Economy June 2009

Do CEOs Matter?

Steve Jobs, Apple’s ailing CEO, is scheduled to return to work this month after a six-month leave, but investors are feeling skittish. Every time he sneezes, shares of Apple catch a cold. Can a CEO—even one as talented and visionary as Jobs—really make or break a corporation? Many business scholars have grown skeptical of the idea of chief executive as superhero. Cutting-edge research reveals that while some CEOs clearly do make a big difference, many are merely the most visible cogs in complex machines.

The answer doesn’t seem as obvious today as it did a few years ago, before corporate scandals and worldwide financial catastrophe shook the cult of the heroic CEO to its foundations. That cult had grown steadily for more than a quarter century, beginning in 1979, when Lee Iacocca rode in to lead Chrysler—then in the midst of its first federal bailout—into a short-lived revival. A handful of corporate CEOs, including General Electric’s Jack Welch, Microsoft’s Bill Gates, and Berkshire Hathaway’s Warren Buffett, later became full-fledged celebrities, lionized for single-handedly lifting their companies to stock-market superstardom—the companies’ share prices prima facie evidence that the CEOs were worth all that a grateful board of directors could award them. According to this school of thought, when Charles de Gaulle said “The graveyards are full of indispensable men,” he was just being a typically contrary Frenchman.

For believers in the CEO’s supreme importance, even the presence of ruffians and scoundrels in the CEO ranks underscored the chief executive’s outsize influence. CEOs could make great companies, and CEOs could break them. Dennis Kozlowski’s fall from grace and into prison for looting Tyco International was inextricable from the company’s disintegration. Enron’s collapse was the inevitable consequence of Jeffrey Skilling’s criminality. And before the autocratic Maurice “Hank” Greenberg left AIG under a legal cloud in 2005, he’d steered AIG into the credit-default-swaps business, precipitating the company’s eventual descent into speculative madness and the global economy’s unraveling. Après moi, le déluge, indeed.

This is Carlyle’s Great Man theory of history, painted on a corporate canvas; and even amid the economic ruins through which we now wander, it still has its zealous adherents, not least among CEOs themselves. Former Merrill Lynch CEO John Thain reportedly believed that his contributions merited a $40 million bonus, even after spiraling losses forced the venerable brokerage house into the arms of Bank of America. (Bank of America thought otherwise; Thain took no bonus for 2008, and was sent packing in January.)

An exalted view of the boss is supported by a cottage industry of management gurus and executive-compensation consultants. They have good reason to sell boards of directors, investors, journalists, and CEOs themselves on the notion that the chief executive is inordinately valuable. Management gurus win new assignments through referrals from grateful clients, and they can expect no thanks for telling the CEO he’s just another cog in the machine. Compensation consultants know that if they win big pay packages for their CEO clients, they’ll be rewarded with lucrative contracts to administer employee-benefits plans and the like.

Yet those who have worked for superstar CEOs are not necessarily in agreement with the close identification, in the popular mind, between the CEO and his company. In a May 2006 article for Stanford Business Magazine, the management professors Robert Sutton and Jeffrey Pfeffer recount a conversation with Spencer Clark, a high-ranking General Electric executive during the Welch years. “Jack did a good job,” Clark said, “but everyone seems to forget that the company had been around for over 100 years before he ever took the job, and he had 70,000 other people to help him.”

Many academics share Clark’s skepticism. The question of the indispensability of the CEO is one that has occupied business scholars for 70 years. And while the debate is far from settled, many of the most prominent and widely cited business-school professors and other experts believe that the American obsession with who sits at the top of the organizational chart has gone much too far.

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Harris Collingwood is a business writer living in New York.

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