Welcome. Welcome to Authors and Innovators. I am delighted to welcome Nitin Nohria to celebrate our 10th annual Authors and Innovators, and I hope you can not only watch our great conversation, but also join us on October 22. I have a bunch of terrific books behind us, and I can't think of a better book to celebrate this terrific occasion with. So, without any further ado, I am delighted to kick off Authors and Innovators with this wonderful book.
Our guest is Nitin Nohria, who needs no introduction. Professor, former Dean at Harvard Business School, and now chair of Thrive Capital, which has been busy as of late, as well. The book is The CEO: The Role, The Reality, The Responsibility. I read this in one sitting, and covered it with a lot more Post-it notes than I have on here now. It is a terrific distillation of three decades of the new CEO workshops at HBS.
Those are workshops, I think, twice annually, 12 or 15 newly appointed CEOs of billion-dollar companies. And those, of course, are... I think what really struck me was these are intensive workshops where people think about, talk about implementation, operations, strategy, and of course, succession planning. So, Nitin, welcome. I am glad to have you aboard. It strikes me that one of the most important messages from the book was that CEOs matter not because they control everything, but because they shape everything that matters.
First, thank you so much for having me on your show. It's really wonderful. You know, I literally finished one of these CEO workshops last week, and I had a new CEO say to me, you know, I finally realized that I cannot outwork this job. There's just so much to do that it's almost impossible for a CEO to be involved in every decision, even decisions of significance. So, they have to in the end recognize that the nature of this job is not to be the person who's the doer, but to recognize that everybody else in the organization is the one who gets the work done.
And your job is to create the conditions that enable them to do the work in a manner that makes you feel happy, that makes you feel that they understand the priorities of the organization, that they're aligned, that if you were in the room and were making the decision, you would have made the same decision. So, to the extent that you can create an organization where you have the confidence the decisions are being made in the best interest of the organization, and knowing that there's expertise in the organization that you can never even have. In fact, in some ways to enable others to make decisions that reflect the collective intelligence of the organization better than the intelligence that you might even have. It's a humbling recognition for people who are used to doing things themselves, but I think that's the most important realization that people have when they get into this role.
And what strikes me is that that mindset has to shift. As you indicate in the book, so many folks who are in these workshops have worked very hard as operators, as strategists within their organization to get this job. So, now they've caught the bus. And your advice to them is understand that the CEO matters, but in a different proportion than you might expect. I think you talked a little bit about some work you've done with Noam Wasserman about how much of an impact a CEO has actually on an organization.
So, there was a very famous thing where in baseball season, coming to the end of the playoffs, and someone said, you know, 'Baseball managers get fired not because managers matter, but because they're scapegoats. The fans need to know that some action was done.' This study led to a long time speculation about do leaders actually matter? Or is it the case that, you know, the company or the industry in which they are matter a lot more. So, when I started to do work on the CEO, I said, 'Let me actually empirically study this.' So, Noam Wasserman, Bharat Anand, and I ended up doing a study of 20 years of a company's performance. These are all publicly traded companies in the US economy. There's a survivor bias. So, if a company has to be in our data set, a company had to be around for 20 years.
So, in 20 years, companies have on average three CEOs. So, you can actually understand how much CEOs matter over this period of time. And what we found is that, you know, there's things that affect all companies in an economy. Interest rates today, for example, go up. So, there are yearly effects. So, if you look at how much this performance varies by year by year effects over 20 years, surprisingly, it only accounts for about 5%.
Then there are companies that are in an industry. And you know, if you're in cement versus pharmaceuticals, that might account for about 15% of performance over a 20-year period of time, which is some industries are just better. You know, the airline industry is a notoriously bad industry in terms of profitability. And the pharmaceutical industry is a great industry in terms of profitability. The third thing that matters is the company itself, which is companies have brands, companies have assets, companies have market position, companies have capabilities. These are quite enduring. They endure beyond any given CEO. Having been dean of our business school for 100 years, I reminded myself that when I became dean, I was the beneficiary of many, many years of the school's history.
And a big organization, 1,500 plus people, billions of dollars.
Yeah. Yeah. So, these things account for about 25% of the variance.
Then, after you control for all of that, you say, 'How much does each CEO matter?' And they matter about 15% of the total variance in performance. Now, at first blush, 15% seems like a small number. But then you have to remind yourself that a board that is appointing a new CEO is making a decision that may have the same significance as asking the company to change its industry. When you just put it in that perspective, which is like saying, 'Oh my god, we're going to switch from cement to pharmaceuticals.' That's the kind of impact that a new CEO might have. By the way, for better or worse, right? So, and we've all experienced it, of course, viscerally and personally with a great coach or someone who's coming as our boss, and the amount of difference they can make in the performance of a single organization in a very quick period of time. And while you might think that the CEO is less capable of having this impact, actually they end up having an equally profound impact on a company.
And you talk about tenure. You were dean at HBS for 10 plus years. And then you talk about, coincidentally, the average tenure for a CEO. Can you talk a bit about that because I found that fascinating as well.
So, it turns out that the most dangerous time for CEOs is the first three years, when they're very much under the spotlight, and while most boards are willing to give CEOs the benefit of doubt for about the first 18 months, then they expect to see some visible signs of results. So, what you see is that when CEOs get fired, they tend to get fired in the first three years. If they survive the first three years, then they usually stay for another six or seven. So, the average tenure of CEOs is about six or seven years, but it's actually a bimodal distribution. You either end up being in the job for less than three years, or you will typically end up being in the job for about 10.
So, the reality. Now, let's talk a bit about the responsibility of the CEO. I was fascinated to learn about the allocation of time. And some 70% of time is spent with internal constituencies, and 3% is spent with customers. Can you comment on that?
So, I think that the job is such a demanding job, and so many people ask for your time, that the temptation is to give the time to the people who ask for it the loudest. Of course, most CEOs recognize that in order to get the work done inside the company, they have to work through others. So, spending time with their own senior leadership team, the next 100 people, doing performance reviews with business units, with functions, is an important part, and that sucks up 70% of their time. Because frontline workers and customers are the least squeaky wheels, sadly, sometimes they get squeezed out of the CEO's calendar.
It was the single thing that when we used to share the data that we collected from CEOs back with them, they would be aghast. Many of them would in fact disbelieve it, and they said, 'It cannot be true that I spend little time with my customers. Go back and check the data.' And we said, 'You know, you gave us the data. There's actually nothing wrong with our data. We can check it again.' And we used to reassure people, and then they would come back, and they said, 'Oh my god, I have to be a lot more disciplined about it.' Because if you don't end up being disciplined about spending time with customers and with frontline employees, that time gets squeezed out by everybody else who's clamoring for your time.
Do you think that's different for companies that aren't billion-dollar companies and maybe founder-led companies? Do you find any variance? And I know you've realized that, I mean, you've done so many seminars, so much teaching. Do you think that varies with the size of the company or do you think it's a consistent challenge?
I think it may vary with the size of the company because early on in a company's history, finding product-market fit, making sure that you can reach your customers is job one for a founder or a CEO. So, these companies are so dependent upon getting the next customer that they cannot take their customers for granted. A large company that's been around for 100 years has customers that have been around for a long period of time. The average company that I studied in our new CEO workshop is about 50 years old. So, you know, they're on their 50th, 60th. So, it's an established company with established, long-standing customers. So, I think in that setting there's a risk that you take customers for granted. But it's not a risk that I would encourage any CEO to take and say, 'Oh, you know, I can't take that risk.' In fact, making sure that you spend more time with your customers is probably one of the single most important things that CEOs need to pay attention to.
Well, and of course the information that you're going to get from your customers is just one component of this. I was fascinated, and part of the reason that I think this book is so valuable is you provide some takeaways at the end of each chapter which are incredibly insightful. But internally, in addition to getting customer feedback, you're going to get internal feedback, perhaps from people who are talking to customers. And you cite examples of wanting to make sure you have a real pipeline. Real pipeline to information. And for the CEO, the CEO often gets sugarcoated information. Which is a challenge. And I'd like you to speak to that because I found that fascinating. People don't always give you the straight scoop.
And one of the things that is the biggest surprise for CEOs is how the information that comes to them is so filtered. You know, as someone said, the organization may be like cornflakes, but information comes to me like frosted flakes. Everything is sugarcoated. And I don't think people do it out of malevolence. People want to bring the CEO good news because it's important for them. They want to present themselves in the best light. If they have a problem, they often think it's their responsibility to fix the problem before they bring it to the CEO. So, there's a tendency to delay bringing bad news, not again out of bad intent, but out of this view that maybe I can fix it so that I can come back to you with it first.
And so, there's a real risk in CEOs that information bends around them and it doesn't come to them in an unfiltered, truthful manner. It comes in packaged, presented form. I think this is one of the most important things that CEOs need to fix. So, Larry Culp, who's a dear friend and was a student in my first class at Harvard Business School. When he took over GE, he wanted to make sure that he spent time in the factory plants, not just in corporate headquarters, because his feeling was that to learn the truth, you have to get far away from the place where people come to you. You have to go to the people.
And the farther you are from headquarters, the more you are in informal settings, the more you're speaking to people more junior in the organization, closer to the front lines, actually customers, and not customers who your sales team has pre-wired to come talk to you. But, you know, go out and a retail executive said to me that I would just walk the stores and I would walk the stores without even letting the manager know that I was there and the conversations I would have with the store clerks and with the customers in the store told me more about the business in 15 minutes than all of the information that I got presented to me at the top. So, this discipline of making sure that you stay connected to the best information in the organization, which lives as far away from your own office as you might imagine, is one of the disciplines that good CEOs have.
