When CEO and board marriages fail

CEO evaluation — indeed, life itself — is a battle of perception. Boards and remuneration committees hesitate to engage with the behavioural and soft aspects of CEO appraisal. This is one important reason for such marriages failing.

A fortnight ago, I was invited to speak on the titled subject for an event in Boston. The subject was of interest because of increasing incidences of CEO and board marriages failing. The question was, can they be reduced and, if so, how?

For sure, more objective and rigorous board processes are required on important issues like acquisitions and appraisals. Think of what happened when HP acquired Britain’s Autonomy for $11 billion in 2011. Just one year later, HP had to write down $9 billion. HP accused Autonomy’s founder CEO, Mike Lynch, and CFO, Sushovan Hussain, of fraudulent accounting. The matter is sub judice. But what do you reckon was the state of relationships between Leo Apotheker, HP’s CEO at that time, and his board, headed by Chairman Ray Lane? Naturally, there followed a parting. This parting occurred just six years after the parting of the HP board with Carly Fiorina. Why? For her acquisition of Compaq.

In 2008, India had a similar case when Japanese company Daiichi Sankyo acquired Ranbaxy Laboratories. Boards rely on judgements of CEO competence and hence, objective performance evaluation of the CEO is undoubtedly important. It is necessary, but is it sufficient?

At variance from corporate governance theory, there are many subjective, behavioural factors also at play. Rational evaluations are possible when there are clear performance metrics. However, subjective, behavioural aspects are fuzzy and that is why judging CEO performance is complex; in my experience, behavioural factors are given low weightage. This creates an illusion in the board that evaluation is objective.

Think of the circumstances around the departure of Ramesh Sarin at Voltas, Vishal Sikka at Infosys, joint CEOs, Suresh Vaswani and Girish Paranjpe, at Wipro or the changes in chairmanship at Tata. Looking overseas, consider the departure of Chris Viehbacher at Sanofi, Rick Thoman at Xerox and Vikram Pandit at Citi. In recent years, Citi has been helmed by Michael Corbat; now Jane Fraser is scheduled to become the first woman CEO of Citi — she has a major turnaround task ahead of her. Recall how legal counsel, Hari Nada, helped to bring down the mighty Carlos Ghosn at Renault-Nissan. The importance of assessing behavioural factors in addition to metrics-based evaluation leaps out.

On January 25, the Financial Times carried a report about two companies, Carillion and Wirecard. Carillion is a British construction company, while Wirecard is a German payments processor. Both are prominent companies in their respective environments. Both companies received glowing reports about the effectiveness and impact of their board processes. Soon thereafter, shockingly, both companies imploded. It is almost as though public recognition is a kiss of death. (As an aside, this seems to happen quite often—that as soon as a newspaper or association recognises the “exceptional leadership and governance”, bad events follow. Recall Satyam Computers.)

In my experience, several remuneration committees function diligently. Remuneration committees do engage, but more with the hard factors of results, and far less on the soft factors of behaviour or human impact. Under the illusion of evaluation being objective, some boards justify a large remuneration for a great performance. That action further fuels the cynicism about CEO evaluation.

The opposite happens when a divorce between the CEO and the board is looming; the performance evaluation seems to be dominated by soft factors—for example, moving too slowly (Tom Flannery at GE), moving too fast (Chris Viehbacher at Sanofi), poor relations with investors (Klaus Kleinfeld at Arconic), or poor interactions with employees/associates (Travis Kalanick at Uber).

The lesson is that the “soft, behavioural” component must influence CEO evaluations even normally, not only when there are stressed relationships. Remuneration committees and boards can discuss soft factors with frankness only when there is trust among directors. CEO and board marriages require sensible management of power and ego among very powerful people!

The exit of Jeff Immelt after 16 years at GE is a remarkable story told by Thomas Gryta in the book, Lights Out. Needless to add, it is one person’s narrative, based on the facts as narrated by the author. Jeff Immelt has told his side of the story in his book, Hot Seat. The reader will never know the truth, if at all there is anything true. 

The writer is an author and corporate advisor. He is distinguished professor of IIT Kharagpur, and was director of Tata Sons and vice-chairman of Hindustan Unilever