Looking for job security? Then maybe you should rein in those aspirations to reach the dizzy heights of CEO-ness. For it seems the life expectancy of a CEO is dropping faster than stock prices in the dot-com sector.
A total of 113 US CEOs left their posts in December, making it the third busiest month of the year. Perhaps more significantly, December also became the fifth consecutive month with over 100 CEO departures, bringing the aggregate total for the five months from August to December to 574, more than double the total (269) for the period January to July. The worst single month was October, when a record 129 CEOs moved on, against just 60 in October 1999.
So says Challenger Gray & Christmas, an outplacement firm that began collecting such data in August 1999. The firm also analyzes CEO job tenure, which is even more alarming for anyone seeking a long spell at the top of a public company.
‘Just look at the average job tenure for CEOs in October – 6.3 years,’ says John Challenger the firm’s own CEO. ‘And that would be much lower if you eliminated some double digit retirees (27 years in one case) operating old economy succession plans. Months on the job, not years, may be the next measure of performance,’ he forecasts. Indeed, the median time in the job for departing CEOs dropped from eleven years to less than seven between 1999 and 2000.
To some extent the sudden increase in departures is attributable to the vagaries of life in the high-tech sectors. A fifth of the quitting CEOs chalked up by Challenger Gray & Christmas in October were at internet firms; but that means four fifths of them were not. The departers included, for instance, the leading lights at both Lucent and Gillette; and while Lucent may be in the TMT sector, precarious internet start-up it certainly is not. Gillette CEO Michael Hawley had only been in post for 18 months when repeated financial disappointments finally led his board to oust him from his top slot in October.
Other US companies whose CEOs left post in recent months include Xerox, Mattel, Coca-Cola, Aetna, Hercules and Procter & Gamble. Sound like a roll call of household name stocks? Well, to be sure, leading corporations make up a significant proportion of the total, with around 40 of the 200 biggest US public companies seeing off their incumbent CEOs during 2000.
And while Challenger Gray & Christmas’ territory was the US, sudden CEO departures are no longer the exclusive preserve of the States. To be sure, life probably remains more precarious for US CEOs than for their counterparts in Europe and Asia, but those two continents still offer examples of how things have changed for the person in the top job.
Take Greg Hutchings, former CEO and chairman at UK conglomerate Tomkins. He was obliged to quit his post after losing shareholder support on a whole range of issues including governance, corporate acquisition and divestment strategy, management excesses and a clear failure to answer questions in a wholly truthful fashion at the annual meeting. That set piece event became the forum for a series of exchanges which culminated after the meeting in the only possible course of action now open to the board: the removal of Hutchings (see Trouble at Tomkins, page 28).
Further east, in Kuala Lumpur, Malaysia, the majority shareholders of John Hancock Life Assurance (Malaysia) voted to fire CEO John Ng in a move that broke with Asian custom. The stated reasons were a decline in market share during his tenure, though Ng hotly disputes this. The company, 43 percent-owned by US-based John Hancock International, called a meeting to remove Ng in December; and since the board speaks for 60 percent of the equity, it was never going to have any problem getting its way. But at what cost?
According to local mores, Ng’s removal should at least have been managed quietly, ideally announced to the wider world after any ruffled feathers had been sufficiently smoothed. But then, such traditions would also imply that the ousted party accepts his fate; Ng retaliated with press releases, a libel suit against the company and two of its directors, and his own web site (www.john-ng.com).
The site sets out a mass of detail, including the fact that when the company told Ng it wanted him out, it gave him just four days to sign a separation contract. Ng objected both to the substance of the company’s complaints and to this unseemly haste, saying it implied impropriety: ‘I didn’t have my hand in the till,’ he says. ‘I didn’t molest anyone.’
Whatever the rights or wrongs, John Hancock risked courting hostile publicity, which could adversely affect its reputation and business. But while this may be the first squabble of its kind to be rehearsed so publicly in the region, it surely won’t be the last.
The unforgiven
So what’s going on? Is the increased readiness to oust a CEO the product of closer scrutiny by independent directors? More effective activism by shareholders? The spread of pressure for reassuring results by increasingly jumpy investors who cannot find it in their financial hearts to forgive a CEO whose company misses expectations?
The answer is probably all the above, to a greater or lesser extent but, at least in the States, the dominant factor seems to be the market’s lack of forgiveness. Tolerance of even quite narrowly missed expectations has plummeted; and achieving earnings ‘within a range’ is no longer acceptable. William Rollnick, a Mattel director who chaired the company for four months after CEO Jill Barad was shown the door, put it like this: ‘There’s zero forgiveness. You screw up and you’re dead.’
So the old forelock-tugging respect once automatically due to the CEO has been firmly consigned to history. ‘There is no hesitation by directors to ask a CEO to leave if there is even the slightest hint that numbers will not be met,’ says Challenger. ‘CEOs are now in a very precarious position. They used to control their boards, which were usually handpicked; now the boards control them.’
To characterize it another way, the CEO used to appoint to the board people he played golf with. Today he may still play golf with his fellow board members, but that’s not why they’re there. They’re there to keep an attentive eye on him. IROs should be just as attentive to their senior management’s succession plans.
Trouble at Tomkins
Getting caught out lying in response to a question at the annual meeting is unlikely to help a CEO’s career. When the lies relate to personal use of company jets and apartments, and to the inclusion of his wife and housekeeper on the company payroll – none of which got a mention in the annual report – those career prospects have probably passed the point of salvageability.
So it proved for Greg Hutchings at Tomkins plc, the UK guns-to-buns conglomerate whose interests include Smith & Wesson, Gates Rubber and Trico. Hutchings was put on the spot at the meeting by a representative of JO Hambro Capital Management Ltd, a small institution (which is also an investor in Cross-Border Publishing) that was dissatisfied with Tomkins’ performance. ‘The shares were trading at a big discount to break-up value,’ says Christopher Mills, chief investment officer at JO Hambro. ‘And the company was vulnerable to a break-up, first because of perceptions about Hutchings’ greed and about his management effectiveness; and second because of the loss of former finance director Ian Duncan.’ Mills says the company also made over-optimistic announcements about planned sales of businesses. ‘And anyway, as a business, the group had no fundamental rationale. Guns-to-buns made no sense at all.’
For some time there had been considerable institutional unrest about Tomkins, often focusing on Hutchings’ combining of the roles of CEO and chairman, which he did until June 2000. The institutions, led informally by Peter Butler of UK pension fund Hermes, wrought change, resulting in the appointment of David Newlands as chairman. The institutions had initially wanted a new CEO to break up the company, but accepted in the end that Hutchings was probably the best person for this task. A sale of the food assets was announced, but at a disappointing valuation of £1.2bn, against an original claim by Hutchings that the price tag would be £1.7bn.
This may have satisfied some institutions, but not JO Hambro. ‘We didn’t believe Hutchings was the right man to break the group up,’ says Mills. ‘But as a small institution we don’t have the ability to fight the might of a Tomkins in a proxy fight.’
Instead Mills decided the best way to accelerate a sale or break-up of the group was to weaken Hutchings. One way of doing this was by posing awkward questions – to which they knew the answers – at the AGM. ‘We reckoned he would be weakened if it was perceived that he had his nose in the trough. And four corporate jets and two houses certainly indicate that.’ But Mills had assumed Tomkins’ directors would answer Hambro’s questions by dissembling, or parking matters they’d rather not discuss as ‘under review’. ‘We certainly never expected him to lie,’ says Mills. But that’s what he did, sealing his own fate. Here’s a précis of the exchange:
Hambro rep: ‘…I understand the company has a Channel Islands registered subsidiary called Chauffair which owns four company jets. Why is this appropriate use of funds?’
Newlands: said he couldn’t understand the question.
Hutchings: denied the company owned Chauffair.
Hambro rep: ‘I believe the company has three central London residences, two in Eaton Place, one in Peninsular Heights …and two of these are used exclusively by Mr Hutchings. Surely given his level of compensation he can afford his own accommodation?
Hutchings: denied the company owned the residences.
Hambro rep: ‘Is that correct?’
Hutchings: ‘Correct.’
Hambro rep: ‘Can we have your assurance the executive stock options which are under water will not be re-priced for the benefit of directors, nor will the company award excess amounts to otherwise compensate?’
Newlands: They would not be repriced.
Hambro rep: ‘Given the use of company jets, houses, cars and no doubt other assets, I am concerned that the amount of Mr Hutchings’ benefits in kind may be understated with potential reputational risk. Should the company incur an Inland Revenue enquiry, can I have your assurance this will be looked into by the independent remuneration committee?’
Newlands:said there weren’t any planes or houses so there was nothing to look into.
But of course the company did own the houses and the jets, as well as having inappropriate people on its payroll; and that’s why, just days after the annual meeting, Hutchings had to go. Since the meeting, other casualties of the episode have included Hudson Sandler, Tomkins’ long-time financial PR firm, as well as Anthony Spiro, its longtime (twelve years) IRO. Ironically, the tale may still have one more twist. Newspaper reports in the UK suggest that the Gates family, Denver-based investors who own 20 percent of Tomkins, are now actively seeking Hutchings’ return.
Thus far, Hambro has got what it wanted. But forcing a CEO into a corner only works where there’s an appropriate corner available; and most institutions will only look for that corner if their investment in the company is giving them cause for concern.
CEOs and IROs hoping not to have to implement succession plans prematurely should take note: When there is real unrest about CEO performance, almost any rescue strategy will be considered by restive investment institutions. And finding support – whether from the press, the public or the professionals – becomes a lot easier when the troublemakers can show they have right on their side.
