Keen observers of governance will wonder how some CEOs become embroiled in scandalous behaviour and yet still remain in post. Examples of high-flying privileged execs are all too clear in the newspapers.

Legal scholars now theorise that governance rules and guidelines are too insubstantial to rein in “superstar CEOs” and only become effective when their stardust begins to fade.

Assaf Hamdani and Kobi Kastiel write in a new paper that governance fails with superstars, not because agency incentives between CEOs and board directors and not aligned, but simply because the board and even investors are too forgiving while they believe their chief executive is uniquely placed to lead their companies.

“We argue that, even in the era of increasingly powerful shareholder, superstar CEOs’ unique contribution to company value accords them significant power over boards of directors,” Hamdani and Kastiel write.

“Even directors who are faithful agents of shareholders might struggle to fulfil their oversight duties when the CEO is believed to have star qualities.

“How effective can directors be in questioning the CEO’s proposed strategy when all believe that the CEO’s singular vision is what makes the company succeed?

“And how likely are directors to take harsh measures in response to misconduct of a CEO who is commonly viewed as critical to the company’s success.”

Only when a CEO loses the faith of directors and investors that they “will outperform”, or when “abusing their power” exceeds the CEO’s “singular contribution”, will directors and investors take action.

The commentary makes for sober reading, given a recent trend for stock markets—including the London Stock Exchange—to introduce dual-class shares in a bid to win the IPOs of new and potentially disruptive tech companies.

It will also further worry those who believe superstar CEOs may wield disproportionate levels of political power.

Double trouble

What will also alarm many is that this new account of superstar CEOs comes with a warning about dual-class shares, often held by powerful founder chief executives; and ESG.

Hamdani and Kastiel believe dual-class shares are sought not because it keeps corporate leadership focused on long-term instead of short-term gains, but simply because “founders perceived by investors as critical to the company’s success use their power to bargain for super-voting shares at the IPO stage”.

On ESG, they caution that though it is often argued that high profile leaders will “push companies toward incorporating environmental and other social considerations into their policies”, even influential investors are “disinclined to confront a superstar CEO who is not promoting stakeholder interests”.

As the world of technology becomes ever more dominated by vast businesses run by individuals possessing extra voting rights and “superstar” status, many are left wondering whether current governance norms are enough to manage them. Hamdani and Kastiel suggest it might be time for a rethink.