José Luis Alvarez. Professor of Strategy and Organization at Instituto de Empresa
21 June 2003
A rare defense of today’s much-maligned chief executive.
That chief executives are bosses to a lesser degree than generally assumed is well known. The reason is inherent in their role: to fulfil their objectives, they need collaboration of groups or people beyond their sphere of formal power: regulators, clients, trade unions or board members. The elevated salaries and status prerogatives of the nation’s most important managers may perhaps compensate for the difficulties of their posts. However, the astronomical paychecks quoted in a recent study from the Hay Group only referred to chief executives of Spain’s most important firms - which you can count on the fingers of both hands - while other high salaries were limited to the 30 IBEX firms. Most often however, independent professionals, partners in professional services firms and entrepreneurs earn more. And they enjoy greater autonomy.
In addition to remuneration that is comparatively less and less attractive, plus job insecurity that is not dependent on performance (the reason for protection clauses in contracts), there is now a growing wave of social delegitimation of the executive role. An example is the public exposition of senior executives, till recently unheard of in any sphere of activity, except for top political posts. Assessments of their work appear publicly in a multitude of classifications, often without specifying what criteria are applied. Salaries are public knowledge at many major firms. Retirement agreements freely entered into with the company’s owners are later impossible to implement due to the social delegitimation that arises. What’s more, senior executives are the first suspects whenever results are bad, and worse, in any ethical mess.
[*D There is too much romanticism surrounding leadership *]
When considering results, it must not be forgotten that firms are overdetermined systems and the impact of singular individuals is limited and exceptional. There is still too much romanticism surrounding leadership (what psychologists call the fallacy of attribution – see separate article). As for corporate scandals, while it is true that a significant number of executives from Spain’s top four or five firms have visited, in diverse capacities, the Audiencia Nacional (National Criminal Court), I know of no statistics that demonstrate a higher degree of corruption or opportunism among top management than in any other occupation. But then, who can demonstrate, and with what systematic data, that chief executives pay less attention to their firm’s long-term future than shareholders, board members, middle managers or employees, or even those who preach on business ethics? Or that they are more opportunistic? Or have a structural or positional advantage?
There can no doubt of the need to improve alignment of decisions from top management with the board of directors, and to stop unethical behavior. Yet these can be achieved without discrediting senior executives or diluting their influence. The problem in Spain is not an excess of professionalized executive power – rather, the lack of it. In the United States, CEOs appoint a large proportion of board members. The paradox is that, at least in part, reform of organizational governance in Spain operates as though our challenges were those of American firms.
Given their structural position, chief executives are the only ones with sufficient capacity to balance the world outside the company (providers of capital, regulators) and the internal milieu (institutional shareholders and employees.). Only they, in their day-to-day work, can take decisions that balance short and long-term interests, benefiting the future continuity of the company. They alone can translate basic strategic directives emanating from boardrooms into an operational language and goals. They are the only ones who can lead processes of organizational change. What’s more, they have more at stake than shareholders or even board members. Their remuneration levels and careers are on the line. As a result, of all those involved in organizational governance, their role is the unique universal actor.
It may prove counterproductive to dilute executive power in corporate governance. Although some division of powers should exist, the democratic analogy is not automatically applicable. Nor are shareholders’ General Meetings appropriate forums for making complex decisions; in most cases, not even Boards of Directors possess the necessary information (or the time to process it) to be able to go beyond a mere supervisory function, or to take important, yet generic, decisions.
It is high time we vindicated the social role of managers, and senior executives in particular. Their work is still going to be necessary, but if not appreciated by society, it will prove extremely difficult to attract the most talented players to this role.