Do CEOs Actually Deserve All the Attention?

Tim Quigley of the Terry College of Business at the University of Georgia, recently set out to measure the “the CEO effect” —or how much profit comes from chief-executive level decisions. In a time of superstar CEOs, it’s a good question.

How can the impact of the CEO be measured?

 

Basically, Quigley starts by examining overall economic conditions and company performance over time. He factors in relevant causes of variance and comes up with a number. (His work has been published in peer-reviewed management journals, so the method must have a reasonable degree of validity.)

 

In the 1950-60 era, he says the effect was about 6 to 8 percent. In recent years, however, it’s more like 25 percent. Clearly, something has changed.

 

How technology and money are driving today’s CEOs to have a bigger effect

 

Today, a decision can take effect faster and on a much larger scale. Years ago, there wasn’t the same global transportation, communications or IT infrastructure in place. Outsourcing production or customer service virtually overnight was not an option. Likewise, large-scale automation of factory and office processes was impossible, since the technology was in its infancy. Instantaneous digital communication had not replaced the letter and the memo. As Quigley said, today’s CEOs have more levers and buttons to play with.

 

The other driver is money. CEOs get more money and, with favorable tax laws, get to keep more of it.  They have unprecedented incentives to push their companies—and people. And, they are judged on money, often to the exclusion of everything else. The pressure to make the numbers is intense. Last year’s performance is never enough. Next year, profits must be higher, revenue must be greater, and share price better be up. If the CEO can’t make it happen, there’s another CEO out there who can. At least, that’s the belief. Of course, the CEO effect is not always on the upside. Disastrous decisions cause failing fortunes.

 

Money is easy to measure. Quigley didn’t attempt to measure the more important effect of the CEO on culture. The ruthless culture of Wall Street likes ruthless leaders. Layoffs, plant closings, and acquisitions show off the CEO’s power. Building a positive culture is slow and subtle. It takes time to improve communication. Corporate business goals and strategies take time to integrate across an organization. People don’t know how to do it. Training and workforce development is cumulative. And, the make-or-break factor is trust. Employees have seen it all, and they’ve seen it evaporate almost every time— it’s not the need to develop trust among employees. Shareholders have to learn to trust that when people are the focus, profits will follow.

 

Karen Wilhelm has worked in the manufacturing industry for 25 years, and blogs at Lean Reflections, which has been named as one of the top ten lean blogs on the web.

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