Selfish Success and Succession!

Investor Relations magazine, Fall 2016

Gold-plated CEOs have little incentive to appoint successors

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August 29, 2016 | By Ian Williams

Ian Williams ponders the best way to hire a figurehead

There has been a recent spate of complaints that boards and CEOs are not planning for CEO succession. Why is anyone surprised? Imperial CEOs assume the company will go to Hell in a handbasket as soon as they leave, and if CEOs need their maws stuffed with gold just to deliver good results, why would they care what happens once they have landed with their golden parachute? 

Just how essential are a CEO’s talents for a corporation? Like the divine right of kings, the indispensability of the CEO seems deeply rooted – but rarely investigated – in IR lore. CEOs are surrounded with awe and pomp while in office but, with a few rare exceptions, in reality they are ephemeral shooting stars who are almost instantly forgotten when they go. Carly Fiorina’s inglorious executive career, for example, had been buried in the public subconscious until she chose to resurrect herself as a US presidential candidate, only to see her reputation reburied even more deeply. 

By contrast, we are likely to remember the Fords and the Bacardis and members of the House of Windsor: these bosses’ names evoke historically successful businesses. Dynastic succession does not always work, however. Many years ago I interviewed the bright and optimistic IRO of Seagram – just before perky young heir Edgar Bronfman, Jr took over and destroyed the company. Normally, family members care enough about their operation to keep upstarts on a rein, but young Bronfman was unconstrained. A good CEO might not make much difference to the upside, but a bad one can signpost the road to Hell.

In fact, one reason for lack of succession planning might be that CEOs are taking the Ottoman approach. The first thing a new Sultan would do is murder all the siblings who might threaten his position, and one cannot help but wonder whether CEOs paranoid enough to need golden parachutes and other protective paraphernalia to guarantee safe succession really want to identify potential rivals – other than to exclude them from the equation.

A CEO is indeed a figurehead for a company: the first person investors see. But if we examine the metaphor, the figurehead only appears to be leading the ship. In reality the engine room is below decks, while the vessel is actually steered from much farther back. But figureheads were often decked with gold, so there is indeed a resemblance to the modern CEO.

How necessary is all that gold, though? Ostentatious emoluments – the corporate jets, the golden parachutes, and the rest – are there like Queen Elizabeth II’s privy purse, crown and state coach: so the incumbent can live up to the expectations that employees and shareholders hold of the company. 

The purpose of pretending to try outside recruitment is to boost the myth that there is a market for CEOs, so that the compensation committee the CEO appoints will be trapped in the whirring treadmill, always paying more than the average, and the few who are appointed from outside contribute admirably to the expanding universe of executive pay by doubling their remuneration. 

Above all, however, it is clear that a CEO’s main tasks are to perform for the shareholders and public, and to boost morale in the company. It is not that high pay is necessary to incentivize these executives, for surely they would give their all for the company anyway, out of loyalty? No. 

Preferably, then, the CEO succession should be from within the company so the candidates know its idiosyncrasies. For the pool of CEO candidates, therefore, the line of succession should clearly come from the IR department. IR people need some coaching in the simulation of leadership – acting, voice coaching, deportment and similar skills – but no one can match their knowledge of corporate workings. At last, a figurehead that thinks!

Then again, CEOs should epitomize, not exclude themselves from efficient market theory, which suggests that CEO contracts, like all others should go to the best qualified – and lowest – bidder, which in turn reinforces using the IR department as the recruitment pool – because everyone knows that IROs come cheaper than all others. 

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Help Poor Struggling CEOs!

Washington should step in to help out needy CEOs

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December 18, 2013 | By Ian Williams

The US has wage lessons to learn from England

Back in 1795, when Britain was fighting Napoleon, there was a financial crisis entailing an oversupply of labor and a shortage of food: bread prices rose, and wages fell.

The orthodox view was that the English peasantry were largely in earnest when they happily intoned, ‘God bless the squire and his relations/And keep us in our proper stations.’ While some might have said that in church on Sunday, however, in reality many of them donned masks at night and went out with flint and tinder. In eighteenth-century England – and indeed in the US – people had quaint traditional customs that included what one historian called ‘collective bargaining by riot’: if food prices went up, the local magistrates’ mansions and hayricks also went up – in flames.

By ancient law, the magistrates could fix the wages of local laborers, but the Justices of the Peace of Speenhamland in England, an area afflicted with serious rioting, decided not to. Instead, they used local taxes to supplement the wages of farm workers so that all taxpayers subsidized the payroll of the most affluent landowners, and paid extra cash to workers depending on the price of bread.

Two centuries later, the jury is still out on the motives of the JPs. On the one hand, their policy did save poor families from dire deprivation and actual starvation. On the other, magistrates tended to be rich farmers, so in effect they were subsidizing themselves while buying tangential arson insurance.

These days, we often maintain old traditions. University of California researchers claim chains like Walmart and McDonald’s use public money to subsidize their Scrooge-like pay policies. The minimum wages they pay are not enough for their employees to live on and are feasible only if society as a whole picks up the balance of the tab with food stamps, rent subsidies and state-provided healthcare; the researchers estimate that this government backing of the fast food industry amounts to $7 bn a year.

Those numbers can be multiplied by much more, as it seems 60 percent of new US jobs since the recession have been similar low-paid service sector jobs. As with the gentleman farmers of yore, paying low wages and letting everyone else pick up the tab is good for the bottom line.

But new times mean new problems. Nowadays, it is clear the bigger problem is that the growth of executive salaries is not accelerating the way it used to. Companies cannot afford, politically or financially, to keep executive compensation increasing the way management so manifestly deserves. If CEOs – those on whom our economic survival and continued prosperity depend – are paid less than their peers, it reflects badly on the perceived prosperity of their companies and thus on their shareholder value. This in turn affects market indices and thus the financial prosperity of the nation. It is essential, therefore, that our industrial leaders are seen to be paid well.

In view of such a national challenge, Washington must rise to the occasion just as those rural English magistrates did: it is imperative the government step in to supplement executive compensation. The essential ‘cost of ostentatious consumption increase’ could be met by granting tax credits that would provide needy CEOs with annual percentage increases tied to the rise in the average remuneration of their Fortune 500 peers.

Naysayers might argue that this is inherently inflationary, but it has sound precedents: most board compensation committees cite comparable CEO pay to justify rises for the boss who appointed them, and of course the rises they then award are taken into account by all the others. ‘Speenhamland for CEOs’ might be an esoteric slogan, but it is surely centuries-old wisdom whose time has come!