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Cover Story
“The role of a CEO is first and foremost to cause no harm!”
Sydney Finkelstein, Professor of Management at the Tuck School, talks about what CEOs need to do in contemporary times
Issue Date - 30/04/2012
B&E: How has the sustained economic uncertainty changed the role of CEOs?
Prof. Sydney Finkelstein (SF): We’ve now seen the result of what happens when CEOs lose control over their companies. Jon Corzine’s MF Global is only the most recent example of a big firm running aground because of a CEO who adopted a high-risk and inappropriate strategy. So, the role of a CEO is first and foremost to cause no harm! Only after that do I want to hear about how CEOs will grow their businesses.

B&E: Have corporate boards started reconsidering criteria based on which they evaluate CEOs? Also, where does the debate stand on choosing an outsider vs grooming an insider for the post?
SF: Boards are aware of the high cost of choosing wrongly, and how that will reflect on them as stewards for shareholders. Boards want CEOs who can create a vision, motivate all employees based on that vision, and then lead an effective execution of the resulting strategy.

With respect to the insider vs. outsider debate, boards are paying more attention to the importance of developing talent inside organizations. I think this will be the biggest differentiator between the most successful companies and the rest of the playing field. So, when boards don’t select an insider, it is really an indictment on the ability of the company to develop great talent. Beyond that, there is a need for deep industry and technology expertise among CEOs, and that is hard to have if you come from another industry. The tide is turning towards more insider hiring.

B&E: Typically, CEOs are asked to deliver in a short span of time. Has the approach of shareholders changed since the credit crisis towards ‘profits at all costs’?
SF: Shareholders still want to make money on their investment, so the pressure on CEOs to deliver in a short time frame has not changed. What has changed is the number of outsiders – shareholder groups, academics, analysts, media – who are more attuned to the potential warning signs of failure. And that’s a good thing.

B&E: What, do you feel, are the top three common strategic miscalculations that CEOs need to avoid today? Please elaborate.
SF: 1. Believing your product or service will always be a winner. That is the formula for disaster. Just ask Research in Motion. CEOs need to build a culture of open-mindedness and creativity, and of not being satisfied with the status quo.
2. Believing that the path to success for your business globally will be the same as it has been domestically. While the world is growing more similar in many ways, the nature of business is different in different countries. So, what worked before in the US, for example, may not work the same way in Brazil.
3. Believing that value will always be created in the same way in your business. Value shifts over time, and this is happening all over the world. Chinese companies created value by having the lowest labor costs, but with rising salaries in China, that will be shifting too.

B&E: When it comes to M&As, do you see CEOs learning from their past mistakes with large deals?
SF: I don’t think that the learning in terms of M&As is particularly strong. This is because CEOs still love to grow their companies, and doing so via acquisition is one of the quickest ways to accomplish that. The track record of M&A success, however, remains weak; more weak than many executives and boards fully appreciate. To learn from the past deals, you really need to invest in building a capability in M&A and that takes some time to develop.


Amir Moin           

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