Few companies have become so emblematic of the continuing affliction of self-aggrandizing CEOs and slumbering boards. Bob Nardelli, who by several accounts has already been compensated to the tune of $245 million during his five year tenure as CEO, will now receive a further $210 million. Just for leaving. All that was missing from Mr. Nardelli’s departure was the accompaniment of the June Taylor dancers and Jackie Gleason shouting and away we go!
Anyone viewing Mr. Nardelli’s despotic performance at the last annual meeting –an annual meeting at which not a single director other than Nardelli showed up– could have little doubt that this was a board, and a CEO, who had forgotten to whom and for what they are accountable. Mr. Nardelli’s exit addresses only part of the problem with this company. The directors who awarded these princely sums in the first place for a strategy that did not work, who lost the confidence of the investing public, and who then had to pay out more than $200 million dollars again to get out of the mess, need to bear ultimate responsibility.
This is a board that seems to reflect little of the real world around it and appears more content indulging in its own cozy emoluments. Each director is paid a handsome retainer of $130,000 annually. Then there are the additional payments for members and chairs of committees. But that’s not enough. On top of the retainer, directors at this company need another incentive just to show up. Accordingly, and with the generosity that is only evident when dispensing other people’s money, these directors award themselves a further $2,000 for each meeting they attend. Perhaps this helps to explain a boardroom culture that is prepared to pay a CEO millions to take on the job but feels it has to offer tens of millions more annually for him to actually show up and do something.
Board members also participate in a stock option plan, the kind of plan IBM recently eliminated for directors because the company finally recognized that they are incompatible with modern governance principles. Stock options have become something of a curse for this board. First, there is the way they were used to boost Mr. Nardelli’s compensation package. Second, there is the astonishing fact, brought to light last December, that stock option dates had been manipulated routinely over the past 19 years in order to obtain greater advantage for those exercising them. Two years’ backdating might be chalked up to bad judgment –not an inconsequential vice, by any means, but one that nevertheless occurs in corporate America and elsewhere. And there may well be consequences for those involved. But two decades of backdating can only be viewed as the product of a corporate culture of willful deception and lack of accountability. In that, the entire governance structure of a company must be viewed as suspect. One heretofore overlooked fact is that, of the company’s 10 independent directors, five were on the board during the period of options backdating, which apparently lasted until 2001. Two sat on the board even before the backdating of options began in 1981.
There are those, of course, who wonder why such a big deal is made about any CEO pay package. They can’t be spending much time in or near the organizations whose employees see such a growing disconnect between the standards set for a privileged few by the board and those imposed upon workers on the floor. They don’t think about factors like morale, or fairness or leadership that eludes respect and the extent to which these affect the performance, growth and, ultimately, the earnings of a company. And I don’t suppose the defenders of Nardelli’s pay even give a second thought to the significance of the fact that the company he led continues to be at the bottom in terms of customer service, and far below its nearest competitor, Lowes, or that it seems to have developed a unique capacity to alienate customers as any quick sampling of opinions on the Internet will reveal. Others still are not particularly bothered by options backdating, viewing it as an innocent mistake. Funny that they always inure to the benefit of some other party, usually the party making these so-called mistakes.
All these things diminish respect for capitalism, which, from my perspective of some thirty years of first-hand involvement in it, is an economic system that needs its guardians of principle and champions of responsibility as much as it needs its hedge fund managers and free enterprise tycoons. The surest way to bring about the overreach and inefficiencies of government intervention is for the laissez-faire advocates of business to continue to cling to the increasingly discredited notion that no amount is too much to pay a CEO. The consequences of the erosion of confidence in capitalism and esteem for its leaders are too important to be left to such short-sighted thinking or to dysfunctional boards –which brings us back to Mr. Nardelli and the board of directors, for it is this board that is the fundamental cause of the company’s difficulties.
Composed mainly of past and current CEOs, boards have had a vested interest in perpetuating a flawed compensation system that has been very good to them. This is a board that boasts of its independence from management –so independent it acceded to Mr. Nardelli’s instructions that no director appear at the last annual meeting. But the most obvious qualification for these directors seems to be that they be connected to each other by way of friendship and past company experiences. I will be exploring this further in a future piece.
For its Annual 2006 year end awards, Finlay ON Governance inaugurated what it called the Home Despot Award for the board and CEO who displayed uncommon obliviousness to the growing discontent of shareholders and customers. The winner of that award demonstrated its blindness to reality by overly compensating an autocratic CEO who had lost the confidence of many stakeholders and alienated other key constituencies, and continued to do so again when it rewarded an exiting Bob Nardelli with more than $210 million for that privilege. These are just a few of the many reasons why the actions of Home Depot’s board are the Outrage of the Week.
The Highs and Lows of Leadership in Business & Government
Biggest Winners
Nancy Pelosi, who helped to bring the Democratic majority back to life in the House of Representatives and thereby secure her place as that institution’s first female speaker; Warren Buffett, probably the world’s most respected businessman, for showing that you can win by promising to give it all away; North Korea dictator Kim Jong-il, who thumbed his nose at the U.S. by firing off missiles on July 4th, then testing a nuclear bomb, and is still alive to talk about it; Canada’s Conservative leader, Stephen Harper, whose election brought an end to more than a decade of Liberal rule.
Biggest Losers
George W. Bush; Karl Rove; Saddam Hussein; former HP chair Patricia Dunn; Conrad Black, who wants his Canadian citizenship back after giving it up to become a British Lord (that was before he met U.S. federal prosecutor Patrick J. Fitzgerald, however); Apple CEO Steve Jobs, who, according to a year-end internal probe by Apple’s board, participated in a scheme to manipulate the purchase price of stock options for other participants in the plan; the ordinary people of Iraq, whose daily and increasing dissent into anarchy make them hapless pawns in the greatest American foreign policy disaster of all time.
Most Significant Political Moment
The U.S. mid-term elections, which saw Republican domination of Congress come to a crashing end;
Most Significant Corporate Moment
The sound of prison doors slamming on former icons of corporate America: Bernie Ebbers of WorldCom for 25 years; Jeffrey Skilling of Enron for 24 years; Sanjay Kumar of Computer Associates for 12 years, and numerous lesser figures.
Runners-Up
The SEC votes for more detailed disclosure of CEO pay, then later blunts the impact of the move at the urging of business lobbies; Canada’s Finance Minister Jim Flaherty ends the tax holiday for income trusts and puts that country’s corporations back to focusing on their business and not their tax status.
Biggest Political Scandal
America’s prosecution of the war in Iraq, which has lost the confidence of the American people, alienated the country’s allies, cost hundreds of millions of dollars and tens of thousands of lives, and whose damage as the greatest blunder in U.S. foreign policy history may be incalculable. America, in Iraq, has shown itself to be the “pitiful giant” Richard M. Nixon always feared America could become if it did not carefully think through the consequences of its foreign policy decisions.
Runners-Up
The wave of improprieties and wrong-doing involving a host of disgraced Republicans, including Tom DeLay and Randy Cunningham, the Abramoff lobbying scandal involving payoffs and bribes, and the House Republican leadership’s turning a blind eye to the disgusting antics of former congressmen Mark Foley.
Biggest Corporate Scandal
The 195 companies, including names like Home Depot, Apple, Restoration Hardware, Staples and Research In Motion, involved in either federal or internal investigations over stock option manipulation –a huge scandal that has already seen the departure of 59 senior executives. And the problem took a stunning year-end turn with the filing of Apple’s internal probe into stock option irregularities, which confirmed that CEO Steve Jobs’ role in the backdating was greater than previously disclosed. A very big job ahead for SEC investigators.
Runner-Up
HP, where its own directors brought discredit upon this icon of American technology with a pretexting scandal that intruded into the personal lives of directors and reporters where the board failed to ask the right questions about how the information was being obtained.
Most Admired Board Move
IBM, for taking the lead, albeit belatedly, in ending the insidious policy of issuing stock options to directors. Apple Computer and Research In Motion, take note.
Most Dysfunctional Board
HP –hands down. (But see the Home Despot Award for a close second).
Home Despot Award
For uncommon obliviousness to the growing discontent of shareholders and customers.
Home Depot’s board paid more than $245 million to CEO Bob Nardelli over five years, during which time share value continued to plummet. His heavy-handed domination of the company’s annual general meeting where he routinely cut off shareholders questions after one minute and where not a single member of the board bothered to attend, was an event that would bring a smile to Kim Jong-il. Add to this the low marks the company receives for customer service and recent revelations that it routinely backdated stock option dates for the past 19 years, and the conclusion is that Home Depot and its board are in need of serious renovation. Time to bring in Mike Holmes.
Jack Welsh – Dick Grasso Award for Brazen Excess
The boards of Capital One Financial, Yahoo, Cendant, KB Home and Lehman Brothers Holdings, which paid their CEOs what amounts to over $800 million for the fiscal year 2005. Five CEOs. Eight-tenths of a billion dollars. One hundred percent insanity in the boardrooms that produced this outrage
Runners-Up
Hank McKinnell, who, after leaving as Pfizer’s CEO earlier than expected amid shareholder outrage over compensation issues, will receive a retirement package estimated at $180 million; Goldman Sachs, for out-of-this-world bonuses, including a record $53.4 million to CEO Lloyd C. Blankfein; members of Ontario’s legislature, who voted themselves a record 25 percent pay hike just days before going off on a three-month break.
Chutzpah Award
Research In Motion’s application to the Ontario Securities Commission (which was granted) to temporarily lift the trading ban on company insiders so its co-CEOs could exercise 750,000 options at just over a dollar a share at a time when the company had not made statutory filings for it second quarter and its own internal stock options investigation was not completed. Talk about moxie.
E.J. Smith Award for Myopic Vision
President George W. Bush, in a strikingly convincing portrayal of the Titanic’s ill-fated captain, who continued to shout “stay the course” long after America hit Iraq and the devastation was apparent
Runner-Up
Members of the self-appointed Capital Markets Regulation Committee, composed of corporate leaders and accounting executives and funded by a former target of New York State Attorney General Eliot Spitzer, which called for a roll back in enforcement against white color crime and higher bars for suing corporate directors and accountants at a time of mounting boardroom scandal over CEO pay and stock option backdating.
Pass the Antidote Award
For all the stories of excess about Conrad Black, his febrile campaign to regain the Canadian citizenship he renounced only a few years ago, and his assertion that he has really become a freedom fighter. Yasser Black? We think not.
The George Costanza “Was that Wrong?” Award
William H. Swanson of Raytheon, who wrote a book containing homespun wisdom that was substantially lifted from one written more than half a century earlier by California engineering professor W.J. King; Tom Parkinson, who, as Canada’s Hydro One’s CEO, put his $45,000 expense tab on his secretary’s credit card to avoid scrutiny and then approved the expenses himself. He’s gone now, too; AT & T, for disclosing without warrant or court order hundreds of thousands of customer telephone records to the U.S. government.
Stupid Utterances Award
“We’re not winning, but we’re not losing.” — The sudden mantra of Bush administration officials to explain why, after spending more than $400 billion on the war and costing hundreds of thousands of lives of coalition forces and Iraqi citizens, the world’s only superpower is in a scientifically neutral position. Absolute zero, Bush style.
“My problem with governance is that it’s really hurting American business.” — Barry Diller, who was paid $265 million in 2005, commenting on corporate governance advocates who question high CEO pay. And you thought it was really Enron and the like that did the damage.
Encore Award
People we would like to hear more from because their voices further understanding of principles of responsibility in governance and leadership:
Harvard professor Lucian Bebchuk, who is doing the most interesting work on CEO pay and stock options in decades; Gretchen Morgenson and Floyd Norris of the New York Times; former White House advisor Richard Clarke; CBS veteran correspondent Bob Schieffer; CBC Washington correspondent Henry Champ, who brings an informed insight to the intersection of Canadian and U.S. politics; corporate governance eminence Robert Monks; former U.N. chief weapons official Hans Blix and U. S. weapons inspector David Kay, two courageous public servants; Generals Zinni, Odom and (Wesley) Clark, who have a commanding sense of vision that has been vindicated by events ; Bono; Belinda Gates, whose mind seems more intricate in its functioning than her husband’s, and she has considerably more style and personality; the (as yet unrevealed) Canadian who can rightfully take Nobel Prize winner Lester Pearson’s place on the world stage to further global peace with the former prime minister’s quiet dignity and professionalism; Zbigniew Brzezinski, perhaps the best foreign policy mind in the United States; Lou Dobbs, who had the courage to see things as they are and speak out; Warren Buffet, who is unique among billionaires; and Michael Beschloss, as graceful a historian as you will ever find.
Enough Already! Award
Belinda Stronach (if you don’t know who we mean you are lucky); lobby groups for corporate directors; David (“Axis of Evil”) Frum, in either his U.S. or Canadian persona; Newt Gingrich, because it really takes a special talent to blow it like he did when he was House Speaker; Jack Welsh. Especially, Jack Welsh; the Business Roundtable’s long since discredited positions on CEO pay and corporate governance; demands for the roll back of Sarbanes-Oxley; CNBC’s James Cramer is on the border line; the dynasty approach to the American presidency, which leads to great tedium and sclerosis of the political arteries due to a lack of fresh thinking. America can do better than alternating its leadership between the Clintons and the Bushes and might just be better off seeing less of both families.
Outrage of the Year: The Two Americas
The war in Iraq continues, demanding the ultimate sacrifice of courageous men and women in the U.S. military and causing unimaginable pain and suffering among the Iraqi people, while at home it continues to be party time for the rich and the powerful with record high CEO pay, oil company bosses pulling in a king’s ransom from astronomical gas prices courtesy of Middle East tyrants and despots, and tax breaks for the wealthy that enable that group to spend like drunken sailors on luxuries. It is a time in which neither the pain nor sacrifice of the war is being shared fairly, nor, for that matter, is the great leap in wealth being enjoyed by a select few.
The New York Times’ Floyd Norris makes some typically insightful comments on the Apple Computer stock options scandal on his blog. Finlay ON Governance has been on this story itself, along with The Centre for Corporate & Public Governance.
It’s unfortunate that the Times requires a paid subscription to view it because this is the kind of thoughtful perspective from which all members of the investing public and interested observers can benefit. Here is an excerpt from his posting today.
It will be interesting to see if the Securities and Exchange Commission agrees that there is no problem if a chief executive was aware that favorable grant dates were selected but did not “appreciate the accounting implications.” And we are asked to believe that when options given to him were ostensibly approved at a board meeting that never happened, he did not know what had gone on, although he was a member of the board.
I responded to the post with the following comments, which can also be viewed at Mr. Norris’s blog:
Another conclusion might be that Apple has not taken corporate governance seriously. It has a tiny board of only seven directors, one of whom is CEO Steve Jobs. Many of them, including Jobs, sit on the boards of several other prominent corporations, thus requiring substantial attention away from Apple. Rather puzzling is the fact that no director or officer of the company appears to hold the title of board chair. I have never encountered this anomaly in any other publicly traded company in some 30 years in and around North American boardrooms. It seems to suggest a lack of proper board organization. No wonder they don’t know when they meet.
As to the matter of stock options, the fact that they appear to be such a driving force in the company, and on the board itself, might account for some of the current problems. Outside directors participate in a stock option plan in which they are eligible to exercise hundreds of thousands of options. It will be recalled that IBM’s board recently eliminated the practice of issuing stock options to directors, thereby winning considerable approval among corporate governance experts for the move. It is disturbing that the board committee admitted that its CEO was complicit in the manipulation of dates in respect of options but does not appear to regard that as a serious breach in the ethical leadership of the company. Nor does it suggest any further steps it plans to take to ensure a culture of integrity and accountability in the company.
A final point on Apple’s board: no woman sits among its directors. There is really no excuse for such a gender gap in corporate governance these days, and when it occurs, it suggests a company that lacks an adequate understanding of the times in which it lives and the expectations that confront major publicly traded companies. There is a serious disconnect between Apple’s technology prowess and its governance performance. It has been costly. And that, perhaps, is the most significant conclusion to come out of Apple’s options mess.
Looking over what has been disclosed by Apple’s board about its investigation –the company should have released the full report to the public in order to avoid further confusion– I am of the view that the company’s independent directors took an overly narrow approach to their mandate. They should have probed further into what was done, why it was done and the implications for the company’s reputation and culture. It is not enough to say that CEO Steve Jobs did not make unlawful or improper gains from options manipulation. Improprieties occurred on his watch. He permitted or encouraged backdating according to the report. Concerns must, therefore, also focus on exactly to what extent Jobs might have assisted in the backdating and whether he misled investors as to the disclosures that were made and have subsequently been proven false to the tune of $84 million.
The report also asserts that Mr. Jobs was unaware of the “accounting” implications involved. He has been CEO of the company for a considerable period and is widely reputed to be a “hands-on” manager. A Ken Lay type excuse that Mr. Jobs was not aware of what was happening around him or did not understand even the ethical implications of what he was doing, and was not bright enough even to seek counsel about any uncertainty, not only is not plausible, but even if it were would still raise serious questions about the standards of competency in the company’s top management.
Inasmuch as CEOs have been fired for making false statements on their resumes and have had their bonuses reduced because of plagiarism, it appears that Apple’s board has not adequately considered the full implications, including far-reaching ethical implications, of what has occurred. What failures in governance oversight, along with the size and functioning of the board, that may have contributed to the fiasco, and what needs to be done to address these shortcomings, also appear to have escaped the board’s gaze.
It’s pretty clear from the actions of all the players involved that there will be more fallout from Apple’s revelations.
