For CEOs, Both Punishments And Rewards Are Outsized

Updated: Apr 28 2004, 05:30am hrs
So, heres my question: If chief executives are as overrated and overpaid as we all think they are, why do investors react so strongly when CEOs come and go

Consider some of last weeks developments. On Monday, McDonalds well-regarded CEO, Jim Cantalupo, died of a heart attack. McDonalds stock promptly lost $850 million of market value. That same day the press reported that Gillette CEO James Kilts, another executive with a solid reputation, might leave to take the top job at Coca-Cola. Gillettes stock shed $1.5 billion of value on the news, and Cokes value increased by $2.5 billion. When Kilts decided to stay put, the stocks moved in the opposite directions.

Last week was also a busy one for CEO dismissals. Faster than you can say, Youre fired, the chief executives of US Airways, Janus Capital Group, and Computer Associates lost their jobs, taking the fall for corporate woes. After Sanjay Kumar at Computer Associates stepped down, his firms stock price rose 4 per cent.

Underlying all these stories is a common link: the perception that the fate of a major corporation is largely determined by who sits in the executive suite. Rakesh Khurana says the perception doesnt square with reality. Khurana is a professor at the Harvard Business School and the author of a book called, Searching For A Corporate Savior: The Irrational Quest for Charismatic CEOs.

People have a tendency to look for simple explanations for complex phenomena, said Khurana. Companies can succeed for a variety of reasons, he said. The dollar can fall, a product can get hot, the firm can have talented people at lower levels who make important contributions.

Sometimes the CEO has the benefit of the wind at his back. Take Coke. Even as the company was engaged in its search for a new boss, Coke last week reported a better-than-expected 35 per cent rise in profits for the first quarter, in part because the world economy is on the upswing. Does that make the current CEO a genius

Khurana can also tick off the names of CEOs who succeeded brilliantly in one job and fell on their faces in the next. Michael Armstrong was a hero at Hughes Electronics and a bum at AT&T when he couldnt find a way to reverse the inexorable slide in the long-distance phone business. Khuranas message: It isnt always about the boss.

Yet there are other examples of companies that seem to revive miraculously under new leadership. McDonalds was in a deep funk when Cantalupo took over in January 2003. In just over a year the stock climbed to $26 from $16 and same-store sales exploded. From the outside the steps he took dont look that remarkable. Does adding salads to the menu qualify as an important innovation No matter. It worked and shareholders benefited.

Shareholders at Gillette have done well in Kiltss three-year reign. The companys market cap is up roughly $6 billion. If you believe Kilts is responsible for a portion of that gain, the $17 million he earned in 2003 is chump change.

Ive never heard of a stockholder at any of Kilts companies complain about the extra value he brought, said John Quelch, another Harvard Business School professor. Kilts held key positions at Kraft and Nabisco before coming to Gillette.

The truth is it is awfully hard to say how much credit or blame the CEO deserves. It is equally true that all of us are suckers for the notion that a strong leader James Kilts, Donald Trump, George Bush can wave a magic wand and cure any ailment. CEOs may have heroic qualities but we help create the heroic aura around them, said Jeffrey Sonnenfeld, a dean at the Yale School of Management. It is a conspiracy on both sides.

As long as we do believe, a few things will be true: Chief executives will be fired when they disappoint, they will be paid huge sums of money on the hope they might succeed, and we will complain about their compensation packages nomatter what happens.

Charles Stein //NYT