William Clay Ford Jr, Tom Freston Patricia Dunn and Peter Dolan were in a room discussing their past, in an attempt to boost each otherâ€™s morale. They had reasons to provide comfort and solidarity to each other. For within a span of two weeks beginning in September, each of them had been relieved of their responsibility as CEOs (board chairwoman for Dunn) of some of the worldâ€™s largest blue-chip companies
Whether this meeting actually took place or not is not important. The fact is that todayâ€™s corporate leaders need to take stock of certain changes in the business environment.
Clay Ford Jr, former CEO of Ford Motor Company was relieved of his job on September 5. Tom Freston, former CEO of Viacom (one of the worldâ€™s largest media and entertainment companies) suffered the same fate on the same date. In the wake of a burgeoning scandal, Hewlett Packard announced on September12 that board Chairwoman Dunn would step own. That very day, acting on the suggestion of a former federal judge who is monitoring the companyâ€™s deferred prosecution agreement, drug maker Bristol-Myers Squibb effectively terminated the tenure of CEO Dolan.
However, the performance of the stocks of these companies provides some interesting insights into how investors valued the departure of these four corporate leaders. For the period September 1-13, 2006 shares process of Ford and Bristol-Myers Squibb increased approximately 11% and 8% respectively. While those of Hewlett-Packard and Viacom remained largely at the same level. Apart from the change in leadership, none of the companyâ€™s fundamentals reportedly changed in any perceptible manner over this period. It seems reasonable to infer that the investors favored their departure; they decided to reward Ford and Bristolâ€”Mysers Squibb for their actions, while treating the other two in a neutral manner.
One may be tempted to explain this stock price movement solely in terms of the inadequacies of the expelled leaders—their failures in corporate strategy and the suspicion they aroused in the minds of investors (not to mention the FBI raid on the offices of Dolan). Besides, it is well known that CEOs of large blue-chip companies command enormous pay packets, and hence non-performance CEOs is considered to be multimillion dollar drags on a companyâ€™s cash flow. But the irony is that finance theorists have long argued that investors prefer stability over uncertainty. An investor is more comforted by a known bad than an unknown good.
In these instances, the firing of the CEOs points to greater uncertainty. At Bristol-Myers, no permanent successor to Dolan was named. The successor at Ford has no auto industry experience. At Viacom, the new boss has little to no public profile. Still, investors seem pleased. They presume that the future unknown quantity must be better than the past known quantity.
This correlation between corporate leadership and a companyâ€™s stock price is relevant to the Indian corporate scene as well. The Indian multinational is no longer a futuristic concept; a number of Indian corporate leaders are discussed and featured in reputed media journals. But is the Indian CEO as accountable as the Fords or the Dolans of the World? Turnover in company leaderships in India is more driven by internal politics and perceived personal gains of the CEO, and less due to the (in)ability of the person to implement a business strategy that results in tangible benefits to the companyâ€™s shareholders.
Indian companies are still saddled with a colonial mindset. The presence of the saheb perhaps less in the case of a memsahib commands an array of salaams and genuflections.
Narayana Murthy of Infosys is truly an exception. While insignia of authority and power are all very well, what we need in equal measure is a sense of accountability from corporate leaders. Globalization is a move towards greater integration with international business, and this trend will implicitly push the global Indian multinational to adhere to global business standards.
Competing in the global world will mean that the performance standards of the CEOs will eventually be no different from those against which the Fords and the Dolans are measured. This is a wake-up call for non-performing leaders.
In a world where corporate scandals are considered a routine by-product of doing business, investors and shareholders are adapting to the uncertainty of revolving doors in high corporate echelons. Boards are less reluctant to dismiss a non-performing leader, particularly when investors are willing to accept the uncertainty and not apply a discount in valuing the future prospects of the company.
One can only hope that the lessons from the business world will apply in equal form and spirit when it comes to evaluating the performance of global political leaders as well. Corrupt or non-performing leaders (including those who are accountable for waging unjust wars on humanity) will suffer the same fate as the four top honchos who were shown the door.