My last two columns dealt with the tug of war between boards of directors and shareholders and how boards are best comprised to effectively carry out their responsibilities. Central to these issues is the relationship with the chief executive officer; specifically, how to provide the kind of oversight that enables the CEO to run the business and achieve growth and return objectives.
Here we’ll look directly at the CEO and his or her position amid the shifting governance landscape. There’s little doubt that the expectations and pressures that this executive experiences are unlike anything we’ve seen previously. In fact, the likelihood that any CEO can satisfy all constituents seems to be steadily decreasing.
Revolt in the Boardroom
Several months ago, a commentary was published in The New York Times regarding the new book published by Wall Street Journal Assistant Managing Editor Alan Murray, which shares the title above: Revolt in the Boardroom. The article highlights some of Murray’s key points, including:
While the media may portray CEOs as the center of the corporate universe, that’s not the case. “In fact,” notes Murray, as cited in the Times review, “the CEO has been greatly diminished and now shares power with an array of others—boards of directors, regulators, pension fund managers, hedge fund managers, accountants, lawyers, non-governmental organizations—all of whom are eager to have their say in the corporation’s affairs.”
According to Murray, there have been a “remarkable string” of CEO departures, including a number of high-profile executives who have fallen. In each case, the departure was a sign that the board was no longer willing to turn a blind eye to the chief’s failings, whether fiscal, managerial, or personal. Murray cites statistics showing that those CEO departures are part of a pervasive trend, with CEO turnover up 126 percent in the five years ended 2005.
Investors have become outraged by both “the disappearance of their own stock market wealth and the almost-daily reports of perfidy by executives,” Murray says. Corporate directors have hence revolted, prompted by the realization that they could be held personally responsible for misdeeds of the CEO. Directors have been forced to wake up and recognize that board membership isn’t “just a cushy honor,” as Murray calls it, but rather “a heavy responsibility.”
Successful executives now act less like autocrats and more like the populist politicians answering to diverse constituencies. What Murray calls a “new power elite” has emerged, including the likes of union executives, non-governmental organizations, hedge fund managers, and others.
Outrage over excessive pay to CEOs, particularly those who fail, is surging among the middle class. “The attack on CEOs could be the leading edge of a much bigger and broader middle-class revolt that is only now rearing its head,” says Murray.
There’s a view that the boards of public companies can be unwieldy and ineffective, which follows the assertion of former AIG CEO Maurice Greenberg that boards can’t run companies. This notion is supported by the tale of Hewlett-Packard’s board overthrowing Carleton Fiorina, installing non-executive chair Patricia Dunn, and ultimately giving CEO Mark Hurd the additional title of chairman, “ending H.P.’s experiment with a new governance structure.”
Looking to the future, Murray says, “Optimists see a more responsive, more democratic, more socially responsible institution emerging from the upheaval. Pessimists fear that the very same ills that plague modern-day politics—polarization, divisiveness, and stalemate—may come to hobble corporations.”
What Does It All Mean?
For what it’s worth, I happen to believe that most, if not all, of Murray’s observations are right on point. Certainly there’s been a major power shift in American corporations. The once all-powerful, imperial CEO has been transformed. The individual in that position is still the most senior officer running the company; however, he or she now truly reports to the board of directors. Of course, there are as many different types of CEOs as there are companies, but certainly the power shift is real.
Also true is the fact that many company CEOs are besieged from multiple angles: boards, institutional investors, regulators, lawyers, and others. Among the most significant questions, in my view, is this: When does the chief executive find the time to run the business?
Having worked with a significant number of CEOs, we see different approaches being taken. Some have turned running the day-to-day business operations over to a chief operating officer or other senior executive, with the CEO focusing on fine-tuning strategy and implementation plans, considering major deals, and courting key new customers and relationships. Other CEOs play the role of “Mr. Inside” or “Mr. Outside,” depending on where the executive sees his or her strengths, and where those interests intersect with the needs of the enterprise.
But more chief executives are spreading themselves thin, still trying to run the company while also splitting time among key parties: the board, its key committees, individual directors, institutional investors, accountants, non-governmental organizations, and others, while also addressing legal compliance, regulatory filings (though hopefully not investigations), and the myriad other issues demanding the CEO’s personal time and attention.
There is a proper balance between management, the board of directors, and shareholders. It is difficult, but it is attainable. And while the rise of the institutional investor may have corrected what some saw as management-heavy governance structures, we also must be careful of swinging the pendulum too far in the other direction, where CEOs are demonized and stakeholders wield the power.
Don’t Kill the Golden Goose
So where do we go from here?
In the New York Times’ critique of Murray’s book, the reviewer called Murray, “maddeningly reluctant to offer his opinion on what changes corporations ought to make in order to endure as viable institutions.”
Well, I have no such reluctance.
What companies can do is simple, at least in concept:
Adding Value. First, if they haven’t already done so, boards of directors need to move away from their recent—and sometimes excessive—focus on compliance and monitoring, and instead must provide value-added advice, counsel, and direction to the CEO on strategic and other critical business issues. In addition to hiring the right person to run the company in the first place, this is a primary board obligation and one that brings the most value-add to the company.
Setting Pay. Second, the board and management need to agree on a compensation paradigm, preferably one that reflects meaningful pay-for-performance metrics. This program should be tied to long-term shareholder interests of growth and return and should be designed to motivate the CEO and senior management to best achieve those objectives. Directors must ultimately ignore those shareholders who send mixed messages, complaining both when CEO compensation tied to stock price rises with broad market upswings, and when CEO compensation moves with internally developed benchmarks that might not follow the company’s short-term stock price. Take the time to get compensation metrics right.
Communicating. Third, boards and managements should listen carefully to what major shareholders have to say—providing a channel for meaningful communication. But shareholders and others need to let management, with board oversight, make the business decisions that are deemed to be in the best interests of the company. They are the ones who know the business, its industry, risks, markets, products, and competitors, and are best positioned to make truly informed business decisions.
Certainly making this happen is not a simple matter, as it involves a “coming together” of many different interests, including institutional investors, regulators, non-governmental organizations, and others. But it’s well worth the effort.
One final warning: All parties must avoid being so internally focused on their own personal objectives and vendettas that they kill the proverbial goose that laid the golden egg.