Debunking the ‘CEO Effect’

Recent research by Texas A&M researcher Markus Fitza debunks the glib conventional notion of the CEO as the prime mover of a company’s fortunes. In a paper, The use of variance decomposition in the investigation of CEO effects: How large must the CEO effect be to rule out chance?, he investigated the impact of two factors: the CEOs’ abilities versus the occurrence of chance events. Put another way, the difference between pluck and luck.
Fitza said, in an interview with Science News,

“I wanted to know how big the effect of chance on CEO performance might be.” Chance can have negative or positive effects on a firm’s performance, he notes. “For example, a scandal at a major competitor can help a firm, while an accident at an important supplier can have negative consequences. Over a long enough time period such effects tend to cancel out (a phenomenon called ‘regression to the mean’), thus it is unlikely that a firm is consistently high performing just because of chance events.”

You’d think that would be a strong argument in favor of CEOs’ abilities rather than chance, but Fitza offers a coda: since CEOs’ tenure has dropped to four years, chance might not regress to the mean in such a short period. And in that case, a major hiccup in the market or a company scandal could obliterate the impact of a CEO on operational results.
Fitza’s research suggests that as much as 70% of the ‘CEO Effect’ touted in other, more CEO-favorable studies could be attributed to outright chance, not connections, skill, charisma, or mojo.Fitza applied statistical techniques, in particular variance decomposition, to determine the influence of difference factors on a central variable, such as company performance. Fitza’s research suggests that as much as 70% of the ‘CEO Effect’ touted in other, more CEO-favorable studies could be attributed to outright chance, not connections, skill, charisma, or mojo.
This belies the short-term obsession with performance — like firing a CEO after a single bad year — and it makes me wonder if companies would be better run if CEOs were appointed for longer terms — like 7 year contracts — during which they could only be fired for cause or willful negligence.
Winterkorn was not undone by luck, but by his misdeeds.Consider a CEO that is headline news these days. Martin Winterkorn was rapidly pushed out at Volkswagen immediately following the ‘Dieselgate’ scandal, which might have been considered just a bit of bad luck. He, in fact, asserted that he knew nothing of the company’s efforts to circumvent emissions testing on certain of the company’s various lines of diesel automobiles and trucks using so-called ‘defeat devices’. However, since the cheating on nitrogen oxide emissions appears to have been going on since at least 2009, this is not on par with a quarter or two of bad financial results, and it is so far-ranging and so integral to VW’s efforts to grow the adoption of diesel vehicles in the US that is is difficult to imagine how Winterkorn could not have known. Winterkorn was not undone by luck, but by his misdeeds.
There is no doubt that at least that the truly top performers — Steve Jobs, Bill Gates, Elon Musk — are worth the astronomical value that their boards, shareholders and the markets are willing to pay. But once you slide down the exponential peak of ability Fitza’s research says that we are overpaying CEOs. And more importantly, we may be allowing CEOs to try to rig the game to cover up for their inadequacies, and to create power cliques that support them in this.
Recent revelations about Winterkorn seem to show him concealing information about Dieselgate from his board of directors even as they were approving a new contract for him. As reported by Jack Ewing and Jad Mouawad,

[…] Several members expressed displeasure with Mr. Winterkorn’s failure to keep them in the loop. Mr. Weil, the prime minister of Lower Saxony, complained about it in a speech last week to the state Parliament.
Volkswagen is the largest company by far in the state and employs about 110,000 people there. The state government [Lower Saxony] owns a 20 percent stake in Volkswagen, and by law has veto power over major decisions.
Under German law, at least half of the seats on a company supervisory board are held by labor representatives. A spokesman for members of Volkswagen’s workers’ council, which is separate from the union and also has seats on the board, said he did not know how they learned of the emissions scandal and could not comment.
At Volkswagen, four of the 20 board seats are held by descendants of Ferdinand Porsche, designer of the original Beetle. The family owns a majority of Volkswagen shares through a holding company. A spokesman for the holding company declined to comment.
Volkswagen executives had a duty to inform the supervisory board of the emissions problem, said Ulrich Hocker, a Düsseldorf lawyer who is president of a shareholder advocacy group known by its German initials, D.S.W. But he said only the supervisory board would have legal standing to seek damages from Mr. Winterkorn, who has kept a low profile since leaving.
Some shareholders have complained that Volkswagen did not follow German laws requiring it to publicize information that could affect the stock price.
Mr. Hocker said shareholders are angry and want changes. “The whole company was run from Wolfsburg,” he said. “They have to get away from this centralized management.”

The reality is that truly great CEOs can have an exponential upside impact, but even an average CEO can damage a company exponentially.That last statement is telling, and suggests we have to look beyond CEOs’ generalized abilities, and specifically dig into the many factors in strategic management that CEOs get credited for, like inheriting or engendering the right kind of culture. And in Winterkorn’s case, it looks like he had created a closed, centralized, and debased work culture, and the workers, investors, and customers of Volkswagen have been immensely harmed by that.
The reality is that truly great CEOs can have an exponential upside impact, but even an average CEO can damage a company exponentially. That shouldn’t be translated into huge salaries for CEOs across the board, however, as if this will translate into making all CEOs great. Winterkorn’s case — like so many others — makes that abundantly clear.

Why do Americans work so much?

134 countries have rules mandating the maximum work week: here in the US we do not, and perhaps it is no surprise then that 85.8% of men and 66.5% of women work more than 40 hours a week. In fact, the International Labor Organization states,

Americans work 137 more hours per year than Japanese workers, 260 more hours per year than British workers, and 499 more hours per year than French workers.

The US is the only industrialized nation to lack a guaranteed parental leave option.

To say we are workaholics does not go far enough.

But it’s clear that this has negative consequences. The issues are stark in some industries, for example trucking. The US Department of Transportation recently enacted regulations requiring that truck drivers to take at least 34 hours off after working 60 hours in seven consecutive days or 70 hours in eight days. The rules also require truck drivers to take a 30 minute rest after 11 hours of driving. It’s obvious that these lengths of driving are too long, and are certainly linked to the high levels of trucks involved in crashes, which have gone up steadily over the past five years — fatalities rose 18% since 2009.

My point is not about trucking policies, which are insane, however. I am using that as just a backdrop to the more general insanity associated with number of hours of work that have come to be the norm in the US.

(Note that I am writing this on a Saturday, so I am as much a participant in the American Disease — workaholism — as the truck drivers out there suffering from white line fever.)

It’s true that those that feel good about themselves are likely to work more than those that don’t, but that should not be interpreted to mean that working longer hours makes people happy. On the contrary. There is clear evidence that allowing people to work less, and to manage when and where they work, leads to more happiness and work satisfaction.

We need to coopt a term from Danish — arbejdsglæde — which means happiness at work. And more importantly, we should adopt the thinking about work hours in Denmark, which is the happiest nation on Earth.

As Alexander Kjerulf points out,

Not only do Danes tend to leave work at a reasonable hour most days, but they also get five to six weeks of vacation per year, several national holidays and up to a year of paid maternity/paternity leave. While the average American works 1,790 hours per year, the average Dane only works 1,540, according to Organization for Economic Cooperation and Development (OECD) statistics. Danes also have more leisure hours than any other OECD workers and the link between sufficient leisure and happiness is well established in the research.

Only 10% of Danish workers are actively disengaged as work, compared to 18% of Americans, and one of the key factors is overwork.

I believe that overwork is one of the dark elements of the dominant business culture in the US, today. In the American entrepreneurial culture overwork is expected. It is a sign of accepting the entire cultural milieu, one based on centralized decision-making on all ‘strategic’ issues, power relations directed through a flattened — but still strongly hierarchical — pyramid, and collective acceptance of corporate policies and procedures, which is referred to as consensus, but which is at its core a demand for unearned loyalty.

One of the pillars of entrepreneurial culture is the requirement of working long hours, to the point that the normal human relationships out of work are threatened, or minimized. The best example of this are the go-go tech companies that feed employees all their meals, so they don’t need to have dinner with friends and family, or to work out with non-work buddies, because the company health club is so much easier.

It’s not just that the company is after the increased productivity theoretically available from those extra hours: the members of the workforce are signaling their allegiance to the cultural norms, and the acceptance of the culture’s demands, even ones that are harmful. It’s an indication of total submission. This is partly what Marissa Mayer was after when she dismantled Yahoo’s telework program.

Alexander Kjerulf tells a story about an American who came to work in a Danish company, and — almost without thinking about it — began to demonstrate US-style signs of company allegiance, and it backfired there:

Wanting to prove his worth, he did what he had always done and put in 60 to 70 hours a week. After a month, his manager invited him to a meeting. He was fully expecting to be praised for his hard work, but instead he was asked “Why do you work so much? Is something wrong? Do you have a problem delegating? What can we do to fix this?”

In Danish work culture his workaholism was seen as something to be corrected, not as proof of his allegiance.

There is a change in the works: a shift away from the need for entrepreneurial notions of allegiance-through-unhappiness. Part of the entrepreneurial mindset is the concept of ‘creating culture’, as if culture is an implement to be designed, shaped, and applied. Corporate culture viewed as a means to control the behavior of the workforce.

I see a shift toward the notion of a greater-than-corporate work culture, one that is not employed by some to control the rest. Instead, it is simply a shared set of beliefs, behaviors, and norms related to work. And central to that new work culture is the desire for happiness in our work, finding meaning and purpose instead of being confronted with coercion and implicit threats.

We need to start with ourselves, to dig your own hole and sharpen your own shovel, as I put it. In this deeper culture, we have to start by putting ourselves first, and not subordinate our lives to the company:

The first principle of deep culture must be that all work is personal, and as a result, each individual must start with engagement with their own work. Only then can they apply that focus — as a marketer, customer support lead, programmer, or auto mechanic — to advance the ends of the business.

Leaders, entrepreneurs, and business owners will need to step up to this new ethos of work, and stop demanding unearned loyalty and subservience from employees. That’s the model that has led us to the current status quo. It doesn’t work, and intensification will most likely only increase levels of disengagement.

And perhaps nothing is more central than the idea of work happiness. If we don’t start by expecting — demanding — a work environment based on happiness, then everything is out of whack. And the first step is to cut back on the hours at work, and spend more time daydreaming, learning new skills, walking the dog, or relaxing with friends and family.

Matt Partovi on Why I don’t tell people to close their laptops during meetings

Matt makes a great point that seems  at first to be a minor aspect of business etiquette: should people be using their companion devices during meetings? The traditional arguments are based on premises of attention and deference. ‘We should close our laptops (tablets, etc.) and direct our total, focused attention to the topic of the meeting. That’s both mindful and polite.’ You can imagine any number of Sunday-supplement, conventional wisdom arguments, as well.

But Matt takes a different tack altogether:

Matt Partovi, Why I don’t tell people to close their laptops during meetings

I don’t tell people to close their laptops in meetings, and here’s why:

  1. It’s taking a top-down, command-and-control approach. Their attention is theirs to give, rather than mine to take. I’d be making the decision for each person that what is being said is more important than everything else they could be doing at that time. What if they are working on something that had emerged that day? Responding to it for a few minutes during the meeting could be more valuable to the organisation. At the very least, being in the meeting means they can listen to most of it, rather than missing it all by not being in the meeting at all. As the meeting lead, I don’t have all the information as to how they should prioritise their other work ahead of or behind what I’m presenting. I’d prefer to give the individual as much context as I could about why we’re here, and then trust them to make the decision about where they devote their attention. Their attention is theirs to give, rather than mine to take.

Matt’s eye is on the productivity of the network — including people outside the meeting — not on the hypothetical purpose of the meeting, or the tender sensibilities of the meeting leader. He is biased toward autonomy, and the trust that underlies the third way of work: we have to trust coworkers to make their own judgments about how to accomplish the work in front of them, and how to balance their various commitments. It’s not our job to pick their tool or techniques, or to determine if they can or can’t effectively split their attention across what’s taking place in the meeting and what’s on their screen. Over time we come to understand if someone meets their commitments or not, but it’s the outcomes that matter, not how they did or did not get there.

Behind Matt’s aphorism — Their attention is theirs to give, rather than mine to take — is a deeper and larger truth. We are now shifting into the always- and loosely-connected workplace of the third way of work (leaving behind the partially- and tightly-connected workplace of the second way of work), we will come to realize that time is a shared space, as I recently wrote

Time is a shared space, a common resource: a commons. None of us owns the moment we are living in: we share it.

The meeting leader who demands that attendees must close their laptops is trying to corner the market on time, and to put his personal interests against the needs of the many, relying on a false doctrine of obligation instead of trusting others to balance their own attention. If you think of it as a question of increased diversity and the need for accepting higher degrees of dissensus as the only answer to the faster speed of business, then it is cast in a totally different light.

The third way of work incorporates the idea that time is the new space. And as Yves Behar said about rethinking how we share space in our workplaces, transitioning to a new way to share time is not the work of a moment, but the work of a movement. That movement will manifest itself in small changes — like not asking for undivided attention in meetings — that represent a tectonic shift below in the cultural rules and values at the core of work culture.

How tablets can make meetings less painful

Those of you who hate meetings and can’t stand endless PowerPoint-based presentations, there’s hope. Todd Barr, chief marketing officer of Alfresco had some encouraging solutions for how to improve them at GigaOM’s Net:Work 2011 conference on Thursday: use tablets.