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BOARDS HAVE LESS PATIENCE WITH CEOs, ACCORDING TO THE FINANCIAL TIMES

 

 

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Too hot in the hot seat

 

By Kerry Townsend  -  Jan 29 2001 18:36:32

THE FINANCIAL TIMES

 

 

When Home Depot, the home improvement retailer, announced that its new chief executive would be Robert Nardelli, a runner-up for the top post at General Electric, it did so amidst the usual fanfare. Analysts cautiously praised the choice. Company representatives expressed confidence that he would be a good motivator. They said he would bring with him valuable managerial experience from working under Jack Welch.

 

The honeymoon lasted a month. The company recently announced an earnings warning, and Mr. Nardelli has already been criticized for offering discounts during the holiday season. If the company doesn’t see growth and a rising share price in the next few quarters, he could find himself under intense scrutiny by an anxious board and a few angry shareholders. He could even find himself out of a job.

 

In the soup

 

If so, he will be in distinguished company. During the past year or so there has been a spate of chief executive departures from companies like Campbell Soup, Gillette, Xerox, 3m, Home Depot, Mattel, Sears, Roebuck and Procter & Gamble. But these big name companies aren’t alone.  there were 113 chief executive departures in December 2000 alone, an 85 per cent increase from the same month in 1999. There were over 1,000 departures in 2000 – with more than half occurring in the last half of the year.

 

What’s more significant is the average length of stay. According to a study of some 500 large corporations, the average tenure of chief executives is currently just three years – less than half what it was fifteen years ago.  Gillette, which announced its successor just this week, ousted its former chief executive after just 18 months, and Maytag, the appliance maker, fired its chief executive in 1999 after just three months. At PacifiCare Health Systems, a California-based health insurance company, it took just 12 weeks.

 

While some left due to retirement, most of the recent departures were due to performance. In the 1990s, things started to move very quickly – with shareholders and boards demanding immediate results. Suddenly every chief executive was expected to be the next Bill Gates or Jack Welch.

International competition increased and growth expectations, alongside the rocketing stock market, grew exponentially. If the company didn’t perform, the chief executive carried the can.

 

Great expectations

 

 

In an attempt to please shareholders, some chief executives even raised expectations themselves. Take Campbell Soup, for instance. After taking the reins in 1997, then chief executive Dale Morrison promised Wall Street nearly 10 per cent annual revenue growth. But when the company missed that forecast, the share price plunged and the board became restless. Just two years after becoming chief executive, Mr Morrison resigned.

 

These kinds of cases are increasing, in part, because most directors are now chosen through search committees, comprised of independent (non-executive) directors - rather than hand-picked by the chief executive. As a result, these independent directors are putting more pressure on the executive management, and particularly the chief executive, to perform.

 

Old boys club

 

 

“It used to be an old-boys club out there. The chief executive would meet with the board once every four weeks or so. They’d have a nice dinner and a cigar. They would only sanction what the chief executive was doing since he appointed all of them,” says Gerry Roche, a top headhunter at Heidrick & Struggles, whose company has seen double-digit growth due to the chief executive placements. “It ain’t that way anymore – they are really demanding now and are worried about their own back.”

 

Many institutional investors say it is about time that board members put the pressure on chief executives (usually but not always a fellow board member in the US) to perform. Investors argue that such pressure can be good for companies – and therefore for shareholders – because an independent board can openly criticise, and even fire, the chief executive without fear of reprisal.

 

And what the institutional investors say now counts. The growth of mutual funds and 401Ks, the private investor pension funds, means that these swelling voting blocks are able to wield more influence than ever before.

Their very presence is often enough to ensure that boards of directors put the squeeze on chief executives.

 

Surprise move

 

“It isn’t so much that institutional investors are constantly reaching out to the boards and applying pressure. But, the boards do know that the investors could pick up the phone at any time if they want to,” says Sarah Teslik, executive director, Washington-DC based Council of Institutional Investors.

 

Analysts say this is what happened at Gillette, which chose its new chief executive just this month. Gillette has two big shareholders as directors, one of whom is Warren Buffett, one of the world’s most successful investors.  Ex-chief executive Michael Hawley was forced into retirement last autumn, after just two years as chief executive, because of problems with the company’s share price and its profits. In a surprise move, the board of directors chose to go outside the company for his replacement.  Traditionally it has chosen successors internally.

 

“It wouldn’t have been easy before to place a chief executive from the outside. But because of the board’s activist nature and because there are two shareholders on the board, it allowed the board to go get a fresh perspective and hire an outsider,” says Jason Fox, food industry analyst, H&R Block Financial Advisors.

 

Merger fall out

 

A flurry of mergers and acquisitions also contributed to the turnover.  There was $1.75 trillion in mergers in 1999 compared to just $195 billion in 1990.

Generally, one chief executive has to leave when a merger takes place and this can create a knock on effect down the line. Two years after DaimlerChrysler’s merger, the ascendancy of German management has led to large scale departures among the company’s top American executives. One of the latest to leave was James Holden, the president and chief executive of Chrysler, who went in November.

 

Headhunters say that if the current turnover continues, there may be a significant shortage of talent for chief executives. That’s because there are so few to choose from among the thirtysomethings – the generation just after the baby boomers.

 

Talent desert

 

“No matter how you slice it, there will be few people in the workforce after the baby boomers retire. Because of this, there is going to be a real dearth of talent in the marketplace.

 

But what if the economy takes a downturn? “It could lower expectations, and swing the pendulum back the other way creating less pressure on chief executives,” says David Nelson, managing director, Credit Suisse First Boston. “But do I think we have gone too far yet? No, because things tend to go the way they are supposed to,” he says.