HOW TO TREAT CEO’S: THE WAY THINGS OUGHT TO BE

Posted in ACTIVIST BOARD, Corporate Crisis Management, Crisis Management Response, DIAMOND FOODS, Doing the right thing, don't white wash the crisis, ETHICS FROM THE TOP DOWN, FIRING THE CEO, HOW TO SHOW THE CEO THE DOOR, MICHAEL MENDES, REPLACING THE CEO on November 28th, 2012 by mnayor

Last week I read that Michael Mendes formally resigned from Diamond Foods Inc. Mendes worked for Diamond most of his working life, serving as President and CEO  from 1997 and adding the title of Chairman in 2010. Then at the beginning of 2012 he was placed on administrative leave after an accounting impropriety was discovered involving payments to walnut growers, which artificially inflated financial results of the company.

 

The shift in payments must have been whoppers because they necessitated the restatement of 2010 and 2011 profits. As a result it appears that Diamond has lost its deal to purchase the Pringles brand from P&G, which was to have been an all stock transaction

 

It is not uncommon for companies to manipulate numbers to look good. It is also not a surprise to find that those at the top may not have been in the know. As a result of such an “event” a CEO will clean house, heads will roll and internal accounting measures tightened. But here it look like the perpetrators may have been those at the very top, including Steven Neil, the former CFO, who was also placed on leave. Why else would Mendes and Neil have been placed on administrative leave? Why else would Mendes repay $2.7 million in bonuses he received for 2010 and 2011, and return shares awarded to him in 2010. He leaves with a net retirement balance after repayment of bonuses, and will not be granted any severance.

 

In his wake, Diamond Foods is stuck with a share price that has plummeted 60%, a lot of angry shareholders who are ratcheting up class action suits against the company, and ongoing Department of Justice and SEC investigations. That’s quite a trail to leave behind.

 

The Board should be commended. In the face of a serious crisis it took decisive action. There was no attempt to white-wash the situation or cover for Mendes. Crisis management oftentimes means nothing more than biting the bullet and facing problems head-on. In this case the Board has taken steps to tighten its internal controls and has cleaned house. But in my view it has done more than that. Too often the guy who screws up, especially if he is at the top, gets a golden parachute and a pat on the backside to ensure that the door doesn’t hit him on the way out. The wheels are greased and everyone thinks the right thing is being done. But this Board obviously saw no need to reward people who created the crisis in the first place. Hopefully this Board will set a precedent for the many situations which will undoubtedly follow in the business world.

 

CEO’s should pay a price when they do something illegal, or in violation of a company’s  ethical standards. All companies should take a page from this playbook. Don’t deplete the assets of your company even more after a crisis by rewarding bad behavior. It adds insult to injury to your shareholders and other stakeholders. CEO’s and others in top management need to receive what they deserve. If they earn a walk out the door, they are not entitled to a fat paycheck. It’s one thing if the chemistry isn’t right or the results are disappointing. It’s another thing if a person has left his company high and dry, bleeding from bad decisions and actions that have done harm. It’s time to change the ugly unwritten understanding between boards and their managements that says that the upper echelon is a fraternity whose members are entitled to hop from company to company accumulating prizes while their reputations remain unscathed, regardless of their perfidy or incompetence.

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RIGHTING THE CITIGROUP SHIP

Posted in ACTIVIST BOARD AT CITIGROUP, CITIGROUP, CRISIS PLANNING FOR NEW CEO, FIRING THE CEO, SUCCESSION IN TIMES OF CRISIS, VIKRAM PANDIT on October 18th, 2012 by mnayor

A little over a year ago I wrote a critical article on the abrupt firing of Yahoo’s CEO, Carol Bartz. The removal of Bartz was done without any succession planning and left the company floundering and rudderless.

On Tuesday, October 16, 2012 Citigroup lost its CEO, Vikram Pandit, under different but similar circumstances. Pandit chose to resign rather than be fired and the financial universe, although shocked, expressed its approval with an increase in the company’s stock price from under $35 a share at the end of Monday’s trading to slightly over $38 this Thursday morning.

The board of  Citigroup has changed dramatically since the beginning of the severe financial strains five years ago. The board is now much more independent and focused on bank operations, especially since Michael O’Neill took over the helm as chairman in April of this year. This, of course, is a very good thing. The company had suffered under a rubber-stamp board ever since the Sandy Weill era.

Essentially, Pandit inherited a mess, made some good calls in divesting poor performing assets over the last couple of years,  took a $1 salary in 2009 and 2010, and returned the company to profitability in 2010. Yet progress was slow. The share price had lost 89% of its value, the company had to recently eat a multi-billion dollar write-down of its stake in a joint venture with Morgan Stanley, and had to suffer the humiliation of not being allowed by the Federal Reserve to launch its stock buy-back plan, even though Pandit had supposedly built strong relations with Reserve Board members. It has been doing poorly compared to JPMorgan Chase and Wells Fargo. Clearly this was a cumulative crisis that had been gathering steam over several years. Pandit had done some good things, there is no question, but overall the situation had reached crisis proportions that called for the board to take dramatic steps

O’Neill is known as a tough cookie, and newer board members are no shrinking violets either. The time had come to take action. O’Neill had had conversations with Michael Corbat, Citi’s CEO for Europe, the Middle East andAfrica. The stage, therefore, had been set for succession, so it was quite clear that a transition was going to take place. The question was merely when. Apparently, some altercation between Pandit and O’Neill or other board members ensued the day before and ultimately Pandit was told he could resign or be fired.

Several things stand out. First, there is now an activist board at the bank. Second, Citigroup remained a limping giant and dramatic measures were necessary.  Third, the consensus was that Vikram Pandit was not the man for the job. Under the circumstances one might wonder why it took as long as it did to make this move. Finally, the board was prepared and the succession was swift and neat. There were three surviving bank CEO’s from the financial crisis as of the end of last week. Now there are only two.

Vikram Pandit did his best. It wasn’t enough. Some outsiders like  Sheila Blair, former head of the FDIC, felt that he was not the right man for the job. but it took a change in the board – fresh faces – to recognize the problem and do something about it. This is crisis management in action, perhaps a bit slower than investors would have liked, nevertheless a smart move that will auger well for the bank over the next couple of years. Big banks, crucial to the well being of our country as well as to its investors, must engage in crisis planning and be ready for the unexpected. At the onset of the financial crisis the banking and investment community was clueless about crisis management even though all the clues necessary had been served up on a silver platter. It didn’t have the will to do anything but push the can down the road. The ostrich approach to crisis management has proven time and time again to be a disaster. It is even more of a disaster when after the crisis has hit the reaction to it is sluggish. Dramatic times call for dramatic action. Vikram Pandit wasn’t dramatic enough. His board finally was. Hopefully Michael Corbat sees the problems and will implement solutions quickly to right the ship.

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