· 26 min read · Features

The cult of the leader

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Trust and confidence in leaders in all walks of life has plummeted.

Even worse, it has also plummeted in the systems and structures over which they preside.

The reason?

Well. As the good times become a distant memory what remains is the increasingly uncomfortable fact that those at the top of society seem to have walked off with the lion’s share of the benefit.

Over the ten years 1998-2008 the wealthiest 10% of the population of the UK saw their real household incomes increase by nearly 40% whilst the poorest 10% saw a decline in theirs of about 2%.

Fourth fifths of the total increase in incomes in the UK over the last decade has gone to those with above average incomes and two fifths have gone to those in the richest 10%

Whilst in the good times the behaviour and spending patterns of the wealthiest became an aspiration for those far less wealthy, now we face the bad times these behaviours, their associated rewards and what they represent are the subject of much criticism.

Yet despite the criticism, the old way of doing things is already rearing its head again, in banking, in politics, in business and in public services.  It doesn’t seem like our leaders have learned very much from what has happened.

These people took us and the world’s financial system to the brink of disaster.  What drove their behaviour and their attitudes, be they politicians, business leaders or regulators, was an unerring sense of their own infallibility.  This blind faith in their own perfection was the product of the cult of the leader that has developed globally over the last 30 or so years.

Not surprisingly, I have a different perspective: no-one can become the perfect leader because no such thing exists.

Indeed, I believe that the cult that now surrounds leadership and leader development is positively dangerous, not just for business but for society as a whole.

You can see the cult at work today.

Leaders are subject to breathless adoration from ‘puff pieces’ in the mass media.  They are surrounded by armies of image consultants and spin doctors.  Cultures of compliance at the top of organisations are driven by the access to untold wealth that can be endowed upon people if they stay ‘in’ with the boss for long enough or indeed if they stay in power for long enough.

 All this has created conditions in many modern organisations more akin to a feudal court than a collective of equals within which freely held views and opinions can be shared without fear.

 

Many CEOs have become best-selling authors, chat show guests, and even hosts of their own prime-time television shows.

Some even made it, albeit briefly, into government.

With all this adoration can you blame them for believing in their immortality?  Can you blame others for working hard to join them in the ranks of the deified?

I am not arguing that leadership hasn’t fascinated every age.

The focus on the role of and the development of the leader in society has been at the heart of the development of much of modern political and social thought.

It was Aristotle in his ‘Treatise on Government’ who captured the essence of the proposition of the ‘altruistic’ or ‘virtuous’ leader.  He said:

‘But since we say that the virtue of the citizen and ruler is the same as that of the good man and that the same person must first be a subject and then a ruler, the legislator has to see that they become good men and by what means this may be accomplished…’

What I am arguing is that for the want of good men (and women) at the top of the world’s financial services industry, its regulators and its political leadership the world nearly destroyed the very system that had until recently delivered the progress, social and economic, that has supported over 60 years of comparative peace and prosperity for mankind.

In business, just as much as in any other part of society, good men and women are needed to lead their organisations through the challenges they face.

Yet today business leaders are as ill-regarded as politicians and at the heart of this ill-regard is a belief that they are overrated, over-powerful and over-paid.

In the 2010 the World Economic Forum Trust Barometer reported that over 60% of the global population said they trusted business less in 2009 than they did in the previous year, with only one major country, India, showing fewer than 50% felt this way.

In the UK, France and Germany only 36% of those questioned trusted business and in the US trust in business was not much higher.

These overall trends were reinforced when asked if business should face stronger and tougher regulation with over 60% globally saying that governments should intervene and even nationalise companies to restore trust.

Even in the US not even half of those questioned thought the free market should be able to operate independently.[3]

Regardless of country, the current state of public opinion in much of the developed and developing world is driving a resurgence of political movements that want to impose controls on the natural human behaviours that underpin the market as the mechanism through which we create wealth.

This desire to restrain or even remove the market mechanism will be accelerated by any continuation of the failure of those responsible for regulation of the market or proper management of those competing within it to address the iniquities of today’s leadership class.

The cost of a government committed to shackle the market, rather than to regulate it, is far too big a price to pay for a failure to reform.

I offer both leaders of business and of society a manifesto for change:  without these changes it won’t just be business that suffers, but society as a whole.

The making of the modern leader

Let me start by trying to outline how we got here.

In the cult of the leader, history matters and whilst we may want to see changes to how leaders behave, one of the big constraints we face is that our leaders still carry the expectations of infallibility set by their predecessors.

 We want them to know the answers, to understand our needs and aspirations, to solve our problems and to protect us from ourselves as much as from others.

In fact the model of leadership still expected and applied in the early part of the 21st century is that of parent.

From renaissance princes through imperialism to the 20th century’s dictators so many of history’s leaders have styled themselves as ‘fathers’ or ‘mothers’ of the nation, and many modern leaders are positioned similarly in their organisations. 

They sit in organisational structures that reinforce these expectations.  And they are still judged by performance models that reinforce the importance of infallibility.

This modern concept of leadership is not that promoted by Aristotle of a virtuous leader as the servant of the state, democratically appointed (however restricted the franchise) and accountable to others for their leadership;

Nor does it resonate fully with Machiavelli’s renaissance prince where coalition, alliance and the search for common ground drives achievement of ambition for the city-state.

Rather it is the direct inheritor of the concept of enlightened absolutism where the leader is firmly established as the state appointed by birth and accountable to themselves (and of course God, of whom they were the chief representative on earth).

This was definitely the leadership model of post-war business and indeed I have personal experience of exposure to such a deity.

I worked one summer on the transfer desk of my father’s stockbroking firm.  A couple of days in one of the partners’ assistants came in with a load of paper and took the time to offload a great deal of abuse about one of his bosses.

He ranted about God this and God that and what God could do with his wants and desires. 

Eventually my boss managed to stop the flow and, pointing at me, said:  John, I don’t think you’ve met Jesus Christ.

In modern management in an attempt to offset unwanted behaviours we have developed the concept of leadership or management competencies.

Whilst the theory behind competency development may well be defensible, the implementation of the competency model created a much more powerful proposition than its intellectual progenitors claimed for it:  that it was possible to develop the ‘Mary Poppins’ manager - practically perfect in every way. 

Inevitably, every leader or aspiring leader looked to ensure that every area of competency was perceived by their bosses as a strength.

Where a weakness was identified for it not to be seen as a potential career roadblock, it had to be one that peers and bosses would see as ‘acceptable’:  normally these are associated as a consequence of being strong in a particular area.

A standard one in all the organisations I have worked in was ‘not tolerating fools gladly’ – a clear correlation of a consequence of high drive and a high desire to achieve.

Even when human resources changed weaknesses for ‘development needs’ to encourage greater openness and honesty in recording this information this same approach to the annual performance assessment round continued, after all they were still really weaknesses, weren’t they?

In many organisations, the basic premise still stands today:  perfection is preferable.

What this proposition creates is insecurity.  Leaders and potential leaders are actively persuaded not to value themselves, their talents and abilities but to value an entirely theoretical model of perfection.

Yet, what makes us successful as a species is our diversity.  What has brought us down in the past and will do so again in the future is conformity.

The consequences of a model that suggests you can achieve perfection are potentially highly damaging for society as well as for those who submit to requirement to conform.

I have been proud to lead a business school whose heritage rejects this leadership model.  We champion the belief espoused by our founders that character and integrity are just as important in a leader as capability.

They understood that all leaders have choices.

I have a reputation for using my favourite modern philosopher, Albus Dumbledore, to illustrate my point and I don’t want to disappoint tonight.

At the end of the second Harry Potter book, ‘Harry Potter and the Chamber of Secrets’ Harry discovers that he has the same competencies or capabilities one might say, as Voldamort, who is the villain of the piece.  It is Dumbledore, Harry’s headmaster who comforts him saying this:

'It is our choices, Harry, that show what we truly are, far more than our abilities’

In a later book, Dumbledore goes on to say one more very wise thing about the choices that we make:

"Humans have a knack for choosing precisely the things that are worst for them."

Tonight I want to explore why this happened to so many in leadership positions during the financial crisis and in the ten or so years running up to it.

The rise of the L’Oreal Generation

The story of the failure of leadership in modern organisations is the story of what I have called the ‘L’Oreal generation’[4].

This was the generation that was owed a living; career success; a house that doubled in value every 5-10 years; a new car on the drive every other year; the latest technology; the quickest broadband and a body that no longer showed signs of age.

 

This was the generation that believed it could cheat death itself.

They were owed these things because they were worth it.

They hadn’t worked as hard for it, hadn’t saved for it, hadn’t forgone things to afford it.  It was there.  Everyone else had it, so why shouldn’t they? 

This generation was the product of a significant shift in values in society.

At the end of the Second World War the defining value set in the United Kingdom could be described as both strongly homogeneous and corporatist.  It agreed on the importance of the wellbeing of society as a whole.  There was a belief that there was a role for the state in providing benefits and support and in leading the development of the economy for the benefit of all.

 

Reporting from the British Values Survey [5]which has tracked attitudes in the UK since the end of the Second World War shows just how marked the shift away from this clear homogenous world view was in the seventies, eighties and nineties towards individualism and self-centeredness. 

This shift is starkly brought home by their attitude to politics.  Unlike their parents, much of this new generation did not define themselves by their political or economic convictions.

In a report on the possible outcomes of the 2010 general election in the UK it was reported seven out of eight of the British population does not feel that politics has any relevance to their self identity.  The authors go on to say:

 

       ‘To put this into some sort of context, almost 19%, close to one in five, chose ‘my  body, face, and hair’ as a self identifier. An ad for L’Oreal "Because You’re Worth It" is more likely to make a connection with self identity than any politically slanted ad.’[6]

 

This is the generation that has found its way into power.  In politics, in business and in the media you can see these people today. 

Self-definition for the aspiring corporate executive was not only physical, however, it was also to be seen by your employer as ‘talent’.

Thanks to McKinsey, big businesses, especially those in global financial services, went to war over ‘talent’, paying top dollar packages for those they believed would deliver superior financial performance.

The ‘War for Talent’ has fuelled the rise of a phenomenon of the late 20th century: the ‘Narcissistic Organisation’.  This is one that is led and peopled by individuals who are reinforced in their self belief every day by systems of reward and promotion that confirm their abilities.  

These leaders are not just infallible, but they get paid at levels that reinforce their superiority above the rest of us mere mortals.

And how rich are they?

There is a plethora of statistics to show the unequal rate of growth of CEO and leadership rewards versus that of the average wage-earner.

In 2006 the chief executives of America's 500 biggest companies got a collective 38% pay raise to $7.5 billion. That was an average $15.2 million apiece.[7]

 In the UK in 2007 chief executives earned on average 98 times more than the average for all UK full-time workers.  Ten years ago the pay differential was 39 times that of the average worker.[8]

And, with some notable exceptions such as tonight’s chairman, performance doesn’t seem to come into it.  Sixty companies at the bottom of the Russell 3000 Index in the US lost $769bn in market value in the five years ending 2004 while their boards paid their top five executives at each firm more than $12bn.[9]

And before anyone claims that this is a problem solely associated with Anglo-Saxon capitalism, research shows that across the board with one notable exception, Japan, there has been a similarly significant growth in CEO rewards.

When you get this reinforcement of personal worth within a corporation displaying all the signs of being narcissistic you have the ingredients for a tragedy.

The hubris of Enron has been exposed by the global financial crisis as a far more common affliction in modern business than its leaders would like us to believe.

In his follow-up novel to Catch 22, Something Happened, Joseph Heller presented a highly critical account of business life in the insurance industry in which he wrote: 

"Success and failure are both difficult to endure. Along with success come drugs, divorce, fornication, bullying, travel, meditation, medication, depression, neurosis and suicide. With failure comes failure."[10]

 

As we think about the last decade we have to ask how much did this explosion of monetary value placed on so few individuals, reinforce their self-belief and conviction of invincibility and as a result sowed the seeds of failure? 

 

Leadership in the wealth-creating sector is a major responsibility:  we trust these leaders to make the right choices not just for themselves or just for their organisations but also for the wider community, for if they succeed we all benefit.

Lord Acton had a point when he famously wrote ‘Power tends to corrupt and absolute power corrupts absolutely’[11] 

For the L’Oreal generation the opportunity to use power to acquire the symbols through which they wanted to define themselves was just too tempting and for those who were able to establish absolute power they were able to acquire fabulous wealth, were lionised and became celebrities.

They got what they wanted. 

Nemesis, however waits in the wings for those who believe that they just can’t fail.

My argument then is that this is a generation that had even more chance than usual of falling into the knack of human beings for making the wrong choices.

Sustained by the belief that there was merit in instant gratification and self aggrandisement, reinforced through their standing as ‘talent’  and underpinned by cultures of compliance from others looking to acquire similar levels of personal wealth they would inevitably look for ways of building even greater levels of personal reinforcement and recognition.

They got their opportunity as the structure, shape and supervision of capital markets underwent a radical change in the 1980s.

Changes in Capital Markets  

The transformation in financial services saw the tearing down of the old boundaries that separated at one end the unlimited liability partnerships who dominated share broking, the re-insurance market and investment banking, from at the other end the limited liability companies who delivered retail banking and the mutual sector who provided insurance and mortgage services.

 In the UK the deregulation was radical and this allowed for significant degrees of conglomeration creating giant organisations with vastly different internal cultures and attitudes to such things as lending and investment risk.

Whilst in terms of people employed and numbers of customers the retail banking, mortgage and domestic insurance businesses of these organisations were significant, in terms of contribution to profitability it was the high risk end of the operation that dominated[12].

Critical to retaining this profitability was the retention of the highly entrepreneurial employees that had been acquired with the buying up of previously unlimited liability partnerships. 

 

These people had swapped the uncertainty of employment in a partnership that, if it failed to judge and manage risk appropriately could go bust with no compensation and with considerable personal liability for the partners; to one where they could still operate in the much more risky investment markets but with the protection of the limited liability ownership structure of a retail bank or former mutual.

What had happened, without any real owner consultation or understanding, was therefore the continuation of the significant rewards associated with the successful taking of risks with considerable personal liability in limited liability banking conglomerates where the risk was transferred to the balance sheet.

As one part of the bank started earning considerably more than the other so this drove a significant upgrading of top executive salaries, regardless of activity managed and the creation of much more entrepreneurial reward structures which in turn drove increasingly risky business practices.

The failure to spot, address or resolve this issue is at the heart of much of the public sense of outrage about bankers bonuses.

Stewardship and Ownership

So as a result of the structural integration of all aspects of financial services into a single organisation we conflated the very important distinction between being an entrepreneur and leading an enterprise on behalf of other people.

This conflation has been contagious and as reward practice in financial services shifted significantly so did that of other sectors including the public sector, who felt that if they didn’t keep up they would lose their ‘top talent’ or fail to attract top talent in the market place.

 

Many of today’s leaders of enterprise are rewarded far more like the entrepreneurs than corporate stewards.

The point of being an entrepreneur is that you are prepared to risk your own capital and if you fail there is no one to give you a handsome severance payment and a pension pot worth millions of pounds when they fail.

The majority of us, however, are not entrepreneurs.  We sell our skills to others rather than exploit them for our own benefit.

 We risk capital that belongs to others and our actions are far more likely to damage the reputation of the brand or public service or charitable organisation than our own

What has happened in big business is that changes in the relationship between the owner of the capital in the business and the management of the business have led to this distinction between ownership and stewardship becoming unclear.

In the 1970s it was still the case that shareholders were predominantly wealthy individuals.  In the United States institutional holdings as opposed to individual holdings represented 19% of stock.  In 2005 it was reported that that the largest one hundred fund managers in the US controlled 52% of all US equity.

In the UK whilst private individuals owned 54% of UK stocks in 1963, twenty years later this had reduced to less than 15%. [13]

Having said this, the vast majority of capital in the market still comes from private individuals.  It comes now however from our pension funds, our investment funds, our insurance savings and our bank accounts.  In other words it’s still our money, but somehow we’ve lost direct control over what is done with it.

The biggest beneficiary of this consolidation was the ‘fund manager’.  These individuals control the bulk of the holdings for most listed companies.  They are the people who cast their votes in favour or against resolutions at an annual general meeting and they do so on their own judgement, without any obligation to consult with or be informed by the opinions of those whose capital they are managing and from whom they take a fixed percentage for administration, regardless of whether or not they are successful. 

So what the media call ‘investors’ are not really investors at all: they are advisers with none of their own skin in the game. Often working to completely contradictory purposes from those who entrust them with their capital, their decisions will be driven by their needs for liquidity, for profits and to achieve targets in their own highly leveraged incentive plans.

Whilst there are some remaining long term investment funds, more and more of the shares in publically quoted companies in developed economies are owned by those such as Hedge Funds with high risk profiles whose business models drive costs that demand increasingly higher returns from investments to ameliorate the higher risk and, research shows us, a track record that looks far less successful than their popular reputation.[14]

So, despite the ambitions of political leaders to create a share-owning democracy, today in the vast majority of developed economies we have transformed the ownership of capital from one share-owning autocracy to another.

The difference between the old autocrats and the new is, however striking:  the new autocrats are getting rich through the administration of the capital of others rather than through risking their own.

In my view this is unsustainable and for capitalism to survive and thrive the system has to reassert the primacy of the owner of the capital and has to find ways for these real owners to make their impact felt.

 

Values and Value

 

Before I move on to the changes I am proposing I want to reflect on a more philosophical dilemma in business:  maintaining the right balance between values and value.

It is very easy in a commercial environment to conflate values and value.

Values define us as individuals. They shape our actions and reactions.  They drive our view of the world and the solutions we choose to support to solve the problems we face.  They are acquired as we develop as children and young adults.  They don’t often change that much and they rarely change radically:  hence the time it takes to move societal attitudes. 

Value and its creation is the bulwark of a free-market economy.

From trading collector cards in the school playground through swapping stamps to exchanging unwanted presents with your friends; even if money never changes hands, we put a ‘value’ on what we want and look for an exchange for it with someone who has an equal value for something we don’t want. However for that value to be delivered, both parties have to have good values, or in other words act with character and integrity.

If there is any doubt in this statement the digital age has presented us with one of the most transparent examples of their roles in the creation of value:  eBay.

This virtual market shows us that in order to trade and create value most people in a market value honesty, integrity and reliability and they want transparent and clear structures that reassure and reinforce these values.

 

The Public Policy Agenda

 

To reassert the role of values there is an overwhelming case in my view for a significant reform of corporate governance and ownership structures that can give the power back to the real owners of the capital employed in an enterprise.

 

This is not a lecture on public policy and despite the temptation to stray I only want to highlight a couple of significant changes that would make a real difference to business and its leaders in rebuilding the trust and confidence of the wider population.

We have to reconnect the fund manager with the owners of the capital they manage.  I believe it is inappropriate and poor governance for a fund manager to cast votes from which they will benefit personally, with no supervision or oversight from those who own the capital. They should be required to consult and act accordingly.

We have to connect the stewards of major enterprises with the owners of the capital they employ.

To do this we should consider making votes on remuneration reports binding on the board rather than advisory and, just as importantly, we must consider reforming takeover rules to require organisations to gain approval of their own shareholders for takeovers as well as those of the target organisation, regardless of the method of funding and regardless of domicile of the acquiring company.

I believe we should consider how to take away the role and influence of recruitment firms in the appointment of non-executive directors and oblige public companies whose share capital is available for the public to buy to advertise openly for non-executive positions.

The Business Agenda for Change

 

So, whilst there is a public policy agenda which could support leaders in business to restore trust, the biggest challenge is really to business itself.

 

Talent

First and foremost we have to reassess and reposition the concept of ‘talent’.  Talent as a term needs to become inclusive rather than exclusive.  It has to be about everyone in an organisation, not just the few and it needs to help us understand how we harness the power of every employee, not just the super-powers of a few ‘high flyers’. 

 

 

There is a role for competencies.  However, they should describe the full range of skills and behaviours that the whole organisation requires for it to be successful.

 

In this role they would be less relevant to the individual and more relevant to those responsible for organisation development as they would then define the diversity of people required to deliver success. 

 

Gaining agreement that it takes a highly diverse set of individuals to create success and then looking to recruit this diversity would also achieve the objectives of those who seek to address access to the workplace for under-represented groups.

 

Couple this with the principle that all leaders are imperfect and we can begin to create positive and enabling cultures rather than toxic and compliant ones.

For too long now the cult of the leader has diverted investment, focus and support for line managers, yet they are critical to delivering the organisation’s goals and long term objectives.

 

I think they are the people who day in and day out deliver on the core purpose of the organisation.

 

Where they are effective, they nurture your talent and develop it, where they are less so they squander it, letting it leave and move to your competitors.

 

Organisations undermine these managers by letting them get squeezed between the top and the bottom, by removing too many of them so that their spans of control are excessive and by undermining their authority by communicating around them and not letting them have sufficient power to act, especially on poor performance and on issues of discipline.

A line manager’s job is simple:  deliver today through those you manage and deliver tomorrow through developing those you manage.

 

Trained properly and measured and recognised appropriately the line manager is the pivotal role in any organisation.

 

Left to guess what we want and disempowered they can become organisation permafrost and worse begin to undermine the enterprise through negativity and change resistance.

 

My solution is simple:  take most of the money you’ve been spending on high flyer development and put it into line manager training and recognition.

The high flyers will get there because their line managers will do a brilliant job, without the line managers doing such a job, the rest of the organisation will become sclerotic and regardless of your high flyers, it will fail to perform.

 The talent you see in your organisation today is a fraction of what you have.  What you don’t see are the diamonds on the soles of your shoes:  your line managers are the only way you can pick up your organisation’s feet and see if anything glitters.

 

Executive Remuneration

 

It was J.K. Galbraith in 1980 who famously analysed the compensation arrangements of chief executives in large US corporations by arguing that the higher up in corporations people rise the greater the say they have in setting their own remuneration.  He reached this conclusion:

 ‘Compensation in the large corporation has become very generous.  No-one can seriously pretend (although some do) that it depends on the scarcity and thus market price, of the talent involved. […] The salary of the chief executive of the large market corporation is not a reward for achievement.  It is frequently in the nature of a warm personal gesture by the individual to himself.’[15]

In fairness to Galbraith his words did not fall on entirely deaf ears.  Legislators in North America and in Europe throughout the 1980s and 1990s acted to address this issue of control and influence with significant regulatory intervention. 

The impact of this concern for shareowners, however, has been negligible, in fact worse than negligible:  it has been negligent. 

 

At the time of Galbraith’s writing a CEO in the United States was earning about 42 times the average blue-collar worker’s pay.  By 2000 this multiple had increased to 531 times.[16]

The proponents of the talent myth argued that the driver of this significant increase was the improvement in the underlying performance of the firm.

Even if one accepts for a moment that this argument has any validity, research, done again in the US, shows a potentially different explanation for the significant increase in the ratio between senior executive pay and that for the average employee.

It analysed the proportion of profits that were allocated to rewarding the top 5 executives in US public companies.  The analysis indicates a doubling in the percentage of profits absorbed by the costs of their total compensation from 5% in the period 1993-1995 to nearly10% in the period 2001-2003.[17] 

 

So these significant increases in the differentials may well have been generated by remuneration policy changes rather than any significant shift in performance.

Regardless of performance what seems to have happened is that those in trusted stewardship positions have managed to extract nearly double their share of profitability from the owners of the business over a period of less than ten years.

 A study in the US found that the high level of increases in CEO pay did not reflect a similar story in corporate performance.[18]  12 US companies (including household names such as Dell, Ford and Wall-Mart) whose boards’ compensation committees authorized a total of $1.26 billion in pay to their CEOs who presided over an aggregate loss of $330 billion in shareholder value[19].

 

In simple terms, despite all the regulation, legislation and corporate governance codes that followed Galbraith’s pithy observation, large company chief executives and their colleagues at the top handed have handed themselves one of the largest and warmest personal gestures using other people’s money in business history.

As a seizure of economic power from the many to the few this has all the hallmarks of a coup.

The issue now is this:  are the owners too late to reclaim the value that is rightfully theirs?

There is no doubt that leaders create vision and guide strategy, but the execution of that strategy falls to the many not to the few.

It is the relative inequitable distribution of the benefit amongst people who could all equally well claim to have contributed great effort to what is after all a collective outcome that becomes such a corrosive factor in modern organisational culture.

The demonization of bankers in particular and business leaders in general does society no good, but it will not cease until they accept that their pay needs to be fair relative to others within the organisation they lead.

Overall we have to be prepared to set a standard that well managed businesses will follow that has to include a mechanism that restores the relative rewards for senior executives against all other employees to a level that has broad social acceptance. 

Whilst having any cap may seem difficult for global businesses which do compete in very challenging markets, given the failure to adhere to the Greenbury principles of relativity to the rest of the company and avoiding of excess without a cap, then one should be actively considered.

 

The prime Minister has set a 20 times multiple as a target for public sector pay.  In the private sector that may well be impossible to achieve but I think there is an argument for a cap of somewhere between 30-50 times the average pay in the organisation.

Public sentiment would want to see something approaching the lower limit.  If we chose the mid point it would take account of sector, specific recruitment markets and other factors such as skill shortages yet still set something I believe society would accept as a relative difference.

The story of the talent myth and its role in driving executive remuneration is an example of the ‘Lake Woebegon Effect’.

This, psychologists tell us, is the human tendency to rate one's capabilities and performance highly in relation to others.

The term is derived from Lake Wobegon, created by the American author Garrison Keillor, a town where ‘all the women are strong, all the men are good-looking, and all the children are above average’.

 

A report[20]  in the US sums this up:


No firm wants to admit to having a CEO who is below average, and so each firm wants its CEO’s pay package to put him at or above the median pay level for comparable firms. Of course, not every CEO can be paid more than average, and so (it is claimed) we see ever-increasing levels of CEO pay. The reasoning behind this effect was perhaps best summarized by former DuPont CEO Edward S. Woolard, Jr., speaking at a 2002 Harvard Business School roundtable on CEO pay (Elson, 2003): "The main reason compensation increases every year is that most boards want their CEO to be in the top half of the CEO peer group, because they think it makes the company look strong. So when Tom, Dick, and Harry receive compensation increases in 2002, I get one too, even if I had a bad year’ 

 

Whilst public policy intervention can address this through for example changes to income tax treatment of earnings over a certain multiple or share option schemes or the like, ultimately change that makes a difference can only come if business leaders themselves act as stewards in the interests of all stakeholders in the firm not as individuals acting in their own interest.

The only people who can curb the excess for good are those who benefit from it.  That is the real test of leadership.

Whilst the leaders in major corporations continue to defend their pay and benefits, continue to turn a blind eye to behaviours that do not live up to their espoused public value systems and continue to pack their boards with non-executives who do not align with the owners’ interests then we, the general public, will continue to regard them with distrust.

 

Today’s wealth creators will have to change their attitude to leadership significantly if the rest of us are to accept that they have any right to lead either in their own organisations or more widely.

 

Conclusion

 

It was Oscar Wilde who defined a cynic as ‘a man who knows the price of everything and the value of nothing’.[21]

More recently it was Raj Patel who used this phrase to propound a thesis that the price mechanism of the market had blinded us to seeing the real value in our world and what it and its fundamentalist ‘free market’ proponents were doing that was destroying it.  What we need today, he argued is to dismantle much of what the market has constructed that is destroying humanity.  This is a proposition gaining increasing support. 

 

This is where we are today:  a wealth creating sector whose ability to generate sustainable sources of wealth is critical to us meeting the challenges of 21st century; yet whose credibility and acceptability to wider society as a legitimate partner in this enterprise is at its lowest levels ever.

This is the legacy of the L’Oreal generation.

It need not be like this.  Strong confident leadership from business to put right what is wrong with its current approach to leaders and leadership would create a more authentic business. 

I define an authentic business as one with the following characteristics:

  • A clear purpose, obvious and transparent to owners, employees, suppliers and customers alike
  • One that sells products or services that are audited for adherence to the best global standards associated with employment, raw material sourcing and environmental impact
  • One that invests in the future of the enterprise and in the future of the communities within which it operates
  • One that rewards all its employees fairly and in proportion to their level of responsibility and personal contribution
  • One that pays its fair share of taxes rather than invests in elaborate schemes to minimise them
  • One that people want to work with and work for.
  • One that is conscious of its obligations to its owners and ensures they get the best possible return for their investment

 

This is a business which stakeholders from across civil society would engage in a positive and supportive manner.  Many businesses are already run like this.

They believe in these principles.

 

Having said this, there is a section of business that needs to clean up its act:  or watch impotently from the sidelines whilst others, less sympathetic to the conditions for business success, probably influenced by the emerging neo-socialist agenda, act on behalf of society as a whole.

The tragedy of this would be the damage done to the majority of the sector who act well within the principles I have articulated tonight.

Finally, the biggest challenge facing those of us who want the market to succeed is to ensure that we don’t see the need for change as purely a technical problem requiring even   more regulations, greater audit provisions, tighter bonus structures and the like.

If we do, we won’t create the change we need to ensure the only wealth creating process we know works has a chance of succeeding in the future.

 

This is a change that requires a change in behaviour right at the top.

Corporations will only exist successfully if they can put more people into leadership positions who understand the difference between right and wrong, have developed their understanding through experience, who have the relational skills to work effectively across many cultures and perspectives and who can see the wider global context within which they are operating and through which their reputation will be built or destroyed.

To do this they have to begin a process of significant and systemic change.

This is not a message that some leaders in global corporations will be too happy to hear.  Some of them have too much of their credibility tied up in the current way of doing things, some will think first and foremost about the impact on their current way of life and some will ignore the evidence and continue to regurgitate the mantra of the ‘war for talent’.

For those willing to give this manifesto serious consideration I would ask them to think not of themselves but of their shareowners, the real ones that is, not the fund managers.

These shareowners are also their customers and their suppliers and quite often their employees.  They are also the voters, the community leaders and the members and supporters of NGOs.  We, the shareowners need you to change and if you do you’ll find us your most supportive stakeholders.

So when we look at you as voters, as pressure group supporters and as members of the community in which you operate we’ll be far more likely to ensure that you get support in your objective to create the most wealth you can.

That’s the advantage of being an authentic business.

 



[1] Source: The Poverty Site (http://www.poverty.org.uk/09/index.shtml)

[2] Aristotle ‘Politics’

[4] This is a tribute to the marketing genius of L’Oreal in capturing the spirit of the age with their strap line.reflecting the increasing importance of looking after oneself.

[5] http://www.cultdyn.co.uk/

[6] Tipping Point or Falling Down? Democracy and the British General Election 2010. Sourced from http://www.cultdyn.co.uk/ART067736u/democracy2010.html, accessed 5th July 2010

[7] ‘Big Paychecks’ Forbes.com, March 2007

[8] http://www.webpronews.com/expertarticles/2007/01/03

[9] Quoted in ‘The New Capitalists’, Stephen Davis, Jon Lukomnik, David Pitt-Watson, Harvard Business School Press, 2006

[10] Joseph Heller, (1974, 1997 (Scribner paperback edition)) Something Happened,. Simon & Schuster, New York

[11] Oxford Dictionary of Quotations (1975) OUP, London.

[12] In 2007 for example Barclays Bank PLC’s retail operations contributed just 17.1% of its overall profitability whilst its investment operations (Barclays Capital) contributed 31.2%. shttp://group.barclays.com/Investor-Relations/Financial-results-and-publications/Results-announcements?tab=122580291669 accessed on 4th August 2010

[13] Davis, Lukomnik, Pitt-Watson (2006) ,The New Capitalists’, Harvard Business School Press, Boston Mass.

[14] B G Malkiel, A Saha (undated) ‘Hedge Funds : Risk and Return’ http://www.princeton.edu/~bmalkiel/Global%20Hedge%20fund%20NEW.pdf accessed on 4th August 2010

[15] J K Galbraith (1980) ‘Annals of an Abiding Liberal’, (Andre Deutsch, New York)

[16] D Bolchover (2010) ‘Pay Check’, (Coptic Publishing, London) quoting research done by the AFL-CIO in 2005.

[17] Bebchuck L, & Grinstein, Y (2005) ‘The Growth of Executive Pay’ Oxford Review of Economic Policy, Vol.21, No 2.

[18] Paul Hodgson, Ric Marshall, "Pay for Failure: The Compensation Committees Responsible," The Corporate Library, June 2006. See: http://www.thecorporatelibrary.com/tcl-store/PressReleases/865mm_in_ceo_compensation_while.htm cited in ‘CEO Pay Reform: A Point/Counterpoint’ (http://www.corporatepolicy.org/pdf/CEO_Pay_Point_Counterpoint.pdf accessed on 30th July 2010)

[20] R.M Hayes & S Schaefer (2008) CEO Pay and the Lake Woebegon Effect; sourced from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=966332

[21] Oscar Wilde (1893) ‘Lady Windermere’s Fan’ Penguin Popular Classics