Peter Drucker on CEOs

Peter Drucker's intellectual production is amazing by any standard. He is a gifted observer of organizations and one of the most prolific writer on management. In a recent issue of the Wall Street Journal (Download Drucker_on_CEOs.pdf), he embraces the task of "Defining the Duties of the American CEO." Tough task indeed as the acronym these days can not only stand for "Chief Executive Officer" but also for "Chief Everything Officer", "Chief Enabling Officer" or "Chief Everything Oracle" etc...

Drucker proposes a definition of the CEO: "The CEO is the link between the Inside, i.e., "the organization", and the Outside -- society, the economy, technology, markets, customers, the media, public opinion." He then procceeds to explain what he means by Inside and Outside. "Inside, there are only costs. Results are only on the Outside." Somehow, and other things being equal, a very Coasian view of the world.

Drucker assigns the CEO the first task of defining the Meaningful Outside, which, he admits, is not an easy one. My pinch of salt here is that Drucker seems to take the set of Outsides as a given among which the CEO has to choose. Nothing in my view is less sure. Indeed, as University of Chicago Luigi Zingales has it, "the boundaries of the firm are in constant flux" (see in_search.pdf ). The economic definition of the firm differs more and more from its legal counterpart. This observation has given rise to a whole literature dealing with the firm as a nexus of contracts, implicit contracts (think of suppliers...) and corporate governance. Even the answer to the "what business are we in?" question is not enough. It is a good start but it does not tell you much about the boundaries of the firm. Drucker's view on the Inside/Outside delineation seems to be very much predicatd on what IMF Raghuram G. Rajan and Luigi Zingales call the "old corporate framework":

• Rigidity: The firm was rigidly defined by the legal ownership of a large set o unique assets,
• Heavy outside ownership: The firm has to rely on outside investors to finance sizeable assets and to bear risks,
• Top-Down Management: Concentration of power at the top and legal claims over assets are the most important source of power.

But, the good old days (were they really?) are over. Now, with the paramount importance of human capital (high mobility) and the financial revolution (easier access to financial means), power has shifted away from the top of the organization. It is thus rather strange that Drucker makes the implicit assumption that the top (CEO) is still the top. Interestingly enough, he does not even mention the board of directors and the role it should or should not play along with the CEO.

The second CEO task according to Drucker is deciding about which information regarding the Outside to gather. Information is a pet topic of Drucker and no wonder it rates high on his CEO priority list. But again, it begs the question of an Outside that is not fixed or given but constantly shifting.

Once these first two tasks are fulfilled, Drucker goes on with a laundry list of tasks:

• The CEO has to decide what results are meaningful for the institution (he says institutions because he tries to encompass both businesses and non-businesses). Let's assume that Drucker is right and the CEO knows how to do it and does it. The challenge is then a direct consequence of Goodhart's law, which we adapt for the circumstance: "When a meaningful result becomes a target it ceases to be meaningful." Drucker recognizes that the judgment about what is meaningful is a risky one but does not seem to worry about what happens when what is meaningful changes hands (that is when it becomes a contractable metric).
• After meaningful results, Drucker advocates "meaningful information". His view is that, for instance, far too many institutions have a narrow view on who their competitors really are. He suggests to shift from market research to customer research. He gives the example of US executives who did not view what was happening in Japan in the '50s and '60s as meaningful information and, as a result, paid a dear price. Two observations are in order here. First, Drucker seems to suggest that a meaningful information is, among other things, an indication of skill that the CEO should be inspired by. But, how can one be sure that this is skill and not luck that the so-called meaningful information is conveying? Would you then agree having the CEO betting the house on an info that is purely luck-driven? Second, was is that bad after all for the US, from a macroeconomics standpoint, having Japan investing heavily in Uncle Sam's securities?
• The CEO has to decide priorities: This is the usual optimization under constraints story. Drucker says that the CEO's most difficult job is to say "No". But again this implies a very static view of the world. Who said constraints are a given and cannot be converted into opportunities. In that respect, Drucker is very Marshallian. He views the CEO as an optimizer as opposed to Brian Arthur's strong sense of adaptation emphasis. I would venture that saying no is indeed difficult bu what about "getting to yes"?
• The CEO places people into key positions: Drucker is right in saying that the issue is not about hiring extraordinary people (who can with a minimum sense of decency and humility pretend to be one?) but having common people perform uncommon things. People are everything but, frankly, I doubt that the CEO is the one to trust on who should do what. Somehow if for whatever reason the magic is there the best thing the CEO can do is... nothing.

Drucker concludes that the CEO is an American invention. He says that you don't find him or her elsewhere (read UK, France, Germany, Japan etc..) even though he admits the American CEO is fast becoming a major US export. I am not sure I want to buy this conclusion either. Is this the explanation as to why US CEOs are far better paid than their Japanese or European counterparts? Anyhow, that a subtle thinker as Drucker is willing to advocate a "CEO model" to be applied everywhere is a surprise to me.

Comments

[Diego Cruz]

The info it is very useful for my job.

Thanks