Managing Leadership^®

I was once asked to explain what, exactly, General Electric Co. does. I ran down the list of the products and services it creates, but then I felt it was necessary to add one more: it produces world-class CEOs. This actually pre-dates the Jack Welch era, although he did a great deal to strengthen and institutionalize this aspect of GE’s operations. The senior managers in this company are so highly regarded that they are eagerly sought after to head other firms. This is a useful situation, since it provides a release valve for the distorting frustration that might otherwise occur in an organization that had so many people so capable of taking the top spot – but that only had, of course, one top spot. It also spreads the wealth around, a bit, which can only help in today’s environment of overcompensated, undercompetent CEOs.

Which brings us to yet another insightful offering by Alan Murray in his latest Wall Street Journal column. He also makes a reference to GE’s remarkable tendency to produce superior senior executives. But the real interest in his piece is a discussion of why one of them made the choices he did when (like so many others) he was wooed from the company to become CEO of another. I will leave the details of this story to your reading of Murray’s column. Here, I want to take a look at some of the important developments that the article refers to.

One is a new wariness by boards of publicly held companies to provide their CEOs with overly-lavish compensation schemes. This may come as news to many of us, but it is true that the highly publicized disasters in this area are having an effect, and CEOs cannot so easily slot themselves into 8- or even 9-figure pay contracts that are essentially sinecures, because they are really not meaningfully tied to performance.

As a result, some are going to non-public companies. Here, investors tend to be more limited in number, have larger stakes, and more interest in how their investments are managed. In a publicly held company, this sort of owner mindset is diffused by the vast number of small shareholders, no one of whom typically has the interest or ability to exert control over management. Most of them simply want the stock price to go up; that’s pretty much the extent of their interest, and it’s one that they, as individuals, can’t even influence directly. This leads to the lack of accountability that has been at the bottom of so much of the difficulty American (and world) business has experienced in recent decades.

The subject of Murray’s column is actually going to an enterprise that is funded by investors who have specific targets for the period of time they will allow their funds to remain tied up in the investment, and specific – and ambitious – goals for the return they expect. The new CEO, as part of his compensation package, will receive a portion of that return at cash-out that will equal or exceed what he might have been offered (in the “old days”) by a large public company.

But he will only do that if he meets the return targets set by the investors. Accountability is strict, uncompromising, and inescapable. Produce the goods, and you can earn even entrepreneurial-level rewards; don’t, and you wil have to console yourself with the base salary.

The lesson is clear: establish a healthy risk/reward relationship and the poisonous atmosphere of moral jeapordy lifts. You have clear marching orders, you know who’s in charge, and you are clear as to your role and its potential consequences for both your bosses (owners) and yourself.

The question is how to establish the direct pressures that can generate such a relationship in the more diffuse ownership world of our publicly traded companies. This is a large and important question. The danger of the widespread environment of unaccountability is clear, and we are reminded of it all too frequently. These companies are an important influence in the American economy, and a way must be found to rectify the situation. Attempts to legislate the problems away are fundamentally artificial and cannot be the key source of the solution. The increasing activism of some of the larger institutional shareholders, such as mutual funds or – better – the investment arms of major retirement funds, is a promising sign. But it remains, at this stage, only a sign, and there is more thinking to be done and action to be taken on this topic.