A Weak “Defense of the CEO”

By James Kwak

I finally bit the bullet and read “In Defense of the CEO,” Ray Fisman and Tim Sullivan’s article on the cover of the “Review” section of Saturday’s WSJ. The inside continuation page is headlined “When CEOs Are Worth a Fortune.” In fact, I read it twice. But nowhere could I find any evidence or even an argument that any CEOs are worth a fortune—just a lot of implying, assuming, and asserting that they are.

Fisman and Sullivan discuss what CEOs do: they go to meetings, which is no surprise. They cite one study saying that CEOs who spend more time meeting with employees run companies that are more profitable than CEOs who spend more time meeting with external parties. But they don’t discuss which way the causality runs, or whether the latter companies would do better with the former CEOs. They make the conceptual argument that “a slight edge in ability can translate into enormous payoffs,” which might justify high CEO pay—if only they provided any evidence that ex ante higher pay packages actually correlate with ex post higher shareholder returns. And they repeat the stock argument that golden parachutes give CEOs an incentive to sell out at high prices rather than dig in and fight off takeovers—but the only study they cite argues that golden parachutes are associated with lower company valuations.

Mainly what they do is name-drop CEOs of successful companies (or at least with successful tenures)—Amazon, Apple, Zappos, EasyJet, Ford—without bothering to argue that those CEOs were responsible for their companies’ success. In a couple of cases it’s hard to argue with the importance of the CEO, but simply repeating Steve Jobs’s name over and over is not going to convince anyone that the average CEO is Steve Jobs.  Three of their five examples, by the way, founded their companies, which makes them far different from the typical hired mercenary with an obscene employment agreement.

This is the best the WSJ can find as an argument for paying oodles of money to CEOs?