How to spot a dysfunctional CEO

CEOs, many think, are crucial to corporate performance. Get the right CEO and you get results. Equally, as Schumpeter points out, the wrong CEO or a CEO gone wrong can wreak havoc on a company. Think World Com, Enron, RBS and Lehman Brothers. Boards spend a lot of time bringing on board somebody who they think can deliver. Somewhere along the line, however, the CEO loses the plot. Can we pick up signs of dysfunction early on? Schumpeter gives some pointers:

An obvious sign of a boss breaking bad is grandiosity. He attributes the company’s success wholly to himself, indulges in endless self-promotion or demands ever more extravagant rewards.... One study shows that chief executives who appear on the covers of business magazines are more likely to make foolish acquisitions. A second sign is over-control. The boss surrounds himself with yes-men and crushes dissent. He tries to control every detail of corporate life rather than building a strong executive team. A third sign is distorted decision-making. The chief conflates personal and corporate assets, is obsessed with buying other companies, or focuses on bizarre details....A chief executive becomes likelier to succumb to these vanities the longer he stays in the job. He gets used to people fawning over him...... A boss may think himself so brilliant he refuses to plan for his eventual departure or undermines possible successors.

Yes, every one of these is an indicator of trouble ahead. Schumpeter quotes a consulting firm as suggesting that boards should monitor "behavioural risk", perhaps, by talking to senior management from time to time. Schumpeter himself suggests introspection and timely self-correction on the part of CEOs themselves.

Alas, neither will work. Boards are incapable of having frank chats with senior management and senior managers incapable of speaking their minds to the board. Megalomania in CEOs and introspection simply won't go together.

So, are we powerless to prevent implosions of companies at the hands of self-destructive CEOs? It seems to me that part of the answer lies in devaluing the post of CEO itself. It is the concentration of power in the hands of the CEO itself that is the root of the problem. I am constantly reminded of Peter Drucker's characterisation of the CEO: not an individual but a team of three. Only the diffusion of power in a company, the democratisation of organisations can provide a health check on the havoc wrong by dysfunctional CEOs.

Is this another impossible solution I am proposing? It's difficult, given the stranglehold of vested interest but not impossible. Boards will not do this on their own. Institutional investors and regulators must push for reform of the post of the CEO itself, ensuring that top management is truly a team and not one person.