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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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Bloomberg
November 5, 2007 12:01 AM ET
The sin that reportedly got Stanley O’Neal expelled from the garden of Merrill Lynch was his authorization of merger discussions with fellow bank Wachovia without first getting the blessing of his board. Directors agree that Mr. O’Neal’s initiative was something of a no-no, particularly in today’s post-Sarbanes-Oxley business world, where full disclosure is all-important. But they also doubt that that blunder alone was big enough to have cost him the corner office. The much larger issue was Mr. O’Neal’s failed gamble on investments in subprime mortgages and complex debt arrangements that led the firm to take an $8.4 billion write-down, and an overall loss of $2.3 billion in the third quarter—the largest loss in the company’s storied nine-decade history. Being perceived as going behind the board’s back just put another log on the fire, observers say, and perhaps allowed the board, already facing scrutiny for its oversight of the true nature of Merrill’s risk-taking, to cast Mr. O’Neal as a headstrong executive who acted first and checked in later. “I can’t believe a secret talk in isolation would ever lead to a forced resignation,” said former Deloitte & Touche CEO J. Michael Cook, now a director at Eli Lilly, International Flavors & Fragrances and Comcast. “The board could have easily sat Mr. O’Neal down and said, ‘Look, in the future, these are the rules of the road in terms of notifying us of any merger discussions.’ But throw the supposed talks in with the write-off and you’ve got a different story.” Nate Bennett, senior associate dean and a professor of management at Georgia Tech’s College of Management, agreed that had Merrill hit its numbers, Mr. O’Neal would still have his job, regardless of any secret conversations with other CEOs. Given the loss, however, his fate rested with the board. “It seems pretty clear that O’Neal didn’t have a great relationship with the board,” said Mr. Bennett. “If he had spent more time building some support from directors, these talks would likely have been viewed much differently.” Last week’s ouster was reminiscent of the firing of former CBS chief Thomas Wyman in 1986. With his performance already being questioned by the board of directors—thanks to sagging profits, declining ratings and poor morale—Mr. Wyman reportedly admitted in a board meeting to having held secret merger discussions with Coca-Cola. His bad. Mr. Wyman was forced to resign within hours. Boards today are certainly acting quickly to remove CEOs for poor performance and other missteps. According to a recent study of the world’s 2,500 largest publicly traded companies by consulting firm Booz Allen Hamilton, in 1995, one in eight departing CEOs was forced from office—in 2006, nearly one in three left involuntarily. Directors and governance experts contacted by Financial Week don’t downplay the seriousness of keeping something as material as a major business combination from their boards. “Ten years ago, a CEO could probably get away with not sharing that kind of information with the board,” said Patrick McGurn, special counsel of RiskMetrics Group, a governance research firm. “But in this post-Enron era, any CEO would be foolish to keep merger discussions from the board.” Lionel Allan, CEO of the Silicon Valley chapter of the National Association of Corporate Directors, and former director of Catalyst Semiconductor and Global Motorsport Group, said Sarbanes-Oxley makes it more important than ever that boards are always aware of what the CEO is doing and why. “A savvy CEO should never surprise his board,” he said. “It’s amazing O’Neal wasn’t sensitive to that, especially at a time when he should’ve been walking on eggshells.” Suzanne Hopgood, head of business consulting firm Hopgood Group and director at DHB Industries and Acadia Realty Trust, said boards need to first determine the process for how they will handle M&A by answering such questions as the following: What’s an inquiry vs. a conversation? When is an outsider brought in to determine the firm’s value? At what point does the CEO bring possible candidates to the board? “A CEO has to follow a process agreed upon by the board, and that’s where the failure occurred with O’Neal,” Ms. Hopgood said. “It’s the area of greatest litigation. It’s the area where boards are most sensitive about following procedure. They’re really trying to avoid surprises of any kind—good or bad.” So why would Mr. O’Neal keep his board uninformed in the first place? A Merrill spokeswoman was not available to comment. “It’s possible that the degree of substance in Merrill’s contact with Wachovia is being overreported,” said Mr. Cook. “If it’s true, there’s not much of an excuse. The fact that you don’t have a board meeting for four more weeks in this electronic age is no excuse. Special meetings are called all the time for this kind of stuff.” Said Warren Neel, an executive director of the Center for Corporate Governance at the University of Tennessee, and director at Saks and Healthways: “There are cases where the CEO is ap-proached by another party and asked to give an opinion. Those cases might be excusable, but to pursue anything beyond just the casual would be inappropriate without first giving the board a heads-up.” FW
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