It is interesting how many ex-Chairman/CEOs express concern about the way our current board system works or the structure of the businesses they built, and recommend sweeping changes—after they retire. I am reminded of poet Maurice Sagoff’s “shrunken” summary of Defoe’s Moll Flanders, the fictional memoir of a woman of easy virtue in eighteenth-century England:That’s the story, briefly told: At age 70, weak and old, Pricked by conscience, Moll retires, Banks her savings and her fires, She repents her sins and all; Love your sense of timing, Moll.
Last month, Philip Purcell expressed his reservations in the pages of the Wall Street Journal regarding the integrated model of investment banking, with the inherent contradictions in its corporate culture:
“Financial institutions with high stock prices tend to be client-oriented and profitability-driven. Investment banks are neither. At their core are groups of talented individuals who are highly entrepreneurial, risk-embracing, and compensation-driven—and for this reason they should not be publicly owned and, if public, have earned a low valuation.”
Thus, one of the architects of such a hybrid organization, who lobbied long and hard for the deregulation of the financial services industry, comes to the belated realization that it is inherently unstable, and represents a poor investment for the shareholders. It would have been useful if he’d said this in 1999, when the Gramm-Leach-Bliley Act was being debated in Congress. Having been one of the architects of Sears’ purchase of retail broker Dean Witter, and as CEO of Dean Witter to merge with then-pure investment bank Morgan Stanley, Purcell should know a thing or two about incompatible corporate mindsets. (To his credit, he did balk at further over-leveraging the already aggressively levered firm in 2005, for which act of prescience he was forced to resign.)
This past week, Carly Fiorina, who rode roughshod over opposition within and outside the Hewlett-Packard board when she was Chairman/CEO and forced through the ultimately disastrous merger with Compaq, was editorializing on the web pages of CNBC how boards needed to be revamped. They needed more fresh blood she wrote, had to become more transparent, and more independent-minded. One can always say, “Better late than never,” except that this expression of concern is a bit late to help H-P shareholders, who have been suffering with a series of dysfunctional boards since Ms. Fiorina’s tumultuous departure, and most recently despite almost total director turnover. But then, even a radical conversion does not always equal understanding.
One of my colleagues at the investment giant where I used to work was a former Chairman/CEO who had been a strong proponent of the combined roles as an executive, but later had second thoughts about the amount of power this had given him to control the deliberations of the board. In retrospect, he felt, he had too often, both consciously and unconsciously, controlled the debate and guaranteed that things went his way when perhaps they shouldn’t always have. His views and those of a few other CEOs with similar experiences have become a significant part of director education programs at the NACD and the Aspen Institute. But still, newly-chosen CEOs insist upon also being their own chairmen, often in the face of strong opposition from major shareholders. Directors almost never resist.
Anne Mulcahy, former CEO of Xerox, with little if anything to regret in terms of company performance when she was at the helm, nevertheless had some second thoughts about her relationship with her board after she had retired. In an address to a professional audience, she admitted that she had discouraged proper succession planning, because it was difficult for a sitting CEO even to envision handing over the reins, let alone to suffer having a known successor waiting in the wings. Her feeling then was that boards should ignore this aspect of CEOs’ personalities and human nature, and insist upon proper succession plans, no matter what. Fortunately, in her case the handover had gone smoothly, but if she had suddenly become incapacitated, there could have been a serious problem. Wisdom, but after the fact.
There are many directors who had been on the boards of banks and finance companies, mortgage lenders and insurers, who now admit that the level of risks being run during the great property bubble of 2002 – 2007 were absurd, and that they did not understand the degree of leverage conferred by all the financial innovations their firms were creating and marketing at the time. Yet there are still complex product innovations being created by the surviving banks, and one cannot be sure that these are being risk-tested any more carefully than their predecessors were. The financial institutions, having forgotten their near-death experience, are back to resisting any constraints that may be put upon them, whether by regulators or by badly-burned shareholders.
If this be the case, what to make of all these post-retirement changes of heart? How much influence do they have upon those who should be their target audience, the executives and directors who are still in power? If those who made the great bubble and the crash of 2008 – 09 eventually have similar belated insights, will any of their successors listen? Or is it a constant of corporate hubris that all leaders must learn for themselves the dangers of going too far, and only scold their successors about the risks which were run after they have completed their turn at the helms of their companies?
This is an important question which must be asked, because its answer should determine whether self-regulation, and the monitoring of shareholders, can ever be trusted, or whether the only alternative to endless cycles of boom and bust, of the rise and fall of imperial CEOs, of wretched excess followed by painful contraction, is the stifling burden of micro-management by external regulators. There is no doubt that business, and the economy, can only expand if they are not overly encumbered by the heavy hand of government, of backward-looking laws, lengthy bureaucratic procedures, and sometimes arbitrary restrictions. But corporations and their executives will have to prove that they are capable of learning from the experiences of their predecessors, and are not condemning themselves—and everyone who depends upon their success and growth—to endlessly repeating their own mistakes.