The death certificates have been signed. The eulogies have been written. The bagpipes have sounded. That's right, folks. The era of the Imperial CEO is officially over. Thanks to the humiliating collapse of the fraud-riddled likes of Enron, HealthSouth, Tyco, and WorldCom, chief executives today are about as respected as, oh, Internet stock analysts.
And they have about as much job security, too. A CEO no longer has to be photographed on a perp walk, handcuffs scraping cuff links, in order to get the boot; heads are now rolling for the slightest whiff of impropriety. In June, Freddie Mac wiped out much of its C-suite — its CEO, COO, and CFO — amid an accounting probe. Another prominent departure of late was American Airlines chief Donald Carty, forced out after neglecting to mention a special bonus pool for top executives while he was asking stewardesses and pilots to take massive pay cuts.
But as the bills come due for the millennium's excesses, many executives are losing their jobs for much less. These days, bosses may actually be shown the door for something as simple as poor performance (imagine that!). Just ask Ford's Jacques Nasser (broomed in 2001); Vivendi's Jean-Marie Messier (2002); EDS's Dick Brown (2003); AOL-Time Warner's Gerald Levin (2002); and — hello, again, AOL-Time Warner — Steve Case (2003).
A stunning 78% of the CEOs at the worst-performing 20% of companies in the S&P 500 have been replaced within the past five years. "The way companies are managed is more by the numbers now," says Chuck Lucier, senior vice president emeritus at Booz Allen Hamilton. "If an executive doesn't perform today, he gets shot."
Or Does He?
Fast Company decided to take a look at the other 22% — the bosses who have somehow managed to hold onto their jobs, new era of accountability be damned. We worked with Bain & Co., The Corporate Library, and Media General Financial Services to screen for companies whose stocks had underperformed both the overall market and their peer groups during the past five years — through both flush times and rough times — and whose CEO had been comfortably ensconced in the corner office for at least that long. (We used the five years ending June 30 as our timeline.) We also looked for CEOs whose companies' corporate governance practices were subpar, whose compensation appeared to be excessive, or who investors believed to have made some critical mistakes.
What we discovered is a group of corporate chieftains who have apparently grown roots into the parquet floors of their plush offices. To our eyes — and to those of fleeing shareholders — these executives have outstayed their welcome. They are the Teflon CEOs, who seem to emerge smiling and unsullied from the muck of poor results, declining stock prices, strategic blunders and missed opportunities.
Let's start the discussion with Michael Eisner, the onetime wunderkind who saved the Walt Disney Co. in the 1980s and has more recently been trying — and failing — to recapture the pixie dust of those glory days. Then there's Christopher Galvin at Motorola, the scion who has led the one-time industry darling into a mire of declining profits and cutthroat competition. We found Robert Waltrip, the 72-year-old CEO of Service Corporation International; he's a funeral-home impresario who got caught up in a death-defying acquisition frenzy. Then there's Patrick Ryan, the CEO of Aon Corp., the insurance behemoth that has seen its margins slide as its competitors' improve. And let's not forget Peter Karmanos Jr., founder and longtime CEO of Compuware Corp., whose beholden board hasn't seemed to notice that revenue has fallen for 12 straight quarters, year over year — and that the stock price hovers below $6, from a split-adjusted $32 four years ago. These are just the most prominent examples.
Certainly, none of these CEOs has been accused of looting the company or cooking the books. Most of them are trying to fix what they broke, but the truth is that the results have been abysmal. If times have really changed — and even if they haven't — why do they still have their jobs? How many strikes will they get before the ump finally calls them out? And is there anything that we might learn about corporate survival from these people?
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.
On July 31, Disney reported that earnings rose 10% in the fiscal third quarter, a sign to some intrepid investors that the long- awaited turnaround may at last be at hand. The stock has recently been on a tear, up 35% this year on hit movies such as Finding Nemo, a joint project with Pixar Animation Studios. Yet the future of Disney's very profitable collaboration with Pixar is unclear, as Eisner and Pixar's Steve Jobs are locked in a bare-knuckled negotiation over a new agreement — one that most observers think will be much more beneficial for Pixar. There is also ongoing litigation with a firm that owns many of the merchandising rights to Winnie the Pooh and asserts it is owed many millions by Disney. Not to worry, says Stan Dinsky, portfolio manager at Lord Abbett's Affiliated Fund and an owner of Disney's stock. "We got the guy doing the right thing now, and the company's moving in the right direction — and Rome wasn't built in a day."
A company spokesman says that Disney's woes are mostly a re-sult of the economy and fallout from September 11 and that Eisner has decided to invest heavily in Disney properties, which also helped depress recent results. He also says that ABC is on the mend.
The Devil You Know
Something funny happens when a CEO (or an elected official) has been in his seat for a very long time: People get used to his being there. Often, he's a really nice guy with all the right intentions, not to mention all the right connections. And in a business atmosphere that's become more about avoiding risk than taking it, the incumbent has the advantage of being a known quantity. "One of the traps for boards is when you have a CEO who is a very good guy but not very bright, who just doesn't have a good strategy and isn't capable of creating one," says John Biggs, former head of pension fund TIAA-CREF. "Boards are slow to deal with that."
The dilemma for a board working with an underperforming CEO is a tough one. Is it better to bet the farm on an unknown or to stick with what you've got and hope he'll somehow come through in time? Says Darrell Rigby, a director at Bain & Co: "The question is always, 'If we replace the CEO, are we going to get someone who is better or worse than the incumbent?' "
That may well be what directors are asking themselves about Robert Waltrip, CEO for the past 41 years of what is now called Service Corporation International, the Houston-based company that is the largest provider of funeral, cremation, and cemetery services in North America. Waltrip is also a very active donor to the political campaigns of many prominent Texans, including the gubernatorial campaign of President George W. Bush. (He is a good friend of the Bush family.) A funeral director himself, Waltrip saw the scale advantages of buying up funeral homes in clusters and embarked on a stock-fueled acquisition frenzy that blew up in 1999. SCI eventually took several hundred million dollars in write-downs and retrenched, selling many of its recent purchases at deeply discounted prices to reduce a ballooning debt that nearly put the company six feet under.
The company also found itself in hot water for a variety of alleged irregularities. In 1998, the Texas Funeral Service Commission recommended a $450,000 fine for SCI's alleged use of unlicensed embalmers in Texas. SCI hasn't paid the fine and has asked for a hearing on the matter, which, five years later, has not been scheduled. In May 2003, it settled charges filed by the Florida attorney general (without any admissions of guilt) that an SCI-owned Jewish cemetery in West Palm Beach dumped human remains incorrectly, desecrating grave sites. The terms of the settlement have SCI paying $4 million to the Florida government and $2 million to set up a fund for individuals with claims. And in August, it took a $15 million charge against second-quarter earnings to pay the uninsured portion of an investor lawsuit that went through arbitration.
Waltrip has apparently faced few questions from his board, which boasts, among others, A.J. Foyt Jr., the race-car driver, and Waltrip's son, W. Blair Waltrip, a former executive at SCI whose noncompete agreement allows him to be paid until 2005 even though he resigned as executive vice president in 2000. Although SCI's stock now trades at just under $4 (down from a high of $47) and the company actually fell off the S&P 500 Index in 2000, only last year did the board bring up the issue of planning for a successor to its septuagenarian CEO. "I realize I am stating the obvious," responded James Shelger, SCI's general counsel, in a letter, "but executives hold their positions because the Boards of Directors . . . feel they are the most qualified."
At Disney, the emotional crosscurrents are even more complex. Eisner isn't just the devil the board knows — he's a fallen angel it revered. In his tenure, after all, he turned a small, lagging studio that was producing increasingly unwatchable movies into an entertainment-industry titan. "If you know someone's doing a bad job and has never done a good job, it's easier to coalesce," says Mahoney, the hedge-fund manager who holds Disney stock. "If you've got someone who did a great job and now is not doing as good a job, you're not likely to get as activist about it."
Mystique of the Founder
Even after family businesses grow into huge multinationals, nostalgia for "the way things used to be" usually lingers. Often, as in the case of Motorola, the house mythology is maintained by passing the torch from generation to generation. Christopher Galvin is the third Galvin to run the company, which was founded as Galvin Manufacturing in 1928 by his grandfather, Paul. Chris's father, Robert, took over in 1959, and the company developed technologies in semiconductors, pagers, and the first cell phones, becoming one of the most successful outfits on the planet.
The gravy train began to slow just before Chris Galvin, known as a nice guy with a persuasive style, took over from a succession of nonfamily members in 1997. He immediately embarked on a radical restructuring plan to sell off assets and cut costs. None of it has worked. In the meantime, Motorola lost its leading global position in mobile phones, its semiconductor business lost its technological edge and began bleeding money, and prices for almost all of its main products went into worldwide decline. The only good news in Galvin's tenure has been the government sector, which continues to buy systems to improve homeland security.
But the stock, down 46% in five years, reflects the combined $6.7 billion in losses, including special charges, over the same period. "We feel like Motorola has been a perpetual restructuring story," says Bob Rezaee, head of equity research at McMorgan & Co., a subsidiary of New York Life that manages $20 billion in assets and sold off its entire 6.5 million-share position in Motorola this year. "The decisive decisions that should have been made years ago were never made." Sam Scott, chairman of Motorola's compensation and leadership committee, responds, "It is Chris Galvin's leadership that is the backbone of the cultural and performance transformation at this middle phase of Motorola's turnaround."
There's a natural inclination on the part of both a board and rank-and-file employees to give a family leader the benefit of the doubt, says Sydney Finkelstein, author of Why Smart Executives Fail and a professor of strategy and leadership at Dartmouth College's Tuck School of Business. "You're buying into the history and the ethos," he says. Mahoney of EGM Capital, whose fund used to own stock in Motorola, couldn't agree more. "Motorola reminds me in some ways of Detroit 25 years ago," he says. "They need to move out of Galvinville and try some time with a different way of thinking about the world."
Even more powerful than the heirs of founding families are founders who still lead their companies, such as Waltrip at SCI or Patrick Ryan at Aon. Building an organization from a gleam in the eye to a major public company is a phenomenal achievement. This "mystique of the founder" can mesmerize even a good board. "The imbalance of power [between a board of directors and an executive] is much greater with a founder," says Teslik of the Council of Institutional Investors. "[It's] not just a CEO."
But a passion for building a company often doesn't translate into a deftness in extricating it from a prolonged slump like Aon's. Ryan, who made his fortune with acquisitions of insurance brokerages, is by all accounts a charismatic man, with steely blue eyes and the presence of someone who is always in control. That feeling of control is no doubt enhanced because Ryan owns a whopping 8% of Aon's stock, and because his board is riddled with potential conflicts. Aon pays the law firm of one director and an investment bank run by another director for legal and financial services. It also pays two aircraft-leasing companies owned by Ryan and managed by his son (a board member until earlier this year) for aircraft usage. "It's the club," says one institutional investor. "He has a personal relationship with these people and they do with him."
Shareholders may feel it's time to clear out the clubhouse, though. "When they did all the acquisitions, they didn't consolidate them well," says Adam Klauber, managing director at Cochran Caronia, a research and investment-banking company for the insurance sector. "They put the Aon name on it but didn't necessarily operate as one company." In 2000, Ryan announced a major restructuring, taking $294 million in charges, but savings have yet to appear as margins still fall short of competitors'. Aon CFO David Bolger says the plan has been working very well in Europe and that the problems have occurred only in the U.S. retail business, where improvements are now beginning to show. The company also suffered a sad blow on September 11, when 175 Aon employees in the World Trade Center lost their lives, but investors say that the company's troubles came far earlier and have lasted far beyond the impact of that tragedy.
Certainly, Ryan has been trying — the success or the failure of his company is his legacy — but that doesn't mean new blood might not help. "Ryan was a strategic genius," says one money manager who owns Aon stock, "but now they need someone to operate [the company]. It's all about management credibility. It's been years and years and years." Bolger disagrees. "There's nobody better positioned to lead this company," he says. "Pat has built this up and has been not only the actual leader but the spiritual leader."
The I-I's Don't Have It
Although large institutional investors such as mutual funds, banks, and pension funds hold the biggest blocks of almost every one of America's public companies, the chances of their leading a public revolt against a bad CEO are mighty slim. Nor, despite conventional wisdom, is the tide turning. In a recent survey, just over half (55%) of big U.S. investors said they exert any influence over the management of the companies whose stock they hold. And that's actually down from 2000, when the number was 68%. The periodic exceptions are CalPERS, the California public pension system that names a watch list of troubled companies each year, and TIAA-CREF, which tries to push for change by meeting privately with CEOs and boards.
So why is it that the shareholders with real clout are nowhere to be found when it's time for the CEO to be sent to the showers? Biggs says TIAA-CREF is studying why large investment firms don't devote more resources to the issue. "We've always contended that you should go talk to [companies], and if you don't get satisfaction, go public," he says. Teslik has a disturbing explanation. "They're conflicted. They'd all like to manage the pension fund of Motorola," she says. Probably the most straightforward reason is that institutional investors are compensated for delivering good returns to their clients — and that means they would rather spend their time finding a stock with real upside possibility than trying to change a company that has already hit the skids.
For now, one thing is clear: For every high-profile corporate execution we read about in the papers, there's another chief executive who has managed to buy one more shot at pulling his company back from the cliff he nearly drove over. They are there because of institutional indifference, political wiles, conflicted boards, or because the fear of the unknown trumps the mediocrity of the current situation. Certainly, these chief executives were happy to take the credit for the good times when the economy floated their boats. Maybe now they should shoulder some of the blame.
Sidebar: CEOs Who Won't Let Go
It's been a rough five years for these guys' shareholders. A look at the record.
CEO: Michael Eisner
Tenure: 19 years
Total shareholder return*: -41.0%
Peer return*: -37.9%
S&P 500 Index return: -7.8%
Total Pay**: $706.1 million
Has made improvements to board once dubbed America's worst, but still gets an F from watchdog group The Corporate Library. Embroiled in a bitter fight with a company that owns some of the merchandising rights to Winnie the Pooh and in tough negotiations to re-up the partnership with Pixar: Trouble in either situation could cost the company hundreds of millions of dollars. Recent improvements and a string of hit movies mean some see a turnaround. Are they right?
CEO: Christopher Galvin
Tenure: 6 years
Total shareholder return*: -41.6%
Peer return*: -34.1%
S&P 500 Index return: -7.8%
Total Pay**: $28.1 million
Third generation of family-run company has hit a brick wall. Ongoing turnaround effort has been a disaster. A $5 billion bet on Iridium ended with losses of $2.6 billion. Stuck in some commodity markets in which prices continue to decline. Pressure to sell off semiconductor business continues. New phone models have been slow to market, plagued by delays, and face a brutal competitive environment.
CEO: Peter Karmanos Jr.
Tenure: 16 years
Total shareholder return*: -77.6%
Peer return*: -28.3%
S&P 500 Index return: -7.8%
Total Pay**: $97.4 million
Revenue has steadily declined for the past three years. Most recent earnings miss blamed by Karmanos on poor execution. Involved in costly lawsuit alleging that IBM has stolen its intellectual property. Move to develop services hasn't paid off, nor has the restructuring of the sales force. Compuware pays a company owned by Karmanos's brother over $625,000 for printing services and another company owned by Karmanos more than $1 million for access to sporting events.
|Service Corporation Intl.||
CEO: Robert Waltrip
Tenure: 41 years
Total shareholder return*: -89.7%
Peer return*: -33.4%
S&P 500 Index return: -7.8%
Total Pay**: $48.6 million
Race to buy up the world's funeral homes with high-priced stock ended in disaster in 1999 for the company and the industry. Now working hard to unwind the buying spree of the previous decade. Half the directors are either insiders or have other relationships with the company or with Waltrip. Took a $15 million charge in second-quarter 2003 after losing an investor's lawsuit that went to arbitration.
CEO: Patrick Ryan
Tenure: 21 years
Total shareholder return*: -39.9%
Peer return*: -32.6
S&P 500 Index return: -7.8%
Total Pay**: $17.9 million
In a good business climate for insurance companies, margins have continued to disappoint partly because an acquisition spree hasn't been well- integrated. Stock down almost 50% in five years. Major restructuring at end of 2000 has yet to show cost savings and has reportedly alienated many of the company's insurance brokers, some of whom left with their clients. S&P credit rating outlook changed to negative in August.
*For five years ending 6/30/03. Split-adjusted, includes dividends but not dividend reinvestment. **Includes salary, bonus, stock-option exercises, and other long-term compensation totaled for the past five years. Data: Bain & Co, Standard & Poor's CompuStat, The Corporate Library, Stephanie Bednar at Media General Financial Services, Yahoo Finance, Ibbotson Associates, and company data and proxy statements.
Sidebar: The Dog Ate My P&L
What Went Wrong...in Their Own Words
Patrick Ryan, CEO, Aon Corp.
 "Fourth quarter results also reflected a disappointing falloff in certain areas of our brokerage businesses, as well as a decline in income from equity investments. These temporarily low results will not change the significant growth opportunities for a company with the scale, depth, and technologies of Aon."
 "At the beginning of 2002, we planned to start a specialty property and casualty insurance venture through the spin-off of our underwriting businesses....Later in the year, however, it became evident that the negative impact of the financial markets on our investment income and pension assets, coupled with losses suffered from September 11, would preclude Aon from building a major new venture."
Robert Waltrip, CEO, Service Corporation International
 "1999 was the most difficult year in SCI's history. At this point, I can assure you that the performance issues have been, and are continuing to be, addressed...Difficult decisions were made, and necessary action was taken."
[Second quarter 2003] "The primary challenges include a lack of near-term growth in the number of deaths and an increasing trend toward cremation. Although the United States Census Bureau projects that the number of deaths will grow up to 1% annually through 2010, modern advances in medicine and healthier lifestyles could reduce the numbers of deaths during this time."
Peter Karmanos Jr., CEO, Compuware
 "Our profit margins continued to be among the highest in the industry although our stock price slumped due to the fact that we missed our analysts' expectations."
 "Increasing revenue growth for a billion-dollar plus company is a much greater challenge than increasing growth for a smaller organization. This law of large numbers is compounded by the hangover currently affecting our industry."
Christopher Galvin, CEO, Motorola
 "Like others we inopportunely chased the dotcom and telecom boom...Then came the reality of 2001. A telecom equipment downturn affecting both wireline and wireless. The worst semiconductor decline in history. Dotcom busts. A U.S. recession. Appalling terrorist acts. Delays in the deployment of next-generation wireless technology. A large customer default. Sales of only $30 billion. Major and painful corporation-wide resizing. Regrettable financial charges."
 "We expect to grow the way we did prior to the artificially inflated growth that resulted from the telecom and dotcom booms in the late 1990s."
Michael Eisner, CEO, Walt Disney Co.
 "The business cycle has its own seasons, which are not ruled by the orderly and predictable orbit of the earth around the sun. Indeed, at Disney, we live by a 60-month calendar. We set our goals over rolling five-year timelines."
 "...[W]ere the economy more robust and were the travel industry not in a slump, the numbers for 2002 would be much more positive....Failure is educational. It keeps one humble. We must and do learn from these failures."
Sidebar: The Replacements
Since succession hasn't exactly been a priority at the companies profiled here, we decided to offer a few suggestions of our own. We worked with some top executive-search consultants to come up with the following short list of potential successors to our five CEOs who just won't let go.
She's worked her magic as head of Paramount for years. Can the most powerful woman in Hollywood handle the mouse?
His return from DreamWorks SKG would be the ultimate irony. Eisner forced the former Disney studio head — and brains behind many of Disney's hit movies — out in 1994.
He's worked miracles at Viacom while waiting for something to happen to Sumner Redstone. Enough already.
He built a heck of a track record as number two at Sun Microsystems before joining an investment company earlier this year. Why not go for the gusto?
She knows the consumer market and how to build something from nothing. After what she's accomplished at eBay, she can do anything.
The most-renowned CEO outside the United States after his turnaround at Nissan. He knows the global markets better than anyone.
Ed Zander, again.
The search guys love him. And he knows from companies run by founders.
How about coming out of retirement for a little sojourn in Detroit? He's tanned, rested, and ready.
It's high time for the head of Hewlett-Packard's services arm to run her own ship.
Service Corporation International
He knows Houston and did a great job as president of Continental Airlines. Let's see if he can work as well below ground as above ground.
President of Taco Bell. Believe it or not, the skill sets are the same: real estate, multiple locations, individual owners. ¡Yo quiero una tumba!
David Fisher and Nate Fisher,
The brothers on Six Feet Under. They're young, motivated, and angst-ridden. Perfect!
The son of AIG CEO Herb, he ditched Dad for the top job at Marsh & McLennan and has blown away the competition.
This gritty maverick from John Hancock could make a difference at the Chicago-centric company.
Joseph Grano Jr.
The chairman and CEO of UBS Paine Webber just might need a new challenge.
Jennifer Reingold (email@example.com) is a Fast Company senior writer. Research assistance for this story was provided by Lucas Conley, Mimi Do, Andrew Moesel, and Esta Tanenbaum.
A version of this article appeared in the October 2003 issue of Fast Company magazine.