It’s time to let shareholders choose the CEO

In more than half of the world’s democracies, voters directly elect their heads of state. Lucky them. Those of us living in countries such as the UK, which goes to the polls in July, are not allowed to choose our own leader.

Such is the parliamentary system of government. The search for a prime minister is outsourced to the politicians elected. After all, they are supposed to represent voter interests. It saves time, too.

But is this approach right for public companies, where elected board members are responsible for hiring a chief executive? Investors are never given a list of candidates and asked to vote.

Not even in America. This is odd given the country’s shareholder reverence, love of presidential elections and country-sized companies. The US has a score of stocks whose revenues would put them in the top-fifty nations on earth by gross domestic product.

Sure investors everywhere can oppose the election or re-election of directors, of which a CEO is usually one. The giant US pension fund Calpers announced this week that it intends to vote against all 12 board members of ExxonMobil, including the boss.

Fair enough. This is no different to a British, Australian or Canadian prime minister ceasing to lead their countries if they lose their seat in an election — irrespective of the overall result.

Both of these examples are retrospective, however. Shareholders didn’t get to choose the CEO of America’s biggest energy business to begin with. Nor did voters have a say when Rishi Sunak became the UK prime minister.

Companies are some of humanity’s most powerful institutions. They create immense wealth. So it’s odd that we allow them to eschew democracy when selecting a leader. What’s worse is that they have opted to embrace a terrible version of the parliamentary system.

At least nations and political parties have rules when picking a leader from the legislature. In contrast, even established public companies are all over the place when it comes to finding a CEO.

Boards sometimes pick outsiders who are unknown to shareholders and employees alike. Or someone from another industry altogether. Alan Mulally, for example, moved from Boeing to Ford. Were investors polled beforehand? Nope.

Internal appointments are more common but the selection process is no more open. Talking about his possible successor at JPMorgan, Jamie Dimon said “there are actually some really great potential CEOs here”. If that is true then let them present their case and allow shareholders to choose. Looking back on my 30-year career, my guess is that if votes were taken on the CEOs I’ve worked with, most wouldn’t have landed the job. Rightly so.

Where do boards get it wrong? One mistake is to succumb to the pressure of the internal candidate whose business or region is currently making the most money — usually a function of luck rather than skill.

This is why heads of investment banking divisions were once routinely promoted to CEO of the world’s biggest lenders. One hustings plus a routine personality test would have quickly revealed their inadequacy.

Shareholders also know when lazily moving the chief financial officer into the corner office doesn’t make sense. CFOs accounted for 8 per cent of new CEO appointments at S&P 500 companies last year, according to data from Crist Kolder Associates. But preparing accounts is no preparation for the top.

The role of CEO has never been broader. Like heads of state, they have to be empathetic one minute and ruthless the next. They must be wonderful with clients, politically astute and decisive yet accommodating.

Only a plebiscite of diverse shareholders has a hope of finding the right person. Boards are too small a sample. They could be tasked with making a shortlist, as they do now. But why not go one step further and allow anyone to apply?

At a stroke you would increase the range of candidates. It would also put downward pressure on CEO pay — a major social and governance issue — as wannabes underbid one other on compensation.

The arguments against directly electing CEOs are thin. Too difficult a process? Voting systems already exist. What about the issue of holdings concentrated in the hands of a few mega managers, such as BlackRock and Vanguard? Easy: the underlying owners either allow them to vote on their behalf or they must be polled.

There is the problem of shares with unequal voting rights, especially in popular stocks such as Meta or Alphabet. These founder-knows-best-companies are as anti-democratic as China. But at least a shareholder vote might apply pressure.

Open elections might discourage some external candidates from coming forward if they are already employed. But isn’t being honest better than sneaking off for interviews?  

Two final reasons to fear direct elections are the risk of ending up with a populist CEO or an activist. If both are good for the share price, though, who cares? Worse are the dull, merry-go-round CEOs who populate most C-suites today. Few add value but boards are conservative and headhunters know they will never be fired for recommending them.

Shareholders can only do better. They should be given the chance to try.

stuart.kirk@ft.com

Letters in response to this article:
Share­hold­ers pick­ing CEOs can’t work, and this is why / From Lindsey Stewart, Director, Stewardship Research and Policy, Morningstar Sustainalytics, London EC1, UK

CEOs or political leaders, selection pitfalls are similar / From Peter Gartside, Royston, Hertfordshire, UK