. They wanted a superstar. Not surprisingly, the search focused on external candidates, and on one in particular: former Citigroup president Jamie Dimon.

Dimon was already a legendary figure on Wall Street by virtue of his long association with—and dramatic firing by—Sandy Weill, with whom he had built the Citigroup empire. Having spent virtually his entire career as a deal maker on the investment banking side of financial services, Dimon had all the mental quickness and chutzpah essential to success in that world. But those were not the traits traditionally valued in commercial and retail banking. Indeed, in many ways Dimon was a strange choice for an organization such as Bank One. He didn’t have much experience with retail banking or credit card operations, two of Bank One’s largest businesses—the latter the source of many of the bank’s operational problems. Known for his hot temper, Dimon also seemed ill suited to bridge the differences between Bank One’s freewheeling, entrepreneurial culture and the far more traditional banking culture of First Chicago.

Despite Dimon’s apparent drawbacks, he dazzled Bank One’s directors. Following a two-hour presentation he made to the board’s search committee, outside director and committee chair John Hall summarized his colleagues’ reaction: “Everyone knew he was brilliant, but the presentation showed just how brilliant he was.” Another member of the search committee enthused that Dimon was the kind of leader who “would not waste time getting stability and consensus, but instead would do what it took to make us the number one bank… Istock, on the other hand, was more consensus-oriented. He felt that Bank One needed to be stabilized and that its executives needed a rest from the turmoil that had resulted from the merger and McCoy’s departure.”

Clearly, the committee’s standards did not reflect a half-century’s worth of wisdom about achieving organizational efficiency through rational management. (By what measure, one is tempted to ask, is seeking stability and consensus a waste of time?) Rather, the values at work here stem from a mistaken belief that complex organizational problems can be solved by a charismatic outsider. In the case of Jamie Dimon, the jury is still out. He may succeed; he may not. But one thing is clear: Bank One’s perceived need to usher in change while playing it safe narrowed its sights in the search for a new CEO. The board in effect cheated shareholders by rushing to choose the usual suspect—the bold outsider—even if it meant ignoring better candidates.

The Destructive Impulse

The cult of the outsider is so strong that even when insiders are appointed to the CEO post, they are often people who have assumed the traits of outsiders. GE’s Jack Welch and Ford’s Jacques Nasser, for example, were both career employees of their respective companies who became known for their willingness to “lay waste” to parts of their organizations. Enron’s Jeff Skilling was another longtime insider who claimed the mantle of a charismatic leader. He succeeded in doing so by advancing his audacious vision of transforming Enron from an owner and operator of natural gas pipelines to an “asset-light” new economy company and by converting people to his cause.

The common thread in the stories of these three CEOs—and in the stories of most charismatic leaders, whether they are insiders or outsiders—is that they deliberately destabilize their organizations. In some cases, as with GE, the destabilization can bring much-needed changes and result in a more vibrant company. In other cases, as with Ford, it can do more harm than good. In still other cases, as with Enron, it can be disastrous. In all instances, however, destabilization carries great dangers.

First, consider the problem of CEO succession. Indeed, one of the biggest challenges facing Welch’s heir, Jeffrey Immelt, is avoiding constant comparison with his larger-than-life predecessor, even as he is forced to deal with the disappearance of the “Welch effect,” which pushed up the company’s stock price during Welch’s tenure. Even at GE, which is famous for having a formal internal-succession process (although the new CEO is still, in the end, selected by the outgoing one), passing the torch from one leader to the next is fraught with difficulties. Because no chief executive stays in the post forever, any system of authority based on the power of an individual will ultimately be unstable. Organizations that depend on a succession of charismatic leaders are essentially relying on luck.

Jacques Nasser illustrates another danger of charismatic CEOs. On being appointed CEO of Ford in 1999, Nasser was hailed by BusinessWeek as a “restless, Lebanese-born outsider,” who “early on showed the impatience with Ford’s bureaucratic fiefdoms that still fuels him today.” The charismatic leader of Nasser’s type stands in opposition to the past and in opposition to tradition. This kind of leader proclaims the company’s destiny—usually in the form of a seductive vision—and demands that all roadblocks be removed. Today, in the troubled wake of Nasser’s two-and-a-half-year reign, Ford is struggling to return to its roots as a high-quality manufacturer and a good employer. Its organization has been damaged not only by the mishandling of the Ford Explorer—Firestone disaster but also by Nasser’s counter-cultural focus on things like a forced-curve performance system for employees.

Lastly, the destructive impact of a charismatic leader can be seen in Jeff Skilling’s ill-fated career at Enron. In this case, the demands of the leader induced blind obedience in his followers. As we now know, Skilling’s abilities as a new economy strategist were considerably overrated. What he clearly excelled at, however, was motivating subordinates to take risks, to “think outside the box”—in short, to do whatever pleased him. One former Enron executive has described the upper managerial ranks of the company as a “yes-man culture.” CFO Andrew Fastow—the alleged designer of the off-the-books partnerships that proved central to Enron’s downfall—was so enamored of Skilling that he reportedly named one of his children after him and hired the architect who designed the CEO’s Houston mansion to design his house.

Enron’s board of directors also bent to the will of its charismatic leader when it agreed to suspend its code of ethics to allow top executives to participate in the off-balance-sheet partnerships. Yet almost to the bitter end, Skilling wowed investors and analysts at gatherings that one analyst likened to revival meetings. As Skilling’s example illustrates, charismatic leaders reject limits to their scope and authority. They rebel against all checks on their power and dismiss the rules and norms that apply to others. As a result, they can exploit the irrational desires of their followers. That’s because following a charismatic leader involves more than merely acknowledging his skills—it requires full surrender.

Enron may seem like an extreme example, but the list of organizations badly crippled by charismatic CEOs includes some of the most respected names in American business. Xerox under the leadership of Rick Thoman—a top IBM executive whom the Xerox board hoped had caught some of Lou Gerstner’s magic—provides a particularly sad example. Michael Armstrong’s performance at the helm of AT&T thus far has not been much more inspiring. Time and again over the past 20 years, corporate boards have seen the superstars they had hoped would be saviors turn into black holes that sucked the energy and purpose out of their organizations.

A New Era?

The decades that saw the rise and apotheosis of the charismatic CEO were not notable for skepticism. In the 1980s, Ronald Reagan convinced Americans that they could have lower taxes, increased government spending, and balanced budgets, thus leading the way to the biggest deficits in the nation’s history. In the 1990s, a parade of pundits and gurus told us that the Internet was changing all the rules. Venture capitalists poured billions into wing-and-a-prayer enterprises with no serious plans for making money, while ordinary investors drove the Dow Jones and the Nasdaq to unsustainable heights at the behest of analysts who claimed to see a pot of gold at the end of every rainbow. It was, in many respects, an age of faith—a faith that was also expressed in the extravagant hopes and expectations invested in charismatic CEOs.? ? ?

Faith is an invaluable, even indispensable gift in human affairs. In the realm of religion, it is said to move mountains—scarcely an exaggeration when we consider its power to make people believe in and work for the triumph of good in a world of guilt and sorrow. In the sphere of business, the faith of entrepreneurs, leaders, and ordinary employees in a company, a product, or an idea can unleash tremendous amounts of innovation and productivity. Yet today’s extraordinary trust in the power of the charismatic CEO resembles less a mature faith than it does a belief in magic. If, however, we are willing to begin rethinking our ideas about leadership, the age of faith can be followed by an era of faith and reason.