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What the World’s Best CEOs Have in Common
Long-term thinking, short-term savvy, and relentless focus on employees.
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Long-term thinking, short-term savvy, and relentless focus on employees.
SARAH GREEN CARMICHAEL: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Sarah Green Carmichael.
Chief Executive Officer, CEO– it’s a term that carries a lot of weight in our minds because in the complex and ever changing world of business, there does have to be someone, a real human, at the top in charge but still accountable. No one, of course, is ever completely in control or even close to it but there’s probably no other single person with as much power over their company’s success or failure.
That’s why when Harvard Business Review publishes its annual list of the 100 best performing CEOs, it says as much about the people on the list as it does about how we define success for this office of the chief executive.
HBR’s new ranking is out now. You can read it in the November issue of the magazine and at hbr.org.
Here to talk about it with us today is Dan McGinn, senior editor at Harvard Business Review. Dan, thank you so much for coming in to talk with us today.
DAN MCGINN: It’s great to be here.
SARAH GREEN CARMICHAEL: So to get started, if you went out on the street and asked people who the best performing CEOs are, they might think of Mark Zuckerberg at Facebook or Tim Cook of Apple, some of these really well known famous CEOs with a lot of name recognition.
But HBR’s list is clearly different. The top spot goes to Lars Sorensen, CEO, of the Danish drug maker, Novo Nordisk. He’s followed up by Martin Sorrell, CEO of British advertising firm WPP. And then comes Pablo Isla head of Spanish fast fashion retailer Inditex So why are these guys the champs?
DAN MCGINN: So the way we look at CEO performance, we do it a little bit differently than other people do. First of all, we’re looking at CEOs over their entire career, not how they did last quarter or the last year. We’re looking at the performance of their company’s stock from their first day as CEO until last April. So it’s sort of like the equivalent of a career number in sports. We don’t look at who is hot just recently.
Second thing we look at, we consider their ESG performance, their corporate social responsibility, how the company works to protect the environment, works for society, works to protect their communities. So we look at it a little bit holistically and we’re looking at it over a much longer term than most people do.
SARAH GREEN CARMICHAEL: How do we balance the sort of sometimes seen as squishy, social stuff with the hard numbers?
DAN MCGINN: So our ranking is based 80% on financial metrics and 20% on ESG numbers. We’re always looking every year to try to find ways to tweak the list and to make our methodology a little bit more sound and make a little bit more sense.
SARAH GREEN CARMICHAEL: So we have to talk about this year’s number one, Lars Sorensen. He took the top spot in the ranking for the second year in a row but that run is actually now coming to an end.
DAN MCGINN: It is. He had a contract to be CEO until 2019 but as we were closing up this issue of the magazine, Novo Nordisk suddenly announced that he was retiring at the end of the year and part of the reason, at least, is that that company’s stock has come under a lot of pressure. It dropped about 20% in August. The competitive position of the company is seen to be a little bit weaker.
So it’s a great illustration that even if you’re the number one CEO in the world for a couple of years these are not tenured positions. You still need to perform quarter by quarter.
SARAH GREEN CARMICHAEL: So you have a CEO here who’s clearly had a great run but now very quickly has fallen from grace. What does that tell us about where we are today, about how we should judge people in these roles?
DAN MCGINN: Well, Adi Ignatius, our editor, asked Sorensen that exact question. He said it’s too early to judge his success. Here’s what he said.
LARS SORENSEN: My influence, through my collaboration with my management team will be assessed 15, 20 years from now when people will be able to determine whether we made the right choices for our business, whether we made the right priorities, whether we built a stronger company.
The good success we’ve had during my tenure at Novo Nordisk was part and parcel due to two decisions that were made by my predecessor. There will be plenty of people willing to throw stones at us 20 years from now.
SARAH GREEN CARMICHAEL: So clearly, we’re hearing there is some tension between short-term and long-term issues and that is something that comes up for me when I’m talking to CEOs for the podcast or when I’m editing a CEO for hbr.org. That clearly is at the forefront of a lot of CEO’s minds.
It seems like this is just a really tough quandary to be in if you’re a CEO. How do you do well in the short-term and also build something that’s going to last?
DAN MCGINN: I think you’re right that this is something that CEOs have always had to think about but that it’s much more top of mind today. There’s that metaphor that I’m not a big fan of that you need to run the plane while you’re fixing it at the same time. And they really are running today’s business while trying to create tomorrow’s business.
I think one of the reasons their minds are on it is because they’re dealing with a very fast changing global landscape. When Adi Ignatius talked to the CEOs, clearly global politics was on their mind. They were thinking about BREXIT. They were thinking about the US election.
So they have to manage through a lot of changes, not just in their business landscape but in the global landscape that are outside what CEOs have any control over.
SARAH GREEN CARMICHAEL: So Dan, one question that raises for me is, I think, so often I hear from people that it feels different now. Short-term pressures feel somehow harsher now. How did the CEOs that HBR talked to for this story respond to that?
DAN MCGINN: They all struggle with this. Pablo Isla said he’s lucky he has a board that’s very understanding, that focuses on the long-term, that helps him do what it takes to make the company become more entrepreneurial.
Lars Sorensen, operating in Scandinavia, has a very different kind of government system. A foundation owns a lot of the stock and they’re clearly oriented towards the long-term.
We asked Martin Sorrell of WPP about that. Here’s what he had to say.
MARTIN SORRELL: The risks I took, let’s say, in 1987 an ’89, a long time ago, would probably be risks that I would agonize over now much more than I did then. And I think it’s inevitable because as you get bigger, as you grow, the nature of the current environment, which I think is too short-term, makes people less willing to take risk, and I think that’s one of the fundamental problems. And I think we all get influenced by it.
SARAH GREEN CARMICHAEL: What else leapt out to you here about what is on the minds of these CEOs?
DAN MCGINN: Well, one of the things that’s interesting when you look at the three CEOs at the top of our list, who we spoke with, is the different paths they took to get there.
Sorrell really created WPP. He’s the most entrepreneurial. He’s almost the founder of the company and he’s running a company that he put together, as are many of the people on our top 100 list.
Isla is actually a lawyer, who worked in government and only came into his company in the last 10 years or so, so a very different kind of background.
Sorensen is a company man. He’s been there for 34 years, operated most of their big divisions.
So one of the things that comes out from these three CEOs is that there is no one way to get to the top of these companies. In terms of the issues they’re worrying about, aside from the global political things we talked about earlier, one of the things that’s top of mind for them is how to manage and motivate millennials.
Big portions of their workforce now are very young. Like a lot of leaders, they recognize different sets of values, different sets of motivations, a different way of thinking about their career, and they’re trying to adapt the culture of their companies to work with that.
SARAH GREEN CARMICHAEL: That’s so interesting and I wonder if, as we talk about the talent management challenges, I mean, clearly talent also was something that was on the minds of these gentlemen. I’m wondering how much time do they spend thinking about their workers, their motivations, how they work best, the right kind of company structure and culture? How much did that come up?
DAN MCGINN: One of the striking things was how much the CEOs talked about the internal workings of their company, the culture, the workers. They didn’t talk a lot about competition. They didn’t talk a lot about strategy. Clearly, all three of them are thinking a lot about how to keep their workers motivated, Pablo Isla most of all.
PABLO ISLA: People talk about in the textile business our model that it’s very disruptive. All that is very, very important but the most important thing with a huge difference is this commitment, this passion, the whole team. All across the world, companies very, very flat. So not having many formal meetings, nearly no internal presentations and a lot of people taking a lot of decisions. Also, because the type of business that we have, allows this possibility, very horizontal and we try to maintain that.
SARAH GREEN CARMICHAEL: One thing that strikes me as we listen to clips from these three top CEOs is that they’re all from Europe. We have one from Great Britain, one from Denmark, one from Spain. And when you look at the top 10, actually eight out of the top 10 are from Europe and just one is from the United States and the other is from Brazil. Why is Europe so dominant here in our ranking at the very top?
DAN MCGINN: It’s partly because our list includes ESG measures, a measure of how well companies are focusing on corporate social responsibility. European companies have more pressure to do that. There are more regulations in place. Two years ago, when we first added an ESG measure to our methodology, the percentage of American companies went down.
American companies still do very well on the financial rankings. Jeff Bezos, from Amazon, for the third year in a row was the top company rated only on finances. But when we made the list more holistic, it became more European.
SARAH GREEN CARMICHAEL: Yeah, and he dropped down to number 87, I think, when that happened, too, which created some headlines of its own.
DAN MCGINN: It did.
SARAH GREEN CARMICHAEL: So Dan, one other thing that leaps out to me and I think anyone who looks at this list, is how they’re almost all men. I think there’s only two women on the list this year. One is Debra Cafaro of Ventas and the other is Marillyn Hewson of Lockheed Martin. What’s up with that?
DAN MCGINN: So there’s at least three things going on. The first and most obvious is just the pipeline issue that everybody talks about. Women are under-represented in MBA programs, they’re under-represented in top corporate management, not just CEO jobs, but senior jobs, and they remain under-represented at the CEO level. If you look at just US companies, big US companies, the numbers are usually between 4% and 5%. So our numbers are a little bit lower but not markedly lower.
The second thing that’s going on is our list is global and when you look at places in the world like Asia or Latin America, female representation in corporate jobs is even lower than it is here. So the moment you globalize your list that’s probably part of the reason.
And the third reason people speculate, at least, that if you look at a lot of the women that get into CEO jobs they talk about this glass cliff. Once you break through the glass ceiling, you’re on the glass cliff, which refers to the idea that women are more likely to get into jobs from the outside of the company when a company is in need of a turnaround. That they face more of a challenge, it’s harder to really drive those companies to bigger successes. So it’s possible that’s an influence.
SARAH GREEN CARMICHAEL: Right, there is some evidence to suggest that women are most usually hired as CEOs from the outside of a company and that could be another reason why there aren’t more women on the list.
DAN MCGINN: Sure, the current example that people point to quite a bit is Marissa Mayer at Yahoo.
SARAH GREEN CARMICHAEL: Or Mary Barra at GM.
DAN MCGINN: Exactly. It’s great when a woman becomes CEO but gosh, a lot of these assignments are unusually tough CEO jobs.
SARAH GREEN CARMICHAEL: So besides being men, what else do some of these CEO have in common? Or when you look at his list, what leaps out to you?
DAN MCGINN: So they do have some things in common. 84 out of 100 are insiders, meaning they were promoted to the top job after a career inside the company. They were not external hires.
There’s an even split between CEOs that have an MBA or have an engineering degree. We have 24 of each of those. On average, the person became CEO at age 44 and they’ve been in the job for about 17 years, which is an extraordinarily long tenure for a CEO but that’s partly because these CEOs are all doing very well so it makes sense. And we’ve had 30 out of 100 have now been on the list for three years in a row.
SARAH GREEN CARMICHAEL: That’s so interesting because I think there’s a couple things there. One is, as you point out, the sort of stability of the list and the long tenure they have in these companies. I think I remember us publishing research that said that the average CEO tenure is now like four or five years. So that’s really 3 times as long, essentially, as the average.
And the other thing that you mention there is the internal versus external CEO promotion path and I am just eager to see how this debate sort of continues to play out.
DAN MCGINN: One of the things that people think, and there is some research on this, is that you’re more likely to hire an internal CEO if the company’s doing well, more likely to go outside if the company is not doing well. And that’s interesting because when Sorensen talks about what’s made him so successful at Novo Nordisk, one of the things he says is, I was really positioned to be successful by my predecessors, that a lot of what happened during my tenure is really a result of what they did before I became CEO.
So when you look at that 84% of them being insiders, that’s sort of an interesting idea that a lot of them were probably taking over a company that was really well positioned because if it hadn’t been, they would have been more likely to go outside.
SARAH GREEN CARMICHAEL: I want to close out by talking a little bit about executive pay because this has become quite a lightning rod with the general public and even with some boards and shareholders who may worry that CEOs are being overpaid. What did these top executives think about their compensation packages and what, if anything, should be done to change the way that they are compensated?
DAN MCGINN: Well, they thought about it a little bit differently. Sorrell points out that he’s been at his company, leading his company since the ’80s and that he really took huge risks in building the firm and that the way he’s compensated should be different than somebody who rises up and becomes CEO of a static kind of firm that’s been around for a while.
Sorensen is very outspoken about this issue. He pointed out that last year he was one of the lowest paid CEOs on this list, even though he was number one. And he points out that he thinks it’s a problem inside companies if there’s too much disparity in what people are paid.
LARS SORENSEN: When we see too wide a disparity between executive compensation and workers’ compensation, we are inherently creating a hindrance or a barrier for achieving the objectives of the company. If there is too wide a gap between what I earn and what a blue collar worker earns in my company, it is going to create problems. And I think part of the distrust we have in business which has developed has been because of executive compensations.
SARAH GREEN CARMICHAEL: You know, it’s interesting. As I listen to that, I think it’s a noble sentiment but I also wonder, is it sort of just a very Scandinavian way of thinking? How common is that among the CEOs that we’ve talked to and that you’ve talked to?
DAN MCGINN: So I don’t know how many CEOs really worry about the pay ratio, the multiple of the CEO pay to the average worker pay. So I think you’re right that Sorensen probably is an outlier on our list.
But when we talked to these three CEOs, it is clear that they’re thinking about pay little bit differently. There’s growing awareness that some of the things that we hoped would happen, in terms of CEO behavior when these packages were put in 20 years ago, hasn’t really worked out that well.
In Britain, in particular, there’s talk about changing the way they pay CEOs. There does seem to be a growing awareness, not so much just because the CEOs make too much money but because the ways that they’re incented aren’t really creating the motivations that we thought they would, that the actual mechanisms of the pay aren’t working very so well.
The three CEOs we talked to all thought that they should be paid on long-term performance. So there does seem to be more of an appetite for some sort of a change now than I’ve seen in the past.
SARAH GREEN CARMICHAEL: Dan, thank you so much for taking the time today to walk us through this ranking.
DAN MCGINN: Thank you, Sarah.
SARAH GREEN CARMICHAEL: Dan McGinn is the senior editor at Harvard Business Review. You can find the complete ranking of the 100 best performing CEOs in the November issue of Harvard Business Review and at hbr.org.
And as always, you can connect with us on Twitter @harvardbiz, on Facebook at facebook.com/hbr.
And I again, want to say how much I appreciate it when you guys do leave reviews on iTunes because it does help new listeners find the show. I am Sarah Green Carmichael and thank you so much for listening.