For example, he notes how advancements in business technology gave birth to synthetic collateralised debt obligations, which some point to as the root of the subprime mortgage crisis. Shareholder scrutiny has also increased with the help of technology, which has enabled easy access to SEC filings and 24-hour business news. Consequently, somewhere along the way, shareholders and management became acutely focused on improving efficiencies and short-term financial performance, according to Wharton management professor Peter Cappelli.
Cappelli says that these pressures forced companies to cut back on staffing, which led to less internal oversight. Additionally, he notes that many companies have also reduced, or completely eliminated, management training programs. And without management training, “people are being pushed into leadership roles without any preparation.”
Regulatory scrutiny – specifically of CEOs – has also increased, especially after the Enron and WorldCom debacles and the resulting Sarbanes-Oxley Act of 2002, which requires all senior executives to sign off on financial documents. Meanwhile, the Dodd-Frank Act forces companies to be more transparent about CEO compensation. But Wharton marketing professor George Day says that those requirements are often “more of an aggravation” to executives than an effective way to influence CEO behaviour.
Leadership styles
Indeed, the scope and visibility of what CEOs are managing have increased over the years, but Day says it’s the leadership style of the CEO that has really contributed to problems like those at JPMorgan and Barclays. He notes that many of the CEOs embroiled in the 2008 financial crisis had a more “organisational” style of leadership, meaning that they prided themselves on efficiency, focusing on short-term results and looking at challenges from the vantage point of the firm. Because these kinds of leaders see failure as an error, Day adds, employees don’t often admit to mistakes, and CEOs are often caught off guard by major problems.
“CEOs are much more vulnerable to surprises and to missing signals these days,” says Day, who is also the co-director of Wharton’s Mack Center for Technological Innovation. On the other hand, CEOs with a “vigilant” style of leadership see challenges from the vantage point of the customer and seek out diverse opinions. “There is a lot more uncertainty and complexity in business, and vigilant leaders tend to embrace uncertainty.”
Day describes Andy Grove, the CEO of Intel from 1987 to 1997, as the “poster child for vigilant leadership.” During his tenure, Grove oversaw a dramatic increase in the company’s market capitalisation, but at the same time created a culture where innovation flourished.
Grove was also a typical CEO of his generation, in that he was with the company for decades, beginning in 1968, and worked his way up to the top. These days, however, an overwhelming number of top executives are often brought in from the outside and, consequently, do not have extensive internal knowledge of the firm or a deep connection to lower-level employees.
“They don’t have a history with the company and aren’t invested in [it],” Cappelli says.
