Why Changing the CEO May Not Change the Company

How much of a difference should investors expect when General Motors—or any company—brings in a new chief executive? Not much.

This past week, GM's chief executive officer, Frederick "Fritz" Henderson, stepped down under pressure from the company's board. His defenestration follows the announcement earlier this fall that Kenneth Lewis will be exiting as CEO of Bank of America.

It seems obvious that getting the right boss in place ought to make all the difference in the world. Think of Steve Jobs parachuting back into Apple and powering it to record profits, or Alan Mulally steering Ford Motor through Detroit's collapse, or James Dimon navigating J.P. Morgan Chase through the financial crisis.

Management is important, which is why Warren Buffett puts such stock in the character of the people who run the companies he invests in. But management isn't nearly as important as many investors think, which is why Benjamin Graham, Mr. Buffett's mentor, paid so little attention to it. In fact, Mr. Graham seldom bothered to meet the managers of the companies he invested in, partly because he felt they would tell him only what they wished him to hear and partly because he didn't want his judgments of business value to be influenced by impressions of personal character.

If you took the CEOs with the best track records and brought them in to run the businesses with the worst performance, how often would those companies become more profitable? According to economist Antoinette Schoar of Massachusetts Institute of Technology's Sloan School of Management, who has studied the effects of hundreds of management changes, the answer is roughly 60%. That isn't much better than the flip of a coin.

"Some people," Prof. Schoar says, "may have this almost blind belief that the manager at the top changes everything. Our results show that managers do matter, but they don't change everything."

Since the 1970s, several other studies have measured what happens when companies bring in new bosses. Most of the findings have been consistent: Changes in leadership account for roughly 10% of the variance in corporate profitability on average.
As Mr. Buffett likes to say, "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact."

But something else is going on here, says Princeton University psychologist Daniel Kahneman, who won the Nobel prize in economics in 2002. "We believe that people with certain characteristics will produce certain consequences," he says. "But we're wrong, because there is way, way more luck involved in determining success than we're prone to think."
The real force in corporate performance isn't the boss, but regression to the mean: Periods of good returns are highly likely to be followed by poor results, and vice versa. High returns attract fierce new competition, driving down future profits; low returns leave the survivors with fewer rivals, leading to better results down the road.

Most researchers agree that a company's results are determined less by its CEO than by its industry and the economy—which, in turn, are shaped by a host of factors that most CEOs can't control, like the price of raw materials, the value of the dollar, interest rates and inflation, bursts of technological innovation and so on.

In short, good management can't solve all problems, while some problems can get solved even without good management.

Plus, a company will be much more inclined to replace the CEO after a run of bad losses—and to bring him in from a firm that has been on a hot streak. That leads to an illusion: "You change the CEO," Dr. Kahneman says, "then performance reverts to the mean, and you attribute the improvement to the new guy."

Furthermore, the hot profits at the new CEO's former company are likely to cool off—by regression to the mean alone. When investors see that, they will mistakenly conclude that he is such a good boss that his old company can no longer thrive without him.

These beliefs tend to be temporary; the rave reviews for incoming bosses C. Michael Armstrong (from Hughes Electronics to AT&T, 1997), Carly Fiorina (Lucent to Hewlett-Packard, 1999) and John Thain (NYSE Euronext to Merrill Lynch, 2007) didn't last.

Some of GM's bonds jumped roughly 5% the day after Mr. Henderson resigned. But he didn't cause GM's woes, and whoever succeeds him might not be able to cure them. The odds tend to be against investors who bet that great new management can solve bad old problems.

- Adapted from The Intelligent Investor, Decmber 4, 2009

See you in the trenches - vmsteveo

11 Ways To Be The Biggest Loser

Happy Thanksgiving!! Every thanksgiving it's the same conversation over the menu with the family chef... "Absolutely Mom, serving biscuits, stuffing, sweet and mashed potatoes make perfect sense, why wouldn't it?" If I run 10 miles each day for a week I should be even-steveo.

I thought I would share the post below as I am sure you are battling the same mind over mid-section dilemma. This post has nothing to do with physically overeating however it does have everything to do with the maniacal ways we mentally overeat with repsect to how we run our business. Don't get stuck in these trenches.

11 Ways To Be The Biggest Loser

1. Quit Taking Risks
It doesn’t take long for things to grind to a halt if you simply reduce risk to zero.

2. Be Inflexible
Inflexibility is one of the fastest ways to lose both customers and employees. That’s what happened at Coke for years as company leaders came to think of the drink and the green bottle as a single unit.

3. Isolate Yourself
Isolating yourself is fun. If possible, build your own Taj Mahal in the corner office.

4. Assume Infallability
To start, never admit a mistake. If you assume infallibility, then you can blame others for whatever goes wrong. Letters to shareholders are wonderful examples of this.

5. Leave Folks Wondering If They Got a Fair Deal
Play the game close to the foul line and it’s easy.

6. Dont Take Time To Think
When you make a decision without taking time to think, you’ll enjoy the gravity of bankruptcy combined with the thrill of a carjacking.

7. Rely on Experts and Outside Consultants
Top to bottom, your people will feel trusted and valuable. Plus, having consultants on board allows you to take your eye off the real business.

8. Love Your Bureaucracy
If you want to get nothing done, make sure administrative concerns come first.

9. Send Mixed Messages
It’s so boring when you say the same thing over and over.

10. Fear Tomorrow
Chicken Little is one smart bird. By staying focused on looming failure, you can almost guarantee it.

11. Lose Your Passion for Work & Life
Bonus item! Forget about the pursuit of happiness. Your keywords here: Be realistic.

—Adapted from The Ten Commandments for BusinessFailure, Donald R. Keough, Portfolio. Executive Leadership Vol.24 No.12 Dec. 2009

See you in the trenches - vmsteveo

3 Reasons To Uncover Customers’ Needs

If it’s important to be user-friendly, and if the highest form of user friendliness is user-centric, then why aren’t you doing it? That’s the challenge posed by Dev Patnaik and Robert Becker, cofounders of Jump Associates. They do “need-finding,” which is part of their user-based business design. Patnaik and Becker offer three reasons to uncover your customers’ needs:

1. Needs outlast solutions. If you focus on a solution, you’ll constantly try to improve that solution. But if you focus on a need, you’ll be open to looking beyond a particular solution and inventing a better one. Cassette tapes, compact discs and MP3s are a series of solutions developed to satisfy the need for portable music.

2. Needs suggest a road map for product development. Exploring needs will give you an idea of what new products should be developed. Even if the capabilities aren’t there yet, you can plan for hiring the necessary talent and making the necessary investments.

3. Addressing needs prevents workarounds. People get so used to compensating for design flaws that they aren’t even aware of what they’re doing. Procter & Gamble had to visit customers’ homes to see them unconsciously wiping drips from bottles of laundry detergent. The company redesigned the spout to catch drips. Similarly, neither OXO nor its customers realized that conventional measuring cups force you to raise the cup to eye level so you can read its measurements. OXO cups now let you look straight down to see the quantity. To start moving toward user-friendly designs, ask “who” and “what” questions,
including:

Who uses something like this now?
Who wants one?
Who told someone else to buy it?
Who installs it?
Who pays for it?
Who sells it?
Who fixes it?
What’s not working?
What do you want?
What’s missing?
What patterns do you see?
What opportunities are there?
What could be better?

—Adapted from “Outside In,” Damien Kernahan, Fast Thinking. – Execleadership.com Vol. 24, No. 10 Oct 2009

See you in the trenches – vmsteveo

Being President...

I understand that President Obama has only two years to do everything he wants to accomplish in his Presidency as it might be over in 4... and of course, you spend the final two years running for re-election... but quit spending money at a pace we might never recover.

When Reagan was President... the Democrats complained about spending money... Now that the Democrats are in power, the Republicans are complaining about spending... So... why are we spending so much money... both sides know not to spend... The President is hoping to equalize many inequalities in two years.... the free enterprise system doesn't work that way... there will always be some do's and some don't.... I am not saying we should not figure out a better system, but we need to keep that in mind.. We should be spending our money in helping people be successful and not helping them when they are not....