Back in the '80s, corporate raiders like Carl Icahn and T. Boone Pickens waged takeover battles against beleaguered companies. With white knights, poison pills, and anti-takeover legislation, CEOs were able to keep their cushy jobs. But now CEOs are under attack again, and it's as if the job has become a temp position. Why the change? The Wall Street Journal's Alan Murray takes a look at this theme in his new book, Revolt in the Boardroom.
The old rulebook for CEOs was fairly straightforward. The CEO selected the board, controlled access to the board, and made the final decisions. In some cases, the CEO would provide nice perks to the board. There were rides on the corporate jet, lavish consulting gigs, and even contributions to favorite charities.
This isn't to say that this was wrong. Keep in mind that America has produced some of the best companies in the world.
But in 2005, the world changed. Within a few weeks, Hewlett-Packard's
What happened? Like any major change in society, the forces had been building over time.
One obvious factor was the extensive regulation of Sarbanes-Oxley (SOX), which was passed in 2002. Because of higher penalties and potential reputation damage, board members became more circumspect. It was simply not smart to be too loyal to the CEO.
SOX has been a powerful tool for auditors, as well, because they must sign off on the financials. Murray notes that in the case of AIG, PriceWaterhouseCoopers refused to certify the 10-K unless Greenberg was no longer CEO. It was enough to push him out.
Another big issue is the explosion in CEO compensation. Even when a company produces negligible shareholder returns, the CEO may accumulate hundreds of millions. At some point, it's something that can't be ignored or explained away.
It eventually attracts the anger of pension funds and activist hedge funds which may buy a significant position in a company's stock and threaten a proxy fight. It's proven to be successful, as seen with cases involving companies like McDonald's
There is also the influence of Institutional Shareholders Services (ISS). The firm provides research services for about 1,700 clients, of which most are institutional investors. It's often the case that these clients go along with ISS recommendations. The upshot is that Corporate America has been eliminating poison pills, staggered boards, and other takeover protections.
In light of all these developments, it should be no surprise that CEOs are taking their companies private. There is a tremendous amount of private equity capital to get these deals done, and if a company can generate enough cash flows to manage the debt load, it could be a big payday for the CEO.
So just like during the '80s, CEOs are finding clever ways to deal with the changed environment. The irony is that as companies go private, there's less transparency. It could even result in more layoffs as companies reduce costs to pay off interest.
One of the most interesting interviews in the book is with Hank Greenberg. Because of his strategic brilliance, he turned a small-time insurance company into a global giant.
His basic premise is that "[b]oards can't run companies." It's a simple statement but important. Can a part-time group really provide the vision for growth?
Greenberg concludes that if he was starting over, he'd go to China or India.
All in all, Murray has produced a great book. With his position as assistant managing editor, he has lots of access and provides some juicy behind-the-scenes details. At the same time, he weaves in some of the core elements of corporate governance.
Since Corporate America is still working things out, Murray's book is still far from definitive. But it gives the reader a useful framework to help understand some of the big changes in the boardroom.