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Executive Interviews: Interview with Margarethe F Wiersema on The Making of a CEO
January 2009
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By Dr. Nagendra V Chowdary
Dr. Margarethe F Wiersema Dean’s Professorship in Strategic Management at The Paul Merage School of Business, University of California 
Before we get into CEO firings
(“Holes at the Top - Why CEO Firings
Backfire”, HBR, 2002) let’s look at
what are the roles and responsibilities
of a CEO? Why should companies
pay huge amounts for a CEO? What
are the expected deliverables of any
CEO? What do you think should be
the correct yardsticks for assessing
the performance of a CEO?
The expectations placed on the CEOs
of large, public firms have never been
greater. There are two major reasons
why this has occurred. Beginning in
the late 1980s, there was a shift in the
investment community that led to an
increasing focus on shareholder
wealth maximization.
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To align managerial
interests with that of the shareholders,
executive compensation became
predominantly stock-based. Today,
90% of US CEO pay is tied to
company stock performance. The explosion
in CEO pay is a direct result
of the nature of CEO compensation
and the fact that the costs of that compensation
(e.g. stock options) did not
appear to have a bottom line impact
and thus boards willingly approved
the nature of these compensation
packages. The growth in average CEO
compensation during the past 20
years cannot be explained by overall
stock market performance, but has
been largely driven by thewillingness of boards to agree to very large stock
incentive pay. This issue has now finally
come to the forefront given the
economic downturn and the fact that
many executives were handsomely
paid for what in hindsight was terriblemanagement
performance. Your research findings are quite
contrasting and extremely interesting
– replacing a CEO is often a self-inflicted
wound, not a silver bullet.
Most companies do no better after
ousting their CEOs than they did before,
but when performance sags,
more and more boards fire their
CEOs. Can you take us through this
research and its insights?
What my research indicates is that
boards are increasingly willing to dismiss
the firms’ CEOs when performance
problems prevail. This is a
good thing overall – in that boards are
more independent and willing to seriously
evaluate the CEO’s performance.
The problem with firing the
CEO is that you are then faced with
the issue of selecting a replacement.
This is where the board fails – in that
they lack the degree of knowledge
about the firm to diagnose the type of
individual needed. Without a good
understanding of the primary drivers
of profitability in the industry and the
problems within the company, it is
difficult to identify what characteristics
and experiences are needed in selecting
a replacement CEO. Furthermore,
the newly appointed CEO inherits
a set of problems (not of his
making) that have festered for a while
and are not easily solvable. Poor company
financial performance is indicative
of a weak competitive situation
and/or an industry plagued by adverse
factors – neither of which are
easy conditions to operate in. Not surprisingly,
the track record for new
CEOs after CEO dismissal is not stellar. When do you think a CEO gets
qualified to be dismissed? What are
the right causes for a CEO dismissal?
Certainly there are multiple reasons
for CEO dismissal. Poor strategic decisions
that lead to value destruction
(e.g. acquisitions that destroy SH
value such as in the case of AOL/
TimesWarner, HP-Compaq) provide a
strong reason for dismissal. The CEO
should also be held accountable for
the deterioration of a firm’s competitive
position. When the strategic direction
of the firm no longer delivers
good performance, one needs to
reevalute the person (e.g. the CEO)
who is the architect of the firm’s strategy
and examine whether or not new
leadership is needed. What’s your assessment of the
CEOs of AIG, Merrill Lynch,
Goldman Sachs, Lehman Brothers,
Freddie Mac and Fannie Mae? Do you
think they deserve to be replaced?
Did they fail to deliver or were they
made to fail to deliver? What should
have been the role of such companies’
boards?
All of the CEOs of these companies
and the immediate layers of management
below them should be held accountable
for what happened to their
companies. These CEOs were at the
helm and directly responsible for allowing
organizational practices to prevail
that did not fully address risk
management and furthermore fueled
managerial behaviors that created the
mess that we now all face. This has
been the greatest and most pervasive
failure of management in the history
of business. It is not an externally induced
event—it is a direct result of
managerial behavior and practices.
The executives of these companies
failed to provide adequate oversight
and monitoring of what occurred in
their organizations. Furthermore,
they failed to question the basis for
their business models and the soundness
of the internal systems of controls.
The world is now paying the
price for their failures – so there is no
question in my mind that they all deserved
to be dismissed. The boards of these companies are not innocent either,
but the extent of their blame will
vary depending on the nature of the
company and circumstances.
1.
The CEO Compensation Controversy Case Study
2. ICMR
Case Collection
3.
Case Study Volumes
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