Wall Street dispatch: Crisis queries power to appoint

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Most of us would not dream of buying a car without first kicking its tyres, or purchasing a house we have never visited.

But when it comes to management teams, investors are being asked to take an awful lot on trust.

Just ask shareholders in Citigroup. They must sit in front of their trading screens hoping that their board turns out to be lucky in its choice of chief executive.

“Hoping” is the operative word, because many of the directors who selected the not-so-successful Chuck Prince in 2003 were behind the recent appointment of Vikram Pandit as the new number one.

Investors in stumbling companies such as Yahoo, Starbucks and Dell, which recalled past leaders to the executive suite – a manoeuvre I hereby christen “the Steve Jobs” after Apple’s comeback bid – must also pray the board’s intuition proves correct.

In all of these, and many other, cases shareholders were not consulted, let alone asked to vote, on the changes at the top.

According to the US corporate handbook, that’s just fine.

One of the commandments of Anglo-Saxon capitalism is that the board, and the board alone, is in charge of executive appointments. Dissatisfied shareholders can oppose directors at annual meetings or, more drastically, “vote with their feet” and sell their shares.

I have some sympathy with the governance orthodoxy.

Companies are not democracies and a well-run, properly-briefed, board has to be better placed to pick the right leader than an amorphous mass of investors with conflicting interests and a myriad of other trading positions.

Even if annual meetings tend to be one-sided, tame affairs dominated by management, the current regime is, to paraphrase Winston Churchill, “the worst system of corporate governance except for all those other systems which have been tried”.

But the credit squeeze has posed new questions about the way companies organise their upper echelons.

By definition, all financial crises increase demands on top management and raise the pressure on boards for more effective oversight of the executive team. But the current turmoil has put a particular focus on the relationship between board, chief executive and chief financial officer.

With asset prices volatile, large chunks of the credit markets in a coma, and huge pressure from investors and regulators for increased transparency, the role of the CFO has become more crucial.

As the executive suite’s link between the internal audit functions, the external accountants, and the directors, the CFO is a pivotal figure in decisions such as write-downs, fund raisings and capital expenditure.

Just like the influence of a finance minister rises when a country faces economic hardship, so does the power of a CFO in a corporation beset by a financial crisis. The problem is that CFO’s rising status in times of trouble is not matched by a commensurate strengthening of the oversight of his actions. The same conventions dictating that boards are charged with selecting a chief executive maintain that the CEO is the supreme judge of a CFO’s performance and ultimate arbiter of his or her fate.

The CEO serves at the pleasure of the board but the CFO is, for all intents and purposes, a direct subordinate to the chief executive.

Dell, one the companies that changed CFO recently, spelt this out when it said that Brian Gladden, the new recruit, would be “reporting to Michael Dell, CEO and chairman”.

American International Group, the giant insurer, said as much this month when it accompanied news that CFO Steven Bensinger was moving to another post with a warm statement of thanks from CEO Martin Sullivan.

Strict collaboration between chief executive and chief financial officer is, of course, beneficial to the company. Corporate America has a long tradition of hands-on CFOs, whose job goes beyond number crunching and takes in strategic planning. Many others have shown their managerial mettle by making the upward trip from finance chief to top dog.

My contention is simply that, in unusually difficult times such as the present, boards should broaden their areas of scrutiny and take more of an interest in the CFO’s day-to-day work.

Before aggrieved directors start e-mailing howls of protest, let me say that I am aware that boards have a “dialogue” with all top executives, including the finance chief. I also know that the board’s role involves planning succession for the whole executive team.

But it is difficult to get away from the notion that, at many companies, CEOs and CFOs work hand-in-glove and that the latter’s foremost incentive is to keep their bosses satisfied.

That, in turn, may forge a conspiratorial atmosphere that could encourage the two top executives to present a common front. Challenging periods tend to foster a siege mentality in many organisations and companies are no exception.

Directors and boards should make a point of ensuring that the “ménage à deux” of their two top executives does not become too cozy, or worse.


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