Reason 1: Corporate America’s Obsession with Experience#

You know about companies demanding 3 years experience for an entry-level job or 10 years experience coding in a language that has only existed for 5 years. But experience is an important metric to gauge someone’s ability to perform their job effectively. If you have been working as a welder for 30 years, you are probably going to weld faster and cleaner than any apprentice with a few months on the job.

The same goes for everybody all the way up the corporate chain, but not by as much. The only way to gain experience as a welder is to be a welder. Likewise, the only way to gain experience as a CEO is to be a CEO, but nobody is giving out those jobs easily.

A report by the Harvard Business Review surveyed C-suite executives and hiring boards and found that their individual technical skills have become a lot less important than business acumen and soft leadership skills. These are not skills that normal people can acquire by climbing the corporate ladder the old-fashioned way. This is why more C-suite executives in Fortune 500 companies than ever came from backgrounds like Private Equity, Investment Banking, or Corporate Consulting.

A survey by the workplace intelligence company On Deck compiled a list of CEOs of America’s largest companies and found that most of them worked for management consulting firms before becoming CEOs, and very few worked their way up within a firm.

• 7.1% of CEOs in the report had worked at McKinsey & Company before securing a position as a CEO in another company.
• Bain, BCG, Kearney, and Oliver Wyman (all management consulting firms) took second, third, fourth, and fifth place.

When CEOs are being selected from such a small pool of people that all know each other, then even if they mess up royally, they are still placed above most other candidates.

It doesn’t make it any better when one of the most common tasks that management consulting firms get hired to consult on is who should be a new CEO. A team of McKinsey consultants picking an ex-McKinsey consultant to be the CEO of a company that hires McKinsey consultants happens all the time.

This would be okay if these McKinsey clones made for the best CEOs. After all, a job should go to the most qualified candidate. But a study conducted by the Harvard Business Review found the opposite. The research looked at three metrics to rank the performance of CEOs:

• Total industry adjusted shareholder returns produced.
• Total country adjusted shareholder returns.
• Total increase in market capitalization.

The best CEOs were typically those from an engineering background with real skills in the field that the company operated in.

Experience in general is overvalued by companies because a lot of valuable workplace skills haven’t been around long enough for experience to matter, which is why you have probably had to help your boss export a document as a PDF at least once in your career. But hiring a CEO is one of the biggest decisions a company will make. New CEO announcements have moved stock values up or down by double digits. So investors and the boards that represent them sometimes pick the safest option over the best option.

And that’s just the first reason why lousy performers with experience get opportunities that untested experts do not.

Reason 2: Negotiating Power, Golden Parachutes, and Signalling Change#

If you make an honest mistake in your job, a good workplace shouldn’t fire you immediately, especially if you have a track record of being a good employee. Sometimes this doesn’t happen, and regular people are fired for stupid reasons. But it happens even more at the very top of the corporate totem pole.

The turnover rate for Fortune 500 CEOs is about 10% every year, according to Fortune magazine. That number is on the rise, with a 12.2% turnover rate in 2023, according to the Harvard Business Review. The number one reason why CEOs leave their position is because they get fired, with over 70% of surveyed CEOs stepping down from the top job because they were told to by their board of directors. The same study found that the average tenure of a Fortune 500 CEO was less than 5 years. So there is clearly a lot less room for these men and women to make any mistakes.

Now, they are paid a lot of money, so their performance expectations should be higher than a regular employee. But another reason this happens so often is by design. The role of senior managers in a company is to set the overall direction and priorities of a company.

• Adam Newman of WeWork clearly wanted his company to prioritize attracting young, alternative businesses that didn’t ask silly questions like, “How is this going to make money?”
• Dennis Mullenberg of Boeing was famous amongst staff and investors for being the CEO that got projects off the drawing board and into the sky.

When the strategies of these CEOs were not met with consequences, one of the clearest ways to signal to investors that a company is going to do things differently is to get rid of the person who is responsible for overseeing the way things are done: the CEO.

The CEO of Boeing was not directly responsible for programming the fly-by-wire system of the 737 Max, and if the issue had been caught in testing, he could still be the CEO of Boeing today. But he was a clear figurehead that the board could use to signal a turnaround to the market.

CEOs at this level know that they will eventually be blamed for a scandal that they didn’t have direct control over, and they also know that their reputation can be worth a lot to investors. So they can negotiate very hard.

If you are a senior executive and you have been offered the position of a CEO at two different companies, offering a base salary of $1 million** and an options package of up to **$5 million, which one would you pick? One job is at a safe, stable company, and the other is with a new company with a thin balance sheet in a risky business. You should pick the safe company because you are more likely to keep your job for long enough to make that bag.

This creates an incentive for the most talented CEOs to only work in the safest companies, even though their skills would be better applied to the riskier companies that need effective leadership the most. So if that risky company really needs you as their CEO, you can pre-negotiate an exit package before you agree to work for them. If you negotiate a $20 million** exit package and you raise the company's market cap by **$200 million, then that’s a good deal for shareholders, and at the end of the day, it is their company.

A golden parachute also protects CEOs in case their company gets acquired. If one company buys another company, then they won’t need two CEOs. If a CEO is going to lose their job if an acquisition goes through, they would naturally resist it, which could result in investors missing out on a lucrative deal.

If the CEO of Twitter didn’t have a golden parachute, he could have made it really hard for Elon Musk to purchase the company so he could keep his own job. Instead, he made it really hard for Musk not to purchase Twitter because he was in line for a $42 million** payday. **Musk** reportedly overpaid for **Twitter** by around **$19 billion, so the exit package for the CEO that was doing a pretty bad job of running the company was still money well spent by the shareholders.

With so much security, this creates a bit of selection bias amongst disgraced former CEOs. Apart from the ones that end up in jail for criminal conspiracy or fraud, most of them have enough financial security to be very picky with their next job. If they don’t get an amazing opportunity that looks like an upwards failure, it doesn’t matter because most of them have enough money that they will never need to work again. So they don’t need to take a job that would be a step down.

Reason 3: The Power of an Incumbent CEO#

If you think CEOs and other C-suite executives have a powerful negotiating position on entering and exiting the top job, then that’s nothing on what they can do whilst they are CEO.

Just last week, Elon Musk stunned investors by demanding that the board of Tesla give him shares worth more than $80 billion if it wants him to develop artificial intelligence within the company. These additional shares in Tesla would bring his total ownership in the company to 25%.

Musk explained his demands in a post on Twitter (or X): “I am uncomfortable growing Tesla to be a leader in AI and Robotics without having roughly 25% control - enough to be influential but not so much that I can’t be overturned.” Musk went on to explain that unless his demands were met, he would prefer to develop AI programs outside of the company, which is something he actually already does with xAI, which is one of the six companies he is the head of.

Musk’s demands put Tesla’s board and shareholders in a difficult position. The New York Times reported on this issue: the company’s stock market valuation of almost $700 billion (more than twice as much as Toyota Motor, the world’s largest automaker by annual car sales) is predicated in part on investors’ belief that the company will lead the rest of the industry in developing cars that can drive from place to place without human intervention. Investors are also betting that advanced automation will allow Tesla to manufacture cars much more efficiently and profitably than rivals.

So, if Musk publicly halts the development of AI in Tesla, the value of the company could tank because it would be the death knell in the coffin of full self-driving and fully automated production.

This gives investors two other options:

1. Option 1: Just Give In. If the Tesla board does award Musk an additional 12% ownership stake in the company, that will dilute every other shareholder in the company by an equal 12%. That sucks for regular investors, but it could also be worse than just a 12% instant loss because future investors will be wary of buying stock in a company that could be diluted the next time the CEO throws a tantrum on Twitter.
2. Option 2: Fire Musk as CEO. This is possible since he is only a minority shareholder in the company. But the value of Tesla is propped up just as much by Musk’s cult of personality as it is by its technology. So, if the board took the nuclear option, shareholders could lose a lot more than 12% of their holdings.

There’s a decent chance that Musk will get what he wants because the power of an incumbent CEO makes them very hard to get rid of unless they are given a nice exit package or a better opportunity in exchange for quietly and amicably giving up their position. Musk has taken this power to the extreme, but even a regular CEO being dismissed instantly sends bad signals to the market.