It is said that perception is nine-tenths of reality, which causes chief executives an awful lot of grief, according to Phil Rosenzweig. In his new book, The Halo Effect, he derides the way management gurus like Tom Peters compile lists of "the world's best-run companies" in manuals such as In Search of Excellence.
After analysing their performances, Rosenzweig, himself a former management consultant, discovered the majority of "excellent" companies fail to produce profits which beat the average in subsequent years. He says rankings draw on perceptions that companies are excellent rather than using objective evidence. For good measure, Rosenzweig draws attention to US research which suggests that just 4 per cent of corporate performance results from the personal style of a chief executive.
None of this will stop chief executives being saluted as visionary when sales, profits and share prices are rising. But reputations rely heavily on luck and third-party judgements. They think they are in control of events but – all too often – events are controlling them.
When enough people start gazing at chief executives in admiration, the risk of disappointment rockets up. Things can go from bad to worse quite suddenly, when economies head south for the winter and the crowd turns ugly. Worse, chief executives are being given less time to perform than in the past. This relates to the speed of innovation plus generous rewards for success, which make everyone compete harder. Performance is measured more precisely.
According to BoardEx, the number of FTSE 100 companies changing their chairman, chief executive or finance director rose again, by 10 per cent, in 2007. Robert Schofield, chief executive of Premier Foods, has gone from hero to much nearer zero in a matter of months. Just over a year into his job, Michael Grade, chief executive of ITV, is under intense pressure. Shares in Google surged after its stock market float in 2004, but since November they have tanked 40 per cent on the back of marginal disappointments in advertising and fourth-quarter earnings. Founders Sergey Brin and Larry Page will be lucky to stop evil being done to their reputations.
Chief executives with an ego problem (that is, most of them) can take an evasive approach to preserving their reputations. One of the smartest things Bill Gates ever did was to step aside as chief executive of Microsoft, in favour of Steve Ballmer, in January 2000. The technology bubble ruptured soon after, and investors realised that Microsoft had been troubled by the competition authorities for years. Distracted by its sheer size, Microsoft has also struggled to get to grips with new internet applications. Ballmer has taken much of the flak, leaving Gates to cultivate the image of a guru. But it is our perceptions which have changed, not the man.
Chief executives could all do worse than emulate Warren Buffett of Berkshire Hathaway, whose $62bn (£31bn) makes him the world's richest man. Buffett says companies which provide the best long-term returns surround their profit-generating "castles" with "moats" to protect them against competitors, economic downturns and a hostile media. The defences take the form of low production costs and powerful brands. Chief executives would also do well to innovate constantly, copy Buffett's modesty and get on with their staff.
Mike Foster is associate editor of 'Financial News'Reuse content