CEOs are chosen by boards of directors who are said to represent shareholders. How do boards choose CEOs? They typically go with the choice of the incumbent. If the incumbent recommends an insider, the board will settle for an insider. If the incumbent thinks it better to look for an outsider, the board will go with that.
Orderly or systematic succession planning is pretty rare. Boards are not disposed to ask a CEO to lave unless there is serious underperformance or a crisis. Boards do not ask themselves in advance: what sort of leader do we need today? An administrator? Somebody who can deal with the outside world especially regulators and government effectively? A technical wizard? A marketing person? Nor is there a rigorous assessment of insiders versus outsiders in relation to a set of requirements. In other words, boards seldom do what textbooks on management prescribe.
If boards do a shoddy job of selecting CEOs, why not let shareholders decide? That's the interesting question posed in an FT article. The author gives to arguments for doing so. Shareholders would have a wider choice. Opening up the job to more competitoin would help keep CEO pay under control.
The author deals with possible objections:
Too difficult a process? Voting systems already exist. What about the issue of holdings concentrated in the hands of a few mega managers, such as BlackRock and Vanguard? Easy: the underlying owners either allow them to vote on their behalf or they must be polled. There is the problem of shares with unequal voting rights, especially in popular stocks such as Meta or Alphabet. These founder-knows-best-companies are as anti-democratic as China. But at least a shareholder vote might apply pressure. Open elections might discourage some external candidates from coming forward if they are already employed. But isn’t being honest better than sneaking off for interviews?
Having shareholders choose can't be worse than what happens today, so why not give it a shot?
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