What's Missing with American CEO's?
Skin in the Game
Family-run companies get no respect. So old-fashioned! The U.S. couldn’t have had an Industrial Revolution and conquered the world if they were all we had! Or so the management professors tell us.
Yet two of the most popular TV series in recent memory are about family-run companies. There must be something that draws viewers to those. In this article I’ll explore what.
The Harvard Business Review says,
Prior to the industrial revolution, of course, there wasn’t much “management” at all – meaning, anyone other than the owner of an enterprise handling tasks such as coordination, planning, controlling, rewarding, and resource allocation. Beyond a few kinds of organization – the church, the military, a smattering of large trading, construction, and agricultural endeavors (many unfortunately based on slave labor) – little existed that we would recognize as managerial practice.
That fairly drips snobbery. “Slave labor!”
The rap on joining a family-run company, call it “Scheisskopf Co.” (to pick a character from Catch-22) is the prejudice that, if your name isn’t Scheisskopf, you can never rise very much. And some idiot cousin will get promoted ahead of you, like Greg
Skin In The Game
Skin in the Game is about one of the great topics of Taleb’s Incerto series of books: risk, randomness, and rare events (“black swans”). Having skin in the game means taking a real risk: not “what stocks should you buy?” but “what do I have in my portfolio?”
Who has more to lose if the company goes under: Person X with his name on it, or Person Y, the guy who was hired to manage it? X was planning to honor his father and his father’s father by handing it down to his own kids, while Y would just get a golden parachute and maybe even another job. Taleb says:
Products or companies that bear the owner's name convey very valuable messages. They are shouting that they have something to lose. Eponymy indicates both a commitment to the company and a confidence in the product. A friend of mine, Paul Wilmott, is often called an egomaniac for having his name on a mathematical finance technical journal (Wilmott), which at the time of writing is undoubtedly the best. "Egomaniac" is good for the product. But if you can't get "egomaniac," "arrogant" will do.
Like South Fork in Dallas two generations ago, Yellowstone Dutton Ranch is a family business. It’s not a soulless corporation. It’s not “YDR Corp.” or some other acronym designed by a corporate consultant. It’s going to be passed on to Tate (John Dutton’s grandson) someday, if all goes well.
If you’re a Dutton, by definition you have skin in the game. If you’re not, you can be asked to donate some skin in an intensely painful ritual where the logo is burned onto your chest, like Jimmy:
Cowboys who take the brand become part of the family. That’s what distinguishes them from garden-variety employees who might just move on to a better job someday.
Time, Lindy, and the Black Swan
Lindy’s is a deli in New York famous for its cheesecake. However, the “Lindy effect” has nothing to do with the restaurant or the food, but for a heuristic that Broadway actors who hung out there discovered: a show that has run for 100 days probably has another 100 days to run. If it’s lasted 200 days, probably another 200. You can find a fuller explanation in Antifragile and Skin in the Game. The Lindy Effect been extensively investigated.
Taleb uses a shorthand throughout his books as something being “Lindy” or “Lindy proof,” and that means that it’s survived. Over time, almost everything that can happen does happen, including Black Swan events (the ones that no one saw coming). A company that is Lindy has met the test of time.
Biological entities cannot be Lindy, of course; they get old and die. Someone who’s lived to 65 does not have another 65 years of life. But companies, ideas, religions, and books — those can be Lindy.
So Who Are The Lindy Companies?
Wikipedia tells us the answer, as it usually does. The oldest continuously operating company in the world was founded in 578 AD, in Japan:
As of 10 Oct 2023, Kong Gumi, a family-owned construction company based in Osaka, Japan, is the oldest continuously operating company in the world. It was founded in 578 AD by an immigrant who was commissioned by Prince Shotoku to build the Shitenn-ji Buddhist temple. Kong Gumi has been in operation for around 1443 years, predating the second-oldest company by more than 200 years. It used to be a family-owned construction company until 2006, after facing some difficult times, it became a subsidiary of the Takamatsu Construction Group.
There are actually a lot of companies more than 700 years old (founded before 1300 AD). 23 of the 62 are Japanese, while Germany and the UK also have quite a few. 13 of them are hotels, while 8 are breweries.
The “Agency” Problem and No Skin in the Game
You can find endless scholarly articles on the “agency problem” of corporations: ostensibly, that the company’s assets are under the control of someone who doesn’t own them, the “agent” or professional manager. For example, Eugene Fama, the Nobel laureate from the University of Chicago, wrote Agency Problems and the Theory of the Firm in 1980. John Armour, Henry Hansmann, and Reinier Kraakman wrote Agency Problems and Legal Strategies.
Let’s translate this in Taleb terms: the managers don’t have skin in the game. They’re not risking anything. Yes, the Board can arrange it so they make a lot of money if the company does well, but if it tanks, they’ll still be OK. Here are some examples, two of them from The 15 Worst CEOs In American History.
I will be writing about Hewlett-Packard in a separate post, since the story is too long for this one.
The HP Board certainly did give her an upside. From Wikipedia:
Fiorina received a larger signing offer than any of her predecessors, including: US$65 million in restricted stock to compensate her for the Lucent stock and options she left behind, a US$3 million signing bonus, a US$1 million annual salary (plus a US$1.25–US$3.75 million annual bonus), US$36,000 in mortgage assistance, a relocation allowance, and permission (and encouragement) to use company planes for personal affairs.
How about taking on risk if she failed? As it happened, she ran the company into the ground and got fired:
In 2004, HP fell dramatically short of its predicted third-quarter earnings, and Fiorina fired three executives during a 5 AM telephone call. In early January 2005, the Hewlett-Packard board of directors discussed with Fiorina a list of issues that the board had regarding the company's performance and disappointing earning reports. The board proposed a plan to shift her authority to HP division heads, which Fiorina resisted strongly. A week after the meeting, the confidential plan was leaked to The Wall Street Journal. According to BusinessWeek's Ben Elgin, directors were also concerned about the board's inability to work effectively with Fiorina.
Less than a month later, the board brought back Tom Perkins and forced Fiorina to resign as chair and chief executive officer of the company. The company's stock jumped 6.9 percent on news of her departure, adding almost three billion dollars to the value of HP in a single day.
No Skin Off Her Nose
That was certainly a Bad Thing, wasn’t it? You would think, wouldn’t you, that a modern company that knows all about the Agency Problem would have arranged it so that she shared at least some of this misfortune. But no, after being fired she wrote a book, ran for US Senate (and lost), served on many boards, and became a public figure (note that in the photo, the Washington Post was interviewing her as a “former CEO.”) Not “disgraced CEO.” It was all upside for her.
Remember WebVan? I thought not. It was one of those dot-bomb companies that sprang up in the Internet boom. They were going to deliver groceries within 30 minutes. Wikipedia tells us:
He joined Webvan while it was "one of the largest start-ups during the Dot-com Bubble," with plans to deliver online grocery orders within 30 minutes. His Webvan employment agreement, signed September 19, 1999 was filed with the SEC. Under Shaheen, the company underwent an IPO in November 1999, raising $375 million with stocks soaring, and the company valued at $8.45 billion. Shares afterwards dropped sharply with the dotcom bubble. He resigned as CEO of WebVan in April 2001. His retirement pack included collecting $375,000 each year for the rest of his life from WebVan. Webvan declared Chapter 11 bankruptcy in 2001. When the company filed bankruptcy, Shaheen became an unsecured creditor. In 2010, Business Insider named him one of the 15 Worst CEOs in American History, citing his involvement with Webvan.
So: $375 million of investors’ money down the drain. He was supposed to get $375,000 per year for the rest of his life, but hopefully WebVan’s bankruptcy wiped that out.
Even more amazing, this is a guy who had been CEO of Andersen Consulting! What does that tell you about the value of big-time consulting advice?
No Skin Off His Nose
After the WebVan debacle, he became CEO of Siebel Systems. It looks like there were no hard feelings about his disastrous performance.
He took over as CEO of Compaq in the 90’s, and briefly made it a huge success. Then he ruined it, got fired, and it was sold to HP. Carly Fiorina (whom we met earlier) forced that merger through.
Texas Monthly, in a puff piece from before his downfall, said:
“Herr Pfeiffer,” as the 54-year-old German-born executive is sometimes called, looks more like a European count than a computer executive. When women first see him, they tend to describe him as “gorgeous.” He dresses in custom-made suits. His silvery hair is perfectly parted. He speaks in such calm, polished, slightly accented tones that he makes the phrase “market share” sound like a line out of Goethe. In appearance and attitude, Pfeiffer is about as far from an eccentric, Bill Gates–like techno-nerd as one can imagine.
By 1994, his relentless cost-cutting had made Compaq the top PC manufacturer. But that wasn’t enough for him. He had a terminal case of IBM Envy, desperately yearning for their “services and solutions” business. In 1997, he bought Tandem Computers, and in 1998, Digital Equipment Corp., two legacy businesses that had already seen their better days. Like nearly all big tech mergers, these did not work out, and Pfeiffer had no idea what the newly-giant company would do, or how.
After missing Wall Street expectations in three of six quarters, Pfeiffer was fired by the Board in April 1999.
No Skin Off His Nose
I hope by now, you’re not expecting the story to end with, “.. and then he was disgraced and reduced to selling timeshares in Florida.”
Pfeiffer received $6 million in severance pay, and received $70 million worth of stock options that vested immediately as a result of his forced resignation. At the time of his departure, Pfeiffer held 9.5 million exercisable options valued at nearly $340 million which vested but Pfeiffer had not yet cashed the options.
He’s also served on several corporate boards.
I’m Not a Businessman, But I Play One on TV
Now we get some of the reasons why people like these get those jobs: they look good. Yet, as Taleb tells us, looking good is, if anything, a counter-indicator:
When results come from dealing directly with reality rather than through the agency of commentators, image matters less, even if it correlates to skills. But image matters quite a bit when there is hierarchy and standardized "job evaluation." Consider the chief executive officers of corporations: they don't just look the part, they even look the same. And, worse, when you listen to them talk, they sound the same, down to the same vocabulary and metaphors. But that's their job: as I will keep reminding the reader, counter to the common belief, executives are different from entrepreneurs and are supposed to look like actors.
Monarchs Did Have Skin in the Game
What risks would you take for glory? The job comes with unimaginable wealth and absolute power, and everyone has to call you “Your Majesty.”
and you get to say, “Kill him!”
On the minus side of the ledger, you have a good chance of getting killed:
According to this study:
Emperors of ancient Rome tended to die bloody, violent deaths. In fact, a Roman gladiator had better odds of surviving a brutal fight in the arena than an emperor had of dying peacefully of natural causes, according to a new study.
From A.D. 14 to A.D. 395, 43 of the 69 Roman rulers (62%) died violently, meaning they were killed in battle or at the hands of assassins.
But surely, you think, that’s just because life was brutal in Ancient Rome. No, regicide continued long after that:
In Western Christianity, regicide was far more common prior to 1200/1300. Sverre Bagge counts 20 cases of regicide between 1200 and 1800, which means that 6% of monarchs were killed by their subjects. He counts 94 cases of regicide between 600 and 1200, which means that 21.8% of monarchs were killed by their subjects.
The top jobs used to mean literally risking your life.
So Did Soviet Generals
Nazi Germany invaded the USSR on June 22, 1941. At first, things did not go well for the Soviets. German forces stormed to within sight of Moscow before being turned back as winter approached.
This guy, Dmitry Grigoryevich Pavlov
was the Soviet commander on the Western front. He and his Chief of Staff, Vladimir Yefimovich Klimovskikh
were relieved of command and executed. They were not the only generals terminated with extreme prejudice. Wikipedia tells us that there were so many that the administrative paperwork got too onerous, and they had to simplify the procedures:
During the first months of the war, scores of commanders, most notably General Dmitry Pavlov, were made scapegoats for failures. Pavlov was arrested and executed after his forces were heavily defeated in the early days of the campaign. Only two of the accused were spared: People's Commissar of Armaments Boris Vannikov (released in July 1941) and Deputy People's Commissar of Defense General Kirill Meretskov (released in September 1941), although the latter had admitted guilt, under torture.
About three hundred commanders, including Lieutenant General Nikolay Klich, Lieutenant General Robert Klyavinsh, and Major General Sergey Chernykh, were executed on 16 October 1941, during the Battle of Moscow. Others were sent to Kuybyshev, provisional capital of the Soviet Union, on 17 October. On 28 October 1941, twenty individuals were summarily shot near Kuybyshev on Lavrentiy Beria's personal order, including Colonel Generals Alexander Loktionov and Grigory Shtern, Lieutenant Generals Fyodor Arzhenukhin, Ivan Proskurov, Yakov Smushkevich, and Pavel Rychagov with his wife, as well as several individuals who had been previously arrested during the immediate aftermath of the Great Purge in 1939, prior to the Red Army Purge of 1941, including politicians Filipp Goloshchyokin and Mikhail Kedrov.[
In November 1941, Beria successfully lobbied Stalin to simplify the procedure for carrying out death sentences issued by local military courts so that they would no longer require approval of the Military Collegium of the Supreme Court and Politburo, for the first time since the end of the Great Purge. The right to issue extrajudicial death sentences was granted to the Special Council of the NKVD.
On 29 January 1942, forty-six persons, including 17 generals, among them Lieutenant Generals Pyotr Pumpur, Pavel Alekseyev, Konstantin Gusev, Yevgeny Ptukhin, Nikolai Trubetskoy, Pyotr Klyonov, Ivan Selivanov, Major General Ernst Schacht, and People's Commissar of Ammunition Ivan Sergeyev, were sentenced to death by the Special Council. After the explicit approval of Stalin, they were executed on the Day of the Red Army, 23 February 1942.
Now that is called Skin In The Game.
“So what: you’re saying we should kill CEO’s and generals who fail?”
No, of course not. That’s so medieval.
But if you’re a Hollywood screenwriter, “threat of death” is a pretty reliable plot device. Why else would Mafia, war, and police movies and TV series be so perennially popular? The viewing public responds to risk. A Mafia don doesn’t get a golden parachute when he fails, like George Shaheen got; he gets whacked.
We do need to put some skin back in the game for these CEO’s. Yes, some of them go to prison (looking at you, Elizabeth Holmes),
but as long as they’re only guilty of ordinary incompetence and stupidity, they’re usually safe from jail.
Shame as “Skin”
American CEOs tend to deny everything. In Japan, though, you’re expected to abase yourself in public and apologize for failure. Here’s the CEO of Toyota saying, “I take full responsibility for that” (their safety issues):
You’d think, wouldn’t you, that they’re anxious to avoid having to do something like this:
This shame culture does have certain consequences, of course. A Westerner who runs a blog about doing business in Japan says this:
My very first job in Japan, and this was a long time ago, was at Fujitsu, and the section chief, Taniguchi-bucho explained promotions and failure in corporate Japan this way.
“In both America and Japan promotions are based on the point system. Whoever has the most points get promoted. The big difference, however, is that in America you start at zero, and points are awarded for your successes, but in Japan, you start at zero, and points are subtracted for your failures. In Japan zero is the highest possible score.”
So, in America, you succeed by succeeding, but in Japan, you succeed by not failing. This caused me endless frustration early in my career. Like most founders, I’m an optimistic, proactive, get-things-done kind of person.
But there I was sitting in meeting after meeting where everyone in the room would take turns eagerly, confidently pointing out risks or potential problems with the plan, but no one offering a single constructive suggestion.
I eventually figured out, that this was simply how management worked in Japan.
It is the junior staffer’s job to do the research and come up with the plans, and management’s job to de-risk those plans and to approve them. Unless a manager is among colleagues he really trusts, it would foolish for him to suggest a new innovative solution in an open meeting. It’s not his job, and he’d be opening himself up to blame if things failed. Pointing out risks, on the other hand, is seen as helping prevent failure. It’s a sign of competence and teamwork.
Stigma as “Skin”
This podcast (which, oddly enough, explains how to speak “Business English” for non-native-English speakers) talks about German attitudes towards failure. It has a “stigma” about it. German investors shy away from anyone who has failed before.
This page explains that failure is frowned upon in Germany and in many countries of the world. I don’t think any have the elaborate rituals of public apology and abasement that Japan has, but in most of these countries, fear of lasting stigma is very much your Skin in the Game.
Money as “Skin”
And then we come to America, where failing at something is almost a good thing. “Hey, you’ve now learned what doesn’t work. Now use that and do something that does!”
The problem is that it’s gone too far. Some of these people (the ones who didn’t end up in prison at least) really should be stigmatized and never work again, except maybe for selling timeshares in Florida.
Suppose a Board of Directors said to a CEO candidate: “Tell us your net worth. We will be checking that figure, by the way. Write a check to the company for half of that, and we’ll give you stock, and throw in a bunch extra as a signing bonus. Besides that, you’ll get a salary equal to fifty times that of the lowest paid worker here. If you’re fired, there is no golden parachute.”
Would any of our three poster children CEOs have taken that deal? Obviously not, but maybe that would have been a good thing. Maybe they’d have ended up with some person with no charisma whatsoever, but who knew the business cold.