Giving the boot
Boards with new backbone are dumping imperial CEOs
Last week's conviction of former WorldCom CEO Bernard Ebbers--and the very real possibility that the rags-to-riches entrepreneur will spend considerable time behind bars--are expected to have a chilling effect in executive suites across corporate America.
But to members of corporate boards, a perhaps scarier event happened earlier this year. In January, a massive shareholder lawsuit arising out of Enron's bankruptcy was settled with an unprecedented twist: Ten former directors were held personally liable for the company's apocalyptic 2001 collapse, requiring them to fork over a total of $13 million out of their own pockets. A similar settlement was announced in a WorldCom shareholder lawsuit, though it was subsequently voided, and a new agreement is expected this week.
Money talks. Corporate governance experts say the prospect that once cushy directorships could now become a liability, in the true sense of the word, is one reason for the recent spate of hasty ousters from the executive suite. "For directors, it certainly focuses the mind," says Harvard Business School Prof. Rakesh Khurana.
So perhaps it is no surprise that the list of ousted executives includes both those whose sin was failing to deliver on their promises to shareholders--like Hewlett-Packard's Carly Fiorina and Disney's Michael Eisner--as well as those whose sin was, well, real, such as Boeing's Harry Stonecipher, who lost his job after acknowledging an affair with a subordinate. Such entrenched imperial leaders as AIG's Maurice "Hank" Greenberg are not above boardroom discipline as soon as a whiff of scandal arises. Even the Japanese, whose love of ritual and respect for hierarchy are legendary, are getting into the act: Sony directors replaced CEO Nobuyuki Idei with Welsh-born American Howard Stringer in an attempt to shake up the company and boost its sagging stock price.
Power is shifting from the executive suite to the boardroom, and directors are taking their responsibilities as shareholder representatives more seriously. John Challenger, of the outplacement firm that bears his name, equates the shift with what took place in Washington following Watergate, when the power of the presidency shrank while Congress took on a more prominent role.
Shareholders, especially institutional ones, are playing a large role, prodding once lackadaisical directors to sit up and take notice. From mutual fund companies to state pension plans, these investors are flexing their muscles for a couple of reasons: First, academic research indicates that shares of companies with what are perceived to be good corporate governance provisions tend to outperform other stocks. Second, "investors view governance as a risk factor," says Patrick McGurn, executive vice president of Institutional Shareholder Services, which tracks corporate governance issues. "And right now, they are trying to mitigate risk in their portfolios."
Boardroom beheadings are by no means new. In the early 1990s, several high-profile CEO s at companies ranging from General Motors to IBM to American Express were also forced to walk the plank. But the pace of ousters is clearly on the rise. And it's not just the celebrity CEO s whose mugs grace the covers of the business books. Last year, 97 chief executives at Fortune 1,000 companies had to be replaced for one reason or another. That was up from 85 CEO s in 2003 and 44 in 2002, according to the public relations firm Burson-Marsteller. "Boards are being much more aggressive," says McGurn. "Whether it's a fear of personal liability or a desire to do better, boards are being prodded by investors to do a better job."
advertisement
