FOCUS ON RESEARCH RAKESH KHURANA The Cult of the Charismatic CEO by CRAIG LAMBERT In 1997, one of the blue-chip icons of corporate America, him astride his Harley Davidson motorcycle, a knight on an iron AT&T, was in trouble and seeking a new leader. The company steed riding in to save the telecommunications giant. was operating in a deregulated industry and facing declining “The selection of a celebrity CEO can drive up the market profit margins in its core business—long-distance telephone ser- value of a company’s stock,” says assistant professor of business vice. After a three-month search, the board of directors passed administration Rakesh Khurana, Ph.D. ’98, whose new book, over a well-regarded insider, John Zeglis, who was intimately fa- Searching for a Corporate Savior: The Irrational Quest for Charismatic miliar with the complexities of the deregulated business envi- CEOs (Princeton University Press) explores the messianic mania ronment, and instead hired C. Michael Armstrong as CEO. After surrounding such hires. Indeed, the day Armstrong was se- a 31-year career with IBM, Armstrong had headed Hughes Elec- lected, the market value of AT&T stock went up $4 billion. The tronics, a defense contractor with interests in satellite television, AT&T board also lavished money on Armstrong; in 2000, his with great success for four years. Business magazines showed compensation was reportedly $21.8 million, and perks included 40 September - October 2002 Photograph by John Soares Reprinted from Harvard Magazine. For copyright and reprint information, contact Harvard Magazine, Inc. at 617-495-5746. a $10-million guaranteed price on a block of his restricted stock. of corporate stock. In the 1980s, dismayed by declining Armstrong embarked on an aggressive program of acquisi- profitability, these big investors sought to dislodge entrenched tions—cable TV, cellular telephony, and Internet delivery sys- management corps, which were seen as an insular, self-satisfied, tems—as part of his vision of remaking AT&T into an omni-In- underperforming group. These major stockholders financed ternet corporation. That strategy has tanked, and AT&T is now leveraged buyouts by private equity firms like Kohlberg Kravis selling o≠ those acquisitions at huge losses. The stock, which Roberts (KKR) and threw out previous management. When peaked at about $64 per share in 1999, is currently priced at states passed anti-takeover laws, the investors shifted their focus around $10. “The company today looks very much like it did to boards of directors. when Mike Armstrong walked in—a formerly regulated com- Using the business media, investors pressured boards to moni- pany with declining margins in its core long-distance telephone tor CEO performance more diligently. They publicized lists of the business,” says Khurana. “Except this: four years ago AT&T had “Ten Worst Corporate Boards” and took out full-page ads in the $6.7 billion in debt; today its indebtedness is $67 billion. Its bal- Wall Street Journal criticizing specific boards and companies. “The ance sheet, which had been one of the healthiest in the country, message was: ‘We will shame you,’ ” says Khurana. “The hot and is now one of the worst.” (On July 17, AT&T announced that searing kind of shame that makes people at the country club look Armstrong is leaving to become chairman of the corporation at you askance.” Investors worked together to elect their own di- formed when Comcast Corporation bought AT&T’s cable-tele- rectors, and at places like Kodak, General Motors, and Westing- vision business; AT&T took a $13-billion charge for the sale.) house, boards began firing CEOs with a vengeance. At the largest Yet AT&T is far from the worst case. The 200 to 300 companies, up to 50 percent of unravelings of Enron, Tyco, and WorldCom CEOs were discharged. have raised searching questions about cor- The trend toward The trend toward charisma may have porate leadership and even shaken in- started when “the idea took root that if a vestors’ faith in corporate America. These hiring “charismatic” firm was doing poorly or well, it was be- debacles have revealed incompetent, uneth- cause of the CEO,” Khurana explains. “Pre- ical, and massively self-serving individuals CEOs may help viously, CEOs were about as well-known atop corporations. Is this a group of bad ap- as their chau≠eurs. But something hap- ples who all went rotten at once, or—more explain the anguish pened when Lee Iacocca was credited with worrisome—do these executives typify single-handedly saving an American icon. leaders at Fortune 1000 companies? Khu- Most people forgot about the $2-billion rana, who earned his doctorate in organiza- that now afflicts federally guaranteed loan to bail out tional behavior, studying under a joint pro- Chrysler, or the United Auto Workers’ gram of the sociology department and so many firms. givebacks. Iacocca made other CEOs look Harvard Business School, suggests that a bland—there was even talk of drafting corporate trend toward hiring “charismatic” CEOs, rather than him for president. The image of a CEO changed from being a ca- competent executives with relevant skills, may help explain the pable administrator to a leader—a motivating, flamboyant leader anguish that now a±icts so many firms. with a new task. In the late 1980s and early ’90s, business tried Drawing on interviews with CEOs, board members, and exec- to redefine itself; it was no longer about the profane task of utive search consultants, plus extensive data on the country’s 850 making money, but concerned with vision, values, mission—es- largest public corporations, Khurana—who was himself a man- sentially religious terms.” ager with Cambridge Technology Partners for four years—asserts This meant “importing the sacred into the profane,” explains that the CEO labor market “is not really a market. A genuine mar- Khurana, who uses the German sociologist Max Weber’s works ket means many people transacting anonymously and e∞ciently, on charisma as a touchstone. Charismatic leadership, which with the guiding factor that no single actor has enough power to grows from a personal magnetism that inspires devotion, reaches set the terms of the exchange. But CEO jobs are a small-numbers its apotheosis in religious cults. Its ascendance in corporate life market: there are only a few positions, and only a small number of is “a throwback to an earlier form of authority that proved to be candidates perceived to have the skills needed to run a large corpo- very unstable,” says Khurana. “Weber said that charisma and ra- ration.” In a typical year, 90 to 140 CEO positions open up in the tionality cannot coexist. The progress of Western civilization largest 850 companies, the vast majority due to normal retire- has been a movement away from charismatic leadership toward ments. One-third of new CEOs hired are outsiders. rational authority invested in laws and institutions. After Hitler But the path to the top has changed. In the past, management and Mussolini, Americans were rightly skeptical of charismatic controlled the succession process: the new top dog was almost leaders. Separating the individual from the o∞ce is one of the always promoted from within the kennel, typically hand-picked great victories of Western society.” by the outgoing CEO with a rubber stamp from the board of di- Yet in corporate America, the personalities of CEOs have been rectors. (In fact, the CEO often chose the membership of the conflated with the success or failure of the companies where they board, which became a highly self-replicating group.) work. “The only explanation needed for General Electric’s perfor- Then, gradually, the structure of corporate ownership mance is Jack Welch,” says Khurana, noting that GE’s 300,000 changed, as stock became increasingly concentrated in the hands employees in hundreds of divisions within many subsidiary com- of institutional investors. In 1950, less than 10 percent of U.S. eq- panies are omitted from the equation. “Under Jack Welch, GE had uities were owned by institutions (such as mutual funds and a stunning run of profit growth—almost 80 straight quarters,” he pension funds), but today, institutions control about 60 percent continues. “Given the complexity of (please turn to page 97) Harvard Magazine 41 95-5746. print information, contact Harvard Magazine, Inc. at 617-4 Reprinted from Harvard Magazine. For copyright and re he enthusiasm for TESTING TRAP (continued from page 37) performance- face in improving the quality and inten- Tbased accountability plays to the sity of teaching and learning. Similarly, students’ ethnic and economic back- worst weaknesses of the American educa- we can hope that the technical failures of grounds. But such measures are highly un- tion system. After World War II, most in- testing will trigger a response that fo- reliable for populations the size of a typical dustrialized countries nationalized their cuses more on broad assessments of stu- elementary school, and they are particu- education systems, but not the United dent learning. larly unreliable for even smaller sub-groups States. Because decisions about content The worst that can happen is that test- of students. Schools are often misclassified and performance were left to states and based accountability will widen the gap as low- or high-performing purely because localities for so long, they never developed between schools serving the well-o≠ and of random variation in their test scores, un- the capacity to monitor the quality of those serving the poor, thus confirming related to any educational factor. teaching and learning in schools, to sup- the public’s suspicion that expecting high The standards and accountability port the development of teachers’ and ad- levels of learning from all children is un- movement is in danger of being trans- ministrators’ knowledge and skill, or to realistic.