Animal Spirits: Udayan Mukherjee on what makes a good CEO

We are a country blessed with world-class CEOs—a fact that finds growing recognition globally, with more and more Indian managers reaching the summit of leading international corporations. While this is to be celebrated, it is also worth asking why many CEOs fail. What are the fundamental traits that enable only some to shine? Equally, what are the red flags that investors, employees and boards need to watch out for in their chief executives? This is crucial, for the basics—intelligence, diligence, patience, sharpness, team skills—are a given, even hygiene for anyone making it to the echelons of top management in today’s competitive environment. Yet, there are softer skill sets which often end up distinguishing the good from the great. Here is my checklist, culled from interactions with hundreds of CEOs over the last two decades.

Integrity tops the list, and this is by no means a given. Far from it, actually. A manager can be supremely competent and possess every skill in the book to lead a corporation, but without a robust value system, he is almost certain to stumble somewhere along the way. Nothing epitomises this more than the recent example of YES Bank. From my very first meeting with the now beleaguered CEO, I had the distinct feeling that something was not quite right. I remember watching in wonder when the bank’s share price kept climbing higher and higher, even inviting comparison with the HDFC and Kotak banks of the world, but could never bring myself to shed that nagging suspicion that the spell would unravel. One would hear whispers, but dismiss those as salacious gossip. Finally, it was this lack of integrity and a core value system that led to the undoing of the bank, and its CEO. As was inevitable. While evaluating a CEO, even the slightest hint that the person can be flexible with his moral compass should immediately ring warning bells for all stakeholders. Some groups, like the Tatas, have in-built checks and balances to ensure that dodgy managers never make it to the top, but not all corporations have such ethical scaffolding.

Somewhat linked to this, though not quite the same, is a sense of hubris that often creeps in with powerful CEOs. All the admiration and adulation goes to their heads, and they begin to feel that they can get away with anything. This air of invincibility is usually the prelude to a disaster. Just look at Chanda Kochhar. Or Rajat Gupta. How could people of their calibre make those mistakes, were it not for sheer hubris? CEOs, who possess the quality of introspection, would do well to be ever watchful of signs of incipient hubris, as do boards monitoring their progress. Humility is almost a precondition for enduring success, in practically any field.

I have always found a CEO’s relationship with the company’s share price most revealing. A CEO who says he doesn’t care about his stock is being facetious, and one who keeps too close an eye on it is susceptible to strategic errors. The sweet spot is somewhere in the middle—not too little or too much, just enough. Though not fashionable to say it these days, delivering shareholder value ought to be one of the most important objectives of any chief executive. Therefore, an assessment of the share price over a reasonable time frame—usually three to five years—during a CEO’s tenure is a good yardstick of performance. When stocks underperform, CEOs often point to extraneous factors such as market conditions, but the fault usually lies within. At the same time, the market’s demanding treadmill can exert enormous pressure on managements to deliver the goods on a quarterly basis and CEOs over-sensitive to share fluctuations can easily end up sacrificing strategic long-term decisions that interfere with short-term profitability. This can be suicidal in the long run. The perfect CEO is the one who seeks to deliver shareholder returns over the medium term without getting too hassled by short-term volatility or underperformance. Easier said than done, and thus to be kept on the watchlist.

Should a good CEO be ambitious or conservative? Again, so easy to err on either side. I have seen so many, driven by sheer ambition, ruin their corporations through aggressive acquisitions, reckless expansion and overreaching forays into new business lines. And these days, the young turks of digital unicorns do this even more effortlessly, since they are burning money that has not been earned the hard way but by dipping into the wallets of private equity funds. Without ambition there can be no growth but there is a fine line between ambition and recklessness. The ongoing saga of one big business empire offers many lessons.

Yet, the opposite can be dangerous too. An over-conservative CEO may be as big a problem for a company’s shareholders. No corporation can grow and succeed without a certain level of risk-taking. There are many CEOs, particularly ones whose rewards are not linked in some way to stock price performance, who shy away from taking risks. Not much upside if they succeed, but plenty of downside if they fail to pull it off, they reckon. It falls on the board to stimulate the right level of risk-taking capability in the chief executive. This is also one of the reasons why CFOs don’t usually make good CEOs. Traditionally too, it is the Lala who is always the engine, or accelerator, that propels an enterprise forward; the Munshi is the lubricant, at best the brake. Necessary, but never sufficient. It is an important distinction.

Finally, if there is one thing which triggers my alarm system, it is a flashy chief executive. The ones who adorn Bollywood parties and are seen often in IPL’s VIP stands, rubbing shoulders with celebrities. Nothing wrong per se in it, as CEOs too are human beings and entitled to a good time. Yet, from Anil Ambani to Rana Kapoor, this has usually been a fairly good indicator of trouble ahead. And so, I have great respect for it. CEOs, particularly of large corporations, will always enjoy a lot of media attention, but when they start acting as celebrities, stakeholders should become wary.

The general belief is that organisations matter, individuals don’t. I have never been a big fan of this line of thinking. Long-serving CEOs leave an indelible impression on their corporations. They shape, guide, mould, know when to leap, when to pounce and when to hunker down. When all these qualities come together, you get a CEO who goes on to create great wealth for shareholders and is remembered well after her time. One hopes that we will produce many more of them, so that while China can brag about being the factory to the world, we can proudly call ourselves the CEO factory to the world.