PwC’s Strategy&: CEOs Increasingly Fired for Ethical Violations

VEA Vice Chair Nell Minow writes in Huffington Post:

PwC’s Strategy& released its annual CEO Success Study on Sunday, May 14, 2017. This year’s study explores the rise in the number of CEOs at the world’s 2,500 largest companies who were dismissed from their posts due to ethical lapses.

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As companies like FOX, United, Wells Fargo, Yahoo and VW are scrutinized for corporate wrongdoing, the study found that the share of CEOs forced out of their jobs due to a scandal increased globally– with a notably dramatic increase at companies in the U.S. and Canada. Specifically, the report found:

  • Forced turnovers due to ethical lapses rose from 3.9 percent of all successions in 2007–11 to 5.3 percent in 2012–16 — a 36 percent increase. On a regional basis, the share of all successions attributable to ethical lapses rose sharply in the U.S. and Canada (from 1.6 percent of all successions in 2007–11 to 3.3 percent in 2012–16), in Western Europe (from 4.2 percent to 5.9 percent), and in the BRIC countries (from 3.6 percent to 8.8 percent).
  • In the U.S. and Canada, forced turnovers for ethical lapses at these companies increased from 1.6 percent of all successions in 2007–11 to 3.3 percent in 2012–16 — a 102 percent increase
  • The share of incoming women CEOs increased globally to 3.6 percent, rebounding from the previous year’s low point of 2.8 percent

Per-Ola Karlsson, DeAnne Aguirre, Kristin Rivera, and Gary L. Neilson, who prepared the report, identified increased public scrutiny and pressure, the rapidity and influence of digital-era feedback, and post-financial crisis regulatory requirements as primary factors in the increase of CEO departures for ethical concerns. The report does not examine the impact of an ethics-based departure on compensation or the correlation between board or shareholder composition and likelihood of such a termination.

In an interview, the authors explained their definition of “ethical lapse” and discussed the impact of social media and the difference between US/Canada CEOs and those in other countries.

What constitutes an ethical lapse for purposes of this study?

An ethical lapse might include fraud, bribery, insider trading, environmental disasters, inflated resumes, and sexual indiscretions. In the context of dismissals, we define an ethical lapse as a scandal or improper conduct by the CEO or other employees that results in the removal of the CEO.

It should be noted that in many cases, even though the CEO was ultimately held responsible, it was other employees who committed ethical lapses.

Are CEOs replaced for ethical lapses most likely to be insiders or those brought in from outside?

We found that there was no statistical difference in the dismissal rate for ethical lapses between insiders and outsiders. We did find that CEOs forced out of office for ethical lapses had longer median tenures than CEOs forced out for other reasons (6.5 years compared to 4.8). One possible explanation is that companies with long-serving CEOs tend to be those that have been achieving above-average financial results, and thus may attract less shareholder and media scrutiny than companies that have been performing poorly. Another is that when an organization’s leadership is static, employees may begin to see ethical lapses as normal, and allegations of misconduct are less likely to be raised, investigated, or acted on.

How has social media put pressure on boards to replace CEOs?

Today, social media plays a large role in not only disseminating negative or embarrassing information about a company, but also allows customers and other parties to directly voice their displeasure to the company and its executives. Often times, the social media backlash becomes a story in itself beyond the negative or embarrassing information which puts extra pressure on boards who may feel they need to implement change in order to take the company out of the negative spotlight.

How does the US compare to other countries in the rates and reasons for CEO dismissal?

In 2016, The U.S./Canada has a CEO turnover rate of 14.2% compared to 15.3% in Western Europe, 15.5% in Japan, and 14.9% globally. Removing, M&A 29% of turnovers in the U.S./Canada were forced compared to 38% in Western Europe, 13% in Japan, and 29% globally. Historically the U.S./Canada has had a lower CEO turnover rate than other regions which is likely due to the fact that companies in the U.S./Canada have more developed governance and succession practices.

In addition, we note in the study this year that companies in the U.S./Canada have the lowest incidence of ethical lapses. Similar to the point about governance and succession practices, companies in the U.S./Canada tend to have more stringent regulation and internal controls than other regions.

What did your study show about women CEOs?

Globally, companies appointed 12 women CEOs in 2016—3.6 percent of the incoming class. This marks a return of the slow-moving trend towards greater diversity—and a recovery from 2015’s recent low point of 2.8 percent.

The share of incoming women CEOs was highest in the U.S. and Canada—rebounding to 5.7% after falling for the previous three years.

We stand by our belief that as much as a third of incoming CEOs around the world will be female. Some of the trends we cited in the 2014 study that supported this findings were: increasing amounts of women on boards, increasing women undergraduates and MBAs, and changing social norms.

What role does shareholder pressure play in replacement of CEOs?

Boards have become much more independent and very infrequently in a position of deferring to the imperial CEO of yesterday. They listen. They listen to shareholders, regulators, other managers. Shareholders don’t want distractions. Our analysis has shown forced CEO turnovers (for ethical lapses or other reasons) are hugely expensive. We found that, on average, forced turnovers cause a hit of $1.8 billion in shareholder value compared to planned transitions. So, by getting ahead of problems, even when they happen, Boards have the incentive to deal with…. ideally in a “planned” way, even if the change wasn’t part of the individual CEO’s plans!

Bloomberg Pay Index: Highest-Paid Executives for 2016

In a year when technology leaders again seized the top spots among America’s highest-paid executives, a scion of Goldman Sachs Group Inc. stood out.John S. Weinberg, 60, whose surname had been synonymous with the bank for decades, left as co-vice chairman in 2015. A year later he joined Evercore Partners Inc., reaping sign-on awards worth $124 million as of Dec. 31. That placed him third on the Bloomberg Pay Index, a ranking of the best-compensated U.S. executives for 2016.

He joins an exclusive club increasingly dominated by bosses at companies that are, at best, just a few decades old. He’s surpassed only by Jet.com Inc. co-founder Marc Lore, whose $236.9 million in awarded compensation last year was largely composed of money Wal-Mart Stores Inc. paid to buy his company, and Apple Inc. Chief Executive Officer Tim Cook, who received $150 million. Google CEO Sundar Pichai, 44, and Tesla Inc.’s Elon Musk, 45, round out the top five.

Source: Bloomberg Pay Index: Highest-Paid Executives for 2016

The $185 million question about ExxonMobil CEO Tillerson joining Trump’s cabinet – The Washington Post

The Washington Post’s Jena McGregor reports:

As CEO of one of the largest and most powerful public companies in the world, Tillerson received compensation valued at $24.3 million in 2015, and he ranked 29th on a list of the 200 highest paid CEOs compiled by the executive compensation research firm Equilar. The pension benefits he will receive, accumulated over more than 40 years at the company, have been valued at $69.5 million. And in a company document filed earlier this month, ExxonMobil said Tillerson has direct ownership of more than 2.6 million shares of ExxonMobil stock, which executive compensation experts say Tillerson will presumably have to divest if he is confirmed as the nation’s chief diplomat.

Yet the majority of those shares — 2 million of them, valued at nearly $185 million based on ExxonMobil’s closing share price Friday — are not yet vested. That means that the shares have been granted to Tillerson but that he doesn’t yet have outright access to them. ExxonMobil has an unusually long vesting schedule and clearly states in its filings that retirement does not speed up the vesting of those shares, meaning many of them aren’t currently due to be under Tillerson’s control for years.

Now that the company has announced Tillerson will retire at year’s end and be succeeded Jan. 1 by Darren Woods as chairman and CEO, its board is faced with a nine-figure dilemma: Should it accelerate the vesting of those shares, rewarding Tillerson for his 41 years of service just before he could take a job that has enormous influence over the geopolitics that will affect his former employer? Or should it stick to the terms in its filings, which have been cited for their good governance standards?

Source: The $185 million question about ExxonMobil CEO Tillerson joining Trump’s cabinet – The Washington Post

Why C.E.O.s Are Getting Fired More – The New Yorker

James Surowiecki writes in the New Yorker:

Business professors once talked about “the imperial C.E.O.,” but, increasingly, we’re in the era of what Marcel Kahan, a law professor at N.Y.U., calls “the embattled C.E.O.” He told me, “Big shareholders and boards of directors have more power, and are more willing to use it. And C.E.O.s have been the net losers.” The breakdown of the old order began more than thirty years ago, but things have accelerated since the turn of the century. The Sarbanes-Oxley Act, passed in 2002, required greater disclosure to investors, and increased the independence of corporate boards. “In the old days, boards were often loyal to the C.E.O.,” Charles Elson, a corporate-governance expert at the University of Delaware, told me. “Today, they’re more loyal to the company.” The rise of activist investors—who campaign aggressively for change when they’re not satisfied with performance—has exacerbated the trend. One study found that when activist investors succeed in winning seats on the board of directors the probability that the C.E.O. will be gone within a year doubles.

Source: Why C.E.O.s Are Getting Fired More – The New Yorker

New Wells Fargo CEO has ‘one-week window’ to prove he’s right choice, critic says – LA Times

VEA Vice-Chair Nell Minow is quoted in the LA Times story about the new CEO at Wells Fargo:

Nell Minow, vice chair of ValueEdge Advisors, which promotes strong corporate governance, said the question of whether Sloan came from inside or outside Wells Fargo’s ranks is less important than his need to move fast to restore the bank’s trust with customers, investors and employees.“We’re going to know very quickly whether he’s the right choice or not. He has a one-week window,” she said.Among other things, Sloan must personally visit Wells Fargo’s largest institutional shareholders and its largest banking centers to listen to the concerns of investors, employees and customers and then respond to them, Minow said.

Sloan also should say Wells Fargo will “add new people to our board and ask investors to suggest candidates,” review the performance of other top Wells Fargo executives “to determine whether they can continue to work there” and even be the face on Wells Fargo’s television commercials, Minow said.

Sloan also must vow to conduct “a very rigorous examination of its system and make the results of that public,” Minow said. “If he doesn’t do all of those things, he was the wrong choice.”

Source: New Wells Fargo CEO has ‘one-week window’ to prove he’s right choice, critic says – LA Times

Volkswagen CEO Martin Winterkorn resigns amid scandal over emissions-rigging “defeat device.”

Martin Winterkorn, embattled chief executive of Volkswagen and public face of the company’s disastrous “defeat device,” said Wednesday that he is stepping down. His decision follows the unveiling of an emissions-rigging scandal in which Volkswagen systematically cheated on U.S. air pollution tests.

While the full toll of the damage is yet to be taken, the scheme is likely to go down as one of the worst and most environmentally harmful of its kind in corporate history. From 2008 to 2015, Volkswagen programmed as many as 11 million vehicles to detect when federal air pollution tests were being conducted on its diesel cars and to shift to a low-emissions mode until they passed. Once that was accomplished, the cars returned to their normal state—spewing up to 40 times the legal amount of pollutants into the atmosphere.

via Volkswagen CEO Martin Winterkorn resigns amid scandal over emissions-rigging “defeat device.”.

Dimon, Paid $27 Million Last Year and $1 Billion So Far, Says Income Inequality is Not a Problem Because Cars and Phones Are So Good

“Let them eat iPhones,” is basically Jamie Dimon’s Marie Antoinette-ish take on income inequality.  The rebuttal is obvious and need not be stated.  However, we would like to add as a side note that the improvements in cars and air quality are largely due to government health and safety regulation which was fought every step of the way by the corporations Dimon’s firm supports with financial services and invests in as a money manager.

“It’s not right to say we’re worse off,” Dimon said Thursday at an event in Detroit in response to a question about declining median income. “If you go back 20 years ago, cars were worse, health was worse, you didn’t live as long, the air was worse. People didn’t have iPhones.”
While income inequality is a problem, slashing CEO pay wouldn’t help, he added.
“It is true that income inequality has kind of gotten worse,” Dimon said, noting that he wants things to get better for low- and middle-class households. Still, “you can take the compensation of every CEO in America and make it zero and it wouldn’t put a dent into it. What really matters is growth.”

via Dimon Says iPhones, Cars Help Balance Out U.S. Income Inequality – Bloomberg Business.

Barclays chairman confirms he ‘fired’ Antony Jenkins – here’s why – BBC News

“I was approached by the senior independent director, who convened a session of the non-execs, who came to me and said ‘I think we need new leadership and we need it quickly, would you prepared to step in?’.
“I considered it and endorsed thoroughly what had happened. There had been some rumbling over this for some weeks in the non-executive camp and so we brought it to a head and we made a decision.”

via Barclays chairman confirms he 'fired' Antony Jenkins – here's why – BBC News.