Companies with powerful chief executives would experience greater variability in their performances, which would increase the risk factors accordingly, said Marti G Subrahmanyam, professor of finance and economics at the New York University.
Addressing a plenary session on "The Fall of Major Corporates: Lessons for the Future" at the Confederation of Indian Industry Partnership Summit in Hyderabad on Wednesday, Subrahmanyam said organisations with an active and vigilant board of directors would have better and more efficient governance.
The status of a CEO had changed dramatically in the past 18 months in light of the corporate scandals in the US, he observed.
"Greater the concentration of power with the CEO, higher their influence over crucial decisions. The personal characteristics of CEOs, particularly overconfidence, distort the investment decision-making. Excessive dependence on a small group of individuals does not make sense," the professor pointed out.
Subrahmanyam said in their initial stages, CEOs tend to function in a more entrepreneurial mode, but as the firm grew, the company's performance became more of a group effort with the CEO adopting the role of a conductor and public spokesman.
On the issue of CEOs' compensation, the professor questioned the need to pay a CEO 500 times more than the lowest paid employee in the company.
Articulating the requirements of a successful CEO in the present times, Ramesh Vangal, the chairman of Scandant group, a Bangalore-based technology-embedded solutions company, said a CEO should have brand-building ability, integrity, trust and energy.
Omkar Goswami, the chief economist of the CII, said there was a need to exercise extreme caution in creating the icons of one-day players.
"Before we call a person an iconic CEO, we need to ask whether he is consistent in terms of delivering value to the shareholder, maintaining the return on capital greater than the cost of capital, and retaining the best people and corporate brand," he observed.
The combination of imperial CEOs and not sufficiently active boards increased the vulnerability of companies, Goswami pointed out.David McLaughlin, chairman of the American Red Cross, said the recent corporate failures in the US were due to the failure of governance by the board of directors and the failure of the auditing profession.
