The CEO's Added Value in a Listed Company

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There is often public debate about the remuneration of CEOs of publicly traded companies. Especially in the US, CEO compensation is very generous.

The added value of CEOs to a (listed) company and thus to its owners is twofold. On the one hand, success is easy to measure: the stock price is a brutal metric. But how much of the success depends on the CEO?

Companies are also in different situations. There are situations where the CEO merely “cultivates” the results of a company in a good situation, and hardly has to strive with restructurings or strategic decisions. Megatrends provide a tailwind, and the company is well-positioned in the market.

On the other hand, in a growth or transformation phase company, the CEO’s role is critical.

How do analysts view and analyze the CEO’s true added value in a company?

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Excellent opening! We talked with Heikkilä about this a couple of years ago on HV, here’s the link: Heikkilä ja Vilén osa 9: Toimitusjohtajan rooli yhtiön menestyksessä - Inderes

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What’s the problem here anyway? If a company pays its CEO a high salary, that’s a problem for the shareholders, which can be addressed at the general meeting. If the owners are satisfied, the board and CEO can keep their positions, and if not, the board can be changed, and through that, the CEO.

Competent management can be well paid if the direction is right and satisfies the owners. No absolute measure can be obtained, as there are so many variables. The essential thing is whether the owners are satisfied, and the more satisfied they are, the more can be paid.

Especially, remuneration should not be reduced based on income inequality. Income inequality is not a problem. Management remuneration is a matter for the company, not outsiders.

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You misunderstood a bit. This wasn’t a fiery speech against compensating CEOs or top management. I agree with you on the compensation criteria and decision-making process.

The point is more about pondering and analyzing what exactly constitutes the added value created by CEOs. This is something that has received very little attention, especially considering it’s essential for every investor and analyst, not to mention major shareholders.

To simply dismiss the measurement of a CEO as a black box where the owner is either satisfied or not, is, in my opinion, a rather astonishing attitude.

However, I should probably do some research on what kind of material is available on the subject.

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As you noticed, my previous comment was mainly related to external scrutiny. If we genuinely consider the added value of a CEO to the company and the owner, it’s a slightly different matter. The success of management must, of course, be analyzed by some metric, but what would be suitable? Are short-term goals, which can conflict with long-term goals, being set and monitored? There’s a significant problem with what the owner’s goal is: to develop the company long-term or to maximize short-term profit. Of course, these aren’t in clear conflict, but they can significantly affect the assessment of success.

The crucial factor is actually how the company has developed in relation to its competitors or what its future outlook is. Has the company invested in the right things? However, these are really difficult to put into numerical form as a whole, because there are so many variables to evaluate. It’s particularly difficult to numerically assess the CEO’s success on top of these. Ultimately, it comes down to whether the owners are satisfied.

It’s somewhat the same problem in choosing a partner. Candidates can be evaluated by certain criteria, but because there are so many variables in human behavior, you can’t find a solution through rational reasoning alone; you also have to use emotion. It’s the same in investing and in CEO decision-making. In some matters, you can utilize more numerical information, but you can’t make decisions solely based on them.

This reminded me of a story where Torbjörn Magnusson talked about how he forms a good team with Nalle and Karin and how they get along well. And this was largely why Magnusson was chosen. There might have been a more competent expert found elsewhere with certain selection criteria, but would that have been better for the overall picture :smiley:

In the long run, for a company’s success, the emotional side and intuition of a leader are emphasized and decisively influence the foundation created for the future. This cannot be modeled in any way; it again comes down to whether there is a feeling that the right choices have been made.

Each owner also has their own personal criteria for evaluating this success. Therefore, no absolute truth can be obtained about success, and naturally, no absolute number can be defined to tell how well leaders have succeeded. This is why compensation is largely determined by the feeling of how good a leader is perceived to be. It should also be added that due to rigidities in the labor market, including the labor market for leaders, there are many exceptions.