206 InManagersWeTrust
the wor kforce by about 9%, or 4200 jobs, and closing ten factories.^1
AMP’s board ultimately may have served the corporation’s interests
in concluding a deal with a friendly partner, but AMP’s CEO and
management undoubtedly pressured the board to resist what by all
accounts looked good for shareholders in favor of something that
looked bad for the workers.
The best way to tell where a company sits is to investigate the
way its directors tackle their key jobs. Focus on those jobs and decide
which boards do them well.
HAIL TO THE CHIEF
The CEO sets the tone at the top. The CEO’s historical performance
on matters such as compensation, acquisitions, and capital alloca-
tion generally is the key question an investor should ask when judg-
ing a CEO and deciding whether to entrust wealth to his or her
management. Special attention must be paid to selecting a CEO
because of his or her unique role in the organization.
Warren Buffett notes that standards for measuring a CEO’s per-
formance are either inadequate or easy to manipulate, and so a
CEO’s performance is harder to measure than that of most workers.
The CEO has no senior other than in theory the company’s board
of directors. That board is often handicapped in its performance
review, however, because of a lac kof measurement standards and
because as meetings come and go, the relationship between the CEO
and the directors increasingly becomes congenial rather than super-
visory.
Maintaining that supervisory attitude is critical. The board’s role
in reviewing the CEO’s performance is most acute precisely where
it can be most easily impaired: dealing with a mediocre manager. It
is easy for a board to get rid of a terrible manager; the hard case is
a so-so one. Recruiting the top talent and a roster of succession
candidates is a critical board function. Too often the importance of
this role is overlooked, as occurs when a board simply replaces an
outgoing CEO with the number two fellow at the company (which
happens about two-thirds of the time). This means that many boards
fail to evaluate changing organizational needs and variations in the
personal talents of the two at the top.^2
Abdication of a board’s responsibility for CEO selection is most
clear when a board simply allows an incumbent CEO to handpick