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October 28, 2011



"We know from football that changing coaches has no effect upon team performance. If bosses of organizations as small as 11 men can’t turn around performance, what hope do they have for larger organizations? As Warren Buffett said, when a boss with a good reputation takes over a business with a bad one, it is the business that keeps its reputation."

This is true for some businesses, but not for all of them. I would guess that stable, mature firms which operate in slow-moving markets can't be improved much, and any attempts to improve their performance beyond their natural limits is likely to be counter-productive (banks, insurers, oil companies, etc.). But technology firms can undergo great swings which do seem to correlate with particular corporate leadership - Steve Jobs is everyone's favourite example, but he's not the only one by any means. Lou Gerstner's turnaround of IBM in the early 90s is a positive example; Microsoft post-Bill Gates is a negative one. Buffett is famously much better at investing in the kind of slow-moving businesses where management can't change the fundamentals than he is in investing in innovative or fast-moving companies, which gives him a fairly substantial bias.

The question is, how can we tell the difference between a boss who is genuinely affecting outcomes and one who is simply taking credit/avoiding blame for the firm's performance? My guess is that mature firms should be fairly easy to identify, and that these firms should move towards a more consultative (democratic?) management style that emphasises doing existing things well rather than the relentless 'change' that every wannabe CEO would advocate for its own sake. But this is still a world away from the kind of management at, say, Amazon (if you have 10 minutes, the link is worth a read), which has to emphasise central control in order to get things done, and the corporate bottom line is substantially dependent on one person at the top making the right decisions over a period of years.

Are investors capable of telling the difference between the two scenarios, and would they demand the correct type of management?


The link that was worth a read in the preceding comment has disappeared, but it was meant to go here: https://plus.google.com/u/0/110981030061712822816/posts/AaygmbzVeRq

Cliff Tolputt

I've long suspected the exorbitant remuneration packages given many CEO's are self-defeating and against the interests of the companies concerned. Reward should induce effort and this is best achieved when remuneration is set at a sufficiently modest level to ensure the future interests of the company are always the priority.
As it is, appoint the guy (or lady)and he's effectively already made it! The monetary “carrot” is lacking.

Need inspires.

Charles Wheeler



So really what you are saying here is not a social justice point but that the shareholder model is inefficient in a number of respects. Actual pay for "top people" is a social status construct. It reflects custom and the idea that people like us deserve high material rewards. As people "like us" are the ones setting pay so we naturally give high pay to our kind of people. The firms actual legal owners could pay a lot less with no lose in their economic interests but cannot be bothered to challenge the status assumptions underlying the custom. Seen more broadly this is both a social and economic problem, the excess rent of the boss has no utility for firm or society and is an unjust income which presumably is a diversion from pay for more productive employees lower down who have less power or status but who are more responsible for the firms success or failure. Which is what every trade unionist knows to be true anyway! You could also point out that there is a strong tendency for firms which have been successful to waste their capital on new ventures and products from ego bias and overconfidence. Bringing about their decline and eventual bankruptcy. Which also shows the limitation of the firm structure.

Randle Stonier

"The bosses pay con trick" - A plea for responsible commentary and reporting.

There are 4.5m+ UK businesses employing 22.5m. SMEs account for 99.1% of all enterprises & 59.1% of private sector jobs. Most are owner operator directors with their life savings on the line and their homes underwriting their businesses.

FTSE directors are normally employees of their shareholders. They have parachute protections at every turn. Their pay and benefits are a complete anachronism to 99.9999% of company directors.

When people gob off about company directors, please caveat that you are only talking about 0.0001% of all company directors.

Kevin Carson

Not so sure of No. 5, Chris. I think high boss pay is a reward for deliberate mismanagement, *is* an extraction of value from the firm, and is a direct incentive to mismanage.

The whole Jensen model of cowboy management doesn't align incentives with long-term productivity at all. Rather, bosses strip assets, gut human capital and hollow out long-term productive capabilities precisely *because* it's the best way to massage the quarterly numbers and game your own compensation.

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