Ask Zompist: Replacing CEOs

In your blog you mentioned that “the CEO system for running corporations is a dangerous anachronism.” I was wondering what you would replace it with – in your perfect world, what system would you design for building and running a global business and ensuring its continuity from one generation to the next? What other cultural or economic changes would go along with the new system if it were implemented throughout society? (E.g. would there still be brand-name identification of consumer products?)



Not the ideal

Great question; I’m not sure I have a great answer. But that’s because we need a whole lot more experimentation. Anti-monarchists couldn’t necessarily describe parliamentary democracy in 1700, either.

First, let’s review the problem. In that post, I pointed out Trump as the epitome of the terrible CEO. He’s a lazy, incurious person who’s used to unquestioning obedience for his terrible ideas, and takes every reverse personally. But he’s not much of an outlier. I’ve met plenty of much smaller-level CEOs, who have the same arrogance and inability to understand their own business. The good CEOs I’ve met are generally the ones who know when to get out of the way of their own workers— the people who actually know the work and know what needs to get done.

Many people are in love with the idea of the strong leader of uncompromising vision. We’re not so enamored of the Louis XIV or the Napoléon these days, but Americans, at least, still admire the entrepreneur who builds up a company from nothing: Bill Gates, Steve Jobs, Henry Ford, J.P. Morgan, John D. Rockefeller.

I don’t necessarily want to touch that.  On the whole, society benefits when these people build something new.  They should obey labor laws and such, but we don’t need to throw out this part of the system. What we should throw out is the notion that their heirs, or some guy with an MBA, deserve the same deference. If you worship wealth and never address inequality, as Piketty demonstrates, what you get very soon is an aristocracy of rentiers, people who never created anything yet sit on all the accumulated wealth, and whose primary incentive is the maintenance of their own comfort.

So, how do we run a company instead? Two basic approaches:

  • Put someone in charge temporarily
  • Put a representative committee in charge

For now, this comes down to your view of human nature. If you think there needs to be a strong leader (even if his power is limited or we can get rid of him), then you pick Option A. If you distrust all single sources of power, you pick Option B.

Perhaps ironically, in theory option B is what we have now, once the founder is dead. Public corporations have a board of directors, and even rules that a good number of these must come from outside the company; and they pick the CEO. In the US, the board represents the stockholders (i.e. the owners), and it is very possible for them to throw out the CEO.

There are two problems with this.

  • One, boards are in practice not very independent-minded. They’re often friends of the executives and only meet for a brief period every few months.  They’re not deeply involved in the business nor inclined to second-guess the CEO.
  • And two, what the stockholders want is basically more money right now.  This may be completely opposed to the interests of employees, customers, the community, and even investors who are thinking beyond the next 12 months.

A minimal reform is to require that some of these other stakeholders get representation. In Germany, up to half of the board represents labor, though stockholders usually get the determining vote. The idea could be expanded by giving other stakeholders representation.

There are many interesting experiments in corporate governance today, such as:

  • Valve, the company behind Half-Life and Portal as well as Steam, is famously run on near-anarchic lines. Employees literally pick which product they want to work on— and if a product doesn’t attract workers it doesn’t get made. (One does wonder if this is why they never seem to get to release 3 with any of their products.)
  • The first company I worked for is now employee-owned.  It works out well for them, and they were able to weather the 2008 recession in part because they didn’t have the huge expense of a CEO’s salary.
  • NFL management is said to be a huge swamp… except for the Green Bay Packers,  owned by a huge mass of individual Wisconsinites. They’re competitive with other teams and the team stays in Wisconsin.
  • The Mondragon Corporation, of Spain, is a remarkable co-operative firm which employs over 75,000 people.
  • We actually have plenty of examples of non-monarchical institutions: churches, universities, co-ops, many arts organizations or activist groups.

We need more experimentation to see what works. The answer to a lot of objections is going to be “Maybe. We don’t know. We need to try things out.”

The obvious worry is that discussion and representation take time, or at worst tie the entity up in knots. Democratic politics is not exactly known for calm, civilized consensus. In response to that—

  • Again, monarchs suck. We put up with the inefficiencies of democracy because one-man rule really is worse. But the inefficiencies are definitely there.
  • People get better at democracy when cultural norms evolve to support it. I’ve been in endless, unfocused meetings— people flounder if they don’t know what they’re doing. That isn’t a condemnation of the system; it just means that the transition is tricky. People who are not used to power do not automatically know how to use it.
  • There are better and worse decision-making techniques. A huge, completely open-ended meeting is one of the worst. People are better at reacting to concrete proposals than they are at coming up with them. If a proposal is rejected, it’s better for a small group to take it offline than for a large meeting to attempt to redesign it. The group needs a way to table arguments, so it is not dominated by a few eristic individuals. And so on. Heuristics will develop to smooth the process considerably.

One big caveat: democracy is not a cure-all. I think we’d be happier if we could vote who runs the company, or at least vote the current bums out. But that’s not the same as saying we’d be happy.

On the other hand, looking at modern representative democracy, we have to remember that it’s optimized for the logistics of 1790. I’m sure we could do better. One big problem, for instance, is the bundling of policies. At the federal level, there’s no way to say that you want (say) more health care and less immigration.  You can only pick between the two major bundles that are offered. Maybe we need to vote on policies more than on leaders.

Your question on brands is just part of a much bigger question: the optimum size of corporations.  I’m sure a bunch of readers are eager to tell me that the problem is not how to fix corporations, but how to get rid of them. But leftists have, to my knowledge, only come up with a couple alternatives, and they’re contradictory:

  • Nationalize them. So the organizations become massive.
  • Have workers run enterprises directly.  So the organizations must be tiny.

In general, the first approach makes the problem worse. (Some public goods should be nationalized; but I do not want a government commissar, or even a People’s Soviet, deciding what books can be published or what crops can be grown.) And the second approach is largely untested, and of questionable utility for a planet of 7.5 billion people.

It might be nice if every firm was only the size of a village— 150 to 200 people.  But there is such a thing as economies of scale. Really big firms can grow corn, build computers or airplanes, and make action movies really efficiently.  A world of small firms is also, very likely, a world of high prices for consumers. There’s also the problem of competing standards. These should never be a monopoly, even a government monopoly.  And yet it’s kind of a nightmare if you have a hundred competing standards rather than two or three. And if you’re eager to break up Google, do you also want to break up Mondragon?  (They’re about the same size.)

Plus, there’s the inconvenient fact that large firms are far easier to regulate, and can be far more progressive.  A corporation with 75,000 employees can have a professional HR department, great worker amenities, and a commitment to diversity. They’d also be far easier to democratize.  Smaller firms are often run by the most conservative, cranky old despots.

Ideally we should be able to choose both options. Restaurants, for example: it’s nice to have a one-chef gem of a restaurant.  It can also be convenient to have a known brand where the type and quality of the food are predictable (and prices are cheaper).  In art, it’s great to have quirky one- or two-person projects; also to have behemoths that require hundreds of people working together.

Anyway, the one thing I’m certain about here is that future economics is going to surprise us. The modern corporation emerged only 150 years ago, with the invention of the telegraph.  (Adam Smith thought corporations were of limited utility.)  As late as the 1960s, the ideal of corporate governance was a class of professional, medium-income managers hired by the owners; the cult of rock-star CEOs paid in the megabillions was a (stupid) innovation of the 1980s. Right now things look kind of dystopian, but that doesn’t mean we’re stuck here.