The AIQ Podcast: Director or dictator?

Hello and welcome to the AIQ podcast, an audio series from Aviva Investors that explores the long term themes influencing investment, markets and economies, with star CEOs bringing into question what makes a good leader in a flatter, networked world. In this episode, we explore what this means for the overall governance of companies. You'll hear from experts such as Luke Hild, yet of the UK's high pay unit. US psychologist Richard Ryan, organisational psychologist Adam Grant and our corporate governance expert, head of Investment Stewardship Merseybeat.

Let's start with a couple of obvious questions. If Google or Bydureon didn't exist, would do we have search engines? If Mark Zuckerberg hadn't dreamt up Facebook in his dorm room, would we have social media platforms? While these may seem absurd, as the answer is an obvious and resounding yes. Yet they give us an interesting lens with which we can view power and leadership. Journalist and bestselling author Matt Ridley gave a talk at Google in 2015 that provides a hint as to what is going on.

We tend to walk around assuming that someone's in charge, as I said. And when we see something being done, we assume it's either being planned or it's being messed up by someone, whereas it might be being emerging spontaneously. And this is a manifestation of what's sometimes called the great man theory of history. And it goes right back to sort of deep instincts, which are that we tend to have the intentional stance sweep when a thunderstorm, when you when somebody gets hit by a bolt of lightning, there's a there's a little bit of us that says, oh, yeah, he must have done something sinful in order to deserve that.

Or, you know, or there must have been purpose behind that. You know, we find it hard to believe that that events are random in that sense. And that, I think, leads us to credit people with too much credit when things go right, the person in charge and to blame them when things go wrong. Now, what does this mean for technology and innovation and the kind of business you work in? And it's a little subversive.

I'm here to say that individual inventors, individual geniuses probably don't matter as much as you think that it's ordinary people interacting with each other that produced the results. To give you an example, Thomas Edison gets the credit for discovering the light bulb. But if you go back and look at history closely, there are 23 different people who deserve just as much credit for inventing the light bulb independently around the world in the same decade to roughly the same idea. I mean, there's obviously differences in Britain.

We say Joseph Swan deserves the credit for the light bulb, not Thomas Edison. In Russia, they say Ludvigsen deserves the credit and we're not wrong. These people did come up with the idea independently. It's just Thomas Edison was the was the best businessman among them. And one that's telling you is that the light bulb was ripe. It was ready to be invented at that time. It was inevitable that in that decade someone would have meant the light bulb.

So the random deaths of who apparently succeeds in inverted commas is hard to comprehend.

And what's more, the godlike status we imbue on the leaders of organizations clearly requires deeper reflection. Of course, every era has its stars, leaders who take ideas and grow them into hugely powerful companies. Martin Sorrell at WPP. Steve Jobs at Apple.

Jack Ma and Alibaba. Mark Zuckerberg at Facebook. Elon Musk. Tesla. The list goes on. Typically, their success is closely bound with their ability to set out a vision, then drive relentlessly towards that goal. The rewards at stake are huge, both for the stars themselves and the future success of the organization. Getting the right person in place can add vastly to a company's market capitalization and cause investors to sell if their star heads for the door. But it's hardly worth mentioning that the skills needed to maintain a workforce of thousands are different to those required to direct a small, tight knit team.

Understanding what motivates and what ties, these are the things that will determine the CEO's tenure. Perhaps it's time to check how rewards might be aligned and structured for the long haul, rather than a sprint towards a bonus check and look more closely at whether tomorrow's organizations are likely to turn away from dictatorial style and move towards flatter structures.

As time goes by, back in the 1980s, just as Reaganomics was taking off, us, economist Sherwin Rosen grappled with the superstar phenomenon as he observed the world around him, including everything from stand up performers to those selling economics textbooks. He saw a handful of leaders dominating their fields and the economics of superstars. Rosen suggested the trend would continue. Technology would empower the best, but lock out those on the lower rungs of the ladder.

His views seem beautifully prescient in recent decades. The superstar phenomenon has intensified, and the gulf between the winners and the also rans has grown. Today, unique conditions where new technologies are being applied in the process of globalization have created superstar companies where markets and networks collide. The obvious elephant in the room here is pay as companies have upsized. So have the rewards on offer for their leaders. Here's Luke Hillyard of the UK's high pay unit.

One of the independent bodies that surveys executive compensation trends systems which evolved time tie the wider economic context, the contribution of the workforce as a whole. These are all things that can shape performance as well as whether an executive deserves to take credit is questionable in a mix that might include salary, equity and equity options and pension.

The equity component has become increasingly important, coinciding with the stockmarket bull run. Compensation has tended to accelerate fastest for those with substantial stock based incentives at the top of the corporate tree. But while the compensation landscape has been changing. Compensation committees have often felt reluctant to break or put downward pressure on pay awards for fear of losing the best talent. The question, of course, is whether the rewards environment promotes considered risk taking for the long term benefit of the company.

Unsurprisingly, interest has grown in capping total compensation to prevent any single individual heading off with an uncomfortably large reward. Other ideas include adding debt and convertibles to compensation packages as well. Meanwhile, there were ongoing efforts to push out decision making time horizons. His Hillyard again. Long term incentive plans. Charity five years ways. They were three years is increasingly common under surveillance. Payments will be paid in shares and deferred for a period of years before the executive can access them.

No surprise, then, that the UK regulators have imposed an extended seven year bonus clawback period in finance ahead of the minimum set out by EU guidelines. And there are even discussions on pushing those clawbacks out to a full decade. Intrinsic to this debate is money and motivation. And it matters both at top of the organisation and all the way through it. So how much does money really matter? Let's hear from us psychologist Richard Ryan.

Most people are not motivated primarily by money. Big money is important in the workplace, but that's not what gives people high quality motivation. It's usually a of commitment and purpose, allegiance with your organization. They're having a sense of concurring with those goals. The keys to getting the most high quality motivation financial workers that are kind of maintenance is something that you have to have what people. But if you're using those as your primary way of motivating them, then you likely have very low quality motivation at your workplace.

Ryan, who now advises Fortune 500 companies in the U.S., believes culture is king. The factors that contribute to engagement can be enhanced. And this is what can drive long term success. Here he is again.

Are employees feeling a sense of autonomy or are they feeling a sense of effectiveness and confidence that they're feeling connected to other people in the workplace? If you've got those three things, the autonomy, the competence and the relatedness, then he'd likely have a very highly engaged employee.

This balance between director and dictator is fine. Organizations take their cues from the top, and corporate culture is shaped by the examples set at the executive level, placing huge pressure on ensuring the right leadership. Tohme Strong decision making with clear direction and focus can easily veer into autocracy.

For businesses to thrive in the long term, they need a clear vision of competency and a strong board to challenge, guide and assist. That was Merza Begue, global head of governance at Aviva Investors. He believes that there may be a time and place for a star to drive. But ultimately, the complexity of the modern business is just too much for any single individual. Instead, diverse boards made up of independent minded people prepared to ask tricky questions can help navigate awkward subjects like the rationale for overly ambitious acquisitions or the need for better succession planning cannot be ignored.

Studies of what differentiates great boards from the not so great show that it's not about cosy club like agreement. As ultimate owners, shareholders have a critical role to play by expressing their views and using their votes actively. They can help regulate company behavior. In some instances, however, shareholders may be constrained by share structures that privilege founders or early investors. The rise of the dual share class with varied voting rights is pretty common in the US these days. Mark Zuckerberg Facebook shares come with waiting worth 10 times that.

If shareholders have ordinary stock, more fluid organizational structures are also challenging traditional beliefs about the optimal ways to organize and motivate and ultimately how best to lead companies. Lately, the impetus to decentralize and delayer has meant fewer managers and greater focus on how individuals can cooperate and drive change themselves. And despite the widespread focus on the benefits of diverse teams, there is still a widespread misunderstanding that more stars will inevitably translate into greater success. Adam Grant, organizational psychologist, is unequivocal on the matter.

The evidence is pretty clear, no matter where you work. Having an entire team of superstars can be a total disaster. It turns out that if you have a team of 10 people, you're better off with six stars than eight. You see it on Wall Street. Teams with mostly top analysts make worse financial recommendations than teams that have a mix of stars and average performers.

One way to think about this is to look at the nature of problem solving. Diversity fuels different ways of looking at the world, of how problems are perceived and how solutions are sought. To think differently is good. The reality, of course, is not all apple pie. Diverse teams tend to produce higher variance performance, both more conflict and better outcomes. So the process of working together won't necessarily be comfortable, and only certain organizations with the right checks and balances in place will survive.

Proving both malleable and resilient enough to reinvent themselves, shared goals, shared culture. These are the features that drive and hold a team and ultimately a business together. Traditionally, the practical side of this has fallen to managers. However, as we move to flatter models, the need for leaders to infuse such values is critical. So what have we learned? What does the modern CEO need to embody to be successful? Demand for those who can carry a brand, give direction to a strategy and promote a feeling of belonging is unlikely to end anytime soon.

But more mature companies are also likely to need individuals with collaborative intelligences and formal governance structures to help them stay on track. Treading the right side of the director dictator line will mean setting culture by example, being prepared to look beyond their own tenure and most importantly, being prepared for a healthy dose of challenge. Well, thank you for listening to the AIQ podcast to look out for future episodes.