The CEO Fallacy


The CEO as a unique corporate asset fallacy ignores the contributions and talents of all the other professional administrators in a large organization. These are the people who operate and maintain the functions of the day to day SG&A (selling, general and administrative) operations.

You know who they are - the people that actually cut the checks, create and execute the contracts, order the raw materials, manage the nuts and bolts of production, coordinate the temporary storage in-house of the finished products, and arrange for their delivery to the customers who pay for these goods when they require them.

This is how Bob Nardelli can go from being a CEO apprentice at GE, a financial conglomerate, to CEO of Home Depot, a hardware retailer, to CEO of Chrysler, an auto manufacturer, without missing a beat.

Ironically, the last CEO of Merrill Lynch, Stanley O'Neal, got his original executive suite experience in the finance side of the auto manufacturing business before coming over to the investment business to count beans.

Believing that there are only a few uniquely qualified individuals that can helm these companies defies all available logic.

The deal to merge Merrill Lynch could only have happened if Merrill survived long enough to consummate it, and if the purchaser had enough cash to tender at closing. Thain didn't raise the the 10 billion from his Rolodex to keep the doors at Merrill open - the U.S. taxpayers, vis a vis Henry Paulson, were the only people willing to risk this kind of scratch on a company that was selling its assets at an 80% discount to face value to try and stay liquid.

Bank of America didn't have the billions on hand it needed to hold up its end of the merger - there was no place on the open market at that time, or even now, that was going to give them the 15 billion they got, other than the TARP fund at the Treasury department.

I don't know if you remember that weekend (in all honesty, I had to refresh my memory of the details by looking it up myself) but Merrill Lynch CEO John Thain went into the weekend thinking he was going to BUY Lehman Brothers at a discount. But Merrill's financial position turned out to be so weak that Paulson had to twist Bank of America's arm to take Merrill before the markets opened the next Monday.

Bank of America could have gotten the same assets for a lot less a week or two later, because the markets were already gearing up to pound Merrill. The $29 a share they paid was a premium over market by $9 a share - something else that looked like it had Paulson's fingerprints on it.

The reason why I am taking the time to write about this is because what I am seeing out here are people who are beginning to do a very human thing - have sympathy for a man who may have a family, who may have committed to obligations that he now can't pay without getting that money. This is a fundamental problem in our society right now, this notion of the CEO as a "super administrator" who doesn't have to have any skin in the game.

Bad decision making and poor performance by their companies should result in harsh outcomes for these guys. When Delta Airlines here in Atlanta went bankrupt, the executives made more money while the company was in bankruptcy than they did when the company was making money.

Mr. Thain might have to sell his home or investment property at a steep discount because nobody is paying full price right now for real estate. His kids may have to go to public schools. He might not be able to meet the margin calls on his portfolio. He might find himself looking at a severely decimated retirement account.

My mother will tell you, "I really can't have a whole lot of sympathy for you if you're down to your last million."

When you face those kinds of real life risks, it sharpens your vision. It also makes you negotiate more salary upfront, and forces you to adopt a less expensive lifestyle or less extensive investment portfolio.

It is unconscionable for me to worry about the problems of this rich man or his buddies. If he doesn't work another day in his life, enough money has gone through his hands to assure him of a lifetime of decent food, shelter, and clothing. If his entire existence has been predicated on never hitting a bump in the road, well, then maybe he shouldn't have been a CEO in the first place.

For what Thain accomplished last year, you or I could have sat at his desk and done the same thing. Reducing headcount or figuring which asset to sell next doesn't really require an MBA. The people who report to CEO's not only do the grunt work - they will recommend a course of action for him to take at no extra charge.

So we ought to get us one of these CEO gigs. I bet we could get through a whole year with only a few stock phrases.

    "So run those options by me again?"

    "Let HR have a look before we go any further with this."

    "Is legal on board?"

    "Shoot that to the CFO so he can scrub the numbers."

    "So the statement I'm going with on the conference call lines up with the press release, right?"

    "I like the way you're thinking here, but we're going to have to review it to see if its headed in the direction we're trying to take the company."

    "I thought I told you I needed to see a 20% cut in operating expenses?"

    "And if I can get the entire board behind this, the adoption of these new policies will strengthen our customer relationships by aligning our core competencies with our mission statement."

    "I'll have to get back to you on that one."

    "We're looking into it."

    "Our initial timeline on this particular milestone may have been a little aggressive, so we're going adjust our forecast on getting this completed from first quarter to third quarter."

    "Due to recent challenges and unforeseen market events, we are going to readjust our earnings expectation for the year slightly downward, but expect to rebound by the second quarter."


Hell - I look good in suit, and can contort my face to whatever level of gravitas is needed to convey the right amount of earnestness for a photo shoot or an interview. Maybe I'll give this CEO thing a whirl.

The worst that can happen is...well, I guess the worst that can happen is if they keep me on, because if they fire me...


...I think I'll take my golden parachute money in small bills.




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4 comments:

Salsa said...

I've often wondered the same darn thing! Good piece!

RiPPa said...

My only problem is that all of a sudden the CEO's are bad guys. I could remember a time way back in the 80's when the yuppie was the in thing. I could remember it well because society was shaping the minds of the young such as myself to be a part of corporate America. Honestly, thats why I went to college. Gordon Greko was my idol. But somehow here in 2008 because we believe in "justice" these guys are bad guys?

Brown Man said...

I didn't care about CEO's in the 80's because I was in college. English majors didn't get all hot and bothered about that kind of stuff.

But I needed a job in the 90's, so I got a Series 7 license to be a financial planner. When that didn't work out, I became a stockbroker, although schlockbroker was probably a more accurate term.

The CEO's I met, starting with the one from my own company, who has only been out of Club Fed for a few years now, were some of the slimiest motherfuckers you ever wanted to meet.

They looked the part, they assembled august sounding names on their boards, but if they needed that stock to move, they had no problem calling up our guy and telling him to start pumping that shit.

If they needed to sell a block of stock, then we had to go find a bunch of buyers so we could cross it out - basically, that means you match the buy and sell tickets so you don't make the market makers at other firms nervous enough about the volume to start dropping the bid.

I did a little business consulting after that for a couple of companies on the west coast - you would be amazed at what doesn't get into the required SEC filings the way it is supposed to.

Corporate governance isn't rocket science - I will stand by my earlier assertion that you can take most mid-level managers with above average intelligence and train them to run a company.

That's the whole ethos behind the executive development plan in these very companies we are talking about - recognizing talent and grooming it. What we see on the news conferences are the survivors.

But machismo doesn't run global enterprises anymore - that's the part that sticks in my craw.

A buddy of mine, who used to work for GE, brought up his beloved Jack Welch Monday when we were talking about this to try to explain how Jack would have solved the problem - I said, "dude, if Jack Welch had been black, with the exact same characteristics he had, he never would have made CEO."

A great CEO, and their are many who do extraordinary things for their companies, are still managers unless they originally owned the company, like Bill Gates did when he was CEO, or bought a controlling interest in it.

But there are far too many of them who are stock jobbers or incentive plan gamers, and quite a few who have mastered the art of fashioning exit strategies that will garner the most amount of loot with the least amount of results.

So for the record, I always thought these motherfuckers were overrated.

Kit (Keep It Trill) said...

"...you can take most mid-level managers with above average intelligence and train them to run a company."

So true, but I've rarely seen it myself. Instead they hire their friends who nearly always didn't work their way up, and thus know the corporation or agency better. Or what's always baffled me, is that the nastiest, semi-competent people get highest jobs.

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