CEOs Who Should Lose Their Jobs

It's the Board, Stupid

Even before the most recent wave of scandals, pressure had been building on boards to act not just as providers of honest feedback, but also as watchdogs on the lookout for trouble. Some activist boards took on that role, while others continued to behave more as enablers than as counterweights to CEO power.

The truth is that while the outrageous corporate frauds (and the prospect of outrageous legal liabilities) have put the fear of God into many boards, there's been little in the way of formal reform -- apart from the Sarbanes-Oxley Act, which requires that members of audit committees be independent and financially savvy but says little about the rest of the board. Media glare has gotten some boards to shape up, says Sarah Teslik, executive director of the Council for Institutional Investors. But until shareholders have some power to select or remove directors, there won't be much added pressure on management. As things stand now, Teslik says, "Good boards are even better, and bad boards haven't changed."

And even where boards have improved, it will take time before better governance produces better results. True, directors these days are likelier to have financial expertise, be free of connections to the executives or to other board members, and have a clear sense of their responsibility to the investor. But few people realize how long it will take before these directors get up to speed, change a corporate culture, and, if necessary, sweep out the laggards. "We are still in the transitional phase," says Nell Minow, editor at The Corporate Library, an online governance Web site, "and it's very much a slow transition."

Some of the boards at our laggard companies seem oblivious to any change at all. Consider, for starters, the question of who chairs those boards. One of the pillars of good governance is to separate the jobs of chairman and CEO. William Pasmore, a partner at Mercer Delta Consulting and an adviser to CEOs on leadership and change, says that's because it's always harder to challenge the power of the CEO if he holds the chairman's title as well. Lo and behold, in each of our five cases, the Teflon chief executive is also the chairman. "It creates just one more thing when dealing with a poorly performing CEO," Pasmore says.

Potential conflicts of interest are another governance no-no. Compuware's Karmanos probably doesn't do much sweating in his boardroom considering that two of his outside directors are paid to do legal work for the company, and another two, Elizabeth Chappell and William Grabe, showed up for fewer than 75% of the board's meetings last year. The board also approved paying a printing company owned by Karmanos's brother $625,000 in fiscal 2003, as well as $1.3 million in tickets and license fees connected to sports teams and arenas owned by Karmanos and Compuware's vice chairman.

In the meantime, Compuware, which sells software and services, has passed much of the past five years treading water. It has spent more than $20 million fighting IBM in an intellectual-property lawsuit, its sales force has been distracted by a reorganization, and its revenue continues to fall even as it spends $350 million on a new headquarters. "I don't think any shareholder would be upset if there was a changing of the guard," says Matthew Kaufler, porfolio manager at Clover Capital Management, which owns 1.3 million Compuware shares. "I put the company's performance at his feet, period." Compuware and Karmanos declined to comment.

At Disney, Eisner's board was for years considered the very model of bad corporate governance. Its "outside" members included Eisner's personal architect, his children's elementary-school principal, and actor Sidney Poitier. Wowed by Eisner's dazzling early successes, the board made him a stock-option gazillionaire. Eisner became the best-paid executive ever in 1998 (though he's since been supplanted), raking in $570 million from previously granted options alone. Following that payday, earnings began slumping in the wake of several movie bombs, an ill-timed move to create an Internet portal, and later the loss of viewers from ABC, the network that Eisner bought in 1996. Earnings have yet to return to 1998 levels.

The pressure on Eisner continued to mount in 2002, despite the announcement of a series of governance improvements, including the hiring of boards expert Ira Millstein as an adviser. Early in 2003, Eisner and the board got rid of the principal, the architect, and Poitier (along with one Andrea Van de Kamp, reportedly one of Eisner's biggest detractors on the board). These were mostly positive steps, but why did it take so many years to make them? "Some time in the last couple of years, an elegant retirement should have been arranged," says Michael Mahoney, managing director of EGM Capital, a $700 million hedge fund that owns Disney shares.