by Adam Hartung | Aug 24, 2017 | Boards of Directors, Leadership, Transportation
We learned last week that Jeff Immelt is a front-runner to be the next CEO of Uber. There are many reasons to be concerned about this possibility.
Uber has received nothing but bad news for a while now:
Amidst these scandals, Uber’s big investors are
writing down the value of their Uber holdings by 15%. After pushing the board for new leadership, and restructuring, it appears investors are losing faith in the company.
This puts the board in the hot seat. Investors want a new CEO that will eliminate the scandals. They want stability at the company. Reeling from so much bad news, they want someone atop the organization who will “right the ship” with “a steady hand on the tiller” so they can regain confidence. Amidst the turmoil, and the need to please investors, an executive who spent 35 years at GE, and over a decade in the top job, probably sounds like a good candidate. He’s known as a stable guy, numbers-focused, genteel, well-schooled (Harvard MBA) and above all “seasoned.”
But the stakes are incredibly high. Picking the wrong person at this moment could well lead to a horrible long-term outcome. While meeting short-term needs sounds like the #1 goal right now, for Uber to succeed means putting someone in the CEO job who can guide the tech company through a decade or more of tough decisions in a fast-paced market. Other boards have suffered horribly from making this decision hurriedly and poorly.
Remember the CEO turmoil at Yahoo:
- Yahoo was an early leader on the web, first in search, content distribution, on-line sales and advertising under CEO Tim Koogle from 1995-2001.
- Due to controversies (remember when he sold Nazi memorabilia?) he was replaced by proven media exec (25 years at Warner Brothers) Terry Semel from 2001-2007. He’s the one who missed the opportunities to buy Google and Facebook.
- Worried the company needed more pizzazz to catch leapfrogging competitors, the board brought back founder Jerry Yang for 17 months (2007-2008).
- When sales didn’t improve the board brought in brash, blunt speaking Carol Bartz, CEO of Autodesk, to turn around the company (2009-2011.) After months of cost-cutting but no sales improvement, she was gone.
- In January 2012 the board hired the President of Paypal, Scott Johnson, as CEO. But 5 months later he was fired for lying on his resume.
- Amidst a need to find someone to lead the company long-term, in 2012 the board hired Google darling Marissa Mayer as CEO. She left when Yahoo dissolved.
Or how about Twitter:
- From 2007-2008 Jack Dorsey was the founder who drove growth and early funding.
- Dorsey was replaced by Evan Williams (2008-2010) who was to supply a steadier, more seasoned hand at the top.
- Looking to grow and go public, the board replaced Williams with Dick Costolo (2010-2015). Although the IPO went well, lack of investor enthusiasm led to stock weakness.
- In 2015 Costolo was replaced by the returning Dorsey. He supposedly would rejuvenate the company. Since his return the stock has dropped about 50% amidst concerns regarding insufficient user and revenue growth.
But this is not a new problem in tech. Remember the CEO litany at Apple:
- Apple’s first CEO (1977-1981) was Michael Scott from National Semiconductor, brought in to support the inexperienced Steve Jobs and Steve Wozniak. But he was unable to get along with the founders, and built a reputation of firing those he didn’t like.
- Mike Markkula, Apple’s early investor and 3rd employee, replaced Scott as CEO from 1981-1983.
- Hoping to put someone with a better pedigree, more big-company experience and a steadier hand in the top job, Markkula hired John Sculley (former Pepsi CEO) to Apple’s top job in 1983. Markkula agreed with Sculley to fire the mercurial Jobs in 1985. Sculley remained CEO until 1993, when he was removed as Apple lost the war with Microsoft for corporate desktops and sales tanked. Sculley, the much heralded, experienced corporate leader, ended up ranked the 14th worst CEO of all time by Conde Nast Portfolio.
- The board replaced him with insider Michael Spindler (1993-1996) who tried to sell Apple to IBM, Sun and Philips, but failed.
- Spindler was replaced by Gil Amelio (1996-1997) former CEO of National Semiconductor, who was considered the kind of mature, dedicated leader Apple needed. As Apple shares slumped to all time lows, he bought Jobs-owned NeXt.
- Jobs (CEO 1997-2011) succeeded in convincing the Board to fire Amelio. Jobs subsequently fired the board. The rest is well documented.
Jeff Immelt is no Steve Jobs
Clearly, Uber’s board needs to find a Steve Jobs. And by all accounts, for all his skills, Jeff Immelt is NOT a Steve Jobs. During his tenure as CEO of GE things might have been boring, but the company also lost a third of its revenues, and a third of its market cap. After more than a decade of stagnation, Immelt was forced out. It is hard to imagine he is the right person to guide Uber, a high-tech company in a fast changing marketplace filled with techie employees who want a culture of rapid growth with opportunities to build fortunes in company equity. To maintain its value Uber needs to keep growing at 20%+/year, and Immelt has no experience creating that sort of revenue success.
So what should the board look for? Last summer Chris Zook and James Allen of Bain & Co. published their treatise on how to lead high growth companies The Founder’s Mentality – How To Overcome the Predictable Crises of Growth . I interviewed Chris Zook last year, and he offered great insights that would be incredibly valuable for the Uber board now:
- Being great is hard. Most companies are focused on going from mediocre to good, far from going from good to great. Uber is the undisputed champion in ride-sharing today. The leader must be unassailable as a visionary. Someone who understands how to build a GREAT company. The last CEO may have been problematic, but he built Uber – a tremendous business success. The new leader has to be on a par with other leaders of companies considered great by the employees (and investors) or he will not be respected, and there will be more problems, not fewer.
- “Next Generation CEOs” (as Zook calls them) are flexible thinkers who can figure out the hidden core, and build on it. The incoming CEO of Marvel realized its core was story telling, not comics, and directed the company into films and other growth venues. Jobs realized Apple was more than the Mac, and tied the company to offering easy-to-use products that fit emerging mobile needs. Uber’s next CEO has to go deeper than the scandals and obvious business model to understand what made Uber the leader, and expand on that nugget of strength to keep the company growing, and beating competitors. (Software for the gig economy? Time sharing assets?)
- Blockages are what kill companies. Most big-company CEOs are great at creating organizational blockages to create stability. They tend to be numbers first, customers and technology second. They put in place middle managers with the primary job of stopping behaviors that could be problematic. They instill “no” in order to stop mistakes. Do not ever forget the Sculley/Apple experience. The next Uber CEO has to be willing to operate in a culture with few barriers, direct access from the bottom employee to the CEO, and the ability to move quickly to deal with problems rather than attempting to eliminate the possibility of problems.
- The CEO has to be willing to make big bets. Today markets move fast. Leaders have to project trends, understand where customers are headed and place big bets that keep the company on top. Think about Bezos pushing Amazon to implement Prime, and buying Whole Foods. Think about Jobs directing Apple’s massive bet on mobile and the iPod. Think about Reed Hastings making the big bet at Netflix on streaming, and more recently on original content. To be a successful leader today of a growth company is not for the timid, nor for those who want to make small, progressive bets over time. It requires vision, the willingness to make big bets and the ability to convince your employees, your board of directors and your investors to buy into that bet.
The Uber board is apparently a bit tired of their search. Perhaps that’s because they aren’t looking for the right kind of person. As Mr. Zook told me, you rarely find leaders with a “Founder’s Mentality” through a search firm. You find them already competing, offering insight, doing new things in situations where the competition is intense. Like Jobs was at Pixar, and NeXt.
The right leader is out there – we’ve seen the type in companies mentioned here, and others like Google and Facebook. But you have to search for them intensely. What seems very, very unlikely is that Mr. Immelt is “the right man for the job” at Uber today.
by Adam Hartung | Aug 4, 2016 | Election, Leadership, Politics
Donald Trump has had a lot of trouble gaining good press lately. Instead, he’s been troubled by people from all corners reacting negatively to his comments regarding the Democrat’s convention, some speakers at the convention, and his unwillingness to endorse re-election for the Republican speaker of the house. For a guy who has been in the limelight a really long time, it seems a bit odd he would be having such a hard time – especially after all the practice he had during the primaries.
The trouble is that Donald Trump still thinks like a CEO. And being a CEO is a lot easier than being the chief executive of a governing body.
CEOs are much more like kings than mayors, governors or presidents:
- They aren’t elected, they are appointed. Usually after a long, bloody in-the-trenches career of fighting with opponents – inside and outside the company.
- They have the final say on pretty much everything. They can choose to listen to their staff, and advisors, or ignore them. Not employees, customers or suppliers can appeal their decisions.
- If they don’t like the input from an employee or advisor, they can simply fire them.
- If they don’t like a supplier, they can replace them with someone else.
- If they don’t like a customer, they can ignore them.
- Their decisions about resources, hiring/firing, policy, strategy, fund raising/pricing, spending – pretty much everything – is not subject to external regulation or legal review or potential lawsuits.
- Most decisions are made by understanding finance. Few require a deep knowledge of law.
- There is really only 1 goal – make money for shareholders. Determining success is not overly complicated, and does not involve multiple, equally powerful constituencies.
- They can make a ton of mistakes, and pretty much nobody can fire them. They don’t stand for re-election, or re-affirmation. There are no “term limits.” There is little to tie them personally to their decisions.
- They have 100% control of all the resources/assets, and can direct those resources wherever they want, whenever they want, without asking permission or dealing with oversight.
- They can say anything they want, and they are unlikely to be admonished or challenged by anyone due to their control of resource allocation and firing.
- 99% of what they say is never reported. They talk to a few people on their staff, and those people can rephrase, adjust, improve, modify the message to make it palatable to employees, customers, suppliers and local communities. There is media attention on them only when they allow it.
- They have the “power of right” on their side. They can make everyone unhappy, but if their decision improves shareholder value (if they are right) then it really doesn’t matter what anyone else thinks
One might challenge this by saying that CEOs report to the Board of Directors. Technically, this is true. But, Boards don’t manage companies. They make few decisions. They are focused on long-term interests like compliance, market entry, sales development, strategy, investor risk minimization, dividend and share buyback policy. About all they can do to a CEO if one of the above items troubles them is fire the CEO, or indicate a lack of support by adjusting compensation. And both of those actions are far from easy. Just look at how hard it is for unhappy shareholders to develop a coalition around an activist investor in order to change the Board — and then actually take action. And, if the activist is successful at taking control of the board, the one action they take is firing the CEO, only to replace that person with someone knew that has all the power of the old CEO.
It is very alluring to think of a CEO and their skills at corporate leadership being applicable to governing. And some have been quite good. Mayor Bloomberg of New York appears to have pleased most of the citizens and agencies in the city, and his background was an entrepreneur and successful CEO.
But, these are not that common. More common are instances like the current Governor of Illinois, Bruce Rauner. A billionaire hedge fund operator, and first-time elected politician, he won office on a pledge of “shaking things up” in state government. His first actions were to begin firing employees, cutting budgets, terminating pension benefits, trying to remove union representation of employees, seeking to bankrupt the Chicago school district, and similar actions. All things a “good CEO” would see as the obvious actions necessary to “fix” a state in a deep financial mess. He looked first at the financials, the P&L and balance sheet, and set about to improve revenues, cut costs and alter asset values. His mantra was to “be more like Indiana, and Texas, which are more business friendly.”
Only, governors have nowhere near the power of CEOs. He has been unable to get the legislature to agree with his ideas, most have not passed, and the state has languished without a budget going on 2 years. The Illinois Supreme Court said the pension was untouchable – something no CEO has to worry about. And it’s nowhere near as easy to bankrupt a school district as a company you own that needs debt/asset restructuring because of all those nasty laws and judges that get in the way. Additionally, government employee unions are not the same as private unions, and nowhere near as easy to “bust” due to pesky laws passed by previous governors and legislators that you can’t just wipe away with a simple decision.
With the state running a deficit, as a CEO he sees the need to undertake the pain of cutting services. Just like he’d cut “wasteful spending” on things he deemed non-essential at one of the companies he ran. So refusing funding during budget negotiations for health care worker overtime, child care, and dozens of other services that primarily are directed at small groups seems like a “hard decision, well needed.” And if the lack of funding means the college student loan program dries up, well those students will just have to wait to go to college, or find funding elsewhere. And if that becomes so acute that a few state colleges have to close, well that’s just the impact of trying to align spending with the reality of revenues, and the customers will have to find those services elsewhere.
And when every decision is subjected to media reporting, suddenly every single decision is questioned. There is no anonymity behind a decision. People don’t just see a college close and wonder “how did that happen” because there are ample journalists around to report exactly why it happened, and that it all goes back to the Governor. Just like the idea of matching employee rights, pay requirements, contract provisioning and regulations to other states – when your every argument is reported by the media it can come off sounding a lot like as state CEO you don’t much like the state you govern, and would prefer to live somewhere else. Perhaps your next action will be to take the headquarters (now the statehouse) to a neighboring state where you can get a tax abatement?
Donald Trump the CEO has loved the headlines, and the media. He was the businessman-turned-reality-TV-star who made the phrase “you’re fired” famous. Because on that show, he was the CEO. He could make any decision he wanted; unchallenged. And viewers could turn on his show, or not, it really didn’t matter. And he only needed to get a small fraction of the population to watch his show for it to make money, not a majority. And he appears to be very genuinely a CEO. As a CEO, as a TV celebrity — and now as a candidate for President.
Obviously, governing body chief executives have to be able to create coalitions in order to get things done. It doesn’t matter the party, it requires obtaining the backing of your own party (just as John Boehner about what happens when that falters) as well as the backing of those who don’t agree with you. ou don’t have the luxury of being the “tough guy” because if you twist the arm to hard today, these lawmakers, regulators and judges (who have long memories) will deny you something you really, really want tomorrow. And you have to be ready to work with journalists to tell your story in a way that helps build coalitions, because they decide what to tell people you said, and they decide how often to repeat it. And you can’t rely on your own money to take care of you. You have to raise money, a lot of money, not just for your campaign, but to make it available to give away through various PACs (Political Action Committees) to the people who need it for their re-elections in order to keep them backing you, and your ideas. Because if you can’t get enough people to agree on your platforms, then everything just comes to a stop — like the government of Illinois. Or the times the U.S. Government closed for a few days due to a budget impasse.
And, in the end, the voters who elected you can decide not to re-elect you. Just ask Jimmy Carter and George H.W. Bush about that.
On the whole, it’s a whole lot easier to be a CEO than to be a mayor, or governor, or President. And CEOs are paid a whole lot better. Like the moviemaker Mel Brooks (another person born in New York by the way) said in History of the World, Part 1 “it’s good to be king.“
by Adam Hartung | Mar 13, 2016 | In the Swamp, Leadership, Travel
United Continental Holdings is the most recent public company to come under attack by hedge funds. Last week Altimeter Capital and PAR Capital announced they were using their combined 7.1% ownership of United to propose a slate of 6 new directors to the company’s board. As is common in such hedge fund moves, they expressed strongly their lack of confidence in United’s board, and pointed out multiple years of underperformance.
United’s leadership is certainly in a tough place. The airline consistently ranks near the bottom in customer satisfaction, and on-time performance. It has struggled for years with labor strife, and the mechanics union just rejected their proposed contract – again. The flight attendant’s union has been in mediation for months. And few companies have had more consistently bad public relations, as customers have loudly complained about how they are treated – including one fellow making a music and speaking career out of how he was abused by United personnel for months after they destroyed his guitar.
But is changing the directors going to change the company? Or is it just changing the guest list for an haute couture affair? Should customers, employees, suppliers and investors expect things to really improve, or is this a selection between the devil and the deep blue sea?
Much was made of the fact that one of the proposed new directors is the former CEO of Continental, Gordon Bethune, who was very willing to speak out loudly and negatively regarding United’s current board. But Mr. Bethune is 74 years old. Today most companies have mandatory director retirement somewhere between age 68 and 72. Retired since 2004, is Mr. Bethune really in step with the needs of airline customers today? Does he really have a current understanding of how the best performing airlines keep customers happy while making money?
And, don’t forget, Mr. Bethune hand picked Mr. Jeff Smisek to replace him at Continental. Mr. Smisek was the fellow who took over Mr. Bethune’s board seat in 2004 after being appointed President and COO when Mr. Bethune retired. Smisek became CEO in 2010, and CEO of United Continental after the merger, and led the ongoing deterioration in United’s performance as well as declining employee moral. And then there’s that pesky problem of Mr. Smisek bribing government officials to improve United’s gate situation in Newark, NJ which caused him to be fired by the current board. Is it coincidental that this attack on the Board did not happen for years, but happens now that there is a new CEO – who happens to be recently recovering from a heart replacement?
Although Mr. Bethune has commented that the new board would be one that understands the airline industry, the slate does not reflect this. Mr. Gerstner is head of Altimiter and by all accounts appears to be a finance expert. That was the background Ed Lampert brought to Sears, another big Chicago company, when he took over that board. And that has not worked out too well at all for any constituents – including investors.
One can give great kudos to the hedge funds for proposing a very diverse slate. Half the proposed directors are either female or of color. And, other than Mr. Bethune, the slate is pretty young – with 2 proposed directors under age 50. Congratulations on achieving diversification! But a deeper look can cause us to wonder exactly what these directors bring to the challenges, and what they are likely to want to change at United.
Rodney O’Neal was the former CEO of Delphi Automotive. A lifelong automotive manager and executive, he graduated from the General Motors Institute and spent his career at GM before going to the parts unit GM had created in 1997 as a Vice President. Many may have forgotten that Delphi famously filed for bankruptcy in 2005, and proceeded to close over half its U.S. plants, then close or sell almost all of the other half in 2006. Mr. O’Neal became CEO in 2007, after which the company closed its plants in Spain despite having signed a commitment letter not to do so. He was CEO in 2008 when the company sued its shareholders. And in 2009 when the company sold its core assets to private investors, then dumped assets into the bankrupt GM, cancelled the stock and renamed the old Delphi DPH Holdings. Cutting, selling and reorganizing seem to be his dominant executive experience.
Barney Harford is a young, talented tech executive. He headed Orbitz, where Mr. Gerstner was on the board. Orbitz was originally created as the Travelocity and Expedia killer by the major airlines. Unfortunately, it never did too well and Mr. Harford actually changed the company direction from primarily selling airline tickets to selling hotel rooms.
It is always good to see more women proposed for board positions. However, Ms. Brenda Yester Baty is an executive with Lennar, a very large Florida-based home builder. And Ms. Tina Stark leads Sherpa Foundry which has a 1 page web site saying “Sherpa Foundry builds
bridges between the world’s leading Corporations and the Innovation Economy.” What that means leaves a lot of room for one’s imagination, and precious little specifics. What either of these people have to do with creating a major turnaround in the operations of United is unclear.
There is no doubt that United is ripe for change. Replacing the CEO was clearly a step in the right direction – if a bit late. But one has to wonder if the new directors are there to make some specific change? If so, what kind of change? Despite the rough rhetoric, there has been no proclamation of what the new director slate would actually do differently. No discussion of a change in strategy – or any changes in any operating characteristics. Just vague statements about better governance.
Historically most activists take firm aim at cutting costs. And this is probably why the 2 largest unions have already denounced the new slate, and put their full support behind the existing board of directors. After so many years of ill-will between management and labor at United, one would wonder why these unions would not welcome change. Unless they fear the new board will be mostly focused on cost-cutting, and further attempts at downsizing and pay/benefits reductions.
Investors will most likely get to vote on this decision. Keep existing board members, or throw them out in favor of a new slate? One would like to see United’s reputation, and operations, improve dramatically. But is changing out 6 directors the answer? Or are investors facing a vote that has them selecting between 2 less than optimal options? It would be good if there was less rhetoric, and more focus on actual proposals for change.
by Adam Hartung | Feb 11, 2016 | Current Affairs, In the Whirlpool, Leadership, Lock-in
USAToday alerted investors that when Sears Holdings reports results 2/25/16 they will be horrible. Revenues down another 8.7% vs. last year. Same store sales down 7.1%. To deal with ongoing losses the company plans to close another 50 stores, and sell another $300million of assets. For most investors, employees and suppliers this report could easily be confused with many others the last few years, as the story is always the same. Back in January, 2014 CNBC headlined “Tracking the Slow Death of an Icon” as it listed all the things that went wrong for Sears in 2013 – and they have not changed two years later. The brand is now so tarnished that Sears Holdings is writing down the value of the Sears name by another $200million – reducing intangible value from the $4B at origination in 2004 to under $2B.
This has been quite the fall for Sears. When Chairman Ed Lampert fashioned the deal that had formerly bankrupt Kmart buying Sears in November, 2004 the company was valued at $11billion and 3,500 stores. Today the company is valued at $1.6billion (a decline of over 85%) and according to Reuters has just under 1,700 stores (a decline of 51%.) According to Bloomberg almost no analysts cover SHLD these days, but one who does (Greg Melich at Evercore ISI) says the company is no longer a viable business, and expects bankruptcy. Long-term Sears investors have suffered a horrible loss.
When I started business school in 1980 finance Professor Bill Fruhan introduced me to a concept that had never before occurred to me. Value Destruction. Through case analysis the good professor taught us that leadership could make decisions that increased company valuation. Or, they could make decisions that destroyed shareholder value. As obvious as this seems, at the time I could not imagine CEOs and their teams destroying shareholder value. It seemed anathema to the entire concept of business education. Yet, he quickly made it clear how easily misguided leaders could create really bad outcomes that seriously damaged investors.
As a case study in bad leadership, Sears under Chairman Lampert offers great lessons in Value Destruction that would serve Professor Fruhan’s teachings well:
1 – Micro-management in lieu of strategy. Mr. Lampert has been merciless in his tenacity to manage every detail at Sears. Daily morning phone calls with staff, and ridiculously tight controls that eliminate decision making by anyone other than the top officers. Additionally, every decision by the officers was questioned again and again. Explanations took precedent over action as micro-management ate up management’s time, rather than trying to run a successful company. While store employees and low- to mid-level managers could see competition – both traditional and on-line – eating away at Sears customers and core sales, they were helpless to do anything about it. Instead they were forced to follow orders given by people completely out of touch with retail trends and customer needs. Whatever chance Sears and Kmart had to grow the chain against intense competition it was lost by the Chairman’s need to micro-manage.
2 – Manage-by-the-numbers rather than trends. Mr. Lampert was a finance expert and former analyst turned hedge fund manager and investor. He truly believed that if he had enough numbers, and he studied them long enough, company success would ensue. Unfortunately, trends often are not reflected in “the numbers” until it is far, far too late to react. The trend to stores that were cleaner, and more hip with classier goods goes back before Lampert’s era, but he completely missed the trend that drove up sales at Target, H&M and even Kohl’s because he could not see that trend reflected in category sales or cost ratios. Merchandising – from buying to store layout and shelf positioning – are skills that go beyond numerical analysis but are critical to retail success. Additionally, the trend to on-line shopping goes back 20 years, but the direct impact on store sales was not obvious until customers had long ago converted. By focusing on numbers, rather than trends, Sears was constantly reacting rather than being proactive, and thus constantly retreating, cutting stores and cutting product lines.
3 – Seeking confirmation rather than disagreement. Mr. Lampert had no time for staff who did not see things his way. Mr. Lampert wanted his management team to agree with him – to confirm his Beliefs, Interpretations, Assumptions and Strategies — to believe his BIAS. By seeking managers who would confirm his views, and execute, rather than disagree Mr. Lampert had no one offering alternative data, interpretations, strategies or tactics. And, as Mr. Lampert’s plans kept faltering it led to a revolving door of managers. Leaders came and went in a year or two, blamed for failures that originated at the Chairman’s doorstep. By forcing agreement, rather than disagreement and dialogue, Sears lacked options or alternatives, and the company had no chance of turning around.
4 – Holding assets too long. In 2004 Sears had a LOT of assets. Many that could likely be redeployed at a gain for shareholders. Sears had many owned and leased store locations that were highly valuable with real estate prices climbing from then through 2008. But Mr. Lampert did not spin out that real estate in a REIT, capturing the value for SHLD shareholders while the timing was good. Instead he held those assets as real estate in general plummeted, and as retail real estate fell even further as more revenue shifted to e-commerce. By the time he was ready to sell his REIT much of the value was depleted.
Additionally, Sears had great brands in 2004. DieHard batteries, Craftsman tools, Kenmore appliances and Lands End apparel were just 4 household brands that still had high customer appeal and tremendous value. Mr. Lampert could have sold those brands to another retailer (such as selling DieHard to WalMart, for example) as their house brands, capturing that value. Or he could have mass marketd the brand beyond the Sears store to increase sales and value. Or he could have taken one or more brands on-line as a product leader and “category killer” for ecommerce customers. But he did not act on those options, and as Sears and Kmart stores faded, so did these brands – which largely no longer have any value. Had he sold when value was high there were profits to be made for investors.
5 – Hubris – unfailingly believing in oneself regardless the outcomes. In May, 2012 I wrote that Mr. Lampert was the 2nd worst CEO in America and should fire himself. This was not a comment made in jest. His initial plans had all panned out very badly, and he had no strategy for a turnaround. All results, from all programs implemented during his reign as Chairman had ended badly. Yet, despite these terrible numbers Mr. Lampert refused to recognize he was the wrong person in the wrong job. While it wasn’t clear if anyone could turn around the problems at Sears at such a late date, it was clear Mr. Lampert was not the person to do it. If Mr. Lampert had been as self-analytical as he was critical of others he would have long before replaced himself as the leader at Sears. But hubris would not allow him to do this, he remained blind to his own failings and the terrible outcome of a failed company was pretty much sealed.
From $11B valuation and a $92/share stock price at time of merging KMart and Sears, to a $1.6B valuation and a $15/share stock price. A loss of $9.4B (that’s BILLION DOLLARS). That is amazing value destruction. In a world where employees are fired every day for making mistakes that cost $1,000, $100 or even $10 it is a staggering loss created by Mr. Lampert. At the very least we should learn from his mistakes in order to educate better, value creating leaders.
by Adam Hartung | Jun 22, 2015 | Current Affairs, Defend & Extend, Lock-in
The Economic Policy Institute issued its most recent report on CEO pay yesterday, and the title makes the point clearly “Top CEOs Make 300 Times More than Typical Workers.” CEOs of the 350 largest US public companies now average $16,300,000 in compensation, while typical workers average about $53,000.
Actually, it is kind of remarkable that this stat keeps grabbing attention. The 300 multiple has been around since 1998. The gap actually peaked in 2000 at almost 376. There has been whipsawing, but it has averaged right around 300 for 15 years.
The big change happened in the 1990s. In 1965 the multiple was 20, and by 1978 it had risen only to 30. The next decade, going into 1990 saw the multiple rise to 60. But then from 1990 to 2000 it jumped from 60 to well over 300 – where it has averaged since. So it was long ago that large company CEO pay made its huge gains, and it such compensation has now become the norm.
But this does rile some folks. After all, when a hired CEO makes more in a single workday (based on 5 day week) than the worker does in an entire year, justification does become a bit difficult. And when we recognize that this has happened in just one generation it is a sea change.
If average workers are angry, and some investors are angry, and politicians are increasingly speaking negatively about the topic why does CEO pay remain so high?
Reason 1 – Because they can
CEOs are like kings. They aren’t elected to their position, they are appointed. Usually after several years of grueling internecine political warfare, back-stabbing colleagues and gerrymandering the organization. Once in the position, they pretty much get to set their own pay.
Who can change the pay? Ostensibly the Board of Directors. But who makes up most Boards? CEOs (and former CEOs). It doesn’t do any Board member’s reputation any good with his peers to try and cut CEO pay. You certainly don’t want your objection to “Joe’s” pay coming up when its time to set your pay.
Honestly, if you could set your own pay what would it be? I reckon most folks would take as much as they could get.
Reason 2 – the Lake Wobegon effect
NPR (National Public Radio) broadcasts a show about a fictional, rural Minnesota town called Lake Wobegon where “the women are strong, the men are good-looking, and all of the children are above average.”
Nice joke, until you apply it to CEOs. The top 350 CEOs are accomplished individuals. Which 175 are above average, and which 175 are below average? Honestly, how does a Board judge? Who has the ability to determine if a specific CEO is above average, or below average?
So when the “average” CEO pay is announced, any CEO would be expected to go to the Board, tell them the published average and ask “well, don’t you think I’ve done a great job? Don’t you think I’m above average? If so, then shouldn’t I be compensated at some percentage greater than average?”
Repeat this process 350 times, every year, and you can see how large company CEO pay keeps going up. And data in the EPI report supports this. Those who have the greatest pay increase are the 20% who are paid the lowest. The group with the second greatest pay increase are the 20% in the next to lowest paid quintile. These lower paid CEOs say “shouldn’t I be paid at least average – if not more?”
The Board agrees to this logic, since they think the CEO is doing a good job (otherwise they would fire him.) So they step up his, or her, pay. This then pushes up the average. And every year this process is repeated, pushing pay higher and higher and higher.
Oh, and if you replace a CEO then the new person certainly is not going to take the job for below-average compensation. They are expected to do great things, so they must be brought in with compensation that is up toward the top. The recruiters will assure the Board that finding the right CEO is challenging, and they must “pay up” to obtain the “right talent.” Again, driving up the average.
Reason 3 – It’s a “King’s Court”
Today’s large corporations hire consultants to evaluate CEO performance, and design “pay for performance” compensation packages. These are then reviewed by external lawyers for their legality. And by investment bankers for their acceptability to investors. These outside parties render opinions as to the CEO’s performance, and pay package, and overall pay given.
Unfortunately, these folks are hired by the CEO and his Board to render these opinions. Meaning, the person they judge is the one who pays them. Not the employees, not a company union, not an investor group and not government regulators. They are hired and paid by the people they are judging.
Thus, this becomes something akin to an old fashioned King’s Court. Who is in the Boardroom that gains if they object to the CEO pay package? If the CEO selects the Board (and they do, because investors, employees and regulators certainly don’t) and then they collectively hire an outside expert, does anyone in the room want that expert to say the CEO is overpaid?
If they say the CEO is overpaid, how do they benefit? Can you think of even one way? However, if they do take this action – say out of conscious, morality, historical comparisons or just obstreperousness – they risk being asked to not do future evaluations. And, even worse, such an opinion by these experts places their clients (the CEO and Board) at risk of shareholder lawsuits for not fulfilling their fiduciary responsibility. That’s what one would call a “lose/lose.”
And, let’s not forget, that even if you think a CEO is overpaid by $10million or $20million, it is still a rounding error in the profitability of these 350 large companies. Financially, to the future of the organization, it really does not matter. Of all the issues a Board discusses, this one is the least important to earnings per share. When the Board is considering the risks that could keep them up at night (cybersecurity, technology failure, patent infringement, compliance failure, etc.) overpaying the CEO is not “up the list.”
The famed newsman Robert Krulwich identified executive compensation as an issue in the 1980s. He pointed out that there were no “brakes” on executive compensation. There is no outside body that could actually influence CEO pay. He predicted that it would rise dramatically. He was right.
The only apparent brake would be government regulation. But that is a tough sell. Do Americans want Congress, or government bureaucrats, determining compensation for anyone? Americans can’t even hardly agree on a whether there should be a minimum wage at all, much less where it should be set. Rancor against executive compensation may be high, but it is a firecracker compared to the atomic bomb that would be detonated should the government involve itself in setting executive pay.
Not to mention that since the Supreme Court ruling in the case of Citizens United made it possible for companies to invest heavily in elections, it would be hard to imagine how much company money large company CEOs would spend on lobbying to make sure no such regulation was ever passed.
How far can CEO pay rise? We recently learned that Jamie Dimon, CEO of JPMorganChase, has amassed a net worth of $1.1B. It increasingly looks like there may not be a limit.
