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.

Marsh & McLennan To Replace CEO

Insurance broker Marsh & McLennan has decided to boot its CEO, Michael Cherkasky, according to the Wall Street Journal:

Chairman Stephen Hardis said the insurance broker's 2007 results have "fallen far short of our expectations. The board has taken this performance into account, and listened to concerns raised by some of the company's largest shareholders in recent quarters, in making this change."

But, in a stunningly insane move, the board is keeping Cherkasky on until a successor is found. Am I purely stupid, or is this one of the more foolish things a board could have done? When an employee is being fired, rarely does the company keep the employee on, at least in a functional role, until the replacement is in. The action creates enormous resentment in the employee (who may be tempted to cause havoc), it's disheartening to the rest of the company, and potential replacements have to be thinking not just twice, but three times whether it makes sense to join a company that would do something so screwy. When the position is that of the CEO, this rises to a potential fiasco.

According to the same short report I received by email, Cherkasky first came on in 2004 when then-NY state attorney general Elliot Spitzer sued the company:

alleging the company steered unsuspecting clients to insurers with whom it had lucrative payoff agreements, and that the firm solicited rigged bids for insurance contracts.

Was the board irritated that the new CEO couldn't get the same results as conniving could? Or did it figure that major credit upheavals weren't interesting enough, and so it would keep as an interim CEO the person it thought should be sent packing for poor performance?

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.

Finance and the Roll of the Dice

From the what-were-they-thinking, department, we have the latest insanity at Merrill Lynch. A big producer of the securitized mortgage deals, the company has already written down $8.4 billion in two clumps. The powers that be there talked about some number of billions, and then almost doubled it two week later. CEO Stanley O'Neal has made a public mea culpa, but as one analyst on NPR said Friday night, they should have warned everyone the minute they knew, and not delayed.

Now, according to the New York Times, O'Neal floated the ide aof a merger with Wachovia without talking to Merrill's board - which would mean a sale at a low point of the stock, forcing the shareholders to bail out management - and the board is ready to fire him. It's certainly drama, but how about the culpability of the board? Was there no oversight? Did they ever ask about the degree of risk the institution was taking on a regular basis? I realize that such things can be difficult for a board to uncover. AFter all, it's getting the numbers from management, and given how difficult it apparently was for many to understand just how shaky some of the assets were, they probably would have essentially said, "All is well."

But at this point, it's obvious the even the largest and most respected corporations are capable of screwing up on a level that is almost inconceivable. Everyone in the business community should remember that capitalism is essentially the combination of two activities: gambling and mitigation. You take risks to make more money, and then you try to minimize the downside and the possibility of an explosion. But as I quoted from a commentary, many people in these institutions never face the essential instability of statistically unlikely activities that happen on a regular basis.

Or, as someone in risk management recently told me, there was the head mathematician in a financial business he once worked for. There was some big loss, and the CEO said, "What can we do to keep this from ever happening again?" The mathematician said, "Sell refrigerators." When you can calculate demand, pretty well know your costs and what you can get, you can make safer decisions. But you won't make as much money. The CEO of that company had forgot that they are gamblers, and, apparently, people at Merrill, and virtually all other financial institutions and investors, have been forgetting that as well.

Mackey's the Real Wackoy

There's a terribly fascination for the business community when a CEO seems to melt before your very eyes. And Whole Foods John Mackey is doing just that. It turns out that for years he's been using a pseudonym to tout his own company and trash talk a competitor (that he now wants to acquire) on Yahoo Finance chat boards. Not only was he shooting from the hip, but he went after at least one journalist, Herb Greenberg.

Bloomberg has a good overview. By trying to take on the FTC and SEC while all this comes out, he's moved beyond putting feet into his mouth and is now filling it by the cubic yard. And not only is he doing things that the SEC might see as blatantly illegal, but he's trying to do them through chat rooms? Oh, puh-lease! As Greenberg aptly put it in another blog entry of his own:

To post on outside message boards, especially using an alias, not only shows poor judgment but strikes to the heart of a company's culture and makes you wonder what else might not be quite right.

How can you argue when said CEO is spending time writing such comments as "I like Mackey’s haircut. I think he looks cute!" and "13 years from now Whole Foods will be a $800+ stock before splits."

My question is where is the board in all this? Are we to assume that none of the directors knew of his inclinations or of his posts? It would be altogether too easy to see Mackey as the sole problem and not look at the environment that permitted and even supported such actions.

When Cleaning House Isn't Reform

The New York Times article about executives being fired for outrageous behavior may seem like the beginning of a new responsibility in corporations, but I don't think that it is. If it were, you'd see more executives sent packing when their bahavior came to light internally. But these are always high-profile scandals - that is to say, the corporations are always in reaction to public rebuke. Individuals are, of course, to blame for their own actions, but what sort of business culture permits or even, at times, encourages such behavior? Boards of directors should be setting the tone, instilling values, and insisting on them, even if no one else is looking.

Kaiser Permanente and Messy Electronic Patient Records

The Wall Street Journal ran a front page story the other day about Kaiser Permanente and how a 22-year-old turned the company's $4 billion electronic medical record (EMR) project into a public freeway pile-up by sending a company-wide email challenging the effectiveness of the project and whether the CIO had conflicts of interest. While CEO George Halvorson - whom I interviewed a few years ago on the topic of EMR - answered in another email the next work day essentially dismissing Justin Deal's analysis, the company's CIO resigned earlier the same day without a public explanation. Not long after this incident, Computerworld (disclosure - I used to contribute to the publication in years past) had its own reporting based on a leaked 722-page internal document that corroborated many of Mr. Deal's complaints about the system, called HealthConnect by the company.

Ironically, Mr. Deal first sent his complaints to Kaiser's compliance officer and to the board of directors:

Kaiser's assistant general counsel sent Mr. Deal a letter saying that "a thorough investigation" found no evidence of misconduct by the executives, nor of a "disastrous failure" of the HealthConnect project.

And yet there was this internal report. In either case it's clear that the board has some problems. Either it knew of the system issues and ignored them - which would seem like criminal negligance if patient health was affected - or it was incapable of unearthing this report. In either case, this would seem a clear issue of board dysfunction.

Kaiser Permanente and Messy Electronic Patient Records

The Wall Street Journal ran a front page story the other day about Kaiser Permanente and how a 22-year-old turned the company's $4 billion electronic medical record (EMR) project into a public freeway pile-up by sending a company-wide email challenging the effectiveness of the project and whether the CIO had conflicts of interest. While CEO George Halvorson - whom I interviewed a few years ago on the topic of EMR - answered in another email the next work day essentially dismissing Justin Deal's analysis, the company's CIO resigned earlier the same day without a public explanation. Not long after this incident, Computerworld (disclosure - I used to contribute to the publication in years past) had its own reporting based on a leaked 722-page internal document that corroborated many of Mr. Deal's complaints about the system, called HealthConnect by the company.

Ironically, Mr. Deal first sent his complaints to Kaiser's compliance officer and to the board of directors:

Kaiser's assistant general counsel sent Mr. Deal a letter saying that "a thorough investigation" found no evidence of misconduct by the executives, nor of a "disastrous failure" of the HealthConnect project.

And yet there was this internal report. In either case it's clear that the board has some problems. Either it knew of the system issues and ignored them - which would seem like criminal negligance if patient health was affected - or it was incapable of