Why activist shareholders travel in packs

Have you ever wondered why activist shareholders travel in packs? It’s because they are significantly less effective alone—just like any other minority on a board.

Activists (often hedge funds) accumulate a position in a stock because they want to make change happen at a company and, by making change happen, they will make money on their investment. It may be that they think the company is being mismanaged and so is undervalued against its potential. It may be that they think it should be broken up and the pieces sold off. Or it may be they think the board is incompetent and by driving change they can increase shareholder return.

Daniel Loeb, who runs the hedge fund Third Point, is currently in the news for the aggressive strategy he pursued to get onto the board at Yahoo!. He accumulated 5% of the stock, demanded 3 seats on the board, was rebuffed, found a fatal flaw in new CEO Scott Thompson’s inaccurate resume, and then used that chink to drive a wedge into the board room for himself and two of his nominees. Dan has become famous for his investment track record and his pithy letters eviscerating the management and boards of the companies he targets.

Carl Icahn has a long history of launching campaigns against companies, and like Dan, often wins—like he is doing at Chesapeake. Shareholders delivered a bruising rebuke to Chesapeake Energy’s board on Friday and although the board had agreed to replace 4 directors with Icahn’s and Southeastern Asset Management’s hand-picks, shareholders still withheld their votes from two key directors. In this case, two activists (Icahn and Southeastern) teamed up and acted as the lightning rod to help shareholders express their dissatisfaction with the board’s oversight of the company.

But why, you may ask, do they travel in packs of 3 or 4? Dan Loeb is a smart cookie and no shrinking violet—why does he need to bring two of his guys onto the Yahoo! board with him?

The answer lies in how inefficient and/or difficult it is to be alone and an outlier on a board. Boards aim to be collegiate, making sure diverse opinions are aired while also providing good financial oversight of the company. They want to get to unanimous recorded decisions in the end (no matter how contentious the internal discussion) and disruptive behavior is frowned upon. If you want to make change happen as a board member you need to develop support from other board members first or there will be no further discussion or vote.

If you are an activist that wants radical change, that very change is probably unpopular with management and the existing board or you would not be agitating for it as an outsider. Your new ideas will die on the vine unless there is someone else in the room to pick up your idea, expand on it, help you build momentum and overcome objections and, in the end, second your motions to ensure a vote.

Further, if you can get three people on the board together with the same purpose they can create significant momentum behind an idea. And sometimes, these activists can take advantage of directors’ natural tendency to act as individuals, and so create divisions among directors who have not yet figured out the need to unite.

This is why Starboard Value (which owns 5.3% of AOL) is proposing three nominees to the AOL board to challenge the strategy. They are also trying to line up proxy advisory firms ISS and Glass Lewis to support their new board members as this will influence how major shareholders vote. They want to be sure that if they get elected they can force a change in strategy at AOL by acting as a team on the board.

When you’re a voice of one it’s very hard to make change happen. It takes two to get a discussion going, and when you are just one it is too easy for you to be shut down—or if you will not back down—be labeled as disruptive and so have your effectiveness reduced. Activists know this and so, like any smart hound on the hunt for a kill, they travel in a pack. They show us the importance of having a group to represent alternative points of view on a board.

Odd, then, that so many Silicon Valley companies whose major customers are women have no women on their boards (like Facebook), or, if they have one, check the box and think they are done. Especially odd since we also now know that having women directors on boards improves return on capital for shareholders.

Because of the nature of how boards work, having token representation, whether it’s an activists point of view, or gender-based point of view, is not enough. Activists are showing us the way. It’s time to get more qualified women onto leading technology company boards.


Yahoo panel: There’s no such thing as work-life balance

Oh the irony of posting on this right after my post on the Iron Lady! She had no balance too.

For a while now I have been outspoken that I think balance is a myth and we are unfair to young women coming up to spin the myth that they can have it all. They can’t any more than men can. Business is just too competitive.

So it was fun for me last week to be on a panel at Yahoo on Breakthrough Leadership Lessons and to be asked about work-life balance. Never the shrinking violet I just went for it as you can see here – and was relieved they laughed instead of chasing me out of the building!


How to fire a CEO

Let’s face it, CEOs get fired all the time.

CEOs with less than 5 years of experience are more likely than the long standing ones to be fired (as found in the University of Miami business school study) so it’s going to happen all the time but there are ways to do it, and ways not to.

Yahoo’s firing of Carol Bartz is a great example of how not to. Don’t fire a CEO over the phone, don’t underestimate their balls, don’t fire them without an agreed on communication plan.

Carol is known for her courage and her balls of steel. She had put a strategy in place where she told the board there would not be revenue growth until 2012 and – whether you think she was right or wrong in her strategy – the board should have predicted she’d be mad to be fired over the phone with no warning, with lawyers waiting for her.

And her response – to send an email to all 13,000 Yahoo employees – was classic Carol. And much more fiery than one of the last tech female CEOs to depart, VMWare’s Dianne Greene who went away quietly after a difference of opinion on her experience. And now there are none…unless the rumors are true and Meg get the job below…
Post ed: She did!

How to #1: If you are firing a powerful personality manage the communication by meeting with them in person! Or get someone you trust to do it for you, in person.

Mark Hurd’s departure from H-P provides more to chew on. In Mark we had another strong CEO with a strained relationship with the board. Facing allegations of expense fraud, a sexual harassment suit, broken trust and the specter of bad PR, the H-P board fired their CEO and entered months of he-said, she-said. In this case the ousted CEO promptly went across to another silicon valley giant, Oracle, and one known to have a tougher, less PC culture. H-P sued and then promptly settled 2 weeks later once they realized how important the Oracle business relationship is to them both.

How to #2: Make sure you have a strong separation agreement when you fire the CEO so if they take another job you can live with it and don’t have to sue, and then settle. List the companies you really don’t want them to go to, especially if you are in California, and put some financial teeth into it.

This weeks roiling H-P rumors also highlight How to #3: Don’t let leaks come out of the board room. Ever. Especially if you are thinking of firing your CEO. The level of detail coming out of the H-P board room is astonishing for such a large public company.

You can tell a company has not been doing a good job of succession planning when a board member needs to step into the breach. Usually there is someone who can take over in the interim, even if it is only the CFO. But in Axciom’s case, firing the CEO after a bad quarter, even the CFO didn’t want to “keep commuting from Florida to Little Rock”. Must have been a tough gig the new CEO Scott Howe took over – I wish him luck.

It’s never pretty when a CEO is fired but it can be done smoothly, take for example the firing of BNY CEO Robert Kelly- a deliberate, confidential process followed by the promotion of an internal leader, Gerald Hassell, into the top spot. Pfizer also, when CEO Kindler abruptly left was able to replace him with an internal candidate Ian Read.

How to #4: Do a good job of succession planning on a continuous basis so if you do need to remove the CEO you have internal candidates to seriously consider.

Which leads to the question what does it mean when the board has to fire the entire senior team as the Cadence board did in October 2008. They were lucky to have a strong board alternative ready to step in and turn the company around, because there was no one senior enough internally left standing, although indications are the CEO, Lip-Bu Tan is investing in How to #4.

Of course there are many more ways to fire a CEO but in the end the hiring and firing of the CEO is the single most important thing boards do. They are accountable to the shareholders and the CEO has more impact on the strategy, execution and leadership team than anyone else, so the decision of who to put in that position vastly outweighs any other decision a board makes.

It sounds easy. Be clear about what the company needs, have a clear and transparent process within the board for nomination, have a strong succession planning process so you are developing internal candidates, keep confidentiality.

But it’s not easy. It is incredibly difficult because companies, and human beings, are complex. Of course board’s make hiring mistakes, or the needs of the company change, or the market changes and a CEO may no longer be a good fit.

So if you do have the misfortune to have to fire a CEO, at least make that a well managed, dignified, confidential process.


The rise in CEO turnover is a sign of the times- both good and bad

Posted on Huffington Post today

In the first 9 months of 2008 the number of CEOs who left their jobs hit a record high according to Challenger, Gray & Christmas Inc – 1,132 by October and when the 2008 full year tally is completed the total will be higher than ever before.

What is going on behind these numbers is two forces of change, both of which should improve the caliber of leadership and cause boards to act.

First the economic crisis makes CEOs more vulnerable. Their companies and markets are in crisis, in most cases their stocks are significantly down and they are under pressure from shareholders and employees to improve performance. And when a CEO leaves he usually “resigns” – which is a euphemism for a difficult conversation in which both the board and the CEO agree it would be best for the CEO to step down.

More visibility than that is exceptional – like when the Cadence Design Systems CEO Mike Fister and his top 4 executives all “resigned” on the same day – you know they were summarily fired and there is a cleanup job to be done there – or when Dianne Greene left VMWare openly stating she did not agree. Or when the CEO has clearly been recruited to a new job like Kevin Kennedy leaving JDSU for Avaya. But usually it’s a civilized, mutual agreement.

In tough times good boards are looking at whether they have the right CEO. The skills needed to grow a company in a rising market are often different skills than operating and preserving a large company in a down market. And in down markets leadership and character is more important than ever.

The second change at work is the unprecedented levels of transparency shareholders now have. This transparency comes from the combination of new executive compensation reporting requirements and the openness of the web. In 2006 board compensation committees were first required to file a Compensation Discussion and Analysis report – the CD&A – at the beginning of the year describing every single element of compensation the top executives are receiving and the rationale behind it. This means that finally shareholders can see everything, and so have the knowledge to question boards in the shareholder meetings. Carol Bartz’s new compensation package at Yahoo is an example of a CEO’s pay lining up with shareholder interests and it’s all publically filed.

I am hoping that with a spirit of change in Washington, a tough economic environment and the unprecedented level of visibility the CD&A, the web and bloggers provide into what’s really happening in a company – that more boards will ask the hard questions about whether they have the right CEO or not. Let’s not have a repeat of leaving Jerry Yang in as CEO of Yahoo for 18 months too long, and let’s have the GM board hold Rick Wagoner accountable to turn GM around or get out. After all, the most impactful thing a board does is hire and fire the CEO.