Another problem with larger than life celebrities on the board is they tend to dominate not only discussions but the direction the company will move in including the choice of a CEO. Ken Langone dominated the Home Depot board and there is even a question as to whether he talked to the board before he offered the top spot to the problematic Bob Nardelli. The board allowed Dennis Donovan a lawyer to negotiate Nardelli's outlandish compensation package and then let Nardelli reward Donovan by making him the highest paid HR executive in history at $21 million a year. In February 2007 Donovan resigned. Under the terms of his 2001 employee agreement, Donovan was entitled to a multimillion-dollar severance package, which was triggered by the departure of
Nardelli who received a $210 million exit package. Donovan structured a most unusual employment contract and Langone's board approved it. According to Home Depot's April 15, 2006 proxy filing, "cessation of a direct reporting relationship with Mr. Nardelli" entitles Donovan to leave the company "for good reason" and receive "all cash compensation accrued but not paid as of the termination date and certain additional benefits, including salary and target bonus continuation for 24 months and immediate vesting of all unvested equity-based awards." Including Donovan's past compensation, it is estimated that Donovan may have received $15 million to $20 million, plus retirement benefits, stock options and compensation already earned.
Short Stay at the Top
The studies of the length of stay in the CEO position vary but they do offer a startling trend. According to Thompson (2010) 40 percent of CEOs last no more than two years at the top. The average CEO tenure dropped from 11.4 years in 1980 to 9.7 years in 1999 to 8.3 years in 2006, the most recent year for which statistics were compiled by consultants Challenger Gray & Christmas, Crist Associates, and SpencerStuart. However the New Your Times (2008) put the trend at 8.6 years in 2000 and 3.2 years in 2007. Lubin (2010) found only 28 CEOs of companies in the Standard & Poor's 500 have held office more than 15 years and she maintains that the average for S&P 500 CEO was about 6.6 years. While we see the length of stay drop significantly, so has the age. The CEO "class of 2004 was the youngest on record, with an average age of 57.8 years. With a young age and short stay these CEO's have been called "The most prominent young temp workers" who retire at an early age. Where do they go after their term has ended?
It is difficult to retread a CEO. The most difficult to retread are those with high compensation, bad press coming from either a scandal or grossly unhappy stockholders and of course those who attained celebrity status, not necessarily because no board wants to hire a celebrity CEO, it's because once one attains such lofty status they do not want to return to the trenches. They prefer to write books or give after dinner speeches and appear on talk shows telling all who will listen "how they did it" and they also become instant experts giving advice and criticism on a wide variety of subjects. If one did research on "What are they doing now?" After a few years in the catbird seat one would find that they join venture capital or some hedge fund firms and manage their money and/or sit on corporate or nonprofit boards or find some university post. Very few return to the corporate ranks and most retire to the corporate CEO "graveyard", the golf course.
Some of the reasons for such a short stay at the top are attributed to burnout, retirements, resignations and forced terminations. With the average length of stay at 3.2 years these CEO's barely have time to impact the corporation before they leave. What we have is instability at the top caused by this revolving door. The brief length of stay strongly suggests we have weakly committed CEO's, preoccupied with "filling their personal coffers," with little concern for their employees who they do not know or care about. Long gone are the days when a beloved CEO personally knew all their employees and symbolically "bled" when his company "bled"
Boards are clearly aware of this and they know that in 3 or 4 years at $10 million plus a year and several thousand shares of vested stock, their "golden boy" will be gone. They typically set up a cue where the conga line of executives will grab the golden ring as they pass through. Does this encourage long term planning? Not a chance. It does encourage pumping up the stock even if it means terminating thousands, outsourcing, off shoring and of course getting handsomely rewarded. While boards try to get a good CEO to stay by offering large retention bonuses, most CEOs have "golden parachutes" or "golden boots" written into their contracts, they are called severance agreements.
Group Dynamics in the Board Room
One needs to remember what it takes to make it to the top of a corporation, one needs to be: fiercely determined, relentlessly competitive, and have a demanding personality. These CEOs show up at compensation meetings with their expert compensation entourage, including attorneys, and scare the hell out of a group of board members who are old, retired and don't want the aggravation. All they want is to get to the golf course.
Pushing back against a demanding and aggressive CEO will often shorten a directors tenure. This creates an intimidating situation where the board becomes more aligned with the CEO than the corporation they are ultimately responsible to govern. Board dynamics can precipitate covert conflicts that can lead to one-off meetings and phone calls outside the conference room where a CEO can gather the support of board directors seen as trusting, protective, and on their side. The CEO wants to discover the board's vulnerabilities that can be tapped as he/she maneuvers to obtain greater compensation. The issue of who is for and who is against the CEOs compensation package is information the CEO and his confederates will ferret out.
Above all, the CEO wants members who are selected to serve on the compensation committee to be his best friends. In many cases the CEO, CFO and their compensation consultants, lawyers and others outnumber the board members on this committee. Meetings tend to be disorganized and board members are swamped with data. The consultants and other experts present the compensation packages for each officer of the company making certain "red flags" are not apparent especially when "activist" stockholders are lurking. Most companies have a team consisting of several senior company officers including the CFO, general counsel, the director of investor relations and outside consultants who are experts responding to these pests.
Another issue that contributes to favorable compensation packages is the boards desire to create a chubby "good old boy" climate. Couple this desire for friendship with the prestige of the position and there is a tendency to believe that they are more competent than they actually are and their support of the CEO's strategy, decisions, and compensation is beyond reproach. They may actually collude in offering greater compensation to increase the climate of friendship and feelings of omnipotence. The rush to agreement and avoidance of conflict promotes the feelings of cohesiveness and power. This type of group behavior is most apparent when board members are selected on the basis of personal friendships and networking.
These former executives possess a high degree of agreeableness in social situations and this most likely is due to their dependency on something that is foreign to them. They are out of the role of authority. The need for equality in social relationships and in the board room was not apparent when they were in the catbird seat. Observing these executives in the board room and at the country club the behavior was the same. They enjoy casual friendly talk and avoid discussions that hint of controversy. Keep it light and easy going and above all be agreeable.
What happens when you get a group of old and tired ex-CEOs in a room? Sounds like it could be a good question for a series of jokes. Working as a member of a team and facilitating discussions is something they rarely did when they were top executives. They are use to making the decisions and in a group they are not familiar with equal give-and-take required for thorough discussion. Also, in thorough discussions group conflict is bound to occur and as mention before, this type of discussion is avoided because it may rupture the friendly atmosphere.
Professors serving on the boards also present an issue. They are not trusted and struggle to fit in primarily because they are viewed by ex-CEOs as intellectual eggheads writing books and cases about the company, who never worked in the trenches and do not play golf.
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