Archives for posts with tag: Board of Directors
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Firing CEOs for Cause with No Severance!

August 12, 2018 //
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Barnes and Noble, the bookstore chain, has experienced more than its share of trouble. They are hurt by Amazon, by the rise of e-books, the lack of book reading by younger people, too much debt, and excessive turnover in the management ranks, to name a few. Now, their third CEO, in two years was just fired by the Board. According to the Wall Street Journal, here are some of the details: the CEO violated Company policy (not specifically named), this was not due to any SEC type financial reporting or potential fraud, he was removed from the Board immediately, and he will receive No Severance!

This is what should happen but rarely does. If you Google severance pay, the stories never end. From media people like Harvey Weinstein collecting $25 million to Fox’s Roger Ailes receiving $40 million both leaving in sexual harassment scandals. United’s former CEO left in a corruption scandal and received $29 million. All this makes the misconduct departure of Lululemon’s CEO, who only received about $5 million, sound like a real bargain.

The only other recent and well-known example I could find of a CEO leaving for cause and getting no severance was the Vegas mogul, Steve Wynn and his ex-wife was a still a major shareholder in his company.

Why don’t more companies and their Board of Directors do the proper thing and not pay severance for executives who were fired for cause?  One obvious issue is the legal definition of  “cause”. When it involves violation of a company’s policies or code of ethics, this should not be an issue, but it is still usually not followed. If it involves a legal action, such as a lawsuit to establish “cause”, public firms usually run or at least look the other way!

Why? The real reason is that large public firms are afraid. Afraid of having to give depositions; afraid to go to court and mostly afraid the company will look stupid or mean or bad or worst yet, wrong! I know this because, as a CFO, I have been in more than one meeting that involved terminating another senior executive for cause and I am the only one suggesting no severance and that our company should pursue legal action.

In the case of a fallen CEO, it is the responsibility of the Board of Directors to take action whether that is to pursue criminal or civil actions and/or to withhold any severance. Too many Boards are weak. They take the easy way out, pay some hush money, sign a nondisclosure agreement and find a new CEO.

So let’s congratulate the Boards of Barnes and Noble and even Wynn Casinos for taking the first hard step and not further enriching a discredited CEO with any severance package! Most people distrust large firms and their executives. When people read about these undeserved and unexplainable severance payoffs, it only adds to that distrust.

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Fraud and SEC Enforcement

December 29, 2017 //
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The Journal of Accountancy (yes, there really is such a publication) had an article about the Securities and Exchange Commission (SEC) bringing and enforcing fraud cases over the last decade. The largest cases involved either improper financial reporting or violations of the Foreign Corrupt Practice Act which deals with bribes to international officials. Not surprisingly the financial services industry had, by far, the most cases and fines followed by natural resource and energy firms (think mining and oil and gas).

But what was very surprising, and more than a bit disturbing to me, was who the SEC prosecuted and fined.  Corporations themselves were at the top of the list which made sense. But, what did not, was that Chief Financial Officers (CFOs) were second followed by a firm’s Chief Executive Officer (CEOs) as a far distant third. Worst of all was that the Board of Directors were barely fined at all! Now, I know I was a practicing (and never indicted CFO) and I know CFOs certainly play a major role in a fraud of any kind. But, let me tell you this: nine times out of ten when a CFO does something bad, his or her CEO not only knows about it but probably pressured the CFO to cook the books in the first place! I could understand if CFOs were fined a bit more than CEOs, but not ten times as much in this study. CEOs are always responsible and often behind what goes on, period.

And, the Directors in these firms should have know something was going on! I have written on several occasions about the often limited involvement or usefulness of many members of Boards of Directors. But remember the corporate officers from the CEO to the CFO all report to and are responsible to the Board. The buck, and on average, $250,000 per year of bucks for large company directors, stops with the Board.

As many readers know, I hate fraud and especially fraud committed by senior managers who are paid a lot of money. So I am all for prosecuting and fining those who commit fraud. But if the SEC and the U.S. Government focus the bulk of their efforts on CFOs and almost ignore CEOs and their Boards, the occurrence and magnitude of fraud will only continue and probably get worse.

Think of this like a National League Football team. When a team, like my Cleveland Browns go winless, they fire the coach. When the team only wins a few games in several years, you fire the General Manager, the Director of Player Personnel and everyone but the Owners. So, in corporate terms, when major fraud occurs, fire the Board. This is how you send a message and how things might have a chance to improve in the future.

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Chickenshit Club and Corporate Fraud

October 9, 2017 //
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The unusual title of this blog post is from a new book called The Chickenshit Club by Jesse Eisinger. The book’s subtitled is “Why the Justice Department Fails to Prosecutes Executives.”  The writer cites several reasons why this is happening.  First, U.S. Attorneys are concerned about their conviction record and shy away from tough corporate cases they could lose, thus the nickname chickenshit. The second reason is even worse. The belief is that a far too cozy of a relationship exists between the government attorneys and the white collar defense lawyers who defend the corporate executives. The issue is that many government attorneys end up working, for far higher salaries later in their careers,  for the very laws firms they have been fighting against.

I have written before that corporate Boards of Directors and senior management are reluctant or afraid to prosecute fellow executives who commit crimes.This is true whether it is internal fraud, breaking security laws or even violating the firm’s ethics or morality code such as with sexual harassment.   Firms are reluctant because it often involves going after one of their own. Firms are afraid because to bring criminal charges because they have to follow through and maybe even testify in court!

So, when you combine the U.S. Government’s unwillingness to charge and try corporate executives and the corporations own reluctance to even report issues to the authorities, what do we have? To paraphrase James Bond, it is a license to steal and commitment securities fraud!

I Hate fraud and especially Management Fraud by those who get paid a lot already. So what is to be done? The federal government is hard to change as we all know. But, if these issues become more known they could end up being debated in law schools and maybe the next group of U.S. Attorneys will handle themselves and their responsibilities better. The corporate problem gets back to another one of my pet peeves, corporate boards.  Board of Directors have to step up and show courage and leadership in properly discipling and prosecuting executives who behave badly. None of this is easy but the present lax attitude to corporate misdoing needs to change.

To paraphrase the Nike logo, Just Do the Right Thing! People’s view of business and government may actually improve.

 

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Uber’s Leadership and Culture Crisis

July 23, 2017 //
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Not many firms have had the continued bad press as Uber has over the past couple years. Sued on their business and employment practices and then on their self-driving car technology. Employees filing numerous sexual harassment and discrimination suits. Now the private Board throws out the Founder and CEO, Travis Kalanick. Mr. Kalanick is a self-described bad boy who admitted before his firing that he needed help managing the company. He is also the person most people believe created and encouraged the firm’s toxic culture.

Uber has fired some twenty managers and brought a couple female executives on board. But all of these measures may be too little and too late.  So what is Uber to do?

Leadership and Culture are the flip side of each other. What Uber needs is not only a new CEO but a new senior management team. Uber should also replace most of the Board, especially the long time Directors.  Mr. Kalanick is no longer CEO but he was allowed to remain on the Board, which is another mistake. Why? Because it will take a new CEO, senior team and Board to create a new corporate culture. This is not an easy or a quick thing to do. Leadership starts at the top and that is the Board. If the existing Board could not figure out the many legal problems and ethical missteps that Mr. Kalanick and his team were subjecting the firm to, they need to be replaced. Actions speak much louder than words. And major cultural change, in this and most cases, must start at the top. The Board is who everyone in a company look to for guidance.

Uber is often cited as an example of industry disruption as taxi cabs are disappearing. But Uber has other capable competitors like Lyft. These competitors may find a way to gain an advantage while Uber tries to rebuild both its Leadership and Culture. We will see if Uber can truly change and survive.

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Improving Boards of Directors

July 4, 2017 //
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Two recent articles in the Wall Street Journal raised some new thoughts about Boards of Directors. This, often little understood group, technically manage the biggest public companies. I have written before on the lack of attention and professionalism of some corporate directors and I keep hoping this governance area will improve! Here are a couple ideas that might help.

One article dealt with the growing trend of large investors, like hedge or private equity funds, who buy a block of a firm’s stock and then trying to force the company to elect a number of their nominees as directors. On the surface the concept sounds good and a way to shake up underperforming  firms. But here is the catch. The people nominated by the outside investor are not subject to any review or disclosure of their positions on critical matters that might impact the target firm. They are just listed as part of the slate of directors that the investor wants. So the shareholders who are asked to vote for the new directors do so with very little useful information. The Journal article suggests that these nominated directors appear at public forums with independent moderators or even some of the current directors to debate views. To make this work the very large institutional equity owners like Fidelity or the California Pension funds would have to insist on this additional step before voting. I really like this idea!

The second article rethought the current trend of having only one corporate officer like the CEO on the Board with all outside independent directors. The concerns here are twofold.  First, in large and diverse businesses the entire board might benefit from more internal knowledge especially during a crisis or new initiative. For example if the firm is about to launch a huge capital or technology project, another corporate officer on the Board might add a lot.  Second, if the Board has only one insider and something happens to that person-health or an unexpected dismissal- the other outside directors may be at a loss as to name their replacement. So the thought is on a board of 10-12 directors having 2 or 3 inside officers might be best. Again this seems like a worthwhile idea.

So as I have said before, the buck stops with the Board of Directors. All the officers report to them and the Board represents the mass of shareholders. The more knowledge shareholders have about directors the better and the more directors know and are comfortable with the senior officer group the better as well.

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Women on Boards

March 9, 2017 //
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The Wall Street Journal just published a new article on this subject. A huge money manager, State Street announced it would vote against corporate Board members who are part of company’s nominating committee and do not add women to their Boards. State Street is also placing a statue of a young girl on Wall Street where she will stare at the famous Bull. (I did not make this up!)

In a review of the Russell 3000 index of companies, a quarter of firms have no female directors and over half of the firms have under 15% of women on their Boards.

In my book, The Business Zoo, I commented on what I called the One Third role of Board members. One third of Board members should not be on Boards at all due to lack of valuable background, age or being too busy on other Boards. The second One Third had the potential to be qualified and contribute but for a number of reasons did not; not reading the Board materials ahead or ever making a worthwhile comment. The final One Third led the Board and did a great job.

In my day we only had one or two women on a typical Board of 10 to 12. The women Directors were always in the best One Third category.  Why was this? Did they consider it an honor and a duty to service a firm which was paying them a lot of money? Were they younger and had much more energy and focus? Did they, as women, just work with other people better when given a chance? Of course all of these reasons are true. In fact, State Street’s research shows that in the last five years, Boards with at least three women Directors outperformed those companies with no women Directors. No surprise to me.

So how do we end up with more women on corporate Boards? I am not big on the statue. I do agree that voting pressure on companies and their Boards can help. Boards all have committees to nominate and elect new directors. Most of the committee members are men who nominate other men who they know. The existing women on Boards need to exert some pressure themselves and get on these nominating committees. Then not be shy about suggesting other women. And they can point to studies that show that Boards with more women directors can drive success and higher stock values!

Add on note: I really appreciate everyone who reads this blog and who bought my book on Amazon. I have received some wonderful feedback and am now starting on a second book!

Brad

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Volkswagon’s Board Flawed Culture

December 26, 2015 //
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The Wall Street Journal recently ran an article about the engine emission crisis at Volkswagon (VW). Senior executives of VW acknowledged that their firm had a “culture of tolerance for rule breaking” that lead to this “chain of mistakes”. Although the article did not name exactly who ordered their engineers to install the software to fool the tests, the article did state that it found no evidence that “VW executive or supervisory Boards were involved in the fraud”.

Yeh. Heard that one before. After British Petroleum (BP) had the disastrous oil spill in the Gulf, a top writer from Fortune magazine stated that BP’s long time focus on cost cutting versus safety goes back directly to the Board of Directors. The Gulf spill was proceeded by several major safety events including a huge explosion in Texas that killed a dozen workers. All organizations look for guidance or direction from the top and a Board is the ultimate top. It appears that maximizing profits through cost cutting was a top priority over safety for BP and its Board.

At my old firm, USG Corporation, every meeting, even the Board meetings, started with a review of safety. This goes back to when USG started as a gypsum mining firm. Major accidents, especially deaths, are reviewed in often grisly details. Senior people, including myself, would attend safety dinners when a plant reached an accident free milestone. Safety was a core value at USG Corporation.

Sadly in most of these disasters like BP and VW often a few, token senior people are fired but with huge severance packages. But a lot of staff or line engineers at these firms lose their job and often their livelihoods because of their presumed role.

At VW, the Board and the senior executives looked the other way or showed a tolerance for rule breaking or it would not have occurred. And  German car companies are known for their excellence in their engineering and engines. That makes this all the more unbelievable to me.

In my view, senior executives and Board members must be held to higher standards than they are and at times, they need to bear the blame and responsibility for not focusing on what is right.  Read the rest of this entry »

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Boards involvement in hiring CFOs

April 15, 2015 //
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The Wall Street Journal has a weekly half page devoted to my former professional as a CFO. In a recent edition, they highlighted a new trend of corporate Board of Directors getting actively involved in their firm’s search and hiring of a new Chief Financial Officer. The reasons cited included the increased importance of the CFO role in everything from regulations such as Sarbanes-Oxley reporting, to  strategy and deal-making. A final reason was that former CFO’s are increasing looked upon as candidates to become a firm’s CEO.

My reaction to all this? Well, it’s about time! Time that CFO’s are getting the respect so many deserve, as they are often quiet and low key, yet are often the second most critical person in a public company. But more importantly, it’s about time that Boards of Directors are actually acknowledging this and getting involved in this hiring activity.

Historically, in many old line firms, the path to CFO was internally determined. Often it was a matter of paying your dues and moving up through various financial roles in treasury or controllership. If a business and its industry remained stagnant over the 20 plus year period it took to groom a CFO, that was a fine strategy. But businesses and their industries are not stagnant. Competition changes, mergers occur and technologies leap ahead. So the perfect internally- grown candidate of the past may not be best suited for a new environment.

The second way CFOs, and most other internal Officers were chosen, was solely by the Chairman or CEO. This was usually decided by the CEO alone who then informed the Board of his choice. The Board then dutifully elected the person to be CFO. Perhaps the Board knew a little about the person from HR succession charts but the Board rarely got involved in the selection or even with a token interview. This, in my mind, is wrong.

All public corporate Officers, including CFOs, are legally “elected by and serve at the pleasure of the Board”. Directors need to perform some due diligence on this critical personnel task. To do this properly, Boards need to spent time, not just in Board meetings or group dinners, with the senior officers. In fact, I would suggest that most of the countless, large, quarterly Board dinners I ever attended were worthless. Private one-on-one dinners between the various Directors and members of senior management would be invaluable to both parties. This would also allow the Board to have a much better of idea of who they were electing to be the next CFO or CEO. And if the current CEO objects because he or she is paranoid of what a Board member could learn in private from one of his team, then the Board better look very hard at that CEO!

Directors of large public company Boards are paid over $200,000 a year. Many of the problems Directors encounter when senior officers, like CFOs or CEOs, either abruptly resign or are fired for cause could be eliminated if they spent more time upfront getting to know these key people. So, Directors, get involved in hiring new, CFOs and, in some cases, other corporate officers. But also spend some quality time with the senior officers you have in place; it will be well worth your while.

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Women on Boards of Directors

February 15, 2015 //
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A recent study of women directors on Standard and Poors 1500 company boards was done for the Wall Street Journal by governance researchers at MSCI Inc. Today, women make up about 16% of all these directors which is a slight improvement from 2009 when women were 12.5% of these directors.  Of the 67 firms that have a female CEO, like IBM, General Motors or PepsiCo, those Boards often have three or more women. Remember that most Boards average 8 to 12 directors. So, some slow progress is being made.

My last two public company Boards each had one female director at the time and currently have three women out of a total of 21 positions. These companies and their competitors in the construction and chemical industries are historically under represented by women versus many of the more consumer related firms.

But enough of the statistics, let’s get to the main point. What was my experience with women directors? In a word or two, they were better than many of their male counterparts. Let me list some reasons why.

1. Women directors view their position on corporate Boards as more of an honor and thus take it more serious. This may be because they have fewer opportunities or because they have to really work hard to land the role versus many of the “old boy” overlapping Board networks which still exist. The women directors are usually younger and are on fewer Boards than many of their male counterparts. We once had a male Director resign because he “accidentally” joined a direct competitor’s Board! I doubt that happens much with female Directors.

2. The women directors came better prepared to Board meetings. All companies send the bulk of their meeting documents ahead. Some of our male directors did not even bother to bring these materials probably because they had not read some or all of it and had made no notes. The women directors brought the materials and you could tell they had read them and had made notes.

3. The women directors stayed focused on the matters at hand. Sometime Board meetings, especially unexpected ones by phone can take a long time and it is hard to manage directors when you can’t see them. On these phone meetings, I have had male directors fall asleep and snore, go to a nearby bathroom without closing a door or have a lengthy discussion with their wife about what sandwich they will make them for lunch. Female directors really behave much better as a group!

So when you consider these examples along the fact that women are smarter than men and are more social than men and live longer, they should be on more Boards of Directors! Seriously, they should-but corporate america, like the rest of the world often takes a lot of time to change. I also believe that some men are aware of all the strengths that women can bring to leadership roles but are Afraid to give them the opportunity. And, as we have mentioned before on this blog, fear is not good in Board rooms or in The Business Zoo!

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Nonstandard Accounting and Management Compensation

March 14, 2014 //
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Wall Street Journal 2/27/14: Firms Alter Bonus Playbook and Use Nonstandard Accounting Measures to figure (Management) Payouts

Public company earnings are reported in quarterly and annual reports using what accountants, auditors, and the Security and Exchange Commission call ” generally accepted accounting principles.” These GAAP earnings or a multiple of them, based on how the firm is viewed in the stock market, creates the market price of the stock. Shareholders make money when the stock price increases.

But nowadays some 28% of the largest U.S. public firms calculate Management Compensation using different measures. These firms may start with the reported GAAP earnings but then add back various expenses to make the earnings higher. Some of these add back items can be the cost of stock options (usually to the same group), the write-off of an acquisition premium (or goodwill) even when those same executives may have overpaid to buy another company, and so on.

You are thinking, this is absurd! And very unfair and inappropriate! Well, get used to it. The number of large firms doing this has more than doubled in the last few years and I doubt it will decrease unless the public makes such a stink that the SEC or Boards of Directors force companies to change. One large, public firm in the article, medical products company McKesson’s shareholders voted 3 to 1 to stop this practice, and to require shareholder approval of executive compensation. But their Board of Directors (who are elected by the same shareholders) declined to adopt this measure. The Board cited that they “exercise great discipline” in deciding upon pay. Last year’s McKesson’s calculation started with the reported GAAP earnings of $.75 a share and some how added back enough to get them to $7.21 a share. Now I was the CFO of two large public companies, but even I was impressed with that story of financial artistry!

As discussed several times in my blogs, Shareholders elect the Board of Directors who in turn elect the Senior Executives. Boards rely on the company’s Human Resource people and outside Advisors to decide these matters. In over a decade of Board meetings I attended, only once did a Director get so upset that he convinced the others to throw out an obviously flawed Management Compensation plan. This needs to happen much more often.

In my book, The Business Zoo, I have written that in Board Meetings, the firm’s CEO should explain a new Management Compensation plan and its impact on pay. Not the Senior HR person or the CFO (yes HR often asks us to do controversial things) and certainly not an outside Consultant. If the Board has trouble understanding this new plan, they should hire their own Consultant to explain it or reject the plan until they do understand it and its implications.

And Shareholders, who have the ultimate power, should vote out Boards of Directors who allow practices or compensation plans that enrich Senior Management in ways that are not consistent with Shareholder’s value.

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