Thursday, October 12, 2006

CEOs Feeling the Heat

Louis Lavelle of BusinessWeek has covered the fact that 3 CEOs were deposed of in a single day yesterday. The original article is here. Syd Finkelstein is quoted heavily in the article.
Here's the entire text:
It was a brutal day for CEOs. On Oct. 11 three chief executives at public companies lost their jobs: George Samenuk of McAfee (MFE), Shelby Bonnie of CNET (CNET), and Jay Sidhu of Sovereign Bancorp (SOV).
Sidhu resigned after months of battling with large investors who said he hadn't done enough to lift Sovereign's stock price. Samenuk and Bonnie stepped down amid allegations of options backdating at their companies, making them instant poster boys for a scandal that has engulfed more than 100 public companies.
More than anything, however, the trio of downfalls underscore the end of the bulletproof CEO. These days, the once-fearless breed is fast becoming more like an endangered species.
INCREASED PRESSURE. Corporate governance experts generally applaud the increased accountability of executives, particularly where scandals have erupted. But some wonder whether the trend may end up going too far, pushing top execs to take on outsize risks or move with reckless speed. "The entire clock is accelerated," says Sydney Finkelstein, professor of strategy and leadership at Dartmouth's Tuck School of Business. "You end up feeling like you've got to act faster than you might otherwise."
The numbers are staggering. According to Liberum Research, at least 21 CEOs were fired outright in the first three quarters of 2006--one every 13 days on average--nearly double the 12 chief executives who walked the plank during the same period in 2005. Of the 21, at least six represent fallout from the backdating scandal. In addition to McAfee and CNET, the affected companies are Comverse Technology (CMVT), Vitesse Semiconductor (VTSS), and (MNST).
The pressure on top execs has become so widespread that no company can escape scrutiny. Among the CEOs under the microscope these days are many at top-tier companies, including Robert Nardelli at Home Depot (HD), Kevin Rollins at Dell (DELL), and Richard Parsons at Time Warner (TWX) (see, 9/6/06 "CEOs in the Hot Seat"). There's even speculation that Steve Jobs, celebrated for his success in restoring the luster to Apple Computer (AAPL), could become a victim of that company's stock option investigation (see, 10/5/06, "Apple Comes Clean on Options")
POWERFUL BOARDS. Experts on governance and leadership say the reason so many corporate chieftains are meeting with ignominious ends is the changing nature of the board of directors. Boards are newly empowered to be more active in all manner of corporate affairs, at the same time that they're being held to a higher standard of accountability by shareholders than ever before. Since the Enron collapse in 2001, the governance revolution that swept through corporate boardrooms has resulted in boards willing to stand up to management, and reforms such as the Sarbanes-Oxley Act that create incentives for directors to do so. The result: a lot of itchy trigger fingers.
The Chicago-based placement firm Challenger, Gray & Christmas reports that the revolving door of the CEO suite is resulting in shorter tenures. In all, 28% of the CEOs who were shown the door so far this year were on the job fewer than three years, and 13% were in the top position for less than a year.
"Boards are much less tolerant than they were, more independent of management, and more likely to act in event of a problem," says Charles M. Elson, a corporate governance expert at the University of Delaware. Evidence of the newfound independence is everywhere, he says, including recent executive departures at Boeing (BA), RadioShack (RSH), and Hewlett-Packard (HPQ). "I think the board has changed fundamentally. It's much more of a monitoring institution than it was."
TOO MUCH TURNOVER? Advocates for better corporate governance generally support the willingness of boards to depose CEOs. But a short tenure, or the ever-present threat of one, creates problems, too. With just a year or two to show results, some CEOs may take big strategic gambles, or push the legal envelope to make their numbers. Others will simply push their people harder and harder. "When the pressure is ratcheted up that way, it cascades down to the next level," says Dartmouth's Finkelstein. "You get this cascading effect of pressure."
Rapid turnover in the c-suite may also affect executive pay. With the clock ticking from Day One, executives who can deliver the goods immediately will fetch an even higher premium than they do right now, while demand for those known for building long-term shareholder value may diminish.
Finkelstein believes the trend toward shorter tenures is not a short-term statistical fluctuation, but a real trend that may get worse. As boards decide to pull the plug on their CEOs over the backdating scandal, more boards will be under pressure to do the same. Says Finkelstein, "The backdating situation is a classic example of zero tolerance. Once this starts, the pressure is going to be ratcheted up even higher on other boards. Nobody wants to be the outlier when it comes to these kinds of things.
"Though CEO turnover for the first nine months of this year is up sharply from the same period last year, the numbers have ticked down in the past two quarters. After 750 personnel changes in the first quarter, there were 711 in the second, and 627 in the third. But that downward trend is unlikely to last, since planned transitions such as retirements, which make up the bulk of all CEO changes, are generally timed to the end of the fiscal year, most of which end in December. April may be the cruelest month, but for CEOs January is no walk in the park either.

Sphere: Related Content