How much is a leader worth? The case of Fabio Capello

December 19, 2007

gold.jpgHow much is a leader worth? Whatever it takes to get the best available, according to FA chief Brian Barwick. The assumption is that the right leader will make the difference between success and failure. But how rational is this financial market model of leadership?

When Fabio Capello was introduced to the media as the new England Football manager and rescuer in chief, The BBC reported the discussion over Capello’s remuneration.

As a spiky question flew in about Capello’s reported salary of £4.8m a year, the perspiring FA chief [Brian Barwick] decided to throw himself into the barb’s path.

“It’s important to realise that the FA’s gross income in the next four-and-a-half years may well be in excess of a billion pounds,” he trumpeted.

“The money is a secondary thing,” added Capello through his interpreter, which is perhaps easy to say when you’re about to trouser £13,150 a day until 2012, with a bonus of £5m if you bring home the World Cup… And what about the arrival of his backroom team of four fellow Italians, who between them will be costing the FA an extra £1.4m a year? Was this not the footballing equivalent of buying an extremely expensive gadget for Christmas, only to unwrap it and find that it won’t work without four additional batteries (not supplied)?

Is it ‘what the market will pay?’

So we have a simple equation based on what the market will pay, what an organization can afford, and its estimated costs of success and failure to achieve its objectives. The simplicity of the calculation is one of the attractions of the theory of rational market economics. Unfortunately such simple calculations are almost certainly wrong.

Academic attempts to find the relationships between corporate performance and remuneration of chief executives have indicated that the relationship is far from straightforward. There is, for example, differing degrees of ‘stickiness’ between organizations attempting to change things. Football has tended to be at one extreme, with a tendency for managers to be fired perhaps prematurely, rather than too tardily. Other institutions cling on to their leaders after their shortcomings seem to be reflected in performance indicators. For rather obvious reasons, family firms fall into this category.

But in any case, the survival or departure of a chief is premised on a belief that any change in fortune will be a direct and simple consequence of a change in leader. That relationship is just too simplistic. Strategy formation and execution have different dynamics, over which a leader has differing kinds of impact.

One international expert, Dr Ismael Erturk, at The ESRC Centre for Research on Socio-Cultural Change, (CRESC), commented on the recent stories in leaders we deserve of executive succession and remuneration:

There are several dimensions … that relate to our work on financialization. One of them is the continuous reinvention of banking institutions in a period defined by financial innovation. Morgan Stanley like other investment banks now earn more from using their own capital than their customers. Goldman Sachs [GS] is the leader in this aspect and the likes of Morgan Stanley and Merrill Lynch are the followers. Merrill Lynch lost its CEO trying to be more like GS. Barclays Capital Bob Diamond is another star name with lots of leadership capital who suffered in recent financial crisis. GS and Deutsche so far have come out OK. From our research, we argue that banks have become opaque organizations, which are among the official classification of large complex financial institutions [LCFIs]. These all have interesting implications for the executives of such giant complex organizations, that have government protection in bad times and now are too big to fail.

A second stream of our research is executive pay. What determines the high levels of pay? There is no link between performance and pay, almost everyone agrees on this. Pay for failure is accepted and that is an interesting social phenomenon, causing serious deterioration in income distribution taking us back to the early 20th century. In a financialized economy, financial services and related intermediary businesses (law firms, accountancy firms, consultants, etc.) need new deals -structured finance, private equity, securitization, hedge funds, etc.- to derive high fee income and remuneration. There is a large literature on how pay packages are designed to achieve the going rate rather than linking pay to performance. Stan O’Neal’s package when he was forced to leave Merrill Lynch was $160 million, which would pay the salaries of the six members of the Federal Reserve, who are responsible for sorting out the mess created by the likes of Stan O’Neal, for 100 years! [Mervin] King in the UK [head of the Bank of England] gets lots of stick as well, from all corners, because of his lack of leadership skills, but his [low] remuneration has no relation to the [high] responsibilities and the risks he carries. Business elites, and the role of intermediaries in a financialized economy, pose interesting research questions.

Theory into practice

There’s nothing so practical as a good theory. The English FA took the views of a range of experts into account in arriving at a deal with Mr Capello and his agents. They may have got the right person, at the best rate they could negotiate. But the statement by Mr Barwick suggested they had not been over-influenced by financialization theorists.


The case of Steve McClaren and the rigged jury

November 23, 2007

mcclaren-exits.jpgJudge me after twelve games. That was the plea when Steve McClaren took over as England manager. He was always struggling. When the England football team lost that twelfth game, the jury met to see that justice was done …

Or, in less metaphoric terms, the England Football team failed to reach the European Championships. This was failure on a scale last witnessed over a decade ago.

The jury (sorry, The FA board), called an emergency meeting for 8.30 the following morning, and gathered to report their verdict (sorry, decisions). A news conference was convened and by 10 am, chairman Professor Thompson chair of the FA, and Sir David Richards of the Premier league took the main roles.

They announced that the board has terminated the contracts of Coach Steve McClaren, and deputy coach Terry Venables. Brian Barwick (CEO) is to carry out a root-and-branch study, and report his findings back to the board together with a recommendation to the board for a new appointment. The recruitment process will take as long as it takes.

One minor saving factor for all concerned. There are no competitive internationals for a while, so it is implied that the decision can wait while before the next major campaign.

Journalists quizzed Brian Barwick. Wasn’t he just a weeny-bit responsible for hiring Mr McClaren in the first place?

Intervention from chair. Brian is CEO, but we as a board take shared responsibility for what has happened.

The accused speaks

Later, the lugubrious ex-manager had his say .

“It is a sad day to have been relieved of my duties but I understand the decision of the FA … It’s a huge disappointment for the nation and fans. But I will learn from my failure,”

His failure to qualify for Euro 2008 cost him his job, said FA chief executive Brian Barwick.

“I spoke to Steve this morning – we get on very well with him. I’ve had many grown-up conversations and had another one with him this morning – and I can only wish him well. But in the end, not qualifying for Euro 2008 comes up short” McClaren’s reign was the shortest tenure of any England coach.

Fantasy football in Westminster and beyond

This has been a good week in the UK for stories about bad leadership, in politics, business, and sport. There does seem to be a few patterns common to all. I’m not sure to what degree they capture a cultural rather than a universal theme.

The scuffles in the House of Commons are seeped in ancient rituals, with occasional efforts to find imaginative ways of yah-booing that stay within the letter of the law, if not in the spirit of Bagehot. George Osborne seems to thrive on vituperation. With every battle as shadow Chancellor he grows ever younger, a variation on the Dorian Grey image, and with genetic traces of Norman Tebbitt.

In Business cum politics, this week we have noted, among others, the inevitable demise of the Northern Rockers, pretty much root and branch.

But the real fantasy football this week was played out the FA HQ at Soho Square. I can’t get that image of a bizarre trial scene out of my mind.

The nightmare

Picture the packed court room. The accused stands grim-faced and slightly slumped in the dock. The judge arrives, and then the jury trails in with the verdict.

But wait a minute. This is no ordinary jury. Isn’t that Brian Barwick, and Thompson chair of the FA, and Sir David Richards? And surely that’s one or two former England managers with them, standing next to Alan Green, BBC’s current voice of the fans? And the others seem to be journalists. The foreman is Paul Hayward of The Daily Mail.

The verdict of this jury has been unanimous. The defendent is found guilty as charged. Defendant seems unmoved, as if expecting the verdict. But then (this is a bad dream, isn’t it) the foreman stuns the court into silence.

This is a rigged jury

This is no ordinary jury, he cries. It’s a rigged trial. McClaren is a fall guy for the toytown Napoleons at the FA. They even got themselves on to the jury. They are the real culprits. I have already made a deposition that proves it.

“The blazers, who paid Sven Goran Eriksson £25million to reach three quarter-finals and then arrogantly assumed Luiz Felipe Scolari would accept the England job just as he was about to lead Portugal to a World Cup, remain untouchable, unindicted, beyond the reach of the anger that washed over McClaren and his players.

Why call Sir Dave and the chairman of the FA to account when you can blame Scott Carson? Why should anyone at Soho Square resign when you can boot out Terry Venables, who was hired as a human shield to protect McClaren from the press and then marginalised throughout the campaign?

The more urgent need is to consider not 45 minutes but 40 years of failure and here we trudge back to the realisation that the crudeness and physicality of the game in these islands is not conducive to international success.”

Uproar in court. Cries of shame. Resign. To the tower.

I wake up from the nightmare. Check the newspapers. No, it’s not entirely fantasy football. England did lose to Croatia. And as someone said, hinting at the manager’s golden goodbye: Football? It’s a game of two and half million pounds.