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Monday, 10 February 2020 05:48

Meet the new boss - Leader, The Economist

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On paper this is a golden age for bosses. Chief executives have vast power. The 500 people who run America’s largest listed firms hold sway over 26m staff. Profits are high and the economy is purring. The pay is fantastic: the median of those ceos pockets $13m a year. Sundar Pichai at Alphabet has just got a deal worth up to $246m by 2023. The risks are tolerable: your chances of being fired or retiring in any year are about 10%. ceos often get away with a dreadful performance. In April Ginni Rometty will stand down from ibm after eight years in which Big Blue’s shares have trailed the stockmarket by 202%. Adam Neumann got high in private jets and lost $4bn before being ousted from WeWork last year. The only big drawback is all those meetings, which eat up two-thirds of the typical boss’s working hours.

Yet ceos say the job has got harder. Most point the finger at “disruption”, the idea that competition is more intense. But they have been saying that for years. In fact the evidence suggests that, as America’s economy has become more sclerotic, big firms have been able to count on cranking out high profits for longer. Nonetheless, bosses are right that something has changed. The nature of the job is being disrupted. In particular, ceos’ mechanism for exercising control over their vast enterprises is failing, and where and why firms operate is in flux. That has big implications for business, and for anyone climbing the corporate ladder.

Few subjects attract more voodoo analysis than management. Even so, studies suggest that the quality of an American firm’s leadership explains about 15% of the variance in profitability. But boards and headhunters struggle to identify who will do a good job (see Briefing). Perhaps as a result, they tend to make conservative choices. About 80% of ceos come from within the company and over half are engineers or have mbas. Most are white and male, although that is changing slowly.

This tiny elite faces big changes, starting with how they control their firms. Ever since Alfred Sloan shook up General Motors in the 1920s, the main tool that ceos have wielded is the control of physical investment, a process known as capital allocation. The firm and the ceo have had clear jurisdiction over a defined set of assets, staff, products and proprietary information. Think of “Neutron” Jack Welch, who ran General Electric between 1981 and 2001, opening and shutting plants, buying and selling divisions, and ruthlessly controlling the flow of capital.

Today, however, 32% of firms in the s&p 500 of big American firms invest more in intangible assets than physical ones, and 61% of the market value of the s&p 500 sits in intangibles such as research and development (r&d), customers linked by network effects, brands and data. The link between the ceo authorising investment and getting results is unpredictable and opaque.

Meanwhile the boundaries of the firm, and the ceo’s authority, are blurring. Uber’s 4m drivers are not employees and neither are the millions of workers in Apple’s supply chain, but they are mission-critical. Big firms spent $32bn last year on cloud services from a few powerful vendors. Factories and offices have billions of sensors pumping sensitive information to suppliers and customers. Middle-managers talk business on social media.

Even as ceos’ authority is being redefined, a shift is under way in where firms operate. Generations of bosses have obeyed the call to “go global”. But in the past decade the profitability of multinational investment abroad has soured, so that returns on capital are a puny 7%. Trade tensions mean that ceos face the prospect of repatriating activity or redesigning supply chains. Most have only just begun to grapple with this.

The last change is over the purpose of the firm. The orthodoxy has been that they operate in the interests of their owners. But pressure is coming from above, as politicians such as Bernie Sanders and Elizabeth Warren call on ceos to favour staff, suppliers and clients more; and from below, as both customers and young workers demand that firms take a stand on social issues. Alphabet has faced rolling staff protests.

ceos are experimenting, with underwhelming results. Reed Hastings at Netflix preaches radical autonomy. Staff decide their expenses and do without formal performance reviews, an idea that at most firms would cause chaos. Others assert authority by reviving the 1980s cult of celebrity. Sometimes it works: Satya Nadella has rebuilt Microsoft using “empathetic leadership”. Often it does not. Mr Neumann’s stint as WeWork’s party-animal-in-chief ended in fiasco. Jeff Immelt, the ex-boss of General Electric, has been accused of “success theatre” by making himself a jet-setting star as its cashflow fell by 36%.

Keen to show they are engaged, bosses are publicly weighing in on issues like abortion and gun control. The danger is hypocrisy. Goldman Sachs’s boss wants to “accelerate economic progress for all”, but it faces a huge fine for its role in the 1mdb corruption scandal in Malaysia. In August 181 American ceos pledged to serve staff, suppliers, communities and customers as well as shareholders. This is a promise, made during a long economic expansion, that they will not be able to keep. In a dynamic economy some firms have to shrink and shed workers. It is silly to pretend there are no trade-offs. Higher wages and more cash for suppliers mean lower profits or higher prices for consumers.

The very model of a modern CEO

What, then, does it take to be a corporate leader in the 2020s? Every firm is different, but those hiring a ceo, or aspiring to be one, should prize a few qualities. Mastering the tricky, creative and more collaborative game of allocating intangible capital is essential. A ceo must be able to marshal the data flowing between companies and their counterparties, redistributing who earns profits and bears risk. Some firms are ahead—Amazon monitors 500 measurable goals—but most ceos are still stuck clearing their email inboxes at midnight. Last, bosses need to be clear that a firm should be run in the long-term interest of its owners. That does not mean being crusty or myopic. Any sensible business should face up to the risks from climate change, for example. It does mean avoiding mission creep. ceos in the 2020s will have their hands full with their own company, so forget trying to run the world too. And if, in between meetings, you find time to smoke weed at 40,000 feet, don’t get caught.

 

The Economist