The evolving role of the CEO
June 2013 | COVER STORY | BOARDROOM INTELLIGENCE
Financier Worldwide Magazine
CEOs seem to be operating in an increasingly hostile environment, where an avalanche of regulation, activist shareholders and political agendas add to the stress of day-to-day business. At the same time, the divisive issue of executive pay has intensified. Addressing these external demands can impact on the core task of driving a company forward and in the past decade, CEO turnover has increased markedly, with high profile exits highlighting the extreme pressure placed on top executives. In today’s environment, CEOs are finding it a challenge to effectively and efficiently carry out their duties.
Has there ever been a more difficult time to be a CEO? It is certainly not easy to recall any period in which chief executives have faced a barrage of challenges like those seen since the financial meltdown of 2008. While the business world is no stranger to economic downturns, the uncertainty of the last five years has brought massive legislative change and greater regulatory intervention. It has also coincided with unprecedented technological advances in the fields of communications and data storage, and the rise of social media. It would appear that a perfect storm of circumstances has emerged, altering the ways in which CEOs operate, and raising the stakes should they falter.
Stakeholder groups have become increasingly powerful in recent years with governments, NGOs and special interest groups increasing the pressure on firms and their leaders. In addition, the platform afforded these groups by the internet, and the backdrop of financial strife against which they now operate, means their message can reach countless millions, many of whom are listening. In addition, activist investors, who historically have targeted smaller companies, are now unafraid to go after larger firms. Most recently, Carl Icahn and Southeastern Asset Management, two of Dell’s largest shareholders, teamed up on a new offer to challenge the proposed $24.4bn management-led buyout of the firm. Added to this are corporate boards which are now eager to become more involved and taking much stronger leadership positions. One can certainly see how the position of the CEO has changed. The days of the domineering leader have long gone.
The external pressures under which CEOs now find themselves may lead many to wonder how they can achieve their main objectives of driving company growth and revenue. Given the role of fire-fighter that CEOs have now taken on – ever watchful for crises and ready to leap into action when they arise – do they have the time to steer the company onward? Furthermore, are stakeholders prepared to afford CEOs adequate time to implement change? These questions are particularly pertinent for incoming CEOs, who, keen to make the right impression, may be eager to make their mark early on. “While there certainly is pressure to deliver results immediately, CEOs typically are given a reasonable amount of time to implement a well-articulated plan, even if that plan spans a relatively long period of time,” says Scott Stanton, a partner at Morrison & Foerster.“Of course, the key constituencies like to see progress during implementation, and it is difficult to tolerate a rough decline even if that was in the plan. But CEOs who fail to articulate a plan or who fail to make appropriate adjustments in the face of challenges can find themselves abandoned without warning.” An example is that of Carol Bartz, CEO of Yahoo! between 2009 and 2011. At the time, the firm was struggling against competition from Google and the then relatively new Facebook, and had seen its market share slip steadily. Ms Bartz, a veteran of the technology sector, was seen as a leader who could develop a clear vision for the firm’s future. After embarking on a shake-up of Yahoo!’s management, and implementing a program of cost-cutting, the company’s earnings rose. However, revenue failed to grow, despite a boom in the online advertising market, of which Yahoo! was the supposed champion. Bartz stressed that a turnaround would take time and called for patience. However, after two years, she was removed by the board of directors. Yahoo! shares jumped more than 6 percent following news of her departure.
That stakeholders and board members demand progress is accepted, but the short timeframe in which they expect to see it can leave them disappointed. Results are important, but stressing this too clearly can impact on the way CEOs approach the task at hand. Given the obstacles that surface in today’s business environment, the ability and willingness of CEOs to drive innovation can be quashed, leaving novel business practices as a casualty. This, at least is one theory, but Doreen E. Lilienfeld, a partner at Shearman & Sterling LLP, believes otherwise. “In today’s business environment, there is little room in the C-suite for complacency. A CEO who is not willing and able to drive innovation and produce results may quickly find him or herself without a job. Communication is key. It is imperative that today’s CEOs engage with shareholders, the board and employees regarding goals and strategy. At the board level, communication ensures both the board and management are in agreement on objectives. Engaging the board throughout the strategic planning process can also help a CEO understand and adapt to board concerns related to risk. Explaining your strategy and involving the board from the get-go can help gain the board’s confidence in your plan and buy you time to implement it.”
Even in cases where the board’s and the CEO’s objective are aligned, there is a fine line to tread. CEOs whose plans have proved too radical have found themselves ousted. For instance, April of this year saw Ron Johnson, CEO of retailer J.C. Penney Co., relieved of his position after just 17 months in the role. Mr Johnson, who had previously reinvented the retail department at Apple Inc, had a bold vision for his new company, which involved scrapping previous pricing policies and offering new products. However, the approach was not well-received by customers, who abandoned the store, forcing a return to the firm’s previous methods. Despite this embarrassing U-turn, sales continued to fall, dropping 25 percent in the year ended 2 February 2013, costing the firm $4.3bn in revenue. Mr Johnson’s dismissal followed not long afterward.
Similarly, Leo Apotheker’s tenure as CEO of Hewlett-Packard proved over-ambitious. When HP hired Mr Apotheker in November 2010, it was seen as an aggressive push by the company into the software business. Mr Apotheker brought in a steady hand to steer HP out of turbulent waters, however his strategic decisions were drastic and baffled many. With disappointing earnings, the announcement that the firm’s PC division was for sale, and a fumbled tablet launch to his name, Mr Apotheker was replaced. Though he had held the position of CEO for just 11 months, he would receive a compensation package worth $13m.
The topic of executive remuneration has always made waves, but in today’s climate it can prove particularly emotive and divisive. While the general public are largely critical of exorbitant pay packages, and with shareholders demanding strong returns for their investment, the fact is that without attractive compensation packages, firms may fail to attract and retain the best people for the job. “Executive pay is a hot button issue for today’s shareholders and regulators,” says Ms Lilienfeld, “particularly since 2011 when the Dodd-Frank Act mandated that shareholders of US public companies be given a non-binding vote on executive pay. Tying a significant portion of pay to performance rewards CEOs for positive performance. Balancing short- and long-term incentives, and mixing up the forms of payment between cash and equity, is a good way for companies to retain CEOs and keep shareholders voting ‘yes’ on pay.”
In assessing executive compensation, companies should also remember that the ultimate goal is not to secure a successful say on pay vote but to attract, retain and incentivise executives who will contribute to the long term value of the company. This is a consideration for all firms, not just those impacted by the regulation of the Dodd-Frank Act. With this in mind, the compensation committees of public companies need to be thoughtful and creative in designing CEO compensation programs. “In this arena, I believe we are seeing good progress and compensation committees seek more effective ways to tie compensation to performance,” says Mr Stanton. “A well designed program will provide appropriate incentives for CEOs to drive both absolute and relative performance over the longer term. Effectively done, these programs can keep CEOs and executives focused on the health of the business even during down times without providing unseemly windfalls that agitate other constituencies when markets rise generally.”
Sometimes, no amount of pay is enough to keep hold of a CEO, particularly if the demands of stakeholders are unreasonable, if they feel constricted in their role, or if their position is untenable. The departure of CEOs, from one firm or other, has become an alarmingly regular occurrence. High CEO turnover is a fact of the modern corporate environment, to which mounting pressures and increased scrutiny from shareholders have certainly contributed. As we have seen, it is not always the choice of the individual to leave his or her post. Failure is, in many cases, unacceptable and the number of CEOs who ‘choose’ to ‘step down’ is remarkable. Is it healthy, though, for the corporate world to hire and fire with the haste we have come to expect? “Whether or not this is healthy for the business world is debatable,” says Ms Lilienfeld. “On the one hand, some studies have shown a correlation between CEO tenure and the success of a company. On the other hand, sometimes complacency grows with time and, in such cases, turnover can be a great thing. It is crucial that boards are vigilant in tracking their CEO’s performance and have considered a succession plan.”
Furthermore, factors other than board and shareholder pressure are at play, says Mr Stanton, who suggests the issue of compensation once again rears its head. “The high turnover rate seems to me to be related to the increased compensation and the correlative increased expectations. Companies pay CEOs handsomely, and they expect that the company will benefit in kind. Of course, this is somewhat unrealistic. Even the best executives will place the wrong bets, and sometimes markets turn in ways no one could have anticipated. “The business world might be more healthy if boards and stakeholders could harmonise – or at least temper – the expectations and the compensation.” While removing a failing chief executive may indeed seem prudent, are increased expectations making companies eager to pull the trigger on a CEO’s contract when things go awry? If this is the case, it would appear that companies are perhaps taking action to remedy the situation. According to Booz & Co.’s recent Chief Executive Study, CEO turnover at the 2500 largest public companies rose considerably in 2012, though forced turnover was relatively low compared to previous years with 19 percent of all CEO exits being involuntary. This may suggest that companies are taking a more thoughtful approach to leadership transitions, or that they are allowing CEOs more time to improve performance.
In any event, the time will come for all companies to replace their leader. In this case, whether the firm is searching outside the company, or selecting candidates from its internal ranks, potential CEOs should possess a number of characteristics. According to Justin Menkes, a consultant at Spencer Stuart, good leaders have three traits which often run counter to natural human behaviour. They possess a sense of realistic optimism, being confident though not self-deluded or irrational, and pursue daring objectives while remaining aware of the challenges and potential for failure. According to Mr Menkes, good CEOs are subservient to purpose – that is, they gain a sense of purpose from the pursuit of goals – often professional – and measure their lives by how much they contribute to furthering those goals. Finally, says Mr Menke, good CEOs are those who can find order in chaos, tackling multidimensional problems and bringing clarity to issues which others may find baffling.
However, the real leaders may be those that possess much simpler and subtler abilities, says Mr Stanton. In his opinion, the ability to communicate effectively is one of the key attributes of a good CEO. CEOs must be adept at sharing their own vision for the company with the board, the stockholders, the employees and the customers. Even when a plan or vision is sound, if it is not effectively communicated to the key stakeholders, it can fail, sometimes with disastrous effects. This does not mean, however, that those who shout loudest make the best leaders. Effective CEOs are those who are able to listen, to learn, and to adapt.
Potentially, an even more important attribute for today’s CEOs is a thick skin. Given the stresses and pressures of the job, the unrelenting scrutiny and the unending hurdles, an ability to shrug off the emotional weight that the role brings with it is imperative. Perhaps the most important question to ask of today’s CEOs is, ‘Who in their right mind would actually want the job?’
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