The End of Power (30 page)

FOR DECADES, THE
“
SEVEN SISTERS
”—
GIANT, VERTICALLY INTEGRATED
companies like Exxon and Shell—dominated the oil industry, the “Big Five” ruled accounting, and the “Big Three” controlled car-making, as did three networks in television and, later, two computer companies in information technology. The same pattern prevailed in many other sectors: a few companies dominated their respective markets, and they were so large, rich, global, powerful, and entrenched that dislodging them was unthinkable.

Not anymore. Across every sector of the global economy, these static structures are gone, and competition for the top slot is fiercer than ever. Shell or IBM or Sony may still be at or near the top, but they have seen their market power decline and their dominance abate as new competitors have gobbled up large chunks of their traditional markets. Moreover, corporations that used to be household names have disappeared—no more “Kodak moments,” to name just one storied brand that in 2012 ended up on the ash heap of history.

The list of companies at the top now routinely includes new names, including many hailing from places not known for spawning world-class businesses—Estonia (Skype), India (Mittal Steel), Brazil (Embraer), and Galicia in Spain (Zara) among them. And whether newcomers or not, those at the top are no longer assured as lengthy a stay among the leaders as in the past.

We are not talking about the displacement of one behemoth by another. More often than not, the space once controlled by old leaders has
been filled by a different set of players that rely on new rules, sources of power, and competitive strategies. The very nature of the power that the old companies and their masters once enjoyed has changed.

How so? The oil industry is an extreme, and therefore illuminating, example. The “Seven Sisters,” the companies that dominated the field from the 1940s to the 1970s, were not simply replaced by others like them; indeed, the oil industry is now more fragmented and less vertically integrated. The creation of new futures markets and the trading of more oil on a spot basis have dramatically changed the way oil is bought and sold. The industry is full of new “independents”: smaller companies that compete with, and in some cases even outrun, giants like ExxonMobil, Chevron, and BP. New players in the oil industry also include state-owned companies that have become more competitive and far more assertive in controlling their nations' energy sources. Giant hedge funds that exert unprecedented influence over ownership, accountability, and finances are now part of the oil industry landscape and may behave as active shareholders of the large companies or as providers of capital to smaller firms. In the past, only the “Seven Sisters” had access to the vast financial resources needed to participate in the oil market. Today, thanks to the combination of new players (hedge funds, private equity firms), new financial instruments (derivatives), and other institutional arrangements (new stock exchanges), it is possible for smaller companies to acquire the capital needed to compete in projects that once were the sole preserve of the oil giants. Finally, all these industry participants must contend with unprecedented scrutiny and intervention by governments, shareholder activists, environmental groups, institutional investors, labor unions, and the media—among others.

As Paolo Scaroni, the CEO of the Italian oil giant ENI, told me: “When I look back at how the leaders of the main oil companies of the 1960s, 1970s or 1980s used to make decisions and run their businesses, I am amazed at the freedom and autonomy they enjoyed. From where I sit, it's obvious that nowadays any oil company CEO has far less power than those who came before us.”
¹

Something similar is happening to banking. Several established big banks disappeared or were taken over as a result of the global financial turmoil that erupted in 2008, and this led in turn to further concentration. By 2012, five banks (JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co., and Goldman Sachs Group Inc.) held assets equal to half the size of the US economy. Much the same is true in the UK, where for the past two decades the “Big Five”—Barclays Plc, HSBC
Holdings Plc, Lloyds Banking Group Plc, Royal Bank of Scotland Group Plc, and Santander U.K. Plc (which was Abbey National Plc until Spain's Banco Santander bought it in 2004)—dominated the sector.
²
But in the last few years, public concerns fueled by the financial crisis and scandals like the rigging of interest rates by Barclays and the complicity in illicit money transfers (HSBC, and Standard Chartered) have created a backlash, which in turn sparked a wave of new regulations that limits the autonomy these banks traditionally enjoyed. Moreover, new players such as British entrepreneur Richard Branson, whose Virgin Money bought up the ailing Northern Rock Plc and aims to become a consumer powerhouse, are indicative of new competitive pressures the traditional megaplayers in banking are facing. As one analyst told
Bloomberg Markets
in 2012, “There is more structural change going on in the U.K. market than at any time in recent history.”
³

But the big challengers to the dominant big banks are the hedge funds and other new financial players that have access to resources as deep as those of the large banks yet can move faster and with far more flexibility. In early 2011, as the global economy was still sputtering, this is what the
Financial Times
reported about the health of hedge funds:

Like their oil peers, the top bankers also lament their diminished freedom of action. Jamie Dimon, JPMorgan Chase's CEO, presides over a larger bank than did his predecessor, William Harrison, but as his constant complaints about government regulation and the pressures of activists suggest, he also is more limited in what he can do. His argument that the public and regulators are better off trusting the banks' self-regulation and competition became harder to defend when in 2012 he revealed that his
bank suffered an estimated $6 billion in losses hidden by some of his colleagues and unnoticed by trusted members of his top management team.
⁵

The newspaper industry offers another telling example. The standard narrative of its misfortunes is that Craigslist and Google took away a critical source of revenues (classified advertisements) from the industry's traditional leaders. But what happened to newspapers is far more dramatic and cataclysmic than a mere shift in market share in classified ads from one set of companies to another. The power that the owners and executives of Craigslist now have is very different from the power once wielded by the Graham family, the owners of the
Washington Post
, or the Ochs-Sulzberger family that controls the
New York Times.
These controlling shareholders—like the Murdochs, Berlusconis, or the many media-owning families around the world—still have clout, but they have to use it, and fight to retain it, differently from their predecessors.

Does this mean that ExxonMobil will be displaced by an independent oil company, JPMorgan Chase by a hedge fund, or the
New York Times
by The Huffington Post? Of course not. These are large companies with immense resources and hard-to-replicate competitive advantages that ensure their dominance in the industry. On the other hand, the same could have been said in the 1990s about once-dominant and now bankrupt Kodak or in 2007 about the world's largest insurance company AIG, which one year later had to be saved from extinction by an unprecedented $85 billion government bailout?
⁶
Who would have said in early 2012 that one of the world's most powerful bankers, Barclay's Bob Diamond, would lose his job in a matter of days after it was discovered that his bank was involved in manipulating interest rates? Large companies that go out of business and once-larger-than-life business leaders who end up in the street, or even in jail, are nothing new. What
is
new is that, as shown in the pages ahead, the probability that a company will fall from its standing at the top of its league has increased, as has the probability that a company or business leader will suffer a damaging “reputational accident.”

Moreover, the broader and more consequential effect of the decay of power in the business world is not that large companies are now more prone to disappear but, rather, that they face a more dense and limiting web of constraints on their ability to act.

The business sectors that have undergone a structural revolution are as numerous as they are varied: from travel to steelmaking and from bookselling to the manufacturing of passenger jets. In fact, the challenge is to
find an industry where this has not happened and where the power of the top players is not more constrained and, indeed, decaying.

Who's in charge here? In the business world, this question calls for a clear answer. In the military, hierarchy comes naturally. And the same is true in corporations; they are not democratic institutions. In an environment where decisions about resources, prices, procurement, and personnel are made every minute and show up in the bottom line, there needs to be a place where ultimate accountability, credit, and blame rest. The title
chief executive officer
suggests orders, discipline, and leadership. It comes with the traditional symbols and perquisites of corporate authority: the corner office, the corporate plane, memberships in fancy clubs. And of course, the salaries. From the end of World War II to the mid-1970s, the median real value of executive pay was remarkably flat.
⁷
But from 1980 to 1996, the real value of CEO compensation in the S&P 500 grew by more than 5 percent per year; overall, CEO pay levels after 1998 were roughly double what they were at the start of the decade. To varying degrees, executive salaries in the rest of the world have followed that trend.

Nice work if you can get it. Yet just beneath the surface of high-flying privilege lurks another reality. Power in the corporate sector is diminishing—and harder to hold onto when you get it.

This is not anecdotal: the statistical evidence clearly shows that the hold of CEOs on their jobs has become tenuous. In the United States, still home to the largest population of big companies, CEO turnover was higher in the 1990s than in the two previous decades. And since then the trend has sharpened. The CEO of a Fortune 500 company in 1992 had a 36 percent chance of holding that office five years hence. But a CEO in office in 1998 had only a 25 percent chance of keeping it five years later. According to management consultant John Challenger, the tenure of the average CEO has halved from about ten years in the 1990s to about five and a half in recent years—a trend that has been confirmed by several studies. Another study found that nearly 80 percent of CEOs of S&P 500 companies have been ousted before retirement.
⁸
Rates of both internal turnover (the kind forced by boards) and external turnover (due to mergers and collapses) rose from the 1990s to the early 2000s. In 2009, another
study found that 15 percent of American CEO positions turned over each year.
⁹
The data vary depending on the sample of firms, but the core trend is apparent: things have grown more and more slippery where “the buck stops.”

And this trend is global, not just American. The consulting firm Booz & Company tracks CEO changes in the 2,500 biggest companies listed in global stock markets. In 2011 alone, 14.4 percent of the world's top CEOs left their jobs and the turnover rate was higher among the 250 largest companies, as it has been since 2005. This trend has also been occurring over the past twelve years. On average, more than 14 percent of chief executives of the top 250 companies by market capitalization have turned over, compared with 12 percent of companies ranked 251 to 2,500. This figure included terminations due to planned retirements, illness, and the like, but the study found that forced successions—CEOs being shown the door—were on the rise in both America and Europe. The rest of the world, where business is growing the fastest, was catching up to the West in this area, too. In Japan, traditional business culture makes it nearly taboo to push out a top executive, yet forced successions quadrupled there in 2008 and have continued to be higher than their historical trend. Booz & Company also found that CEOs around the world are much less likely than before to be chairman of the board—another measure of the growing limits to corporate executive power.
¹⁰

As it is for bosses, so it is for their firms. Sojourns at the top of corporate league tables have noticeably shortened. This, too, is not an ephemeral trendlet of the last few years, though the economic crisis certainly made it more pronounced; rather, what we're seeing is a deep transformational phenomenon.