The team of Talent Equity Institute compares common ideas about what makes CEO successful with the results of the study of Ward Howell and Harvard Business Review and shares with readers some unexpected findings.
The position of a general director, or CEO, in contemporary global terminology has piqued and continues to pique great interest from a variety of audiences: business school students, journalists, sociologists, psychologists, economists, managers, general directors themselves and shareholders.
At the same time, the relationship with the role and the influence a CEO has on the effectiveness of a company is extremely ambiguous. Several experts challenge the idea that a chief executive influences how a company works, instead reducing his role to one that fulfills a nominal social function. Others consider his contribution decisive, and a third contingent sees him as one of several factors contributing to efficiency, along with the external environment, resource base, and the company’s human capital. Accordingly, most practitioners and researchers agree that in challenging market conditions, a talented leader can save a company, while an ineffective one can run it into the ground, even in the most favorable of conditions.
What do effective CEOs have in common? Does an effective CEO in Russia differ from his colleagues around the world? In the search for answers to these questions we researched Russian general directors and weighed the data we received with the results of research on the 100 most effective CEOs from the S&P 1200 list, published in the November 2014 edition of the Harvard Business Review (HBR) (a full list is provided in the appendix).
We found that there are several widespread reports about what makes CEOs successful that do not square up with the results of both studies. We want to acquaint readers with several unexpected findings and provide general conclusions about the characteristics of CEOs of Russian companies
Myth 1: Effectiveness comes with time.
The facts say the opposite – most effective CEOs are younger. The Russian leaders with the best results are three years younger than the average CEO (42 versus 45), and more than 40% of successful CEOs of Russian companies are under 40. The most effective CEOs, according to the HBR study, come into their positions five years earlier than their less successful colleagues (48 versus 53).
Why are more effective CEOs younger?
One cited explanation is that effective CEOs are more talented, and climb the career ladder more quickly. They receive the required experience in a much shorter time than their less talented colleagues. As concerns Russia, another explanation is that people under 40 don’t have work experience from the Soviet era and, therefore, more quickly mastered working in a market economy and replaced their Soviet-era leaders. There is a third explanation, to which we will return later in our discussion about the model of an effective Russian CEO.
Myth 2: An MBA from a leading business school is necessary for an effective CEO
The percent of effective CEOs with an MBA is actually lower than the average. On HBR’s list of CEOs, about 32% have an MBA (while about 40% of leaders on the S&P 500 list do). Business education is even less popular among Russian leaders: 18% of Russian CEOs have an MBA, while 17% of effective CEOs do, which indicates a lack of correlation between business education and effectiveness.
Myth 3: Hardskills are no longer needed
About a quarter of the most effective CEOs on HBR’s list have a technical education (primarily engineering). According to researchers, the study of engineering develops practical and pragmatic thinking, and teaches one to think about things and processes in terms of their efficiency and cost – which are all skills needed to manage an organization. The percentage of effective CEOs with technical education is higher – around 50%. To some extent, this is related to the popularity of engineering education in Soviet times, though young CEOs have predominantly been educated in finance. Regardless, our interviews with successful leaders confirmed the critical importance of industry knowledge for a chief executive.
Myth 4: The market for leaders has become global
The CEO market has not yet become global – only 15% of HBR’s most effective CEOs were born in a country outside of the one in which their company is headquartered, and slightly less than 20% have experience working abroad.
The Russian market for leaders is sufficiently closed. Foreignborn CEOs in contemporary Russia is rare, and successful foreign-born CEOs are far and away an exception. Just 7% of the most effective CEOs of Russian companies are foreignborn top managers, compared to 9% in the overall sample of general directors. Furthermore, the average tenure of an expat CEO at a Russian company is just 2.1 years, versus the overall CEO tenure average of 3 years.
What is even more counterintuitive is that not one of the most effective Russian general directors had experience working abroad. It seems that a knowledge of the environment and the presence of a local social network is a significantly more important ingredient for success than a global outlook and international experience. Or are Russian leaders just so talented that they can develop the latter without even leaving their homeland?
Myth 5: Effective CEOs can easily change a company and frequently transfer between different functions in the early phases of their careers
The contemporary philosophy of managerial development is based upon a multifunctional rotation – transferring managers from finance to marketing, from operations to auditing, etc. – as a necessary tool for preparing a future CEO, as he must understand the whole organization. However, an analysis of the HBR data shows that the most effective CEOs have made fewer transfers between functional areas. Though moving between functional areas is less popular in Russian companies in the first place, the trend is still the same – effective CEOs make fewer transfers between functional areas.
The situation is similar with regard to changing companies. On average, the most effective CEOs in the HBR study changed companies twice in their careers before becoming the head of their current company. The share of “lifers” – CEOs that have spent their whole career at one company – is 22%, which is slightly higher than the average (18%).
In Russia, where the managerial labor force market is very dynamic, a CEO works in more companies than his colleagues abroad – three, compared with two. However, the most effective Russian CEOs also change companies fewer times (2.2) than the average.
Interviews with successful leaders revealed to us a possible explanation for these trends, at least in Russia. It seems that functional and organizational stability allowed for managers to develop critical, important competencies such as industry knowledge, an understanding of the organizational environment, and the opportunity to develop intra-organizational networks. Longer tenure in one functional area also allows one to deliver better results, which is necessary to progress toward and assume the role of the highest positon. It’s also important to note that the most successful CEOs are younger, and for that reason may not have had as much time to change positions and companies.
Myth 6: A general director should be “battle tested”
In our last study on succession in Russian companies (see TEN #7) we talked about the different kinds of successors in Russian companies – group insiders, or managers that move from one shareholder’s asset to another. As a rule, group insiders preserve the business fairly well, but rarely demonstrate exceptional results. This is probably because it is more important for group insiders to maintain good relationships than to excel in business. Therefore, they try to minimize all possible risks, which limits the company’s potential growth. In HBR’s list of most effective CEOs, very few (4%) are group insiders).
Мyth 7: An effective CEO is firmly rooted in his position
It turns out that for companies in the HBR study, this is true. Effective CEOs hold their positions twice as long as the average – 12 years instead of 6. Accordingly, effective CEOs most often retire as planned, having carefully laid out a transition process and having adequately trained their successor.
For Russia, this is a myth. Successful CEOs do not linger in their positions. In an environment where loyalty is more highly valued than results, there is no apparent correlation between effectiveness and length of tenure. The average length of tenure of a CEO in a Russian company is 3.7 years.
Logically, family members hold their positions the longest, followed by effective group insiders, who have managed to reinforce their loyalty with actual results. It is worth noting that while there is a difference in tenure between internal and external CEOs in the HBR study, no such difference exists in Russian companies.
Myth 8: New CEOs start out with a clean slate upon which they can attain outstanding results
Contemporary corporate folklore casts successful CEOs as visionaries and reformers that have come up with and implemented programs for large scale organizational change. What follows is the widespread belief that these CEOs do not speak of their predecessors and work to leave their mark. The actual picture looks quite different. Most successful CEOs solidly “stand on the shoulders of giants” – their predecessors. In the HBR study, the rapid rise of a company from being an outsider to a leader under one CEO is extremely rare.
The same is true on the Russian market. Only five of 160 companies managed to turn the company into a leader from an outsider under one CEO, before the next came in. In most cases, a CEO that followed a very unsuccessful predecessor managed to achieve average results, from which his successor could make the company a leader.
Myth 9: An effective leader will be effective in any context
One of the most difficult moments in an executive’s career is the transition of the company to a different form of ownership – from private to state, public to family, etc. The most effective model in one context doesn’t work in another, despite the fact that its external attributes remain practically unchanged – the clients, competitors, employees, objectives, budgets. The ownership structure provides a context, often invisible to the naked eye, the specificities of which make old tools ineffective.
In order to examine the differences between the contexts created by different kinds of business ownership and their influence on the factors that determine a CEO’s success, we evaluated effective Russian CEOs from our research according to the following four indicators, using a scale from 1 to 7.
- Work experience in the industry – industry experience helps a CEO more quickly and deeply gain insight into a company’s essence, and also helps him more quickly establish authority and gain the trust of his employees.
- Company knowledge – one advantage insiders have over outsiders is their knowledge of a company’s internal climate and the connections that facilitate access to resources and help implement solutions
- Relationship with the owner – as we mentioned earlier, group insider CEOs who have previous experience working with the owner and have, presumably, earned his trust remain in their positions longer, even amid poor results. In the case of state-owned companies, where the owner is not a physical person, we replaced this indicator with a GR-resource indicator – the ability to build relationships with regulators and other authorities that directly impact the company’s business
- Visibility – this feature describes how a general directoris perceived in the external environment, how he presents himself as the face of the company and a proponent of its objectives, strategy, and values
Figures 5 and 6 provide a visual representation of the differences between effective CEOs in state-owned and private companies. CEOs in private businesses are more balanced between three main indicators: work experience in the industry, company knowledge, and relationship with the owner. 9 of 12 effective CEOs had over eight years of work experience in the industry, 8 had worked in their company for over three years, and only one CEO from the sample was unacquainted with the owner before his appointment. The fourth indicator – the CEOs’ level of visibility – was markedly lower (more than half of the effective CEOs were completely unrecognized by the media, and the remainder very rarely agreed to interviews or made statements in the press).
On the other hand, CEOs of state-owned companies had only two of the indicators, though those were significant – knowledge of GR-resources and visibility. As for company knowledge and work experience in the industry, 6 of 9 effective CEOs of state-owned companies had no previous work experience in the industry and only one had worked in the company for more than two years. Analysis of the least effective CEOs showed that they had work experience in the industry and had worked in the company before their appointment to CEO. Apparently, for CEOs of Russian state-owned companies, there is a negative correlation between a leader’s industry experience/company knowledge and the success of the company.
How can this be explained? Most likely, it is easier for a new CEO who has no socialties within the organization or obligations to influential members to make radical organizational changes, including replacing ineffective managers. To some extent this explanation could be related to a CEO’s lack of industry experience – when lacking a team from the industry, they are freer to choose their own team and can attract the best of the best from the market. This happened in four often cases: a new CEO hired the best professionals in the industry, and two others brought their own proven teams that had no industry experience. Another possible explanation is that external candidates have a high social status and their own extensive social network, which provides them access to additional resources not available to insiders.
Effective CEOs of state-owned companies have significant GR-resources (6 of 9 CEOs previously worked in highlevel federal or regional government positions) and have a notable presence in the public arena. It’s possible that these characteristics serve one purpose – they build trust in the CEO from the owner (the government). The state owner and the representatives working on its behalf are far more removed rom a CEO than shareholders of a private company. Creating an image of effective management in the public sphere can help strengthen trust in a specific CEO from the government and its representatives.
In private companies, where in the best of circumstances an owner is “an arm’s length” away but is frequently extremely close to the business, a CEO that is “in the media limelight” can cause irritation and, consequently, distrust. The most effective CEOs are able to build a productive relationship with the owner because they have learned to achieve results without eclipsing the owner. Accordingly, business owners typically take concerns about the company’s GR and PR needs upon themselves.
Features of CEOs in the Russian business context
Russia is famous for its dichotomies – we, without even noticing, live with conflicting values, easily cross back and forth across the boundary between private and public, ignore laws when we find them inconvenient yet call up on them when needed, allow official orders to fall on deaf ears but carefully execute informal instructions. We have even revealed a certain dichotomy in the CEO position in Russian companies
On the one hand, an appointed general director of a private Russian company has all the powers of a single executive body and presents himself to an outside observer as such. On the other hand, the owner is almost always at his side, assuming no official position in the executive leadership, but playing a significant role in the company’s management. Our research showed that in Russian companies the role of CEO is divided between the ambassador (minister of external relations), who provides a connection with the external world, the necessary political resources, a vision and a goal, and the operator (minister of internal affairs), who focuses on internal management and routinely achieving results. Typically, the first role is fulfilled by the owner, and the second by a professional manager. Only in exceptional circumstances does an appointed manager execute both roles. An important note is that the separation of powers and responsibilities between the ambassador and the operator is almost always informal and frequently unspoken. Furthermore, the boundaries between them are flexible and almost always changing. According to our observations, effective CEOs understand how to work in such a dualistic model and extract from it significant benefits for the company and themselves, while their less effective colleagues rarely reflect on the characteristics of the management model in which they work, and thus make mistakes.
CEOs themselves most often explain the dualistic model with two particularities of the Russian environment: the complexity of the business environment, which requires additional managerial strength and an additional pair of eyes, and the short-sightedness (the unprofessionalism, greed, etc.) of owners. Without question, both of these factors play a role; however, in our opinion, he primary reason lies in the particularities of the Russian economy and society, which are characterized by the weakness of institutions like private property, an independent judiciary, commercial arbitrage, etc. Ineffective institutions are compensated for by relationships. Business owners create and actively make use of relationships with necessary people – government officials, regulators, clients, suppliers, and competitors, in order to ensure favorable conditions for business’s operation, from the signing of contracts to maintaining control over them. Such activity is not only time-consuming, but, most importantly, is based on the owner’s social network – aunique resource, which can not be given to an appointed CEO. As a leading Russian business owner told us, “I would gladly spend my time doing more enjoyable things, but I can’t give my connections to an appointed general director or even to my children – people won’t talk to them the way they talk to me”.
So then why, despite the required involvement in the business, do many owners leave the position of general director instead of hiring a deputy operational director? In our interviews with business owners, two primary, sufficiently pragmatic reasons arose, as well as one romantic one. We’ll start with the latter – many business owners do not fully understand the importance of their network in supporting the business and assume that departing from the CEO position will radically change their lives. The pragmatic reasons are to relieve themselves from legal responsibility for the company and to attract a stronger candidate to the CEO position than wouldbe possible for the deputy position. Interestingly enough, in the Russian environment of weak institutions and strong relationships, business owners are not afraid of losing control of the business when they leave the CEO position, as their informal influence gives them real power in the company.
How does this dualistic model of management influence Russian CEOs and the factors determining their success? Effective CEOs provided several answers.
Firstly, they understand and accept that this model exists, and have no illusions regarding their role and authority in the company. Quite the opposite: they see additional opportunities for themselves and for the company from the owner’s active role. They also understand that the success of the company and the fate of the CEO depends on the effective interaction between the owner and CEO. Building and nurturing these relationships is one of the most influential areas of their everyday work.
Secondly, they are proactive in delineating their own “zones” and the owner’s “zones.” All the best, when this can be done practically by spelling out one and the other’s powers and responsibilities, but owners are often unprepared to articulate these boundaries. Therefore, effective CEOs identify arenas of responsibility through experimentation, observation, and picking up on informal signals. Furthermore, they are prepared for those boundaries to change, and not always in their favor.
Thirdly, effective Russian CEOs are much more deeply involved in their companies than their colleagues from the HBR study and aren’t afraid to “roll up their sleeves and get their hands dirty”. They know their products, technology and employees extremely well, and make both strategic and operational decisions, all while giving managers of other levels enough space to act independently.
Fourthly, successful professional Russian CEOs do not attract media attention to themselves, nor do they intrude upon it, leaving the owner to be the public face of the company.
We also saw signs of a dualistic CEO model in successful stateowned companies. While the role of ambassador, rightly so, is taken on by the CEO, the role of operator is taken on not by a single person, but a several-person management team.
How sustainable is the dualistic CEO model? Several CEOs believe that it will disappear with the first generation of Russian entrepreneurs. However, examples from other countries in which institutional rights are poorly protected show that the active involvement of the owner in supporting the company continues in the second and in subsequent generations.
This introduction was published in the ninth edition of the Talent Equity Newsletter, "Effective CEO".
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