The lead item in a Jason Leow column in last month’s Wall Street Journal is about a research study that has detected a link between the lowering of ratings by analysts and board terminations of CEOs. The study examined Fortune 500 companies over a 5-year period and determined that analyst rating reductions had a more pronounced affect than issues, such as profit levels and projections, that should really be influencing the board’s deliberations.
The suggestion is that boards are firing CEOs based on the assessment of major analysts’ opinions, rather than their own. The firings are taking place regularly within 6 months of the issuance of these downgrades, further suggesting that the boards are failing to take into consideration the broader picture, such as a CEO in the midst of a difficult struggle to turn a corporation around.
It is one thing for a board to overlook underperfomance by a CEO, as has so often been the case up to the recent past (and, all too often, is still the case). It is quite another to allow the opinions of outside analysts to drive board decisions. In the first instance, the board is passing on its responsibilities, and in the second, it’s merely passing its responsibilities on to an unwitting third party. In both, it’s failing to properly discharge its duties.
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