More on Owners, Managers, and Socially Responsible Investors
The Financial Times got a great quote Wednesday (link via MSNBC) from executive headhunter John Challenger: "The pressure is not going to relent on CEOs in 2007. The days of the imperial chief executive are over."
One reason is the growing influence of private equity. Reporter Francesco Guerrera got another great quote from Steve Ellis of Bain & Co.: "One of the messages for 2007 is: whether you like it or not, your company is for sale."
It seems that society's view of the CEO is becoming increasingly bi-polar. We assume CEOs are extraordinarily gifted, as evidenced by their robust pay packages. But we are simultaneously become less tolerant of underperformance, as evidenced by the Ellis quote and Mr. Nardelli's recent exit from Home Depot. One could wonder if this fire and ice approach will deliver the best results. It brings to mind something Warren Buffett wrote in another context in his 1990 Letter to Shareholders:
"Huge debt, we were told, would cause operating managers to focus their efforts as never before, much as a dagger mounted on the steering wheel of a car could be expected to make its driver proceed with intensified care. We'll acknowledge that such an attention-getter would produce a very alert driver. But another certain consequence would be a deadly - and unnecessary - accident if the car hit even the tiniest pothole or sliver of ice."
Like excessive debt, the current policy toward CEOs raises the stakes without doing much to improve prospective performance. If one of our biggest problems is short-termism (past commentaries here), putting the CEO in a position where the only options are immediate positive results or termination seems to me ill-advised.
But what is the alternative? In his excellent update of Benjamin Graham's The Intelligent Investor, Jason Zweig observes that in early editions of the book Graham wrote extensively about management quality. But he reduced the section over time, ultimately limiting it to a few paragraphs on dividend policy.
Perhaps no other part of The Intelligent Investor was more drastically changed by Graham than this... Why did Graham cut away more than three quarters of his original argument? After decades of exhortation, he evidently had given up hope that investors would ever take any interest in monitoring the behavior of corporate managers.
...Graham wants you to realize something basic but incredibly profound: When you buy a stock, you become an owner of the company. Its managers, all the way up to CEO work for you. Its board of directors must answer to you. Its cash belongs to you. Its businesses are your property. If you don't like how your company is managed, you have a right to demand that the managers be fired, the directors be changed, or the property sold. "Stockholders," declares Graham, "should wake up."
So perhaps they are. For those who believe, as Graham did (and as Robert Monks does today) that shareholders should rule the company, there is plenty to rebel against (see, for example, my September post on stakeholder theory).
But investor attention is, um...intermittent. Scandals make headlines, but it's hard to show that governance improves. Graef Crystal observes that even after the scandals and reform of the first half of this decade, there's still not much rhyme or reason to how top executives are paid. That won't change until shareholders give the matter sustained rational attention.
But how likely is that? Home Depot co-founder Bernie Marcus doesn't seem to think it's about to happen. In the AP story he is quoted as saying: "It’s like the old story, if the stock goes up 10 points, who’s going to care?"
By the way, there is an interesting new paper on CEO tenure and firm performance here. I particularly like their distinction between 'owner' and 'manager' CEOs.
