The New Model CEO

5 January 2007 at 4:09 pm 1 comment

| Peter Klein |

The firing of Home Depot’s Robert Nardelli, whose Saban-esque compensation package was a flashpoint of controversy during his six-year tenure as CEO, dominates the front page of Thursday’s WSJ. Alan Murray’s column, “Executive’s Fatal Flaw: Failing to Understand New Demands on CEOs,” neatly summarizes the New Corporate Governance:

What Mr. Nardelli missed . . . is that in the post-Enron world, CEOs have been forced to respond to a widening array of shareholder advocates, hedge funds, private-equity deal makers, legislators, regulators, attorneys general, nongovernmental organizations and countless others who want a say in how public companies manage their affairs. Today’s CEO, in effect, has to play the role of a politician, answering to varied constituents. And it’s in that role that Mr. Nardelli failed most spectacularly.

Here’s the problem: Do we really want CEOs to be politicians? If we accept Hayek’s argument that in the political marketplace, the worst get on top, what kind of leader becomes our New Model CEO?

In Bureacracy(1944), Mises wrote about business conditions in the corrupt, statist economies of Eastern and Southern Europe:

Under this system the government has unlimited power to ruin every enterprise or to lavish favors upon it. The success or failure of every business depends entirely upon the free discretion of those in office. . . .

In such an environment the entrepreneur must resort to two means: diplomacy and bribery. He must use these methods not only with regard to the ruling party, but no less with regard to the outlawed and persecuted opposition groups which one day may seize the reins. It is a dangerous kind of double-dealing; only men devoid of fear and inhibitions can last in this rotten milieu.

Of course, answering to institutional investors and shareholder groups isn’t the same as answering to corrupt bureaucrats. But answering to some of today’s regulators, and particularly attorneys-general, seems little different. 

Entry filed under: - Klein -, Business/Economic History, Classical Liberalism, Institutions, Theory of the Firm.

Agency Costs in Corporations We Got Street Cred

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