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A much more thoughtful treatment of this problem is "The Dictator's Handbook." There are three possible explanations: 1) The CEO knows something I don't. 2) T

by wegs 6y ago

A much more thoughtful treatment of this problem is "The Dictator's Handbook." There are three possible explanations: 1) The CEO knows something I don't. 2) The CEO is dumb. Those are rarely it. The third one is: 3) The CEO is optimizing for personal wealth / fame / success, and there are political considerations. Most CEOs can recognize that a business decision can be absolutely the right thing to do for the business and not make that decision if it either would cost them (1) their standing with shareholders (2) their annual bonus (3) their standing with the board (4) their standing with internal constituents. The key skill CEOs need to be CEOs can be summarized as: "How to become a CEO." That involves a lot more management of politics than it does business success (but still a fair measure of both). Furthermore, if a strategy leads to business success but costs a CEO their job, they cannot take that strategy.

jacobush 6y ago
They can and sometimes will take that strategy, but of course then be self-selected out of the CEO and be replaced by someone who conforms to nr 3. This is the filtering process that makes psycopaths over-represented at the top.
lazyjones 6y ago
It blows my mind how people can come here and attempt to write a serious answer claiming the CEO "rarely" knows something his armchair critic doesn't (as a basis for their "bad" decision). Then proceed to peddle cliches and conspiracies. Also, shareholders aren't stupid, they usually reward CEOs for good business decisions and so does the board. Sometimes it's unclear what is better long-term and short-term results are preferred, but nobody knowingly punishes or fires a CEO for a good decision. That just exists in the imagination of people whose involvement with business decisions consists of reading Dilbert cartoons.
- wegs 6y ago
  ... to the extent you consider one of the most influential and best-researched management books a "cliche and conspiracy." I'll mention I didn't claim that a CEO rarely knows something a critic doesn't; just that things like the CEO's greater understanding of something like market dynamics are rarely the basis of what is externally perceived to be a "bad" decision by an armchair critic. The basis is usually political dynamics (which most armchair critics have far less insight into than the CEO -- the information gap is greater). And as a shareholder, I can say I don't think my intelligence matters very much in this story. The amount of time and thought I can put into each company in my portfolio is what matters. That's both especially true because I have index funds, and why I have index funds. As a footnote, if you'd like a more extreme take on this, Pfeffer's Power is a good read (but quite controversial -- the book basically makes the claim that CEOs are fundamentally psychopaths). Pfeffer is at Stanford. Dictator's Handbook is considered hardly controversial at all. It's a game-theoretic argument, backed by pretty good data. The author is at New York University. I'll also mention that simply insulting the poster of an argument ("just exists in the imagination of people whose involvement with business decisions consists of reading Dilbert cartoons") doesn't strengthen your point. You know nothing about my background. It just makes you look like you're either a jerk, or ran out of sound arguments.
  - lazyjones 6y ago
    > Pfeffer's Power is a good read (but quite controversial -- the book basically makes the claim that CEOs are fundamentally psychopaths). Can you point me to a summary that makes this claim? Because https://www.slideshare.net/johnnemo/power-by-jeffrey-pfeffer-key-takeaways https://www.slideshare.net/johnnemo/power-by-jeffrey-pfeffer... certainly doesn't. > You know nothing about my background. It just makes you look like you're either a jerk, or ran out of sound arguments. You made 2 appeals to authority - of dubious authenticity - and I have no reason to assume you wouldn't make a 3rd if you thought it'd give you extra points. My background is: ex-CEO.
    - wegs 6y ago
      No, I can point you to reading the books. If you're don't read books, I don't think this is a bridge you'll cross. And I'm sorry you find two respected professors, one at NYU and one at Stanford, to be of dubious authenticity. I'm not quite sure where to go from there in the conversation. There are many individuals who find Pfeffer dubious, but de Mesquita is extremely highly regarded. I'm not going to share my background on the internet, but ex-CEO doesn't make you qualified to talk about much of anything. It depends on the organization. I've virtually never seen these sorts of dynamics at organizations below 100 people, and they don't become universal until around 1000-10,000 people. You need to reach a certain scale of competition before people start acting in ways which are game-theoretically optimal. If you have 10 people, it's easy to keep alignment on mission, vision, community, and business. If you have e.g. 10,000 people, and 1% are gunning for CEO, the only way to get to the top is to out-gun the other 99. That competition is what leads to these dynamics.
      - lazyjones 6y ago
        > And I'm sorry you find two respected professors, one at NYU and one at Stanford, to be of dubious authenticity. Obvious straw man. I have no qualms with those professors, just with your claims about their books, which at least one summary contains no trace of. Should I read those books merely to verify your claims? I'm not so sure. > I've virtually never seen these sorts of dynamics at organizations below 100 people, and they don't become universal until around 1000-10,000 people So your initial claims don't apply to CEOs of corporations with less than 1000 people? Moving the goalpost much?
- pessimizer 6y ago
  Self-interest is only a conspiracy theory as far as all economics is a conspiracy theory.
adamlett 6y ago
I would postulate that 3) is indistinguishable from doing a great job as CEO the vast majority of the time. Only very occasionally are the personal interests of the CEO in conflict with those of the company and its owners. Most CEOs can recognize that a business decision can be absolutely the right thing to do for the business and not make that decision if it either would cost them (1) their standing with shareholders (2) their annual bonus (3) their standing with the board (4) their standing with internal constituents. Again, you'll have to provide some compelling evidence or some very good arguments to convince me that the cases where the wishes of the board and/or the shareholders are in conflict with what is best for the business, are anything other than a rarity. The key skill CEOs need to be CEOs can be summarized as: "How to become a CEO." That's a very cynical and reductionist view. I prefer to think in terms of peacetime and wartime generals. In peacetime (ie. when the market forces make it difficult to fail for example because you have a monopoly), I think it's probably true that a very important requirement for rising to the top, is political skill. In a wartime, ie. in a highly competitive market, good business people rise to the top. You fail to mention the 4th possibility (alluded to in the article): Market conditions sometimes change and the CEO is left with no good options. If you had a wildly successful business selling abacuses and someone suddenly introduces a low cost electronic calculator, there's probably not much you can do a CEO to prevent you market from shrinking. Of course you could try to change your business from making abacuses to making calculators in an attempt to hang on to your customers, but there's is also nothing about manufacturing abacuses that translates into creating electronic calculators, so the chances of that succeeding are slim to none.
- wegs 6y ago
  Your postulate is generally correct on a quarterly time span. It's generally incorrect on a 5-year time-span. Good examples are Carly Fiorina gutting HP in ways which weren't immediately externally visible, or Bezos / Jobs pursuing tactics which took years to show value. Key differences between the Board / shareholders and the CEO include: (1) Amount of time available. Boards meet a few times, and it's exceptionally hard to get buy-in for something which doesn't have a concise executive summary. Shareholders have even less time. (2) Insider information. Shareholders (and, to some extent, Boards) have far less inside information than the CEO. If you'd like good evidence, the book "The Dictator's Handbook" builds a pretty good case that mirrors my experience operating at both executive and board levels. It's not a complete explanation, but I think it accounts for 50% of the types of dynamics described. If full-length academic texts aren't your thing, CGP Grey has a nice summary on Youtube too: https://www.youtube.com/watch?v=rStL7niR7gs https://www.youtube.com/watch?v=rStL7niR7gs >> The key skill CEOs need to be CEOs can be summarized as: "How to become a CEO." > That's a very cynical and reductionist view It may be cynical, but it mirrors my experience. It's definitely not reductionist. "How to become a CEO." is an incredible complex, intertwined set of skills. Some of those skills include effectively leading companies, but others do not.
motohagiography 6y ago
The Dictator's Handbook would say the CEO is optimizing for survival as CEO. The book was subtitled, "the logic of political survival," and is based on a game theory based model called the predictioneers game. It was written precisely as a more useful quantitative tool to describe these things instead of just moralizing about them. It means this CEO makes decisions that first secure her ability to maintain benefits to the essential people who keep her in that position, second, to prevent influential people from coordinating for leverage themselves to become new essentials she'd be accountable to, and third, maintaining the pipeline funnel of interchangeables to keep those influentials in line. The goal is to reduce the size of the coalition you need to please to maintain the ability to keep making decisions in that role. The moralistic version of this is the Gervais Principle from Ribbonfarm that gets posted here periodically. In that model, instead of Smith and DeMesquita's leader managing coalitions of essentials, influentials, and interchangeables, you have the Gervais psychopath using idiots to manage losers. It's just a different description of the same mechanisms. There is a third related model, which describes how, where to do any good in the world at all, you need the power to do it, and obtaining and sustaining that ability long enough to do the good you intend to becomes %95 of the work, with vary little left over for benevolence and altruism. The path to that is straightforward and achievable, as evidenced by how many objectively unremarkable people seem to achieve it. It's just a matter of desiring that over all the substitutes and distractions that keep you comfortably in your place.

by wegs 6y ago

jacobush 6y ago

They can and sometimes will take that strategy, but of course then be self-selected out of the CEO and be replaced by someone who conforms to nr 3. This is the filtering process that makes psycopaths over-represented at the top.

lazyjones 6y ago

It blows my mind how people can come here and attempt to write a serious answer claiming the CEO "rarely" knows something his armchair critic doesn't (as a basis for their "bad" decision). Then proceed to peddle cliches and conspiracies. Also, shareholders aren't stupid, they usually reward CEOs for good business decisions and so does the board. Sometimes it's unclear what is better long-term and short-term results are preferred, but nobody knowingly punishes or fires a CEO for a good decision. That just exists in the imagination of people whose involvement with business decisions consists of reading Dilbert cartoons.

wegs 6y ago
... to the extent you consider one of the most influential and best-researched management books a "cliche and conspiracy." I'll mention I didn't claim that a CEO rarely knows something a critic doesn't; just that things like the CEO's greater understanding of something like market dynamics are rarely the basis of what is externally perceived to be a "bad" decision by an armchair critic. The basis is usually political dynamics (which most armchair critics have far less insight into than the CEO -- the information gap is greater). And as a shareholder, I can say I don't think my intelligence matters very much in this story. The amount of time and thought I can put into each company in my portfolio is what matters. That's both especially true because I have index funds, and why I have index funds. As a footnote, if you'd like a more extreme take on this, Pfeffer's Power is a good read (but quite controversial -- the book basically makes the claim that CEOs are fundamentally psychopaths). Pfeffer is at Stanford. Dictator's Handbook is considered hardly controversial at all. It's a game-theoretic argument, backed by pretty good data. The author is at New York University. I'll also mention that simply insulting the poster of an argument ("just exists in the imagination of people whose involvement with business decisions consists of reading Dilbert cartoons") doesn't strengthen your point. You know nothing about my background. It just makes you look like you're either a jerk, or ran out of sound arguments.
- lazyjones 6y ago
  > Pfeffer's Power is a good read (but quite controversial -- the book basically makes the claim that CEOs are fundamentally psychopaths). Can you point me to a summary that makes this claim? Because https://www.slideshare.net/johnnemo/power-by-jeffrey-pfeffer-key-takeaways https://www.slideshare.net/johnnemo/power-by-jeffrey-pfeffer... certainly doesn't. > You know nothing about my background. It just makes you look like you're either a jerk, or ran out of sound arguments. You made 2 appeals to authority - of dubious authenticity - and I have no reason to assume you wouldn't make a 3rd if you thought it'd give you extra points. My background is: ex-CEO.
  - wegs 6y ago
    No, I can point you to reading the books. If you're don't read books, I don't think this is a bridge you'll cross. And I'm sorry you find two respected professors, one at NYU and one at Stanford, to be of dubious authenticity. I'm not quite sure where to go from there in the conversation. There are many individuals who find Pfeffer dubious, but de Mesquita is extremely highly regarded. I'm not going to share my background on the internet, but ex-CEO doesn't make you qualified to talk about much of anything. It depends on the organization. I've virtually never seen these sorts of dynamics at organizations below 100 people, and they don't become universal until around 1000-10,000 people. You need to reach a certain scale of competition before people start acting in ways which are game-theoretically optimal. If you have 10 people, it's easy to keep alignment on mission, vision, community, and business. If you have e.g. 10,000 people, and 1% are gunning for CEO, the only way to get to the top is to out-gun the other 99. That competition is what leads to these dynamics.
    - lazyjones 6y ago
      > And I'm sorry you find two respected professors, one at NYU and one at Stanford, to be of dubious authenticity. Obvious straw man. I have no qualms with those professors, just with your claims about their books, which at least one summary contains no trace of. Should I read those books merely to verify your claims? I'm not so sure. > I've virtually never seen these sorts of dynamics at organizations below 100 people, and they don't become universal until around 1000-10,000 people So your initial claims don't apply to CEOs of corporations with less than 1000 people? Moving the goalpost much?
pessimizer 6y ago
Self-interest is only a conspiracy theory as far as all economics is a conspiracy theory.

adamlett 6y ago

I would postulate that 3) is indistinguishable from doing a great job as CEO the vast majority of the time. Only very occasionally are the personal interests of the CEO in conflict with those of the company and its owners. Most CEOs can recognize that a business decision can be absolutely the right thing to do for the business and not make that decision if it either would cost them (1) their standing with shareholders (2) their annual bonus (3) their standing with the board (4) their standing with internal constituents. Again, you'll have to provide some compelling evidence or some very good arguments to convince me that the cases where the wishes of the board and/or the shareholders are in conflict with what is best for the business, are anything other than a rarity. The key skill CEOs need to be CEOs can be summarized as: "How to become a CEO." That's a very cynical and reductionist view. I prefer to think in terms of peacetime and wartime generals. In peacetime (ie. when the market forces make it difficult to fail for example because you have a monopoly), I think it's probably true that a very important requirement for rising to the top, is political skill. In a wartime, ie. in a highly competitive market, good business people rise to the top. You fail to mention the 4th possibility (alluded to in the article): Market conditions sometimes change and the CEO is left with no good options. If you had a wildly successful business selling abacuses and someone suddenly introduces a low cost electronic calculator, there's probably not much you can do a CEO to prevent you market from shrinking. Of course you could try to change your business from making abacuses to making calculators in an attempt to hang on to your customers, but there's is also nothing about manufacturing abacuses that translates into creating electronic calculators, so the chances of that succeeding are slim to none.

wegs 6y ago
Your postulate is generally correct on a quarterly time span. It's generally incorrect on a 5-year time-span. Good examples are Carly Fiorina gutting HP in ways which weren't immediately externally visible, or Bezos / Jobs pursuing tactics which took years to show value. Key differences between the Board / shareholders and the CEO include: (1) Amount of time available. Boards meet a few times, and it's exceptionally hard to get buy-in for something which doesn't have a concise executive summary. Shareholders have even less time. (2) Insider information. Shareholders (and, to some extent, Boards) have far less inside information than the CEO. If you'd like good evidence, the book "The Dictator's Handbook" builds a pretty good case that mirrors my experience operating at both executive and board levels. It's not a complete explanation, but I think it accounts for 50% of the types of dynamics described. If full-length academic texts aren't your thing, CGP Grey has a nice summary on Youtube too: https://www.youtube.com/watch?v=rStL7niR7gs https://www.youtube.com/watch?v=rStL7niR7gs >> The key skill CEOs need to be CEOs can be summarized as: "How to become a CEO." > That's a very cynical and reductionist view It may be cynical, but it mirrors my experience. It's definitely not reductionist. "How to become a CEO." is an incredible complex, intertwined set of skills. Some of those skills include effectively leading companies, but others do not.

motohagiography 6y ago

The Dictator's Handbook would say the CEO is optimizing for survival as CEO. The book was subtitled, "the logic of political survival," and is based on a game theory based model called the predictioneers game. It was written precisely as a more useful quantitative tool to describe these things instead of just moralizing about them. It means this CEO makes decisions that first secure her ability to maintain benefits to the essential people who keep her in that position, second, to prevent influential people from coordinating for leverage themselves to become new essentials she'd be accountable to, and third, maintaining the pipeline funnel of interchangeables to keep those influentials in line. The goal is to reduce the size of the coalition you need to please to maintain the ability to keep making decisions in that role. The moralistic version of this is the Gervais Principle from Ribbonfarm that gets posted here periodically. In that model, instead of Smith and DeMesquita's leader managing coalitions of essentials, influentials, and interchangeables, you have the Gervais psychopath using idiots to manage losers. It's just a different description of the same mechanisms. There is a third related model, which describes how, where to do any good in the world at all, you need the power to do it, and obtaining and sustaining that ability long enough to do the good you intend to becomes %95 of the work, with vary little left over for benevolence and altruism. The path to that is straightforward and achievable, as evidenced by how many objectively unremarkable people seem to achieve it. It's just a matter of desiring that over all the substitutes and distractions that keep you comfortably in your place.