CEOs join the unemployment line

Senior executives - CEOs prominently among them - are being given the boot at the highest rate in at least five years, according to Inc.com. Last month alone in the US, over 2000 executives were “replaced,” and more than 10% of these were CEOs; that means they were rotated not by regular bosses higher in the managerial chain of command, but by increasingly assertive boards of directors.

Some are being shown the door for failing to provide sufficient shareholder value in the form of increasing prices for company stock. Others are being evicted for more clear-cut transgressions such as the growing options back-dating scandal.

This phenomenon points to the rise of more independent, assertive boards, according to BusinessWeek.online. While corporate governance experts generally support this change, it may not, as the article points out, be all good news.

Increased shareholder activism is prompting boards to become more proactive, but the effect on CEO behavior may not be what was expected. On the one hand, the attempt to align manager and shareholder interests through the award of shares and options may be behind some of the backdating scandals we have been seeing evidence of recently.

On the other, increased pressure by shareholders/boards to produce results in terms of share price may be pressuring CEOs toward an untoward focus on the short term. This unfortunate consequence may even be exacerbated by the fact that CEOs know that they will, these days, quite possibly be removed if they fail to produce short-term results, together with their having in their possession options that will only pay off when in the money. Add to this mix the ability to manipulate the terms of the award of these incentives and you can only expect what we seem to be getting.

Supporters of corporate governance reform should indeed be encouraged at the growing independence and even aggressiveness of boards. But while the integrity of the system cannot survive the dominance of boards by CEOs, the reversal of that peculiar situation, and the consequent alignment of authority and responsibility, do not by themselves guarantee the desired result. Corporate governance rests, at bottom, on the ability of boards to discern shareholder interests and translate those into policy and supervisory regimes that promise to realize those interests though corporate activity.

Yes, as the HP scandal and some of the observations of the personalities involved shows, there is still work to be done on properly conceptualizing - not to mention structuring - the relationship between boards and management. But now it is becoming increasingly important to examine the internal behavior of boards, and their relationship with the owners they have the fiduciary duty to represent.