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Cover Story
 
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B&E ANNUAL CEO REPORT 2012-13
What should CEOs not do
The past decade or so has seen too many unfortunate precedents that have raised apprehensions about the way CEOs work and also whether their role is overstated. It’s important that CEOs don’t forget the lessons therein.
Issue Date - 30/04/2012
 
This popular anecdote from the 1980s alludes quite aptly to the state of affairs in organisations back then in India. The employees at a certain company hand over their corner office to a parrot, who keeps repeating, “Call a meeting & set up a committee”, to every problem they communicate to it. When asked the rationale for a parrot, they said that this was all that their old bosses said too; and besides, the parrot was obviously far more economical!

If you look at it, the debate on both these aspects – the CEO’s role in the organisation of today and his/her ‘economic value’ to its investors/shareholders – is as alive and kicking as ever before. Unsurprisingly, the pitch of the debate is at its highest note in corporate America, where the average CEO’s pay is over 400 times of the average worker today compared to around 10 times in 1960. Despite that, we have witnessed two rounds of preposterous shareholder wealth destruction in 2001 and 2007, and serious compromises on corporate ethics and morality to boot. Consequently, there is a wealth of research today on how realistic CEO pay really is, and its consequent correlation with shareholder returns, and more underway. And when it comes to the topic of what CEOs should not do, a lot of votes would surely go to the option that reads, “Don’t get overpaid!” A lot of research concludes, that more pay to CEOs does not ensure better performance, and in fact, some research concludes that it could only be worse. For instance, a benchmark 2009 research by Michael J. Cooper of the University of Utah and Huseyen Gullen & P. Raghavendra Rao of Purdue University measured the correlation between CEO pay and future stock price performance. They concluded that CEO pay (industry & size adjusted) is negatively related to future shareholder wealth for upto five years after the companies were ranked on the basis of CEO compensation. They found that companies where CEO pay was in the top 10% achieved negative abnormal returns of around -13% over the next five years. Ironically, the effect was worse when CEOs received higher incentive-based compensation as compared to their peers in the industry. In an HBR blog, Ron Ashkenas, a managing partner of Schaffer Consulting and acclaimed book author, notes how CEO pay is no longer linked to stockholder performance and yet, stock options figure so prominently in CEO pay (especially when they flaunt $1 salaries)! He concludes that CEO pay today is no longer based on value (though that’s the over arching question that the CEO faces day in & day out), but on competitive evaluations.

So the unbelievably high compensations will continue to rise, and so will the unusually high expectations on what CEOs need to do. While the rest of this exclusive cover package deliberates on how CEOs today are looking at their companies and the business environment and provides a blockbuster HBR research on the things that they do, it is pertinent to also look at the strategic bloopers that they need to avoid. Based on critical leadership failures that have rocked the corporate world in recent years with unprecedented ferocity, we proceed to elaborate on some of them. This is of course assuming that the CEOs are willing to put the organisation’s interests above their own, and not be Gordon Gekko sympathisers like Delphi Financial CEO Robert Rosenkranz, who demanded $110 million more than other shareholders during the now infamous negotiations between him and Tokio Marine Holdings of Japan for the $2.7 billion buyout of Delphi by the latter. When CEOs are unwilling to think beyond themselves, the battle for the company is lost before it started.

 
The vision conundrum: Formulating a vision statement that takes your company to the next level (and sticking to it) is a key part of a CEO’s role; and if all goes well, a legacy that keeps stakeholders smiling. But the last mistake that a CEO can afford to commit is to assume that he owns the vision and has to drive his team to work in a manner so as to bring that vision to fruition. At times, CEOs do worse; and even their closest associates are unclear about the what and why of their vision. HP’s Leo Apothekar is a very recent instance of a CEO who seemed to run in a direction of his own. HP, the organisation, either struggled to keep pace, or lost track completely. The launch of an ‘iPad killer’ during his stint, which was killed in seven weeks, was one of the most unfortunate outcomes of this pandemonium. It got worse when the company also announced that it was exiting the PC business and destroying all hopes of the Palm acquisition doing any good even as it made another – Autonomy. Ultimately, the exit instruction came for Apothekar himself, and considering the 46.34% destruction in share price during his term, not a moment too soon. Also, looking at the way they handle CEO appointments and severances, it seems the entire HP board needs a rejig.

The best thing that CEOs can do today is to maintain a ‘zero vision’ approach – basically that means not just sharing the vision, but transferring it to frontline managers and giving them ownership. Respected management author Jim Heskett writes in the HBS paper titled, ‘How much of leadership...’, “Companies growing (shareholder) value the most are the ones with leaders that have a clear vision, continually communicate that vision, and then get out of the way!” Akio Morita is one of the few visionary Japanese CEOs, most others are vivid examples of the zero vision philosophy, yet immensely successful.

Missing out on the woods/trees/both: Indra Nooyi is one of our most celebrated exports to corporate America; yet, investors are losing sleep over her vision to take Pepsi beyond a beverage giant to a multi-brand ‘convenient food & beverages’ major. In her initial years as CEO, her idea behind delivering health-oriented products for the world when colas were facing unprecedented bad PR was lauded and rightly so. The snack food business is doing well, but PepsiCo as an enterprise still lags behind Coca Cola and is facing issues of its own at the moment. For Q4, 2011, the company posted an EPS gain of 3% (compared to 10% for Coca Cola), much lower than its expectations of high single digits and the company has also announced 8700 job cuts worldwide. Moreover, PepsiCo’s mcap at $103.32 billion is now way behind Coca Cola’s $162.72 billion (March 26 data), and the day when it historically overtook the latter in 2005 is now a distant memory. Both Pepsico America Beverages and Pepsico America Foods increased volume by just 1% for 2011, while Coca Cola showed 4% growth in North America and 6% in Latin America (however, PepsiCo is doing well in emerging markets and growing much faster than Coke in Europe). But the red flag for PepsiCo is that its ‘good for you’ portfolio is not passing muster (still only around 20% of PepsiCo’s revenues). Nooyi seems to have overestimated their impact on the market or missed out in terms of approach, given the fact that PepsiCo is also accused of not advertising its health & wellness initiatives well. Moreover, their health portfolio is seen to lack what Pepsi always had – the taste proposition – look at how Pepsi Max failed so miserably in India. Now the company seems to have learnt its lessons and is planning to pump in around $600 million more on advertising. But the better thing may really be what’s being suggested time and again – make the food and beverage businesses part ways and live out their individual destinies.

          

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