12 Leaders The EconomistFebruary 8th 2020
O
n paper thisis a goldenageforbosses.Chiefexecutives
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 Ro-
metty will stand down from ibm after eight years in which Big
Blue’s shares have trailed the stockmarket by 202%. Adam Neu-
mann got high in private jets and lost $4bn before being ousted
from WeWork last year. The only big drawback is all those meet-
ings, 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’ mecha-
nism for exercising control over their vast enterprises is failing,
and where and why firms operate is in flux. That has big implica-
tions 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 ex-
plains 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 com-
pany 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 con-
trol 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 divi-
sions, and ruthlessly controlling the flow of capital.
Today, however, 32% of firms in the s&p500 of big American
firms invest more in intangible assets than physical ones, and
61% of the market value of the s&p500 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 author-
ity, 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 ser-
vices from a few powerful vendors. Factories and offices have bil-
lions of sensors pumping sensitive information to suppliers and
customers. Middle-managers talk business on social media.Evenasceos’authorityisbeingredefined, 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, suppli-
ers 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”. Of-
ten it does not. Mr Neumann’s stint as WeWork’s party-animal-
in-chief ended in fiasco. Jeff Immelt, the ex-boss of General Elec-
tric, 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 pro-
gress for all”, but it faces a huge fine for its role in
the 1mdbcorruption scandal in Malaysia. In Au-
gust 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 econ-
omy 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? Ev-
ery 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 es-
sential. 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. 7Meet the new boss
The rules of management are being ripped up. ceos need to adaptManagement in the 2020s