Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!americast.com!americast.com!americast-post Newsgroups: americast.ibd From: americast-post@AmeriCast.Com Organization: American Cybercasting Approved: americast-post@AmeriCast.com Subject: Executive Update Date: Fri, 20 Nov 92 13:33:51 EST Message-ID: <6.1992Nov20.133351@AmeriCast.com> 11/20/92 TITLE Executive Update #m#sw#m#In Removing CEOs, Boards Send Sig- nal To Holders The Impact On Stock Can Be As Great As That Of A Major Restruc- turing Vineeta Anand In Washington The chief executive's post is still a plum one, but tenures might be getting shorter as impatient directors show those who don't perform the door after just a few years. And in taking such ac- tion, directors send shareholders a strong signal - as powerful a signal as the announcement of a major restructuring, some finance experts say - that improved perfor- Corporate Governance mance may be in the offing. "It's a little more Draconian in that the board has expressed disappointment or disapproval with the management team and, in many instances, the board members were themselves hand-picked by management," observed Patrick Finegan, a New York-based financial consultant. Frequently, the shake-up is accompanied by a change in strategic direction, Fine- gan notes. Although the payoff isn't guaranteed, preliminary results of a study by Joseph A. Grundfest, law professor at Stan- ford University and a former Securities and Exchange Commission member, suggest such a move can benefit shareholders to the tune of billions of dollars. Collective Windfall Grundfest figures shareholders of four financially troubled com- panies -General Motors Corp., Goodyear Tire & Rubber Co., Allied-Signal Inc. and Tenneco Inc. - reaped a collective windfall of $2.7 billion over and above stock market movements on the days their directors announced house-cleanings were under way. Goodyear shareholders received $184 million when Tom H. Barrett resigned as chief executive under pressure from direc- tors, according to Grundfest's study. Shareholders of Allied- Signal reaped more than $500 million when directors helped Alfred L. Hennessy pack his bags last year, and those at Tenneco real- ized $600 million on the announcement that James L. Ketelson had been given his marching orders. Grundfest has not yet updated his study to include the stock market's reaction to the coup at GM late last month, in which Robert C. Stempel was pressured to resign after two years in the job. But he noted that the stock market was so pleased in April when the board put Stempel on no- tice by removing him as head of the board's executive committee that the beleaguered company's total value rose by $1.4 billion over and above the general stock market trend that day. An expanded version of the study by financial consulting firm Stern, Stewart & Co. corroborates these results. When Midlantic Corp., New Jersey's second-largest banking company, dropped Robert Van Buren as its chief in January 1991, its stock shot up, creating an unexpected $22 million in wealth for shareholders, according to Stern Stewart. And Digital Equipment Corp. share- holders enjoyed an estimated $14 million gain when directors moved in July 1992 to replace Kenneth Olsen at the helm. An exception is Compaq Computer Corp., whose stock fell when the company announced the sudden ouster of co-founder Rod Canion as chief executive in October 1991. Its shareholders suffered an es- timated $370 million loss factoring out the influence of the gen- eral market that day. But in all, shareholders of seven large laggard companies studied by Stern Stewart had realized an addi- tional $3.4 billion in value 10 days after the management an- nouncements compared with 10 days before the announcements. "This just dramatizes what common sense and intuition would tell you -that a chronically underperforming company would benefit from new leadership," noted Ralph Whitworth, president of the Un- ited Shareholders Association, a Washington-based shareholder ad- vocacy group that targets mismanaged companies. Some academics suggest a company's stock price may spurt even higher if the ousted chief executive is replaced with an outsider, on the theory that such an individual might be more likely to stir things up. "An outsider may have industry experience and doesn't have any personal allegiances to the current management struc- ture," said Stanley Feldman, professor of finance at Bentley Col- lege. "Basically, he will fire people if he needs to. An insider has the opposite problem." Keep Up The Pressure The Grundfest and Stern Stewart studies also serve as reminders to shareholder groups to keep up the pressure on directors at companies whose performance lags peers. Most boards are still noted for their inertia and will act only when their failure to do so becomes an embarrassment. GM's directors, who had been im- pervious to the giant automaker's decline over the past decade, were galvanized into action this year after two years of pressure from the California Public Employees' Retirement System and other institutional investors. "Are there other corporations out there where the chief executive needs to be changed? I'm afraid the answer is yes," Grundfest said. But he also acknowledged that directors often don't act until there is a crisis - and until there is outside pressure that compels them to act. Virtually all the companies in the Grundfest and Stern Stewart studies kicked out their chief executives only after years of criticism from major investors. Focus On Actual Competence Allied Signal had received more than eight shareholder proposals in the past seven years, Digital Equipment was targeted by two large pension funds this year, and Goodyear received around four shareholder proposals in the past five years, according to the Investor Responsibility Research Center, a Washington-based con- sulting firm. At a recent conference in Washington, Grundfest exhorted pension fund managers to keep goading directors to hold chief executives' feet to the fire. "What you want to do is focus on the actual competence of the individual running the cor- poration and on whether the board has done the job it's supposed to do of monitoring executive performance," he said. This article is copyright 1992 Investors Business Daily. Redis- tribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. For more information, send-email to usa@AmeriCast.COM