By contributor Phin Upham
CEOs Warren Buffett, Sandy Weill, and Maurice Greenberg accumulated power during their long tenures as CEO. For each the market was or is fearful of their demise or retirement, each had a reluctance to name a successor, and each had a cult of personality attached to the leaders which gives them sage-like wisdom and Olympian insight. There conceptions of CEO power and longevity are challenged (or at least questioned) by William Ocasio’s (1994) article Political Dynamics and the Circulation of Power: CEO succession in U.S. Industrial Corporations, 1960-1990. I will attempt to summarize Ocasio’s essay, interspersing this analysis by relating it to popular articles on CEOs, and then discuss some of the underlying issues that this discussion has raised, particularly of agency, managerialism, and top management teams.
In his essay Ocasio explores central structural factors that influence CEO longevity. He identified two competing frameworks with which to view CEO longevity, the model of the institutionalization of power and the model of the circulation of power. Each model has a different way of viewing CEO tenure, power accumulation, strategic maneuvering and effects of time. Thus, Ocasio teases from each model competing or complementary predictions which he then tests. The CEO’s discussed all had at least a decade in power (one has been there for over 30 years!) so this is a biased sample of the “survivors” in Ocasio’s structure not representative of CEO’s in general. Further, these are examples of CEO’s who are extraordinarily successful (or, at least preside over extraordinarily successful companies) so they are in a unique position there as well. With this in mind, Ocasio’s arguments are very illuminating.
Ocasio’s argument depends on the competing logics of the institutionalization of power and the circulation of power. The institutionalization of power model posits that a leaders position will become more secure over time as his/her views become legitimated or institutionalized for those in the company, as his/her views gain momentum and are committed to, and as they consciously consolidate and perpetuate their power. Thus, a CEO ought to have greater chance at remaining in power the longer he/she has been in power. The CEO’s discussed have been in power for decades, this Ocasio would argue that part of the “fear” generated by their death or retirement is caused by the solidity with which they have legitimized themselves in their respective institutions. The circulation of power view posits that as the CEO’s tenure elapses, and the CEO’s time in office grows, coalitions are more likely to grow against the CEO and his/her views are more likely to be seen as old, stale, and status quo. This view stresses, after Selznick, that intraelite conflict is a driving force for change as the CEO suffers from competency traps and becomes “stale in the saddle.” Thus, this view would hold that a CEO’s tenure in office might be inversely related to his/her chances as surviving succession struggles, and thus the CEO’s chances of remaining in his/her job.
This structuralist view of CEO tenure has some hidden presuppositions in it which are very relevant to the aforementioned article. Ocasio does not include any personality characteristics in the metrics, it is hard to say whether these different view affect different sorts of people in different way (say, politically savvy people fall under the institutionalization model while blunt CEO’s with a specific agenda fall under the circulation of power model. The CEO’s in this article are, allegedly, extraordinarily charismatic people with devoted followings. This is not typical even for a CEO with a long tenure. Thus, we have reason to believe that these are extraordinarily personable and intelligent people well above the average for a CEO. So these CEO’s might never have been I much danger of being thrown aside despite Ocasio’s arguments (which address the average CEO). The situation of CEO’s in this sample is also unique in that they will either retire from office or die in office. If they are pushed out of office (appears unlikely) it will be because of their age not their perceived abilities. So their situation is a bit unique. Ocasio’s study, for example, right censored people who retired around 65. But all of the men discussed in the article are well above this age. This, Ocasio’s article really describes these men’s pasts, if that, not their futures. Ocasio’s article can be extended to address these men, but it does not do so completely or naturally.
Ocasio differentiates between these two models by constructing competing and complementary hypothesis. He begins by showing that tenure in office for a CEO will decrease he rate of CEO succession in the institutionalization model and increase the rate of CEO succession in the circulation of power model. Furthermore, he posits, bad economic times or performance tends to put more pressure on CEO’s and this ought to exacerbate their ability to stay or leave. Institutionalization model, the accumulated power of the CEO ought to help buffer him/her during this time, whereas in the circulation of power model, this pressure ought to exacerbate the challenges to the CEO’s power and undermine confidence in the CEO. Lastly, he posits that board tenure will inversely affect the later model, and conversely affect the former. Other hypothesis formulated by Ocasio are dovetailed in the predictions of the two models. They include the relationship between inside/outside board members and CEO tenure, as well as various interaction affects.
Ocasio uses 120 randomly sampled industrial corporations from the Moody’s Industrial Directory for 1980, accounting for 4.45 percent of the population.Company years of 1960-1990 were used, causing 6 of the firms to be dropped due to lack of data, resulting in n=114. Ocasio uses many statistical tricks to left and right censer the data such that the affects of beginning in 1960 and ending in 1980 do not shift the data one way or another. At the same time, he preserves as much of the data as possible. Control variables for firm size, as well as basic factual characteristics of CEO are used. For example, a CEO’s age until 60 is treated on way, from 60-63 another, and 64 and up, the CEO is excluded from sample. This is in order to eliminate age affects from the results.He uses ROA, adjusted for industry performance, to measure firm performance (H2a and b, H3a and b). Using continuous history analysis, Ocasio varies K, the gamma-shape parameter, in order to generate multiple models. Ocasio presents exceptionally clear logic to his data analysis and assumptions, though the granularity of his description is very fine at times. He presents the data in various formats with succinct explanations of the significant effects.
His results come up with the very elegant conclusion that circulation of power logic is dominant during the first decade of tenure, but that beyond that the CEO begins to cement his position in a way similar to that described in the consolidation of power model. The CEO’s of our article thus have very consolidated positions. This held for 2b and b and 3a and b as well. It was found that during times of adversity, a CEO’s prior board experience rather than being an asset was a liability. This surprising result warrants further testing. The nature and stability of the CEO’s tenure is discussed in this study in an illuminating way, and the data analysis is remarkably clear and rigorous.It highlights the dynamics between the obsolescence of the CEO’s schemas and strategies over time and the attempts of the CEO to cement his own power. It discusses the mitigating affects of high board umber and internal board members (which, surprisingly, during times of economic adversity, were a liability to the CEO rather than a support) with the interaction affects of performance.
One of the reoccurring themes discussed deals with the incentives and the relevance of top executives. What is the real (vs. perceived) goal of a CEO and do they really matter. There are two main lines of thought here both of which can lend support for the idea that top executives either matter or do not matter.
The first line of thought says that top executives do not matter. Top executives, this strand of thought, argues, do not matter both because they have little impact on the firm they “run” and also because they spend much of their time defending and fortifying their own positions (and/or hiking up their pay packages). So, this view argues, the role of top executive is essentially not important, and the job of an executive seems to be in protecting and feathering his own nest (Ocasio argues, as above, that CEO’s indeed do institutionalize their positions – this requires energy!). Lieberson and O’Conner’s 1972 study, for example, argues that leadership can explain either a little over or a little under 10% of variance in a firm. Porter (1980), borrowing from Bain-IO economics, and the structure/conduct/performance paradigm, both argue that firm rents are largely exogenous to a company since its actions and potential for profit are a result of external not internal factors. Hambrick and Finkelsein introduce a more moderated view. They review the literature on either side and argue that different CEO’s have different levels of “managerial discression.” Depending on the environmental, organizational, and individual managerial’ characteristics of the situation, CEO’s can have varying levels of impact.
McGahan and Porter (1997), for example that the whole corporate effect (much less CEO or top management team) is less than thought (though they find it varies). Brush and Bromiley (1997) argue against Rumelt (1991) who argues that corporate effect does not matter. They say the studies are flawed.I introduce corporate effect because it the corporate effect does jot matter for a company, then the CEO makes even less difference.
Central to this discussion is Fligstein’s (1987) article which points to the heart of this issue. In the 1930’s and before, firms tended to be run by entrepreneurs and founders/owners. Later, as firms became larger and more long-lasting, in the 1950’s, sales and marketing people were more prevalent. Since then, people in finance have tended to become powerful. Fligstein attributes this to various factors, including, primarily, the organizational strategy, structure, and technology. Further, the state, in which forms are embedded, is also important.The aspect of the firm that has the most “leverage” or that matters most will tend to place its people in control. This view shows us that the agency problem in CEO power, the separation of bureaucracy and ownership, is not necessary. It also shows us that leadership in a firm has a lot to do with power struggles between factions of the firm (and, one might hypothesis, correspondingly somewhat less to do with actual ability). Thus, this view builds a compelling and neat case for downplaying the CEO’s impact on the firm. 1) the CEO is not statistically important on performance 2) the CEO works to protect his own best interests while in office at the expense of the firms best interests and 3) the selection of the CEO is as much one of power struggle as it is of ability. But this very argument can be seen from the other side just as easily (and often using the same authors taken from a different perspective).The article in the FT speaks to some of these points. It would disagree with the lack of importance of a CEO, but only because a CEO is perceived as important. Stock prices at BH would certainly plummet upon the death of Buffet. Perhaps one way for the CEO’s to institutionalize themselves is to make themselves perceived as crucial to the company so that their loss would negatively affect the companies stock price (this would be exacerbated if no clear and tested successor were provided – might this explain why not clear successor is provided in any of the three FT (Financial Times) cases? Might this be a way for CEO’s to institutionalize themselves and protect their position?).
The argument that CEO’s do matter is also compelling. CEO’s determines corporate strategy, what products to focus on, and lend a “spirit” to the company. Anecdotal evidence (i.e. Jack Welsh, though not included in the article except briefly because he has retired) abounds. Further, the views marshaled in the last argument are not so clear as they pretend. Porterian analysis, which was used to show that it was the industry not the CEO that determined profit, was argues by Porter himself (Caves and Porter, 1977) to be endogenous as well as exogenous. Porter and Caves argue that firms (i.e. CEO’s) must work to construct barriers to entry and profitability motes, and also to position themselves in advantageous markets. The Citigroup and AIG can be seen to have successfully done this. So, these supposedly exogenous factors that determine profitability are not really completely exogenous after all.Thus from this perspective, CEO’s matter more than they appear. Further, as Hambrick and Finkelstein argue, CEO’s can matter more or less depending on certain factors. So this question hides some unobserved heterogeneity often taken one dimensionally.
Hambrick and Finkelsein, Ocasio and Fligstein’s articles do not so much argue for or against CEO importance as they show that the job of a CEO has a political dimension, both in origin and in longevity. This is not really a surprise but rather shows that CEO’s have constituencies and checks and balances just like other power structures in the world.
Lastly, Bowman, Dingh, Useem, and Bhadury (1999) hint at another view of CEO importance. CEO’s might be less powerful (have less managerial discression) most of the time than common perception would imply but there are rare and crucial descriptions of firms, turning points, when leadership might become very important. It would be hard to measure this importance since it would be idiosyncratic and hidden, but it might make all the difference.Restructuring is a good example. While the authors find mixed results in studying restructuring, they conclude that it can be important and that, importantly, results are heterogeneous. Perhaps CEO’s rather than being important every day and in every day, are important in key times. This would incorporate (i.e. be consistent with) the existing literature on both sides and also support the accumulated wisdom of popular perception. Weill’s decision to merge Travelers and Citicorp, for example, could be seen as one of these watershed moments.
Warren Buffett, an another example, in his dramatic and brief role as CEO of Salmon Smith Barney was instrumental in changing the firms destiny. This is the “Buffet Premium” companies with his blessings enjoy. Further, his decision to get BH (Berkshire Hathaway) into first stocks and investing and then Insurance were pivotal to the company. But Buffet is a bad example of the lack of importance of a CEO. By almost any metric, even those who do not believe in a CEO’s importance, Buffett is an exception. He took control of a small manufacturer and began investing money in stocks. Through his prophetic insight into the market (or shockingly good luck) he has transformed the company into an investment vehicle. He makes most major investment decisions himself and he does much better than other managers (in the long term). So perhaps he is an example of a CEO with a lot of “managerial discretion” – which he created for himself, it should be pointed out. The other two CEO’s ended up crashing and burning before or during the financial crisis of 2008.
Many of the propositions that emerge above could be tested that have not (to my knowledge) been tested. Many of the propositions I bring up refer to points discussed above. The situations of the CEO’s in the article raise specific questions. 1) the state of the company since the CEO took power (as differentiated from temporary performance of the company, which Ocasio does measure). I bring this up because Warren Buffet and the other two CEO’s discussed in the article took over companies significantly smaller than they became. When a CEO leads a company though tremendous growth, I would speculate, his position is much more secure, even through hard times. A loyalty and a mystique is attached to the CEO. So perhaps this growth during tenure could buffer a CEO from bad times, bad judgment, and age. 2) The personality traits of the CEO. It is altogether possible that these factors might be able to further differentiate between when the cycle of power model would hold (perhaps for professional managers) and when the consolidation of power model might hold (perhaps for engineers with company experience and employee loyalty). These three CEO’s are allegedly very charismatic and likable. Is this a factor in their longevity? Certainly, it would help in coalition building and in maintaining good relations with coworkers. 3) Status of successor – these three CEO’s have made their successors either vague or fragmented. Perhaps they are exaggerating their “value” by exacerbating “uncertainty” if they leave. So the proposition would be that the more vague the successor, the longer the CEO would likely maintain power. 4) CEO’s above 65. Ocasio right censers his data before 63, so we really have no evidence about CEO’s after this from him. When a CEO becomes older than 65, his situation changes. No longer are people as likely to argue that he is not ‘good’ enough. Rather, they are more likely to argue that he is “too old.” So, perhaps, a proposition about the comparable age of the rest of the management team could be made. A homogenously old management team would imply that the CEO is more secure in his position since no young successor is available and this is his chief weakness. 5) the stock power of the CEO. Warren Buffet controls a significant portion of BH. Weill does as well.How does this affect their ability to maintain their power? Is there a correlation between stock ownership and longevity after the first decade? After 65?
We have discussed above the importance of the CEO for a company, agency problems that the CEO experiences, the advent of managerial capitalism, and top management teams. The CEO’s discussed, it must be pointed out once more, are likely to be outliers inmost respects. Not only are their companies very successful (until a crisis revealed their flaws, but only after a long CEO tenure) but they are likely to have particularly strong abilities (or am I falling into the very trap Ocasio describes by ascribing abilities to CEO’s without evidence but company performance). I think the most clear case of a CEO competence and value-added is Buffett since stock picking involves fewer people in a company and rests on judgment more than routines.
About the Author
Phin Upham has a PhD in Applied Economics from the Wharton School of Business. He currently works as an investor in New York and San Francisco. For more information visit PhinUpham.com.
