If it’s not one thing…

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Expert Perspective by Grahall’s OmniMedia Editorial Board

expert perspective telescopeExecutives and boards might have thought that having made some minor changes to their executive pay practices that they could breathe a sigh of relief and put a year of brutal questioning from media, the public and legislators behind them.  Some of those publicly criticized executives and boards have even made some New Years’ Resolutions to “trim some fat” off the executive compensation rolls, to “help others” though charitable donations and to “improve” their organizations’ risk management policies with callbacks.  But a few others should have added one last resolution: “quit procrastinating” and finally establish thoughtful and thorough succession plans and policies for the top positions, particularly the CEO.

Two recent articles starkly depict the issues associated with a failure to plan for succession.  A January 27, 2010 article for Bloomberg titled “Paying Big Bonuses Exposes Wall Street’s CEO Succession Failure”  by Lisa Kassenaar described the event where BofA then CEO Kenneth D. Lewis presented Brian T. Moynihan, “the man who would succeed him as head of the biggest U.S. bank.”   Kassenaar quotes Lewis saying: “‘Hopefully, he’ll be in this job much longer than the last three or four,’ Lewis, 62, who became CEO in 2001, quipped as he heralded Moynihan’s brains and commitment. ‘Another unique characteristic about him is that he wanted the job’.”

Kassenaar continues, “For Lewis — and thousands of Bank of America investors, loan officers, traders and tellers — the laughter that filled the theater was a collective sigh of relief. After almost three months of meetings with more than a dozen candidates, Chairman Walter Massey and his directors had finally found someone to take over before Lewis’s planned departure on New Year’s Eve.”

It is a sad statement that there was no one who wanted a job that will purportedly pay Lewis “nearly $64 million retirement pay [which] puts him ahead of most, though not all, fellow major bank CEOs who have left their institutions during the financial tumult of the last two years.  [In addition to ] the $53 million pension and $10.6 million in deferred compensation — previous years’ compensation that has been delayed until retirement …When Lewis’ other Bank of America investments are taken into account, he will leave the bank with $125 million in total compensation…” according to an article in  October 8, 2009 article by Alice Gomstyn for ABC NewS titled Why Bank of America’s Ken Lewis Will Take Home More Than Peers. (Although Lewis did agree under pressure from the Government’s pay Czar, Ken Fienberg “to give up his $1.5 million annual salary and forgo any possible bonus this year”.  What a guy!)

Internal promotions to top jobs do tend to provide a better outcomes long term than to external hires and perhaps that was the thinking of GM’s board when it “… turned to Chairman Ed Whitacre to become chief executive officer after finding a lack of top-rank managers with manufacturing backgrounds… Some board members saw Whitacre as a candidate from the start of the search… The former AT&T Inc. CEO emerged as the choice after he rebuilt GM’s leadership team and directors had no better alternatives…” according to a January 25, 2010 Bloomberg article by David Welch, Jeff Green and Katie Merx (GM Said to Pick Whitacre After Finding No Top Industrial CEOs).

Interestingly though, the article also provides insights and perspective from Jeffrey Sonnenfeld, senior associate dean of Yale University’s School of Management.  It quotes Sonnenfeld as saying:  “No strong, experienced, industry executive would step in when the chairman and want-to-be CEO will continue to spread a shadow over the position.” So maybe the failure to find another viable candidate had more to do with possible candidate’s unwillingness to work with Whitacre in his role as Chairman then a lack of “top-rank managers”.

Whitacre admits that he will only remain in this position for a few years.  Sonnenfeld is quoted as saying “This might create an internal sense of jockeying for position since Whitacre clearly won’t be CEO for 10 years… This could create power feuds between warlords. Whitacre and the board will have to watch for that.”  With luck GM will immediately address succession planning to avoid a repeat of this scenario a few years hence.

Perhaps circumstances resulted in Whitacre being the “only” person for the job, but I doubt if we are alone in our questioning if he was the best person for the job.  Whitacre joined the GM board in mid-2009 admitting that he knew nothing about the car business.  At least he had experience and success with innovation and corporate cultural change.   From Grahall’s perspective elevating Whitacre to CEO may result in a governance issue.  More and more companies, and especially large companies, are purposefully separating the CEO and Chairman roles.  Further,  Whitacre retired in 2007 with over $160 million, and that raises the question of how a company incents an already enormously wealthy individual to do the right things for the business over what will certainly be a pressure packed two to three years with “24/7” demands.  As of the writing of this article, Whitacre’s pay package had not been disclosed, but many people are keeping their eyes peeled for that announcement.

So how can one know if a company is adequately addressing succession planning?  The greatest executives and organizations (Warren Buffet and Berkshire Hathaway, for example) have made clear indications to their Board of Directors whom their choice would be should succession be required.  It is important for all shareholders, investors and in the case of government assisted companies, taxpayers to know if succession planning is receiving an appropriate level attention by boards and management.
Grahall’s 2009 study of executive pay that can help highlight some considerations. (Download the the first in this series of reports.) The research investigated many aspects of CEO pay and that of the next top five named positions.  Compensation for these individuals can shed some light onto the succession planning approach (or lack thereof) taken by companies.

The first thing to look at is the difference in pay between the CEO and his direct reports.  If there is a large gap (on average by industry) then the CEO may be what we refer to as “an imperial CEO” and may not have cultivated one or more individuals to succeed him.  The second thing to consider is the pay differential among the CEO’s direct reports.  If the pay is similar for this group then that suggests that there is a large “stable” of individuals who might succeed the CEO.  If there is a disparity and one individual is significantly higher paid than the others, this high paid individual might be the anointed successor.  One hopes that when time comes for a change in CEO, that person will be the best one for the job, or for that matter, even still employed by the company.

As we can see, compensation can illuminate a company’s approach to succession planning.  The painful lessons of short sightedness and “one thing at a time thinking” of 2008 and 2009 by some of the country’s largest companies can be avoided by linking people and rewards strategy to long term business strategy.  Without this holistic approach there will always be another crisis brewing in the wings.

We have to wonder when, and hope that soon, the Boards of Directors of America’s largest companies will grow some “backbone”, be stewards for shareholders and stakeholders and thereby effectively fulfill their most important obligations: to choose and appropriately compensate a CEO, to build sustainable shareholder value and to provide continuity of leadership through effective succession planning.

Contact Grahall’s OmniMedia Editorial Board at edie.kingston@grahall.com

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