NIRI Southwest CEO Succession and Shareholder Activism

Edward Ferris, Partner
Hedge Fund Solutions LLC
eferris@hedgerelations com ▪ 215.353.6472
eferris@hedgerelations.com ▪ 215 353 6472
CEO SUCCESSION PLANNING AND
SHAREHOLDER ACTIVISM
National Investor Relations Institute (NIRI) Regional Conference, New Orleans; August 19th, 2010
Marc Andreessen to Maria Bartiromo
August 6th at 6:00PM ET
CNBC Special Report
“We will run a search as fast as we can, but insuring we get the best
possible candidate. We will look at both internal and external
candidates in that process.
We have just formed a committee, so work will begin on this
W h j f d i k ill b i hi
immediately. But we’re going to dive right into it.
And fundamentally, you know, we
And fundamentally, you know, we’re re looking for someone who is
looking for someone who is
outstanding, who we can pair up with a truly great company. The
company is in great shape, it’s extremely well positioned for the future.
We’re executing on the strategy. The performance is strong, so we’re
look at someone who can both maintain that level of performance and
then build on it.”
Market Reaction
Concerning Statistics
CEO turnover is currently
42% of companies have no CEO succession plan
running at 14.4% per year
running at 14.4% per year
46% of successions (in 2008) were unplanned
1,227 CEO transitions in 2009
40% of companies are not prepared for an emergency
succession
48% of directors currently see CEO Succession as the sole
responsibility of the CEO
More than 60% of companies report that the CEO
recommends his/her successor
57% of directors say that they do not know when their CEO
plans to step down
Only 16% of directors believe their Board is effective at CEO
succession planning
For citations, see Examining the Impact of SEC Guidance Changes on CEO Succession Planning, The Conference Board, April 2010 and
The Role of The Board in Turbulent Times, The Conference Board , 2009
Importantly
External CEOs are often paid significantly more than internally groomed
ones (~75%+); insiders tend to deliver better results
40% of CEOs are fired or “retired” within 18 months; 64% never make it to
their fourth anniversary
h i f h i
It is estimated that the faulty integration of a senior executive can cost a
company 10 to 20 times the executive salary in opportunity costs
company 10 to 20 times the executive salary in opportunity costs
The leader effect can account for up to 40% of variance in performance
and value
CEOs tend to achieve more in the first half of their tenure
For citations, see Examining the Impact of SEC Guidance Changes on CEO Succession Planning, The Conference Board, April 2010 and
Executive Flameouts
Hurd Moffatt Brown Heyer Albrecht Everson Dunn Stonecipher Couglin Kozlowski
H‐P IBM BP Starwood HBO Red Cross H‐P Boeing Wal‐Mart Tyco
Unplanned Transitions
S
Succession
i FiFiascos
See Appendix for details
A New Frontier of Corporate Governance
The October 2009 SEC release reframes CEO succession as a risk management
issue and placed its responsibility firmly in the Boardroom
No longer will the SEC consider CEO succession an operational matter. Instead it is
“aa key board function
key board function” and
and “aa significant policy (and governance) issue
significant policy (and governance) issue” “so
so that a
that a
company is not adversely affected by a vacancy in leadership”
“One of the board's key functions is to provide for succession planning.”
Securities and Exchange Commission, Staff Legal Bulletin No. 14E; October 27, 2009
For citations, see Examining the Impact of SEC Guidance Changes on CEO Succession Planning, The Conference Board, April 2010
Momentum is Building
“A board’s biggest responsibility is succession planning. It’s the one area where the
board is completely accountable, and the choice has significant consequences, good
board is completely accountable, and the choice has significant consequences, good
and bad, for the corporation’s future.”
The Role of the Board in CEO Succession: A Best Practices Study, National Association of Corporate Directors (NACD) 2006
“The responsibility for succession planning belongs in the boardroom, and nowhere else.”
The Role of the Board in Turbulent Times, The Conference Board 2009
2010 Proxy Season CEO Succession
Planning Shareholder Proposals
Council of Institutional Investors
“A (corporate) board should approve and maintain a detailed CEO
succession plan and publicly disclose the essential features”.
“Poor CEO succession planning and inadequate internal development
of managerial talent could result in a panicked board vastly
overpaying a replacement chief executive.
Shareowners would be able to assess the strength and
appropriateness of CEO succession plans if the essential features of
appropriateness of CEO succession plans if the essential features of
such policies were publicly disclosed.”
Connecticut Retirement Plans and Trust Funds ((CRTPF))
“Because poorly planned transitions can be highly disruptive and may put the company at risk, failure
to engage in succession planning has real consequences for shareholders.”
D i L N
Denise L. Nappier
i
Connecticut State Treasurer and
Connecticut Retirement Plans and Trust Funds (CRPTF) Principal Fiduciary
“An analysis of the board’s role in succession planning would … be useful in enabling investors to
understand how the board manages risk. The (SEC) should require companies to disclose whether it
has approved and maintains a CEO succession plan and, if it has, to describe the key terms of that
plan. Also of value to investors would be disclosure about whether CEO succession planning has
been delegated to a board committee and if so which one”
been delegated to a board committee, and, if so, which one
“Inadequate succession planning can certainly result in high levels of external hire starting pay, but
can also be indicative of Boards that are reticent to challenge sitting CEOs and that in turn can
manifest in disproportionate CEO pay slice, over‐generous change‐in‐control/severance provisions
and entrenched management.”
CRPTF advocates tying succession planning to CEO and board performance metrics, and
disclosing these to shareholders.
Activists Today
Activist Hedge Funds:
2009 was a year for activist funds to restructure, rebalance, rebuild and refocus
y , ,
New marketing campaigns to raise capital and create awareness are underway
Recent examples of resurgence (Jana Partners, Ramius, Spotlight Advisors, Barington
Capital, Riley Investment Management, new activists)
l l )
Hybrid Funds – Private + Public Equity:
Active value carve
Active value carve‐outs
outs from larger PE funds
from larger PE funds
Increasing number of private equity funds filing 13Ds
Improved M&A environment will position PE as white knight once again
Traditionally Passive Funds:
Increased level of active involvement: Governance, Director and Management
Compensation CEO Succession Transactions etc
Compensation, CEO Succession, Transactions, etc…
An Enabling Environment
Economic Recovery:
D
Despite Dow 10,000+: Strong corporate balance sheets and accessible credit markets will
it D 10 000+ St t b l h t d ibl dit k t ill
drive activist efforts to return cash, boost dividend payouts and examine strategic
alternatives
P liti l/R l t
Political/Regulatory Landscape:
L d
Mid‐term elections; Dodd‐Frank Act; and the perception of corporate greed and
malfeasance will continue to encourage activism
SEC is continuing to shift the balance of power out of the boardroom and toward
shareholders
Leverage Opportunities:
g pp
Risk oversight and CEO succession planning will be added to shareholder proposals
Activists will leverage governance deficiencies to secure agenda votes
Wynnefield Group Proxy to Crown Crafts Inc.
July 2010
Spotlight/Clinton Settlement Agreement with Red Robin
March 2010
CALSTRS/Relational Investors to Occidental
July 2010
Investor Relations
Relations’ Executives
Provide high level
Know (and influence) disclosure of your CEO
what the Board’s role succession planning
Shareholder
in CEO succession Disclosure process to reassure
planning should be shareholders of the
Board’ss oversight
Board oversight
Board
Oversight
Practices
CEO Succession
Process
Understand why Know that there is no
shareholders care
h h ld other job like the CEO
h j b lik h CEO
about CEO succession … and that internal
planning development is a
multi‐year process
y p
For guidance, see Examining the Impact of SEC Guidance Changes on CEO Succession Planning, The Conference Board, April 2010
Appendix A
Appendix A
Executive Flameouts
Executive Flameouts
Succession Fiascos
Executive Flameouts
Mark Hurd resigned Friday as CEO of Hewlett‐Packard after a board investigation of sexual harassment allegations turned up expense irregularities. Though the
Mark Hurd Hewlett‐Packard company said he hadn't violated its policy on sexual harassment, Michael Holston, H‐P's general counsel, said Mr. Hurd had demonstrated a "profound lack of judgment
that seriously undermined his credibility and damaged his effectiveness."
Robert Moffat, a former senior vice president at International Business Machines Corp., left the company in 2009 after becoming ensnared in big insider trading case
Robert Moffatt IBM involving the hedge fund group Galleon and other corporate executives and traders on Wall Street. Earlier this year, Mr. Moffat pleaded guilty to criminal charges
related to passing on inside information to Danielle Chiesi, a woman with whom federal prosecutors have alleged he had an intimate relationship.
John Browne, the former chief of oil giant BP PLC, resigned in 2007 after he admitted lying to a judge while trying to prevent a British newspaper from exposing details
John Browne BP
about his personal life.
Steven J. Heyer was ousted as chief executive of Starwood Hotels & Resorts Worldwide Inc. in 2007, after the board of directors received an anonymous
Steven Heyer Starwood letter accusing him of creating a hostile work environment. The letter alleged for example, that Mr. Heyer made inappropriate physical contact with
a female employee outside a restaurant bathroom, on at least one occasion. Mr. Heyer denied engaging in any impropriety.
Chris Albrecht, the CEO of Time Warner Inc.'s Home Box Office unit, left the company over an incident for which he pleaded no contest to battery against his girlfriend.
Chris Albrecht HBO
Mr. Albrecht at the time said he was leaving because he did not want his "personal circumstances" to distract the company.
Mark W. Everson was ousted in 2007 as president and CEO of the American Red Cross due to his affair with a female subordinate. Mr. Everson said he was leaving "for
Mark Everson Red Cross
personal and family reasons."
Patricia Dunn H‐P In 2006, Patricia Dunn resigned as chairman of Hewlett‐Packard after launching a private and secretive investigation into leaks to the press by the H‐P board.
In 2005, Boeing Co. replaced then‐CEO Harry Stonecipher after emails revealed a relationship with a female executive at the company. Boeing said at
Harry Stonecipher Boeing the time that Mr. Stonecipher, who was then married, was fired not for having an affair, but for violating Boeing's code of conduct. Mr. Stonecipher acknowledged his
conduct.
In 2005, Thomas M. Coughlin resigned his post as vice chairman of Wal‐Mart Stores Inc. amid allegations that he abused expense accounts and fabricated invoices to
Thomas Coughlin Wal‐Mart
obtain reimbursements totaling as much as $500,000. A year later, he pleaded guilty to federal wire‐fraud and tax‐evasion charges.
Tax evasion also felled L. Dennis Kozlowski of Tyco International Ltd, who resigned in 2002 after he was caught evading New York sales taxes on purchases
Dennis Kozlowski Tyco
of artwork. He was later convicted of stealing tens of millions in unauthorized compensation from the company.
In 2004, when the board of directors of McDonald's Corporation moved swiftly to replace suddenly deceased CEO James Cantalupo, the bar was set for good
governance. Cantalupo was replaced in an orderly manner six hours later. A few weeks later, the replacement CEO, Charlie Bell, was diagnosed with cancer, and the
James Cantalupo McDonald's
board again was able to make an orderly replacement. Bell was replaced as CEO by Jim Skinner, the Oak Brook, Ill.‐based company’s third CEO in a year. Bell died in
2005.
Kenneth M. Jacobs was appointed Chairman of the Board of Directors and Chief Executive Officer of Lazard on November 17, 2009, suceeding legendary Lazard Bruce
Bruce Wassernman Lazard
Wasserstein, age 61, who passed away October 14, 2009.
August 9th ‐ Sara Lee Corp., tannounced that Brenda Barnes is resigning as chairman and chief executive officer, focusing on her health after taking leave in May to
Brenda Barnes Sara Lee
recover from a stroke. Marcel Smits will continue as interim CEO and James S. Crown will remain chairman during the search for a successor.
BP's embattled Chief Executive Officer Tony Hayward will be replaced by American Robert Dudley on Oct. 1, the company said Tuesday, as it reported a record quarterly
loss and set aside $32.2 billion to cover the costs of the devastating Gulf of Mexico oil spill. BP said the decision to replace Hayward, 53, was made by mutual
Tony Hayward BP
agreement. In a mark of faith in its outgoing leader, the company said it planned to recommend him for a non‐executive board position at its Russian joint venture and
will pay him 1.045 million pounds ($1.6 million), a year's salary, in lieu of notice.
September 2009 ‐ Avon Products Inc. said its president, Elizabeth Smith, will leave her post next month to pursue a chief executive position elsewhere, leaving the
company's succession plan unclear. Avon said it had no immediate plans to name a successor and didn't disclose whether Ms. Smith, 46 years old, had another job in
Elizabeth Smith Avon
place. As second‐in‐command at the New York‐based direct‐seller of beauty products, Ms. Smith was believed by many to be heir apparent to CEO Andrea Jung, who
has held the role since 1999.
General Motors chairman and CEO Rick Wagoner has agreed to "step aside" after pressure from the Obama administration last week, ending his eight‐year tenure at
Rick Wagoner GM
the helm as the company seeks additional federal aid. He's been replaced by GM President and COO Fritz Henderson, effective immediately.
Succession Fiascos
In December 2000, the board chose Bob Nardelli, an outsider with no prior retail experience, over several internal candidates to the CEO post. Once in
place, Nardelli overhauled the organization’s decentralized decision‐making structure and consolidated several divisions. His blunt and autocratic management style
Bob Nardelli Home Depot
turned off employees, alienated the public, and drew attention to his excessive compensation (which was well
in excess of past company standards). The board asked him to step down in January 2007, paying a severance estimated at $210 million.
In November 2007, Charles Prince resigned from his post as CEO of Citigroup after the company reported billions in write‐downs due to the failing mortgage industry.
He was later named by Fortune magazine as one of the “eight economic leaders who didn’t [see] the crisis coming,” noting the overly optimistic statements he had
Chuck Prince Citi
made as late as July 2007.* Unprepared to face the transition, Citi resorted to an interim CEO until the search for an outside successor was completed and Vikram
Pandit was hired.
After the death of CEO Roberto Goizueta in 1997, Coke’s board picked his designated successor, Doug Ivester, only to realize that Ivester did not have his predecessor’s
leadership skills. Two years later, Ivester was replaced by Douglas Daft, an Australian who had run Coke’s Japanese operations but had little or no familiarity with the
Roberto Goizueta Coca Cola
corporate culture in Atlanta. In February 2004, Daft publicly announced his retirement and said that his chief operating officer would be the best candidate to succeed
him. It took the board four months to appoint a new CEO, and he was not Daft’s choice.
In November 2007, CEO Stanley O’Neal stepped down after his boardroom colleagues lost confidence in his risky strategy of betting billions on American
mortgage‐backed securities. O’Neal walked away with a golden parachute compensation package that included Merrill stock and options valued at $161.5 million.
Stanley O'Neill Merrill Lynch
However, he left no succession plan. The board eventually chose as new CEO John Thain, who announced that he would slash expenses, cut thousands of jobs, and exit
businesses to fix the ailing securities firm. But not before spending over $1 million of company money to refurbish his office.
In 2003, CEO and chairman Philip Condit resigned amid allegations that one of his direct reports had engaged in unethical conduct and extended a job offer to a
government official in return for a profitable contract with the U.S. Department of Defense. Despite the scandal, the board was not scrupulous enough in vetting the
Philip Condit Boeing
succession candidate’s moral profile. The successor, Harry Stonecipher, did not escape Condit’s fate and stepped down two years later due to an affair with a company
executive. The board, citing a new code of conduct instituted by Stonecipher, demanded his resignation.
The board of directors had to choose between two insiders—Durk Jager and Alan Lafley— when it appointed a new CEO in 1999. But it made the wrong choice. In June
Durk Jager P&G 2000, CEO Durk Jager was ousted after a consecutive series of missed quarterly earnings projections. He had been on the job for just 17 months. The board then chose
Lafley, who went on to become Chief Executive magazine’s “CEO of the Year 2006.”
In 2001, Morgan Stanley president John Mack was forced out after a power struggle with Philip Purcell. But employees disliked Purcell’s abrasive leadership style, and
John Mack Morgan Stanley
shareholders were not pleased either. In June 2005, after a tumultuous proxy season for the company, the board asked John Mack to come back and take the helm.
November 2009 ‐ When Bank of America CEO Kenneth Lewis said that he was resigning, no one was surprised. Except, it seems, BofA's board of directors.
It's been six weeks since the announcement, and the company still hasn't named a replacement. Shareholder groups are saying that it's a sign of weakness and
unpreparedness on the part of the board, that it didn't have a succession plan in place despite clear signs that Lewis' job was under pressure for months. "The
handwriting was on the wall that Lewis' days were numbered," says William Patterson, executive director at CtW Investment Group, which advises union pension funds
Ken Lewis Bank of America
representing $217 billion in assets. At the bank's annual meeting in April, some of the largest shareholders voted against Lewis and stripped him of his chairman's title.
Patterson says his group met with board members in April and urged them to accelerate a CEO succession plan. "They told us, 'We are ready,' but now it's starkly
apparent that they don't have a plan," he says. "There was a succession plan in place, but the board didn't have the time to execute it, given the suddenness of this
decision," says BofA (BAC) spokesman Robert Stickler, adding a decision is planned by Thanksgiving.
Fritz Henderson stepped down Tuesday December 2, 2009 after the board determined that the company wasn't changing quickly enough. Chairman Ed Whitacre Jr. said
at a hastily called news conference that he will serve as interim CEO, and an international search for a new CEO and president is planned. The resignation comes just
eight months after Henderson, 51, replaced former chairman and CEO Rick Wagoner, who was ousted March 29 by the Obama administration's government's auto task
Fritz Henderson GM
force. Henderson has been with GM his entire career and was the government's choice to run the beleaguered company after Wagoner left. Whitacre, picked by the
government in June to be chairman of the new GM, is considered an industry outsider, having run AT&T Inc. for 17 years. Whitacre was interim CEO, then confirmed as
permanent in January 2010 and now is handing the reins over to Daniel Akerson on September 1.
Sources:
The Wall Street Journal, w/c August 9th, 2010
Examining the Impact of SEC Guidance Changes on CEO Succession Planning, The Conference Board, April 2010

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Edward Ferris, Partner

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