CEO Influence and Lovaglia’s Law

I mentioned Rakesh Khurana’s book Searching for a Corporate Savior in my last post. After I wrote it, I realized that Rakesh may have found an instance of Lovaglia’s Law: "The more important the outcome of a decision, the more people will resist using evidence to make it."

Rakesh’s book is so compelling because he blends impressive quantitative data with insights from his in-depth research on how senior executives are selected and evaluated by corporate boards. Rakesh described how directors of huge companies had enormous faith in the power of CEOs that went beyond anything that could be justified by any research, how they spent vast amounts of money and time searching for new corporate saviors, and paid out huge sums to executive search firms and to the CEOs they ultimately hired. Following Lovaglia’s Law, perhaps because these decisions were so important, Rakesh found that when he asked corporate directors if CEOs are worth all that money, they reacted with anger and surprise, as if he had raised a taboo subject. He found that they had “virtually religious” convictions on the subject, which led them to dismiss any evidence showing that CEO quality is not a primary and powerful cause of company performance. My hunch is that they would have been more receptive to evidence about more trivial decisions, such as what colors to paint the walls or what music to play in the elevators.

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[Women]

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a woman, or the feminine in men and women, seeks to share deep awareness of the world
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[Alexander Kjerulf]

Excellent point Bob (and an excellent blog all-round).

Did you see James Surowiecki's article in the New Yorker on why overpaid CEO's are bad for business:
http://www.newyorker.com/talk/content/articles/060213ta_talk_surowiecki

From the article:
it’s becoming increasingly clear that, from a shareholder’s perspective, overpaid C.E.O.s aren’t just expensive; they’re downright destructive. One recent study of the market between 1992 and 2001 by economists at Rutgers and Penn State found that the more a C.E.O. was paid, relative to his peers, the more likely his company was to underperform in the stock market.

It's the hero myth, the easy fix and Lovaglia's law rolled into one.

[ann michael]

These boards also "spent" their reputations. Once they pronounced someone the savior, how could they risk questioning their own judgement?

I bet they'd do it in a second if it weren't "their guy" in the CEO's seat!

I worked for a CEO that put someone in charge of a huge part of his business and although EVERY senior leader in the company eventually came to realize (and communicate to him) that the appointed guy was not right for the job (with evidence), he never saw it (or would, at least, never admit it).

Ironically the CEO is gone but that person is still there - in the same job!