At The Money: What the Best CEOs Actually Do

What are the most important parts of a CEO’s job? How much does the CEO of public companies matter to their stock’s performance? Professor Nitin Nohria was dean of the Harvard Business School (he still teaches there), and is the author of a new book “The CEO: The Role, the Reality, the Responsibility” Each week, “At the Money” discusses an important topic in money management. From portfolio construction to taxes and cutting down on fees, join Barry Ritholtz to learn the best ways to put your money to work. See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

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• 1:54Barry Ritholtz?

  What do CEOs actually do? What are the most important parts of their job? And how much do they matter to their stock's performance? To help us unpack all of this and what it might mean for your portfolio, let's bring in Professor Nitin Noria. He's former dean of the Harvard Business School, where he's still a professor. He's also executive chairman of Thrive Capital, Joshua Kushner's venture firm. His new book is out.

• 2:37Barry Ritholtz?

  It's The CEO Role, Reality, and Responsibility. So let's start basically. I always assumed the most important aspect of a CEO was allocating the firm's capital. Turns out to be a little more complicated than that.

• 2:52Speaker 04

  Certainly allocating capital is one very important aspect of the CEO's job. But beyond that, CEOs are responsible for all of the decisions that companies make. And while they cannot make but a very small number of those decisions, their responsibility is to create the conditions so that the decisions that are being made by everyone in the organization are decisions that they can endorse, feel good about, and move the company forward in a direction that is aligned with the priorities and goals that they have.

• 3:24Barry Ritholtz?

  Yeah, there's a quote from the book that resonated with me. CEOs matter not because they control everything, but because they shape everything that matters. That really seems to sum up a lot of that, doesn't it?

• 3:37Speaker 04

  Yes, and what are the things that are part of that shaping that CEOs can do? Resource allocation is one. Strategy is another. Culture is a deeply important thing. Sometimes CEOs also have to create the processes by which things get executed in firms. And here, CEOs have to create the conditions for execution. What are the standards to which people execute? What happens when performance is missed? How do you go in and intervene? What does green, red, and yellow look like in any organization? So all of these create the architecture on which decisions get made. And that's the real job of the CEO, is to create the architecture of these things that

• 4:21Speaker 04

  surround people and enable them to make good decisions.

• 4:24Barry Ritholtz?

  So as dean of the Harvard Business School, not only do you work with a lot of students, but you also help oversee the workshops that the business school puts on. And there's very specific, I forget what it's called, very specific set of skills that are taught at executive leadership classes that Harvard gives. Some of the data that came out of that was really shocking. So the people who participate in Harvard Business School workshops average about $17 billion in revenue, have about 25 years of executive experience prior to becoming CEOs,

• 5:06Barry Ritholtz?

  and they describe the role as, quote, "the steepest learning curve of my life." Why does prior leadership roles just not prepare people for what the CEO position is like?

• 5:19Speaker 04

  So these workshops that you described are new CEO workshops. We have people come to them in their first year of having been appointed CEO. As you note, they're all CEOs of very large companies. And these are very experienced leaders. You don't become a CEO of a Fortune 500-type company unless you've had plenty of leadership experience before. And yet, to a person, they will describe the job as a surprise, as something that they suddenly have, did not realize all that would entail. Simple things from, "Oh, I used to serve in board meetings, and when I was presenting at board meetings, it's one thing, but now I have this board that I have to manage.

• 6:03Speaker 04

  I used to know how to manage one boss. This crazy group of 10 or 12 people is a very different kind of boss than I was." Every word that I now say gets magnified, amplified, it's put under a microscope in a way that I'd never imagined. I used to be able to speak my mind a little bit freely. I can't do that anymore. I thought when I became CEO, I would finally have access to all the information in the world. Then people realize, actually, information comes to me packaged, presented in a way that everybody has an agenda around. So actually, getting to know the real truth is even harder than I imagined.

• 6:45Speaker 04

  These are just examples of the ways in which people feel surprised by the job. I could give you more. But it's an illustration of why people experience this as a gigantic surprise. You know, you suddenly have every constituency in the world wants a little bit of your time, and you only have so much time to give anyone because, as a CEO, that's your scariest resource. So this is why I think people, despite being tremendously seasoned leaders, experience the CEO's job as a surprise and one of their steepest learning curves.

• 7:21Barry Ritholtz?

  So here's a data point I was genuinely surprised at. Individual CEOs account for about 15% of their company's performance. You know, almost the same as completely switching industries. I'm curious how that number comes about. And I'm also curious, does that apply for the sort of rare CEOs, the Warren Buffets, the Jamie Diamonds, the Steve Jobs? Can you say the same thing about those CEOs?

• 7:53Speaker 04

  So the data is essentially 20 years of data in which you look at all of company performance. And you can look at it either in terms of total returns to shareholders, return on assets. It's almost indifferent what kinds of measures you use. And if you look at those 20 years and you just do the total variance in performance and you say, what accounts for it? It turns out that, you know, every year in which we have interest rate movements, macro shocks, and things like that affect all these companies uniformly, that accounts for about 5% of performance variation over actually a 20-year period. Then you say, the industry in which a company is, how important is that? And that accounts for about 15% of the variance over a 20-year period.

• 8:37Speaker 04

  Then you see, you know, companies themselves have unique assets and unique positions. And so, as Warren Buffett used to say, you buy a great company, and that great company can endure for long periods of time. It turns out that the, or if you end up with a very bad company, even a great CEO can't save it. So the company itself accounts for about 25% of the performance. And after you control all of that, there's about three CEOs on average over a 20-year period in these companies. They account for 15% of the performance, for better or worse. So it's not the case that these are only for better. And that's a pretty large number, right? It means that any board that's appointing a new CEO is making a decision that could be as significant as changing the industry in which the CEO operates.

• 9:22Speaker 04

  Now, there'll be great CEOs, like Jamie, like as you said, people who last 20 years, have astonishing track records. They're part of the data. So they represent the upside of this. But there's also CEOs who get fired in three years, who do very poorly, who end up not doing very well. Messy CEOs, who don't do much one way or the other, but that's part of the equation, too.

• 9:44Barry Ritholtz?

  Really, really interesting. Here's a quote I really appreciated and enjoyed. "The job is not to make all of the decisions, but to create the conditions for others to decide well." Unpack that. That's really a fascinating observation.

• 10:06Speaker 04

  When you sit in a meeting as a CEO, all eyes are on you. People will say, what are the things that the CEO is really paying attention to? Did they just care about the quarterly results? Did they care about how the quarterly results were achieved? If I'm a person who delivers the results, but I act like a jerk, is that okay? If I'm a saint who ends up exemplifying all the values of the organization, but actually don't deliver results, do I still get a pass because I happen to be a culture carrier? I think how CEOs respond to all of these things is what sets the context for how decisions get made and how others read.

• 10:51Speaker 04

  What decisions will be important? When the CEO intervenes, when they ask 10 questions versus when they end up having a very lighthearted conversation and it looks like, ah, you know, we know that the decision's been made in any case. Are decisions made in the full context of the executive team? Or are decisions made in back rooms? These are all choices that CEOs have and it shapes in a profound way both the way decisions are made and the quality of decisions in any company.

• 11:20Barry Ritholtz?

  The book is chock full of just fascinating data points from your experience with the Harvard Business School workshops for new CEOs. Let me share my three favorites and really, these are all the most surprising data points that I read. The first one, maybe this shouldn't be surprising because we all deal with this headache. Meetings account for 72% of a CEO's total work time. That seems astonishing. Three quarters of their week is meetings.

• 11:55Speaker 04

  Yeah, you know, I, in a very small way, I remember when I first became dean, which is not quite a CEO's job, but has characteristics of the CEO job. I often used to joke that these CEO workshops, little did I know, ended up being in some small way preparation for my time as dean. And what you suddenly see is your calendar has meeting upon meeting upon meeting upon meeting. There's one-on-one meetings with your leadership team. There's meetings in which you're reviewing performance. There's meeting with alumni, which is the equivalent of having meetings with customers or with investors. So CEOs have no choice but to get their work done face to face in a series of meetings. And so three quarters of the time is spent in meetings, which is why the choice of meetings that you have, who is in it, how you conduct them.

• 12:41Speaker 04

  Some meetings are very task oriented. Some meetings are about relationship building. This is the CEO's life and they better do their meetings well.

• 12:49Barry Ritholtz?

  Really interesting. This is, here's another one. CEOs spend 36% of their time as CEOs reacting to unfolding events. I guess we shouldn't really be surprised at that, should we?

• 13:03Speaker 04

  Yeah, this one we shouldn't be surprised by, but yet, most people think that the job is, I set an agenda, I proactively do things. So the whole nature of the CEO's job, you know, my colleague, John Carter, from whom I learned everything about teaching leadership, used to say it's about having a vision, aligning people around the vision and then motivating them to get things done, which forgets that the world comes at CEOs in ways that are unpredictable. We had COVID happen. I had during my time as dean, the marathon bombing. I had a student who suddenly died. When these things happen, they don't come announced and you have to pay attention to them. You have to respond to them quickly and they take up very large amounts of your time.

• 13:48Speaker 04

  So it's, in some ways, we should not be surprised by this finding. And yet, when you first share it with people, the reaction is the same as you, Barry, which is, I didn't realize it was such a large amount.

• 13:58Barry Ritholtz?

  My father always used to say, man plans and God laughs. And there's a lot of truth in that.

• 14:04Speaker 04

  I think is a wonderful, your father was wise.

• 14:07Barry Ritholtz?

  Here's the third data point that, again, is stunning, but we shouldn't really be surprised at it. More than 60% of corporate mergers and acquisitions fail to deliver. That's a pretty beefy number, isn't it?

• 14:24Speaker 04

  Yeah, and this is a number that's been a number that hasn't changed for like 30 years. And you would think that, given how commonly this number is known, we would get better. But there are two things that end up happening, I think, in most M&A situations that are, that create the statistic. One is that it's hard to not fall into a bidding war and because you've committed so much to it, the risk is that you overpay, that in the end, there's the winner's curse. You want to win desperately and the winner's curse occurs again and again and again. And the second is that people tend to underestimate all that will take to integrate the merger once it's done. I can't tell you the number of companies that I have been

• 15:06Speaker 04

  in which, five years after the merger, people will still introduce themselves as, I am from the company that was the previous merger. They introduce themselves carrying the identity of the original company as opposed to of the merged company. And that is a tell sign that integration never really occurred.

• 15:25Barry Ritholtz?

  Huh, really, really interesting. There are some quotes from the book that I thought were really telling. This, and you've already talked a little bit about communication and focus, but this one jumped out at me. If the message doesn't travel intact, it doesn't matter how well I said it in the room, it has to keep its shape when I'm no longer there. We don't usually think about, how do we communicate? Not just to express something in the moment, but to make sure that when there's second and third effects, when there's copies of copies, the message, the telephone game doesn't somehow invert the message.

• 16:10Speaker 04

  I think that this is, I did a study once in which I asked the CEOs, what are the five things that you hope everybody in your organization knows? And then with their permission, just like my time study, this I could only do with half a dozen people. I said, can I just randomly send out to 30 people in your organization, randomly chosen, what would they say are the five messages that the CEO most wanted to hear? Most CEOs were gassed by what came back. They were surprised by what people actually believed was not in any way aligned with what they thought they had to say. And this is what led me to this, to this quote, which is, you think that what you're saying is what people hear.

• 16:55Speaker 04

  People hear very, very different things. So the, the goal therefore is, the lessons are simple. Keep it simple, say the same thing, repeat yourself, find compelling stories that cause your message to stick and check. Go out to the front lines. It's stunning to me that one of the most surprising things that I found in the CEO study was how little time CEOs spend with the front lines and with the customers. Because that's where you actually hear the truth. That's where you can tell whether your message is traveling in the ways that you intended. So I would say to every CEO, don't ask your head of communications whether your message traveled. Go out to the front lines and to your customers and then you'll find out how well your message traveled.

• 17:38Barry Ritholtz?

  Michael Lewis once told me, the book you write isn't always the book people read, which is kind of astonishing. But I guess it's the same thing. People hear and perceive through a filter that's different than what perhaps you were putting on the page. But, but since you mentioned how little time CEOs spend with the front lines and with customers, explain what is corner office isolation?

• 18:07Speaker 04

  I think you end up, everybody wants a piece of your time. They loudly clamor for your time and as the old saying goes, the squeaky wheel gets the grease. And it's easier for the assistant and for the CEO in terms of efficiency of their time to have the meetings occur in their own office as opposed to going out on the road. Like if you had to go out and have your meetings, you'd have to build in the travel time for every meeting and it's just more efficient to do. So from a standpoint of efficiency, who asks for your time? CEOs have a real risk of being isolated. It takes real discipline to go out and carve out the time

• 18:48Speaker 04

  to visit plants, to visit stores, to go out to the front lines, to meet customers in a setting that hasn't already been orchestrated, where you're only meeting the best customers who've already been prepared by your team. That takes real effort and I think the best CEOs do that.

• 19:04Barry Ritholtz?

  You know, I have heard stories from, from various executives and, and fund managers and others about CEOs who, when they first get the job, do a six-month listening tour. They travel to different plants, they speak to customers, they speak to mid-management, they speak to front lines people. It seems incredibly time-consuming. Is that sort of approach really worth it to get them out from, from their bubbles?

• 19:35Speaker 04

  Everyone should do that and actually, my experience is that most CEOs do do that in the first six months. But their job is much longer than six months. The question is, are you continuing to do that periodically? You don't have to do it with the same intensity. But I think the best CEOs recognize that the world is constantly changing and just because I had a pulse of the organization when I first became CEO, I can't lose that pulse of the organization. And so I need to have that as a habit, which I continue to find ways of doing throughout my time as a CEO.

• 20:09Barry Ritholtz?

  So again, very related to the concept of communication, I want to wrap up with this quote. When you tell the truth in bad times, people believe you in good times. How important is that sort of credibility and legitimacy for a CEO to successfully perform their task?

• 20:31Speaker 04

  So one of my favorite examples, also because he happened to be a student in my, in the first class I ever taught at Harvard Business School, is Larry Kulp.

• 20:43Speaker 04

  I remember when he became CEO of GE and everybody thought that the company was on its way to bankruptcy. And his capacity to both tell the truth of what was wrong at GE, but also to create hope at the same time. And I think this is the magic of great CEOs, which is they don't deny the truth. They have people confront the reality, but then they also give them the confidence that this is not a reality that you should be afraid of. This is a reality that we created, and it's a reality that we can fix. And I'm here to work alongside you to fix it. And I think that that's what great CEOs do, which is they always confront the organization with the reality. By the way, my experience is that in most people in the organization already understand that reality.

• 21:28Speaker 04

  Nobody has just shown them the mirror in a way that they should see it. And I think good CEOs know how to do that, but then they also don't leave you feeling afraid of the reality. They find a way to giving you confidence about what lies on the other side.

• 21:42Barry Ritholtz?

  Really interesting. Professor Nitin, Maria, author of the new book, The CEO, The Role, Reality, and Responsibility. Thank you so much, Professor. I'm Barry Ritholtz. You're listening to Bloomberg's At the Money.

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