Thursday, June 12, 2014

Leaders: Not the smartest in the room

People become leaders because they are popular, not because they are the most competent or intelligent.

This article, using statistical data, shows that there is no correlation between a CEO's pay and performance.  In fact, there might be an inverse correlation.  Among the CEOs who were in the top 50 percentile of performance based on total shareholder return during 2010-2014, there were more CEOs in the bottom third of pay than there were in the middle or top third of pay.  In other words, the lowest paid CEOs performed the best.

Carl Icahn is one of the most successful investors in the world, who has dealt with many CEOs as an activist investor.  He wrote a blog entitled "About CEOs – Anti Darwinian Metaphor – Survival of the Unfittest".  He explains that the people who become CEOs are not the most intelligent or competent.  Essentially, the most "likeable", do-nothing and non-threatening guy becomes CEO.  The following is from his blog:
"The way CEOs become CEOs in America is a travesty. This is one of our major problems.  I use the anti - Darwinian metaphor. The survival of the unfittest.
If you remember if you were in college the fraternity president was always there for you. When you had nothing to do or when you were a little depressed. Feeling down. You go to the club and the fraternity president would always be there. You wondered when he had time to study which he probably didn’t do very much of in school. He was there to sympathize with you if your girlfriend didn’t show up or didn’t call you back and you obviously sort of liked the guy because the fraternity president was usually a likeable guy
When the elections came up you would always vote for him. He had a couple qualities - the fraternity president. Politically, he was a survivor and he never made many waves. He did not promote controversy. Therefore when he went out into corporate America he was able to move up the ladder fairly quickly. Remember he survived, he didn’t make waves, and he wasn’t a threat. He kept moving up and up. 
Eventually he becomes the assistant to the CEO. The CEO had the same qualities. He’s a survivor. He’d never employ anyone underneath him who might be a threat. The boards like these guys… this type of CEO. The boards generally don’t own any stock (another problem with our system). The boards don’t really care to hold CEOs accountable. Remember it’s a symbiotic relationship. These guys pay the boards very well – they give the boards perks. The boards don’t care to hold them accountable because that might endanger the perks they love so much. 
When the CEO retires the assistant becomes the CEO. And remember what I told you. He’s a survivor. He would never have anyone underneath him as his assistant that’s brighter than he is because that might constitute a threat. So therefore, with many exceptions, we have CEOs becoming dumber and dumber and dumber. We can all see where this is going. It would almost be funny if it wasn’t such a threat to our ability to compete and to our economy in general."
Icahn is implying that the person who is the most popular, most politically savvy or most compatible with the existing leaders and boards, is the person who becomes leader.  Here is a recent CNN article with a quote from Icahn:
"So we're going to have morons running the companies soon. And we're sort of almost there with many companies."
Icahn stated that the non-threatening guy becomes CEO.  University of Maryland conducted a study that found that handsome men may not get hired because they are seen as a threat by other men (source).

Warren Buffett has been a Chairman since 1970 and has managed or dealt with dozens, if not hundreds, of CEOs in his career.  In his 1988 letter to shareholders, he wrote:
"Their performance, which we have observed at close range, contrasts vividly with that of many CEOs, which we have fortunately observed from a safe distance.  Sometimes these CEOs clearly do not belong in their jobs; their positions, nevertheless, are usually secure.  The supreme irony of business management is that it is far easier for an inadequate CEO to keep his job than it is for an inadequate subordinate. 
If a secretary, say, is hired for a job that requires typing ability of at least 80 words a minute and turns out to be capable of only 50 words a minute, she will lose her job in no time.  There is a logical standard for this job;  performance is easily measured; and if you can't make the grade, you're out.  Similarly, if new sales people fail to generate sufficient business quickly enough, they will be let go.  Excuses will not be accepted as a substitute for orders. 
However, a CEO who doesn't perform is frequently carried indefinitely.  One reason is that performance standards for his job seldom exist.  When they do, they are often fuzzy or they may be waived or explained away, even when the performance shortfalls are major and repeated.  At too many companies, the boss shoots the arrow of managerial performance and then hastily paints the bullseye around the spot where it lands. 
Another important, but seldom recognized, distinction between the boss and the foot soldier is that the CEO has no immediate superior whose performance is itself getting measured.  The sales manager who retains a bunch of lemons in his sales force will soon be in hot water himself.  It is in his immediate self-interest to promptly weed out his hiring mistakes.  Otherwise, he himself may be weeded out.  An office manager who has hired inept secretaries faces the same imperative. 
But the CEO's boss is a Board of Directors that seldom measure itself and is infrequently held to account for substandard corporate performance.  If the Board makes a mistake in hiring, and perpetuates that mistake, so what?  Even if the company is taken over because of the mistake, the deal will probably bestow substantial benefits on the outgoing Board members.  (The bigger they are, the softer they fall.) 
Finally, relations between the Board and the CEO are expected to be congenial.  At board meetings, criticism of the CEO's performance is often viewed as the social equivalent of belching.  No such inhibitions restrain the office manager from critically evaluating the substandard typist."
A recent finding explained in this article entitled Female 'A+' Students End Up Making As Much As Male 'C' Students supports Icahn's claims .  According to this article:
"If you want to make more money, it helps to do well in school, but it helps even more to be a white man."
"The study also found that minorities tend to benefit less dollar-wise from getting good grades than their white counterparts, even though [minority] high-school students with high GPAs are more likely to continue their schooling than white students with good grades."
Since most leaders are currently white men, other rising white men would be the most compatible to replace them.  People who are not white men, are not compatible.  There are a few exceptions, but generally this factor outweighs intelligence. It also helps if you play golf, can chat about sports (especially sports stats), look the part and go to the same church.

There is more evidence to support the claim that the leaders are not the most intelligent:
  • According to the US census, 5.1% of the American population are Asian.
  • According to Fareed Zakaria, admission to top universities is not based on 100% merit:
    • Many of the top schools discriminate by limiting their Asian populations to 16.5 - 20% with quotas.  (What would society think if NBA teams limit the black population in their teams to 16.5 - 20%?)
    • If admission is based on merit without quotas, Asians make up a far higher percentage of the student population:
      • 40% at Caltech and the University of California, Berkeley
      • 72% at New York City's Stuyvesant High School
    • "... the single largest deviation from merit in America’s best colleges: their recruited-­athletes programs. The problem has gotten dramatically worse in the past 20 years. Colleges now have to drop their standards much lower to build sports teams. ... A senior admissions officer at an Ivy League school told me, “I have to turn down hundreds of highly qualified applicants, ...because we must take so many recruited athletes who are narrowly focused and less accomplished otherwise...” William Bowen, a former president of Princeton University, has documented the damage this system does to American higher ­education—and yet no college president has the courage to change it."
If admission is based on merit, then 40-72% of the student population should be Asian.  So, what percentage of the leaders is Asian?  According to DiversityInc, 1.8 percent (or nine) of all Fortune 500 CEOs are Asian and based on their list, only one of them has an East Asian name.

Using Carl Icahn's metaphor, here are examples of "survival of the unfittest":
  • Ron Johnson, who oversaw JC Penney's decline
  • John Sculley, who oversaw Apple's decline
  • Carol Bartz, who couldn't turnaround Yahoo
  • Scott Thompson, who couldn't turnaround Yahoo
  • Thorsten Heins, who couldn't turnaround BlackBerry
  • Steve Ballmer, who watched Microsoft flatline and do nothing in the social media and mobile spaces
  • Tim Cook, who has not innovated much compared to Steve Jobs
  • Brooksley Born warned and tried to regulate the derivatives that caused the financial crisis.  Larry Summers, Tim Geithner and Robert Rubin fought against Born and got her ousted.  For this incompetence, all three got promoted.  Geithner became Treasury Secretary, Rubin went on the board of Citigroup and Summers became economic advisor to Obama.
  • George Bush, who failed at various businesses.  For him, appealing to the religious right and having a recognizable surname were more important.  Then he did a horrific job as president.
  • Senator Chris Dodd, who bragged about how the government created wealth for Americans through home ownership
  • The numerous leaders on Wall Street who drove their companies into bankruptcy, created the financial crisis and drove the U.S. into recession 
One exception belongs to entrepreneurs.  They became stellar leaders by creating their own companies.  Many of them would have never become leaders if they had to climb the corporate ladder or play (office) politics.  Steve Jobs created Apple and made it into the most valuable company in the world in 2012.  With his abrasive and abusive style in his early years, he would never have been promoted to manager, let alone CEO.

The glass ceiling is not limited to Asians and females.  It also applies to geeks and nerds as well.  If Bill Gates and Mark Zuckerberg had to climb the corporate ladder, they would never have been promoted either.  However, one can argue that they are among the best leaders in the world for having created such immense wealth for all stakeholders, as they created some of the most successful companies in human history.
Elon Musk is another good example.  He co-founded PayPal, Tesla and SpaceX.  According to his brother, Elon was first in line for engineering skills but not for social skills.  It wasn't until Elon got older before he appreciated connections to friends, family and people.  Watch the video starting at 1:30:

Many other leaders, who became leaders by climbing the corporate ladder and who were articulate, well-dressed and looked the part, accomplished little other than to milk the cash cow.

Other victims of glass ceilings include singles, gays and interracial-couples.  Conservative companies, such as IBM at one time, prefer married men, even though there is no proof that married men are more productive or intelligent than single men.  Evangelicals hate gays.  Some religious groups, such as the Mormons at one time, believed that interracial-couples should be punished with death.

In politics, there is even less of a requirement to have intelligence.  The overriding factors for success are popularity, public speaking skills and knowing how to tell people what they want to hear.  There have been politicians in government who are still students who have yet to graduate.  Many of them have education or career experience with questionable value or relevance.

As explained here, the most important job for the politician is to manage the economy.  Yet, most politicians know little of economics or business, from either an educational or experience standpoint.  Obama has amazing public speaking skills, but did not study business and has less business experience than a cashier at McDonald's. You likely know much more about business and economics than Obama.

Before you vote at the next election, look up the educational background and career experience of the politicians.  You will be dumbfounded at some of them.

Many of you are probably intimidated by people in leadership or authoritative positions.  Generally, this is caused by the belief that the leaders are more competent, intelligent or knowledgeable than you.  However, this is not accurate.  Hence, many voters rarely contact their politicians to raise their concerns or wishes.

According to Dan Ellsberg on ExposeFacts, "all governments lie" and when governments are not held accountable, "disastrous" policies happen such as "Vietnam" and "Iraq".

During elections, politicians make promises.  Unfortunately, they are not bound by legal contracts to these promises.  One can argue that they should be.  Short of this, voters such as you need to ensure that they keep their promises.  If you voted for a politician based on his/her promise and he/she breaks that promise, it is akin to fraud.  You need to contact them with your complaints, otherwise they will feel that the people are not against their broken promises or changed policies.

You should never be intimidated by leaders in business or politics.  You should never be reluctant to voice your concerns to your politicians.  They are not leaders because they are smarter or more competent than you.  Quite often, you are more so. They are leaders because they are more popular, or in the case of politicians, because they chose a different career path as well.


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