Corporate boards are shedding their sleepy images and becoming more ruthless when something is not quite right at the top.
The result: Top U.S. executives are being knocked off their pedestals faster than ever.
Boards are asking high-level company officers to hit the road for anything ranging from a financial scandal, lackluster results, improper insider trades or even an affair with another executive.
In February, U.S. companies announced 103 CEO changes compared with 92 in January, according to Challenger, Gray & Christmas, an outplacement and employment research firm. It was the fourth consecutive increase in monthly turnover and the first time in four years that more than 100 CEO changes were announced.
“A few years ago, most boards only rubber-stamped the decision of the executive team. But today they are flexing their muscles and digging into every area of the company,” said John Challenger, the firm’s chief executive. “They are scrutinizing the results and second-guessing every decision the CEO makes.”
Eisner, Fiorina, Stonecipher ...
Challenger's assertions were reinforced on Sunday, with Walt Disney Co.'s announcement of Robert Iger as the company's next chief executive. Iger was tapped to replace Michael Eisner, the longtime Disney chief who ran afoul of some of the Disney board last year. Eisner will be exiting a year earlier than planned.
Last month, Hewlett-Packard Co.’s board dismissed its chairman and chief executive, Carly Fiorina, as HP’s merger with Compaq Computer failed to deliver results.
OfficeMax Inc. also ousted its CEO in February after less than four months on the job after a billing scandal at the office products retailer.
And there is no sign of the trend slowing in March.
Just last week, Boeing Co.’s Harry Stonecipher was ousted for his romance with a female executive, while Fleetwood Enterprises Inc. fired its CEO following lackluster results and a bleak outlook.
Taking no prisoners
One reason for the no-nonsense attitude is the increasing independence of boards from management. New rules mandated by the New York Stock Exchange, the Nasdaq Stock Market and the Sarbanes-Oxley law require greater director independence and expertise.
Directors are becoming more fearful of facing legal action if they let fraudulent behavior go unchecked.
Ten former directors of WorldCom Inc. had been set to pay $18 million out of their own pockets to settle an investor class-action lawsuit. But the deal fell apart in early February when a federal judge ruled that a key part of the settlement was illegal.
WorldCom, a star of the late 1990s telecommunications boom, collapsed in 2002 in the largest bankruptcy in U.S. history, facing $41 billion in debt and an $11 billion accounting scandal. Bernard Ebbers, former WorldCom chief, is on trial for fraud.
“Boards are going to be much more apt to move quickly these days if they are not happy about something,” said Joe Griesedieck, head of CEO recruiting at Korn/Ferry International, an executive recruitment firm. Korn/Ferry is planning a boot camp for new CEOs in May. One issue in focus will be the importance of building a constructive relationship with boards.
Flashpoint over compensation
Another reason boards are adopting a tough stance is the flak they are getting about the huge compensation they are paying CEOs and other top executives. Bonuses paid to chief executives surged 46.4 percent in 2004, according to Mercer Human Resource Consulting.
“Executive compensation is up and since society also views that as a problem, boards are under even more pressure to get their money’s worth,” said Bradley Agle, director of the David Berg Center for Ethics and Leadership at the University of Pittsburgh.
The jump in CEO turnover, though, can act as a catalyst to increase pay in the executive suite.
An offer they can't refuse
Boards trying to lure successful chief executives from another company will have to make an offer that the prospective candidate cannot refuse and that is likely to mean a more attractive package than the predecessor’s, analysts said.
“The reality of this is that these searches are going to take more and more time as board committees are going to be much more discerning than they used to be,” said Cummins Catherwood, managing director of Walnut Asset Management.
“Companies will have to offer very attractive financial package or prospective candidates are never going to leave their safe perch, where they are having a good time.”
