When the CEO is Fired, Does the Director Follow?

On BNET, I had a piece on VMware's CEO being summarily fired and the accompanying attempt to clean up the PR mess. In doing the research, I noticed that although the bio of the old CEO (and co-founder) had been taken down, her name was still on the list of directors. And that got me scratching my head. Had the company forgotten that part of the web site?

And then I realized that while the board could fire a CEO, it wasn't clear that it could necessarily fire a director. Oh, it might not put the person up for another term, but I don't know how many companies allow removal of a director for anything short of some great legal failing. If she decided to hang around, they might have to put up with her views for the near future. Granted, most people wouldn't want to stay around after being told they were unwanted, but what of the stubborn cusses who refuse to give up? It could make for a very uncomfortable board room.

US Versus European Managers

The Financial Times has a story today about a report from executive search firm Heidrick & Struggles:

Chief executives of large US companies have far less international experience than their UK counterparts, a sign of corporate America’s struggle to balance the lure of globalisation with the needs of its large domestic market, new research will reveal on Tuesday.

According to the study, only a third of US CEOs at Fortune 100 companies have lived or worked abroad for at least a year, compared to 67 percent of chief executives at the FTSE 100.

I find it interesting that with such an emphasis on globalization, so few US firms have international experience in their CEOs. Some in the US, including Intel's chairman, Craig Barrett, say that visiting markets can be enough. Excuse me, but that seems like arguing that someone experienced in a service business can understand a manufacturing corporation by visiting some factories. Granted, companies often find it useful to recruit people with backgrounds in industries different from that of the company, but it then takes a pretty long time to get up to speed, and that is with having all the information and in-house experts at hand.

There have been so many glaring errors that US companies have displayed when doing business overseas that you'd have to wonder why anyone would think that visits would be enough. That doesn't let you understand the dynamics of other cultures, business atmospheres, or political systems. No, you won't gain experience in all the places that you'd ideally want as CEO, but at least you'd have had your nose rubbed in the typically problems that will occur when doing cross-cultural business, and you'd hopefully have learned some of the principles that help you navigate the waters.

In the past I've interviewed Steen Kante, the former US head of IKEA during its heady growth years in the 1990s. "There were probably no land mines we could step on that we didn’t step on," he said. They made mistakes in a host of ways - not realizing that American cars, larger than European counterparts, didn't have to get a chair in a box, and that they didn't want to deal with the assembly. European beds were smaller and wouldn’t fit into existing American frames, so consumers here assumed that IKEA wanted to force the sales of new mattresses and box springs. "You’ve got to understand how the consumer thinks and adjust to them," Kanter said. "It took IKEA years. But when we finally got it, we got it." That was with someone living in the US.

Yet, if you asked American executives whether European counterparts could come in and start effectively operating in the US, I suspect they'd laugh. You have to know the market, the culture, the economic structure, the government ... all the same things you need to know when operating overseas. To be fair, the article, and study, I guess, suggests that Americans are concerned that they will be overlooked if out of sight for a significant period of time. The American market is also so large that it does take significant attention. But over time, I wonder if companies will come to see the need for overseas experience - and will that put US managerial jobs in jeopardy of "outsourcing," after a fashion.

Something that did surprise me was that American companies did far better than European counterparts in succession planning, with 86 percent of the Fortune 100 CEOs being promoted from within. There wasn't a number available for the percentage at the FTSE 100.

O'Neal, Merrill Lynch, and Boards

Via a PR person, I heard from Ron Garonzik, vice president of leadership talent at Hay Group, a New York-based consultancy. He thinks that Merrill Lynch's board is making a mistake in naming a board member as even an interim CEO.

The fact that its Board has appointed a board member -- a non-executive chair -- is indication of the absolute breakdown of its accountability of ensuring business continuity for Merrill’s most critical management positions. The success rates of outside CEO hires are grim: it is well documented that the chances of getting the boot of a forced resignation are much higher for external CEO hires as compared to insider hires (by 20 percentile point or more for North American companies).

That certainly squares with what I've heard over the years. Plus, if a company develops candidates internally, it isn't at the economic mercy of someone from the outside who already probably has a good deal and whose personal fiscal future now has to be guaranteed under what are now more questionable circumstances.

I did take some exception to the idea of a breakdown of the board's accountability, but Mr. Garonzik did have a good explanation:

The breakdown in accountability isn’t about the stopgap measure of appointing an interim CEO – but rather that fact that no credible successor is waiting in the wings to take over from O’Neal. As if things weren’t bad enough with Merrill’s name being dragged through the mud with investors, and that they have to deal with the negative publicity concerning O’Neal’s departure package. On top of all that, they have to deal with the uncertainty of not having a pair of steady hands at the helm of a venerable “Wall Street” firm. That alone is evidence of the board’s failure to meet it’s accountability of ensuring business continuity.

Now here's where the board really fell down. When O'Neal was coming up through the ranks, so were a number of other people. But the CEO got rid of much of Merrill's old guard - and potential successors, or challengers. The board allowed him to do this, which really was foolish. The evidence is that the board evidently had to consider a short-gap measure and someone from the outside to follow. A company with a well-developed succession plan always has someone who could reasonably well take over.

Unfortunately, this isn't going to be an issue just for Merrill Lynch. Investors are calling for the head of Citigroup's Charles Prince. Does that company have talent ready to go? And if New Jersey Institute of Technology finance professor Michael Ehrlich is right, structured investment vehicles - the class including the securitization of mortgages - could still face another $30 billion to $50 billion in losses. According to this from a press release:

The SIV rescue attempt, led by JP Morgan, Citibank, and Bank of America with US Treasury Dept encouragement, will not stop the losses, Ehrlich said. The SIV bailout fund known as the Master-Liquidity Enhanced Conduit (M-LEC) will, at best, slow down losses because there is no Federal bailout money in the plan.

"The fundamental market mispricing of the real estate and also the credit risk markets will be corrected," said Ehrlich. “In the best case, the M-LEC might forestall a panic leading to an over-correction in pricing. Unfortunately, there is likely to be the unintended consequence that the M-LEC will discourage new capital from flowing into this market.”

That leaves the question of the red ink or the blood on the water will spill faster.

Yahoo Shows Strategic No-No

Terry Semel is out and company co-founder Jerry Yang is in as Yahoo CEO. After a reorganization in December, continued disappointing earnings (while Semel earned an estimated $71.1 million last year, as estimated by the Wall Street Journal), and operational snafus, the company felt the need for changes.

it's quite a change in fortunes. According to the Journal, the man originally was a savior:

Mr. Semel, 64 years old, is widely credited with helping to focus a foundering Yahoo following his 2001 arrival and helping it ride the recovery in online advertising. The Sunnyvale, Calif., company is one of the largest sellers of such ads, and has played a key role in leading some name-brand companies to increase their marketing on the Web.

Then key managers left, they weren't replaced, the company couldn't digest the acquisition of an Internet ad platform company quickly enough, and things generally went badly when Google continued to out pace Yahoo. So now there's talk of possibly selling the company, or partnering, or ... something.

I wonder if management will really take a page out of Google's book. It's not to copy, but to better understand how Google gets so much right where it counts - with customers. They actually seem to listen, because nothing else would explain how they would continue to pick up share in areas filled with the fickle. An audience of over 100 million is a significant asset. Instead of playing catch-up in search and search advertising, why not talk to the customers big-time? Find out what they want? Not through focus groups, but by getting managers to actually talk to the people the company deals with, learn what they want, what they like, what's missing. Now that would be a radical solution.

How Do You Judge CEO Pay as Fair or Not?

Reuters has a story today about NASDAQ's CEO Robert Greifield getting $18.4 million for 2006. Stock value fell, and yet the exchange's profits more than doubled. And recently I had an executive compensation consultant make the same point about Robert Nardelli, who was forced out as CEO of Home Depot. As people bemoaned the level of his compensation, this consultant said that Home Depot's actual financial performance improved - and others have pointed out as much. So how do you value a company? Is it the stock price? I can remember one company in the semiconductor business that steadily increased their profits quarter after quarter with little interest from investors because it was in an "unexciting" segment of the industry. But what else can happen? So long as investors expect to see the big pay-off from increased stock prices regardless of what the business fundamentals do, there will continue to be a split between how CEOs are paid and how companies perform, because too often the firms will do well from one point of view and badly from another.