Sunday, 7 October 2007

Randomness and chief executives

I've posted previously about the misattribution (in my opinion) of business success to the actions of superstar chief execs, or company boards in general. I think the business press is particularly bad for this. I've also thought for quite a while that what really delivers results may a) happen much lower down the corporate ladder (ie some subtle change in processes that has a significant effect) and b) might not ever actually be identified.

Going further, Nassim Nicholas Taleb suggests in the great book Fooled By Randomness, that great corporate performance might just be ...err... random in any case, and as such this raises questions about how we pay execs. Here's an excerpt from the book's postscript:

Lower-ranking persons in [an] enterprise are judged on both process and results - in fact, owing to the repeptitive aspect of their efforts, their process converges rapidly to results. But top management is only paid on results - no matter the process. There seems to be no such thing as a foolish decision if it results in profits...

Now take a peek inside the chief executive suite. Clearly, the decisions there are not repeatable. CEOs take a small number of large decisions, more like the person walking into the casino with a single million-dollar bet. External factors, such as the environment, play a considerably larger role than with the [lower ranking employee]. The link between the skill of the CEO and the results of the company are tenuous. By some argument, the boss of the company may be unskilled labour but one who presents the necessary attributes of charisma and the package that makes for good MBA talk. In other words, he may be subject to the monkey-on-the-typewriter problem. There are so many companies doing all kinds of things that some of them are bound to make "the right decision."

He goes on to argue that shareholders therefore need to reflect of what executives really deliver, and whether their rewards are appropriate. If only!

PS. On the subject of executive pay, Snowflake5 blog has a nice post asking why institutions aren't under more pressure in respect of their voting on pay.

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