By N Meenakshi, Associate Professor in Marketing at Goa Institute of Management

Charisma is a set of personal qualities that inspire awe and submission in others. A successful leader is often described as charismatic. Lee Iacocca, Jack Welch, Steve Jobs are considered charismatic leaders. A board of directors will look for charismatic leaders to lead their companies. But charisma was not always an essential qualification for a leader. In the era of managerial capitalism that lasted till the 1980s, a CEO was an organization man who worked his way up the ranks. He was hardly known outside his company. In the 1980s, due to long-standing decline in corporate profits, investors began to label senior managers as insulated, self-interested elite, and ill-prepared to face the challenges of global competition and rapid technological changes. In the new era of investor capitalism, investors started looking for CEOs who could shake things up and put an end to business as usual. At around the same time, the public began to invest in companies, and the mass media expanded coverage of corporate doings and business personalities to serve the public’s appetite for business news. Lee Iococca is probably the first charismatic business leader. The turnaround of Chrysler was attributed to his inspirational leadership, and he became a celebrity. Steve Jobs gave a contemporary spin to inspirational leadership. He created a corporate culture in which employees were supposed to work ceaselessly, uncomplainingly, and for low pay not just to produce and sell a product but to realize the vision of the messianic leader.

The charismatic leader has exaggerated self-importance, is a celebrity, and is either an entrepreneurial founder or has been brought into the company from outside. He is not a predictable organization man. He offers a vision of a radically different future and attracts and motivates followers for a journey to the new future. He uses dialogue to inspire employees to work harder, and to gain the confidence of investors, analysts, and business press. He has the magical powers to bring a dying company back into life and to vanquish much larger, more powerful competitors.

THE TRAP

The fervent and irrational faith in the power of charismatic leaders is part of human nature. It is fostered by tales of heroic figures who rescue people from danger. Major events are easier to understand when people can attribute them to the actions of prominent individuals rather than having to consider the interplay of social, economic, and other impersonal forces that shape and constrain even the most heroic individual efforts. People overestimate the impact of individuals – presidents run countries, finance ministers run economies, generals win wars, and so on.

There is no conclusive evidence linking leadership to organizational performance. Various external and internal constraints inhibit an executive’s ability to affect a company’s performance – 30 p.c. to 45 p.c. of performance can be attributed to industry effects and 10 p.c. to 20 p.c. to year-to-year economic changes. When a CEO is considered responsible for a company’s success, he is also held responsible for the company’s failure. When a company fails, directors automatically blame the incumbent CEO and fire him and start looking for a savior, i.e., a charismatic leader. A struggling company often misdiagnoses its problems by attributing them all to the CEO, and then pin its hopes on a charismatic successor. For example, in the early 1990s, Kodak’s then CEO, Kay Whitemore, was intensely criticized for failing to improve the company’s performance. He was fired in August 1993, and Kodak hired George Fisher, who was then CEO of Motorola, as its first outside CEO. Fisher was greeted with much fanfare and high hopes. Fisher was credited with Motorola’s strong performance during the tenure. But, analysis shows that much of the company’s success was due to increased competition in local cellular markets and lower retail prices which led to a more rapid adoption of Motorola’s phones and related technology. If Motorola’s successes were largely the result of broad trends, so were Kodak’s failings. Fisher failed to recognize that Kodak’s fundamental problem was that it missed the shift from chemical to digital photography, which had little to do with company’s executive leadership. Kodak’s fortunes continued to decline even after many acquisitions and divestitures, investment in internet technologies and digital photography, and a wholesale turnover of executives. Since the incumbent CEO was not responsible for the failings of the company, the successor CEO could not reverse its fortune. For all the excitement and optimism that surrounds charismatic CEOs, the fact remains that the factors affecting corporate performance are varied, highly complex, and definitely beyond the power of even the most charismatic leader to influence single-handedly.

IN REALITY

When a company fails, its directors fire the incumbent CEO even if the company’s failure cannot be attributed to him. The directors look for a charismatic CEO who will take the company in a new direction, but they also play it safe because they cannot be certain if a CEO has the charisma to lead the failing company out of trouble. Their initial pool of candidates is narrow and consists of top executives they already know. From this narrow pool, they focus on candidates who will be acceptable to outsiders. The result is that the selected CEO is already of the rank of CEO or president and comes from high-performing, high-status companies. For example, a failing company chose a particular CEO largely because he had worked with Jack Welch in GE. The directors did not attempt to make any connection between the CEO’s performance at GE and the problems facing the company. In the directors’ eyes, the CEO has been imbued with charisma simply through his association with GE and Jack Welch.

The example illustrates an important point: charisma is assumed to be inherent, i.e., it is not borrowed from other people or conferred by the social milieu. But in reality, charisma is more a social product than an individual trait. In primitive societies, leaders wore special clothing, masks, and ornaments that conferred on them a larger-than-life appearance that helped create perceptions of their charisma. In monarchies, kings and queens assume charisma through heritage, and buttress it with symbols, such as palaces, robes, and crowns. In business, CEOs assume charisma through large offices, private planes, expensive suits, and other trappings of corporate power.

It is believed that outsiders are most qualified to lead. The person coming from outside has a clear mandate, particularly if he is coming into a failing company. He is not beholden to anyone. In contrast, there is so much baggage and so many constraints on the internally promoted CEO. There are so many people at various levels in the organization who expect that he will protect their interests. He has been part of the process of building the business and its culture, and it is difficult to imagine an internal candidate getting to the top of the system and systematically destroying the existing business and its culture. This belief in the superiority of the outsider CEO further constraints directors in hiring CEOs. The belief that complex organizational problems can be solved by a charismatic outsider CEO leads directors to ignore the process of finding a CEO who has the experience of handling the type of problems the company is facing. They choose the bold outsider, ignoring better candidates in the process. For example, two banks merged, and the merged entity was stumbling. The bank’s problems stemmed from the difficulty of blending the operations and cultures of the two banks. The incumbent CEO was fired, and the directors settled on a superstar executive who had helped built a banking empire. He had spent his entire career as a deal maker on the investment side of financial services. He had all the mental quickness and the smartness to succeed as a deal maker, but these were not the traits traditionally valued in commercial and retail banking. He did not have any experience in retail banking and credit card operations, which were the bank’s largest businesses. And his hot temper was ill-suited to bridge the difference between freewheeling, entrepreneurial culture of one of the merged bank and the more traditional banking culture of the other merged bank.

DESTROYING VALUE

The cult of the outsider CEO is so strong that even when an insider is elevated to the CEO post, he is often the person who has assumed the traits of an outsider CEO. Jack Welch and Jacques Nasser were both career employees, but they became charismatic CEOs because they showed a willingness to do what outsiders CEOs do: dismantle parts of their companies and convert people to their cause. Charismatic leaders, whether they are insiders or outsiders, destabilize their companies. In some cases, as with GE, the destabilization brings much-needed changes and results in a more robust company. In other cases, as with Ford, the destabilization does more harm than good.