CHAPEL HILL, N.C. — CEOs are a lot less powerful than you probably think.
If you want to focus on the factors that will have the biggest impact on a company’s long-term prospects, pay attention instead to its internal culture.
I made this argument a week ago, boldly declaring that “you shouldn’t care who the CEO is.” Some of you objected, and I can sympathize. It’s easier imagining that there is one person at the top who is calling all the shots. Even more seductive is the notion that a superstar CEO can ride into a crisis situation and save the day.
But, as any of you who have worked in a large bureaucracy can attest, organizational change is a lot more difficult and complex than is painted by this simplistic picture. As I mentioned last week, Rakesh Khurana, a professor of leadership development at Harvard Business School, told me that “large-scale statistical studies have failed to find any direct causal link between CEOs and firm performance.” He said that a corporation’s internal culture “exerts a far greater longer-term influence on the company’s success.”
If you’re still having trouble accepting the profound powerlessness of the CEO, consider a comment made by Harry Truman, who as president was — presumably at least — the most powerful CEO of all. He complained that the president “has to take all sorts of abuse from liars and demagogues. … The people can never understand why the president does not use his supposedly great power to make ’em behave. Well, all the president is, is a glorified public relations man who spends his time flattering, kissing and kicking people to get them to do what they are supposed to do anyway.”
Another reason most of us focus on CEOs rather than corporate culture: Culture is notoriously difficult to define, much less measure.
Fortunately, in recent years, major strides have been made.
One of the most comprehensive studies into corporate culture was conducted by Paul Gompers of Harvard, Andrew Metrick of Yale and Joy Ishii of Stanford. They found that one good proxy for corporate culture is a firm’s governance: To what extent does it restrict shareholder rights and thereby entrench its leadership?
The professors devised an index based on 24 separate restrictions on shareholder power. Examples include so-called “golden parachutes” that guarantee compensation to senior executives even if they are terminated, as well as dual classes of stock that give a controlling interest to a company’s executives. The study found that, over the 10-year period studied, companies with the fewest such restrictions gained 9.3% more than those with the most.
Gompers told me that he knows of no firm that uses this study’s precise 24-point index on an ongoing basis to rate companies. But there are some firms that come close.
One is GMI Ratings in Portland, Maine. In addition to corporate governance factors, the firm has found that another good proxy for a company’s internal culture is the reliability and accuracy of a company’s financial reporting. The following 10 firms are those large-cap stocks that rank highest according to GMI’s “Accounting and Governance Risk” (AGR) ratings.
Bear in mind that corporate culture is not the only factor you should take into account when buying a stock. But it should be one of those factors. GMI Ratings reports that, on average, the stocks with the best AGR ratings have, in the past, outperformed those with the worst.
The list below is in descending order, with the firm with the highest AGR rating from GMI at the top:
- Progressive Corp.
- Range Resources
- American Electric Power
- CNA Financial
- CSX Corp.
- AFLAC
- Under Armour
- Colgate Palmolive
- Whole Foods Market