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The $44 Million One Day CEO

We have to do better on CEO compensation or it will be the undoing of business.

Bill Johnson, recently terminated CEO of the newly merged combination of Progress Energy and Duke Energy, now holds the record for the highest paid CEO for the shortest time in office – $44 Million for one day!

$1.5 Million of that was for “not disparaging the company and cooperating with the termination.” How do you explain this to shareholders?

Earlier this year during negotiations on the merger Johnson said “we are going to work well together” – what happened? Do you think shareholders and employees are owed an explanation? North Carolina’s utility regulators have had to compel Duke Energy CEO Jim Rogers to appear before him in order to get any explanation.

Here we have yet another example of totally inwardly focused corporate politics at the board level apparently without any consideration or approval of the owners of the corporation – the shareholder’s. The fundamental logic of the corporate structure where the board is elected by the shareholder’s to oversee and protect their investment seems to be absent.

Ram Charan, well known author and expert on management and governance, writing in the July/August 2012 issue ”Fix Your Board,” of Chief Executive advises that about one-third of top companies in the U.S. have one or two dysfunctional directors who compromise board effectiveness. Charan argues that these directors have their own motivations and many are driven by ego. Some, Charan describes as seeing themselves as the smartest person in the room. To satisfy their needs , he says that these directors try to micromanage the boardroom.

Too many boards operate as a band of good ole boys, and now with more women on board, a good ole gals, network. Many figures sit on one another’s boards, meet infrequently and simply rubber stamp costly decisions without any consideration from the owner/shareholder’s. More and more often these board members are getting caught up in their own political machinations that have more to do with their personal egos, as Ram Charan also concluded.

The other unsettling aspect of all of this is that they are playing with somebody else’s money and getting paid handsome fees along with generous stock options. How can anyone who has the shareholder’s best interests in mind approve a $44 million payout just to get rid of a CEO who has only been the CEO for one day?

What was the business sense in this decision? What is the ROI explanation to shareholder’s on this payout? Obviously, some board members did not like Bill Johnson, or preferred someone else. And if it were true as newspaper reports contend that the board felt Johnson’s managerial style didn’t comport with the combined Duke-Progress culture, why wasn’t this evident to the board sometime during the 18 months the merger was unfolding? Such an explanation doesn’t wash and shareholders and employees are owed something closer to the truth. Nor was Johnson’s termination package predetermined by contract as was the case, for example, when Bob Nardelli was severed from Home Depot, but rather one developed in a “special meeting of the board” shortly after the merger was effective.

Rather than have confrontations between the board and dysfunctional directors Ram Charan suggests the best way to deal with these situations, is to develop a process that evaluates all the directors on a board and helps the lead director and the chairman of the governance committee give feedback to each director privately. Another alternative Charan offers is to select an independent third party who is trusted by both the board and by management and have that person ask each board member about each of his or hers peers. This evaluation can then be the basis for a variety of corrective actions.

The list of CEOs who squandered their firm’s funds is lengthy. For example, during Hank McKinnell’s five year reign at Pfizer the company lost $140 billion, but McKinnell walked away with a pension worth $161 million for overseeing an unprecedented loss. At International Paper, shares fell 68 percent while John Faraci was CEO, but he was paid $38 million.

Michael Jeffries, CEO of Abercrombie & Fitch holds the record for 17 years of poor performance, but has been paid $71.8 million. Mike’s package includes a $6 Million “stay bonus” as an incentive to continue the “good” work.

Tom Freston, who was the CEO of Viacom for only 9 months walked away with $100 Million. That’s better than Leo Apotheker’s recent 11 month tenure at HP.

In terms of huge golden parachutes, Jack Welch holds the record at $417 million when he retired. He receives $9 million a year for the rest of his life. That’s better than social security by a long shot. He is followed by Lee Raymond of Exxon who received $320 million when he retired. Am not suggesting that such folks should walk away with only a gold watch and a handshake, but where’s the proportion?

With corporate executive compensation committee’s packed with compliant colleagues beholden to the CEO in one way or another, and receiving additional fees, options, and other perks is it any wonder that too many CEO compensation packages have very little correlation with the performance of the firms they manage?

Unfortunately, the shareholders who actually are the owners of these corporations are not even given any consideration whatsoever in any of these critical decisions regarding how their assets are being managed and squandered in more and more firms these days. This is likely why during the recent proxy season, there have been a host of negative say-on-pay shareholder votes in the U.S. and outright rebukes on CEO pay voting in the U.K. The larger issue is the overall economic impact of all of these episodes.

Obviously, the CEOs who are the beneficiaries of these events are oblivious to the consequences of their mismanagement on the employees, shareholders, and the communities impacted by their actions. Is it any wonder that shareholder’s are becoming more vocal and active on the issue of CEO compensation packages?

To review how well run corporations tie CEO compensation to performance one might look to Ford Motor, 3M, and Caterpillar just to mention a few. Better yet, for a more rigorous model look to private equity. When investors put their own money at risk you can bet that the board is watching performance more closely and that it’s aligned with shareholder interest.

About Robert M. Donnelly

Robert M. Donnelly
Robert M. Donnelly is CMO of Flo-Tite Valves & Controls, a U.S. based supplier of valves and components to the process control industry in North America. A coach, educator, and advisor to founders/CEOs of growing firms, he is a serial entrepreneur, having started, grown and sold several technology based businesses. Previously he held executive positions at IBM, Pfizer and Exxon.