Boards Demonstrate More Willingness to Pull in Reins on CEOs

But what’s actually happening is that boards of directors—influenced by factors ranging from greater corporate transparency to the urgency forced by activist investors—are simply paying closer attention to all the affairs of the companies they oversee, and having a shorter leash on CEOs is one of the byproducts.

So argues Dennis Zeleny, one of the nation’s leading practitioners of human-resources strategy and a former top HR executive at a range of companies including Sunoco, CVS Caremark, DuPont and PepsiCo.

“The marketplace has become more intensified as a result of market forces and transparency, with the expectation for quicker results, quicker turnarounds, quicker change and quicker improvement,” Zeleny told Spotlight on Boards. And, as in the case of DuPont’s Kullman, “activist shareholders have intensified the environment with their own views on corporate structure, performance and expectations of performance.”

Meanwhile, corporate performance—as reflected, for instance, in the controversy over the new pay-ratio rules—has come into a stronger center as a social issue. Digital communications and the greater push by shareholders and consumers for “corporate transparency” also tend to shine a harsher spotlight on director performance, as well as those of CEOs.

As a result, Zeleny said, “boards today are more responsive and play a more active role in working with the CEO for success. There are greater and more frequent communications, more discussion of strategy and execution, and shorter time horizons to destinies.”

One result is that boards may seem less patient with CEOs. Another result is that they actually may give chiefs shorter deadlines for achieving a desired level of results or a turnaround. In the case of DuPont, sources say that the board was weak, and simply caved under activist pressure.

Another result is that, when it comes to new and future CEOs, boards are tending to get stingier with the promise of big payouts regardless of how and why the chief ends up leaving.

Paying dismissed CEOs “remains a common practice,” the Wall Street Journal noted recently, with nearly 60% of publicly held companies in the Fortune 250 having policies or employment agreements that pay cash severance to top bosses who are “terminated without cause,” according to researcher firm Equilar.

But as the Journal noted, “slowly but surely, that generosity appears to be changing,” as “certain corporate boards are having second thoughts, and crafting more modest departure deals for new leaders.”

Zeleny’s view is that “boards are less willing to agree to golden parachutes.” Severance-pay norms of the past—of three times base pay and bonus, for instance—have been replaced by smaller multiples and other reductions, he said.

It’s gotten to the point that investor-advisory firms such as ISS and Glass Lewis recommend “no” votes on board compensation-committee members who push for lucrative golden parachutes, “which is a strong incentive for boards to frown on this behavior,” said Zeleny, who also was co-CEO of the Center on Executive Compensation.

Still, Zeleny noted, boards of directors have to “find the right balance” between the new attitude of lower tolerance for errant CEOs and for compensating them handsomely upon exit, and the continuing—and perhaps even growing—need to attract the top candidates for open jobs.

Read more:
Time for Boards of Directors to Show More Backbone