Managing Leadership^®

I used to tell clients that GE not only produces world-class products in all of its business lines; it also produces world-class CEOs. As executives rise toward the top, realize that for one reason or another they are not positioned to make it all the way up, they accept offers for the top job at other firms. Many of the finest companies in the US are headed by former executives of GE. This phenomenon was most pronounced when Jack Welch was CEO of the company. Indeed, two now famous exports occurred on his departure, when Jeffrey Immelt succeeded him; one of these went on to perform successfully heading both 3M and, now, Boeing (so far). The other proved to be the exception to the rule, and has recently been dismissed from his position as CEO of Home Depot.

Alan Murray, in his most recent WSJ column, argues that Mr. Nardelli learned the wrong lessons at GE, assuming that the focus there on business fundamentals was an exclusive – rather than the basic core of a comprehensive – managerial value. Murray identifies the greatest shortcoming as a failure to understand the modern CEO’s purported requirement to address the wide array of “stakeholder” interests.

In yesterday’s Toronto Star, David Olive observes that the major reason behind Mr. Nardelli’s early departure was his extraordinary compensation, including the severance package. Mr. Olive, however, also focusses on perceived failures in properly identifying and acting on operational and procedural issues internal to the company and, in particular, in assessing and adapting to the firm’s changing and highly competitive market – in other words, on classic management.

The Economist relates the exorbitant pay package to the issue of corporate governance. The magazine suggests that this dismissal may be yet another evidence of boards beginning to assert themselves and to rein in their celebrity CEOs, although much of this at present is done only under pressure from activist shareholders.

Hank Greenberg offers an intriguing 3-step prescription for the overpay malady in a recent WSJ column: 1) Eliminate employment contracts for senior executives – the rest of us serve at the pleasure of our bosses, why not CEOs at the pleasure of their boards, as well? 2) Eliminate bloated golden parachutes. Recall that in a previous post we noted that these initially served the valuable purpose of removing or reducing managerial resistance to mergers or acquisitions that were good for shareholders. Upon evolving into ordinary severance packages, they introduce a moral jeopardy that is difficult to counterbalance by other sorts of incentives; and 3) Eliminate the linking of pay to stock performance. Greenberg argues that an over-focus on this link can lead to short-term manipulative behavior, rather than the longer-focus owner-interested management that is intended.

The specific assessments and prescriptions commentators are generating about this unfortunate event are interesting and point to insights that are of benefit as the corporate governance discussion continues. I would suggest, however, that the primary concerns to follow are twofold: 1) Analyze anew the role of boards, how they generate a view of their shareholders’ interests, and how they translate that view into strategic guidance and directorial policy for execution by management; 2) For CEOs and other senior executives, the principal issue is to find from this guidance and policy regime the core strategic and operational aims of the company, to assess the company’s internal and external environments from the perspective of those aims, and to manage based on the result, rather than on the basis of some formulaic security blanket carried mindlessly into every new job or situation.