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FT editor Roula Khalaf selects her favorite stories in this weekly newsletter.
In more than half of the world’s democracies, voters choose directly their heads of state. How lucky they are. Those of us who live in countries like the UK, which goes to the polls in July, cannot choose our own leader.
This is the parliamentary system of government. The search for a prime minister is outsourced to elected politicians. After all, they are supposed to represent the interests of voters. It also saves time.
But is this approach suitable for public companies, where elected board members are responsible for hiring a CEO? Investors are never given a list of candidates or asked to vote.
Not even in the United States. This is strange given the country’s shareholder reverence, love of presidential elections, and national-sized companies. The United States has twenty stocks whose earnings would place them among the fifty most important nations in the world by gross domestic product.
Surely investors around the world can object to the election or re-election of directors, which usually includes the CEO. The giant American pension fund Calpers announced this week who intends to vote against all 12 members of ExxonMobil’s board of directors, including the boss.
That seems fine to me. This is no different than a British, Australian or Canadian prime minister ceasing to lead their countries if he loses his seat in an election, regardless of the overall result.
However, both examples are retrospective. For starters, shareholders couldn’t elect the CEO of America’s largest energy company. Voters also had no say when Rishi Sunak became UK Prime Minister.
Companies are some of humanity’s most powerful institutions. They create immense wealth. That is why it is strange that we allow them to avoid democracy when selecting a leader. The worst thing is that they have chosen to adopt a terrible version of the parliamentary system.
At least nations and political parties have rules when it comes to choosing a leader of the legislature. By contrast, even established public companies are all over the place when it comes to finding a CEO.
Boards of directors sometimes elect outsiders who are unknown to both shareholders and employees. Or someone from a completely different industry. Alan Mulally, for example, went from Boeing to Ford. Were investors previously surveyed? No.
Internal appointments are more common but the selection process is no longer open. Talking about his possible successor At JPMorgan, Jamie Dimon said, “There are some really great potential CEOs here.” If that is true, then let them present their case and let the shareholders choose. Looking back on my 30-year career, I assume that if the CEOs I’ve worked with had been voted on, most would not have gotten the job. Justly.
Where do boards of directors go wrong? One mistake is to succumb to pressure from the internal candidate whose business or region is currently making the most money, usually based on luck rather than skill.
This is why heads of investment banking divisions were once routinely promoted to CEOs of the world’s largest lenders. An election campaign plus a routine personality test would have quickly revealed his insufficiency.
Shareholders also know when it doesn’t make sense to lazily move the CFO to the corner office. Chief financial officers accounted for 8 percent of new CEO appointments at S&P 500 companies last year, according to data from Crist Kolder Associates. But preparing accounts is not preparation for reaching the top.
The role of the CEO has never been broader. Like heads of state, they have to be empathetic one moment and ruthless the next. They must be wonderful with clients, politically astute and decisive but accommodating.
Only a plebiscite of various shareholders has any hope of finding the right person. The boards are too small a sample. They could be tasked with making a short list, as they do now. But why not take it a step further and allow anyone to apply?
In one fell swoop you would increase the range of candidates. It would also put downward pressure on CEO pay – a major social and governance issue – as challengers underbid others on compensation.
The arguments against the direct election of CEOs are few. Too difficult a process? Voting systems already exist. What about the issue of concentrated holdings in the hands of a few mega-managers, such as BlackRock and Vanguard? Easy: The underlying owners allow them to vote on their behalf or they must be polled.
There is the problem of stocks with unequal voting rights, especially in popular stocks like Meta or Alphabet. These companies whose founder knows best are as undemocratic as China. But at least a shareholder vote could apply pressure.
Open elections could discourage some outside candidates from running if they are already employed. But isn’t it better to be honest than to sneak out for interviews?
Two final reasons to fear direct elections are the risk of ending up with a CEO or a populist activist. However, if both are good for the share price, who cares? Worse are the boring CEOs who populate most C-suites today. Few add value, but boards of directors are conservative and headhunters know they will never be fired for recommending them.
Shareholders can only do better. They should be given the opportunity to try.