Credible

1

When Non-experts Fly the Plane

‘What banking qualifications have you got, Mr Hornby?’

A forty-two-year-old man, in an expensive dark blue suit and a nondescript tie and pink shirt, takes a shallow breath. The questioner, Nick Ainger, a Member of the British Parliament, who began his career as a dock worker in south Wales, and has seen a side of life inconceivable to the man in the expensive suit, leans forward across the table. His eyes slightly harden. Mr Ainger waits for an answer, although he knows the answer. Mr Andrew Hornby waits to answer, although everyone in the room knows the answer.

‘I do not have any formal banking qualifications.’

Mr Ainger’s thoughts on receiving this reply are unknown and may have been unprintable. What he did know, however, was that the man sitting opposite him, whose previous experience had been running a grocery business, had just ruined one of the world’s most important banks. As this book will go on to argue, when non-experts are put in charge of organizations, disaster often strikes.

Andrew Hornby was CEO of HBOS, one of the largest financial institutions in Europe, when interrogated by Ainger on 20 February 2009, while the world was suffering the aftermath of the worst financial crisis since the Great Depression (1929–39). The room was a grand one, and full of adrenalin and journalists. A fourteen-member cross-party Treasury Select Committee were questioning four astoundingly well-paid British bankers.¹ In addition to their interrogation of Hornby, the inquisitorial committee were interviewing Sir Fred Goodwin and Sir Tom McKillop, former chief executive and chairman of Royal Bank of Scotland (RBS) respectively, and Lord Stevenson of Coddenham, its former chairman.

Andy Hornby, without mentioning that his primary degree was in English literature, went on: ‘I have an MBA from Harvard Business School where I specialized in all the finance courses, including financial services.’

The fact of the matter was that none of these four senior bankers had any formal banking qualifications.

In a £28 billion merger in 2001, Halifax and Bank of Scotland became HBOS, then the fifth largest bank in the UK. In February 2005 the Guardian newspaper ran a headline ‘Bank Managers Getting Younger’ when Andy Hornby became chief operating officer of the merged HBOS. A year later, at the age of thirty-nine, Hornby succeeded James Crosby as HBOS CEO. He embarked on a forceful campaign to increase the bank’s stature relative to four other industry giants: Lloyds TSB, Royal Bank of Scotland, HSBC, and Barclays.

Hornby’s expansion strategy proved catastrophic. Instead of focusing on sound, long-term business goals, Hornby pushed the bank to aggressively pursue riskier loans to maximize short-term profits. This led to a £213 billion gap between loans and deposits.² In 2008, with the United Kingdom’s national economy at risk, taxpayers extended to Lloyds and HBOS a £20 billion bailout. The UK’s National Audit Office, the watchdog of public spending, estimated that around £1.2 trillion was eventually paid out by British taxpayers after colossal mistakes were made by these and other bankers. At that time, the working population of Great Britain was approximately 30 million people. If you do the arithmetic, that comes to a cost of £40,000 ($54,400) per person. The average annual wage in Great Britain was then close to £20,000 per annum.

Citigroup Inc. is another of the world’s largest banks. It too nearly collapsed in 1991. Between the late 1950s and early 1980s the bank had been led by two experienced commercial bankers: George S. Moore followed by Walter B. Wriston.³ But in 1984, John S. Reed, a non-banking general manager, was appointed chairman and CEO. He wasn’t shy about his lack of expertise; indeed he proudly declared that he was ‘not a banker’.⁴ Like Hornby, Reed had management degrees, but from MIT. In 1991, for the first time in its history, the bank failed to pay annual dividends and the company lost around a billion dollars.⁵ To get out of the hole, thousands lost their jobs, and savage cost-cutting ensued. Reed was sacked in 2000. But rather than learn from their mistake, the board hired two similar men, one a corporate lawyer, Charles O. Prince III, and the other an economist, Robert E. Rubin. In the 2008 financial crisis the bank almost collapsed a second time. Like HBOS, Citigroup was bailed out by the government, which cost US taxpayers $517 billion.⁶ Prince was let go, but Rubin convinced them he should stay. Rubin earned $115 million in pay between 1999 and 2008.⁷

Andy Hornby had once been described as the ‘whizz kid of British banking’.⁸ Educated at Oxford University, and finally Harvard, his early professional life was in the cement business of Blue Circle Industries, then on to supermarket chain Asda, where he became a managing director at the age of thirty. After running grocery supermarkets, Hornby then moved to a top management job in a major bank, with virtually no core business knowledge or experience in banking.

A few years after the 2008 crisis, I struck up a conversation about Hornby with an acquaintance of his at the London School of Economics. When I mentioned Hornby’s lack of banking qualifications and experience, or core business knowledge, he replied: ‘Andy is a really smart guy, you know.’ ‘So,’ I said to my friend, who was a smart guy himself, ‘you wouldn’t mind, then, if he performed surgery on you should you ever have the misfortune to need it?’

Another more recent example of the disastrous consequences of having non-experts in leadership positions occurred as I was completing the book.

On 6 September 2022, Elizabeth Truss won the competition to become leader of the Conservative Party after Boris Johnson was forced to step down. As a result, she became the next prime minister of the United Kingdom and immediately appointed her close political ally Akwasi Kwarteng Chancellor of the Exchequer (‘Finance Minister’ in other countries’ terminology). Due to the peculiarities of the British political system, a tiny proportion of the British electorate had put them in charge of the United Kingdom’s economy and society. It was to prove an extraordinary natural experiment vividly demonstrating what happens when leaders not only lack expertise themselves, but also ignore the deep expertise available to them.

Forty-eight hours after taking office, on 8 September, Truss and Kwarteng sacked the most senior civil servant in the Treasury (the nation’s finance department). They then refused to listen to, or co-operate with, the Office of Budget Responsibility, a publicly funded body expressly created to provide independent analysis and advice on the public finances. For months before her election, Truss had derided what she called Treasury economic orthodoxy, and she and Kwarteng had hatched a radical plan to transform the nation’s finances, informed not by any real knowledge of economics, but by ideology.

Truss had studied politics, philosophy, and economics (PPE) at Oxford and Kwarteng classics and history at Cambridge, eventually completing a PhD on the Great Recoinage of 1696. As one UK economics professor I spoke to, who preferred to be anonymous, said, ‘If you take the most generous possible view, they have between them approximately one half of an economics undergraduate degree. It’s like somebody taking a few hours of training in a prop plane and thinking they can now fly a Jumbo Jet. It’s ridiculous.’

What Truss and Kwarteng did have, however, was self-belief. On 23 September 2022, Kwarteng rushed to announce a set of historically extraordinary tax cuts in a mini-budget. These cuts were enormous and un-costed, in the sense that no indication was given as to how the cuts would ever be funded. A financial hole of more than £45 billion suddenly appeared in the UK national accounts.

Chaos ensued. It started even before Kwarteng had finished speaking in the UK Parliament. Money-market managers around the world had been listening to the speech. Almost instantly the value of sterling fell to its lowest-ever level against the US dollar. UK government bonds were heavily sold off in international markets. The financial markets were making it clear by their action that they no longer had confidence in the people in charge of the UK economy.

Kwarteng was sacked as Chancellor on 14 October after thirty-eight days, making him the second-shortest-serving post-war Chancellor, and Truss announced her resignation a few days later on 20 October, after only forty-four days in office.

In that time, lasting harm had been done to the economy, and arguably the international reputation, of the UK. In the world’s money markets, a damaging premium was quickly added by investors to UK borrowing costs in the form of higher interest rates offered on government bonds to make them still attractive to international investors and pension funds, despite Truss’s perceived fiscal recklessness. This premium was dubbed the ‘moron premium’. It did not just affect how easily the UK government could service its national debt, it also led to significantly raised mortgage payments for millions of ordinary citizens who were already struggling with high inflation and rising energy bills.⁹

The moron premium is a good term. It gives an evocative sense of how costly it is when non-experts are in charge of something that they simply do not understand.

And this is the point of the book. Would you like the school that educates your child to be led by a former retailer or an outstanding schoolteacher who understands children and schooling? Would you rather fly in a commercial aircraft commanded by a pilot who until recently had operated only gliders, or by someone who had spent two decades flying Airbus A320s or jumbo jets? Would you want your federal court case decided by a judge with zero courtroom experience, or by someone who had clerked for a Supreme Court justice? In any area of endeavour, intelligence is no substitute for technical expertise or experience. To think otherwise is to leave your organization vulnerable to mediocre performance – or worse. Leaders must be credible.

Is this idea really a surprise? Imagine trying to coach a team or come up with new plays when you have never actually played the sport in question. Or imagine conducting an orchestra if you can’t read or play any music. Or starting Microsoft or Apple if you had never written computer code.

In a Financial Times article in 2018, Wolf draws on Adam Tooze’s book Crashed to try and understand ‘What really went wrong in the 2008 financial crisis?’¹⁰ The near collapse of global banking, Tooze argues, had long-term detrimental effects: taxpayers’ money was used to bail out banks around the world; politics was turned populist and nasty; there were waves of unemployment and homelessness; European integration was destabilized; extreme austerity measures were implemented; and ultimately the gulf between the wealthy and poor deepened. Herd behaviour stampeded out of control. Trust in the state was dealt a profound blow.

Perhaps the most penetrating and worrying point raised in the Wolf article was ‘The fact that the people who had been running the system had so little notion of these risks’.¹¹ A lack of government regulation facilitated the bundling and rebundling of assets that became impossible to untangle, with financial packages designed by physics PhDs based on mathematical formulae that few could understand.¹² People who had been in banking for years struggled to comprehend the complexities. So how were CEOs with no banking credentials and no experience going to keep up?

In this chapter I will describe the problems associated with this shift towards generalists and away from expert leaders, namely the people who hold deep accumulated knowledge about their firms. And I will provide stark evidence of why being an all-purpose manager is not enough.

The role of non-experts in corporate failure

‘Home Depot Inc. Chairman and Chief Executive Robert Nardelli has abruptly left the company after a year of heavy criticism of everything from his pay package to the underperforming retailer’s corporate governance,’ read a Reuters lead article in 21 January 2007.¹³ Robert Louis Nardelli was born in the north-eastern part of Pennsylvania. He completed a bachelor of science in business at Western Illinois University and an MBA at the University of Louisville. Nardelli has been what you might call ‘a serial CEO’ who led many firms, and made huge amounts of money from his various leadership roles.

Nardelli started his career at General Electric (GE) in 1971, where he was mentored by GE’s legendary CEO Jack Welch. Welch was the Elon Musk of his day, a rock star who seemed to be known by everyone. When I interviewed Patrick Harker, then dean of the University of Pennsylvania’s Wharton School, he joked that all MBA students longed for Jack Welch, the most influential business leader of his era,¹⁴ to be the dean of their business school.

Robert Nardelli was reportedly known in GE as ‘Little Jack’ due to his promotion by Welch.¹⁵ Nardelli rose to become president and CEO of GE Power Systems, but his ambition was to become ‘Big Jack’, and succeed his mentor in the top job, a race he eventually lost. Nevertheless, minutes after resigning from GE, Nardelli was invited to take over at the home-improvement retailer, The Home Depot, where he was CEO from 2000 to 2007.¹⁶

The Home Depot had been led by its founder Bernie Marcus, who started the business in 1978. His mission was to make all kinds of building materials and equipment accessible to the general public, selling from warehouses in a retail model now seen around the world. Wired magazine journalist Joe Flaherty praised the innovative culture of The Home Depot that had become, over its two decades, a household name.¹⁷ Until Nardelli, that is; he knew nothing about retail and when he arrived he applied the same Six Sigma management strategy used at General Electric.¹⁸ ‘Nardelli, who had been one of Jack Welch’s hatchet men at GE, then spent the next seven years driving down costs – at the expense of The Home Depot’s reputation for innovation.’¹⁹ Nardelli was reported to be autocratic and blunt, and it was claimed that he replaced employees who had years of experience and a deep knowledge of the business and its customers with cheaper, inexperienced part-time staff.²⁰ In 2007 Nardelli was fired by the person who had hired him, founder Bernie Marcus, who replaced him with a Home Depot veteran, to aid its return to its original focus on innovation.²¹ Despite his unpopularity, Nardelli still parted from The Home Depot with a severance package estimated at over $200 million.²²

Yet again, when Nardelli walked out of The Home Depot he was soon picked up for another CEO job, this time by car manufacturer Chrysler. So he moved from General Electric to a home improvement retail outlet and on to a car manufacturer. These are huge companies upon whose success thousands of people depend for jobs, the local economy, and investments. Would we countenance a dentist switching to become a gynaecologist with no training or experience? No. So why do we tolerate the hiring of CEOs from similarly different sectors? There are many more people’s lives at risk with the latter.

‘Who will Bob Nardelli fail next?’ ran the headline on TheStreet in May 2009, after Chrysler cruised into Chapter 11 bankruptcy. It was ‘his second failure in a top position that could mark the end of an era for celebrity CEOs’, suggested journalist Robert Holmes optimistically.²³

Sadly, it did not. Not for Nardelli, who continued his journey, in and then out, of various firms,²⁴ and not for industry in general.

Whether leaders have excelled in their own area or not, placing them in a new domain and expecting the same level of competence is at best naïve, as demonstrated by my research in the following chapters. Yet in the modern world it has become troublingly common. Putting unqualified people into top jobs is a reflection of a generalist management culture that dominates business and beyond, particularly in the US and UK. It is the result of placing an often equally unqualified mix of non-experts on to corporate boards, who then choose the CEOs. Selecting generalist candidates suits the headhunters, who can enlarge their pool of candidates to sell on to employers. Itinerant CEOs gain from changing job regularly, because research shows that those who move around most, accrue the highest pay.²⁵ Remarkably, even when CEOs fail, they still stroll out of their last elevator ride with golden parachutes worth millions, having secured contracts with these potential payouts when they sign up (as if they almost expect to fail). You win when you win, and you win when you lose. What kind of message does this send to young managers?

German businessman Léo Apotheker was fired by Hewlett-Packard in 2011 after losing in excess of $30 billion in market capitalization during his short time as CEO. He was in post for just eleven months. Yet he left with a sum of $23 million.²⁶ Yahoo, when led by CEO Marissa Mayer, failed to disclose two major security breaches, in 2013 and 2014, yet awarded her a similar payout.²⁷ ‘Marissa Mayer’s $23-million severance from Yahoo may look obscene. But it’s even worse,’ read the Los Angeles Times headline in 2017, as it revealed the ‘tens of millions of dollars in stock options’ also held by Mayer.²⁸ Despite being blamed for taking British bank HBOS into virtual collapse, with the loss of 16,000 jobs and huge debts to the UK taxpayer, Andy Hornby went into another CEO position.²⁹ A few months after being questioned by UK politicians about the bank’s failure, Hornby was back earning £2.1 million for his first year as CEO of pharmacy business Alliance Boots.³⁰

Many seem to believe that bringing in an executive from outside can add a newness of thought and perspective. It can. If an organizational culture has become political and prone to infighting, or sluggish and inward-looking, it might require the kind of change that is made more easily by someone less invested in the status quo. But outside should not mean beyond the general core business or sector experience. Whoever takes over still needs to understand the industry, what motivates the key employees, and, importantly, how to diagnose problems. As we will see, the world’s best and most profitable organizations know this.

The companies behind the tech we turn on every morning were started by experts who went on to become effective leaders. Some companies then switched away from credible bosses and learned a hard lesson. Apple was one, co-founded by Steve Jobs, possibly the most celebrated leader during an extraordinary time in which world populations moved way from desks to desktops. Jobs was clever, charismatic, and often combatively challenging. But he was, first and foremost, a techy expert.

Famously, a simple garage features large in the history of Steven Paul Jobs. It is where, in their first family home, his father shared his own passion for mechanics with his son;³¹ where the young Jobs started to dabble at a very early age in different kinds of electronics, and, notably, where the newfound Apple Computer Company relocated to, from Jobs’ bedroom, in 1976.³² Today, all this is world history. Although its business antics have been criticized (e.g. practising anti-competitive behaviour and using unethical business practices),³³ Apple became the first company to reach $3 trillion market value in early 2022.³⁴

Back in 1983, the company was expanding and Steve Jobs decided he required an expert marketer. He recruited the former marketing executive John Sculley from his CEO perch at PepsiCo, where he had become well known during the so-called cola wars between Coca-Cola and Pepsi in the early eighties. Sculley was an experienced mid-forties business and marketing legend whereas Jobs was twenty-eight and still learning the ropes. He was also distracted. ‘While Jobs pursued his MacMission he required a more orthodox chief executive to run the company. A respectable face who could sell to corporate America,’ explained Andy Hertzfeld, a designer on the Macintosh Development Team.³⁵

As CEO, Sculley is credited with boosting Apple’s sales, turning it from a start-up into a major player.³⁶