PBS NBR Commentary #3: "Paying CEOs for Non-Performance" August 16, 2007
We have a big problem in CEO compensation these days, but it’s not paying CEOs too much money. No one ever criticized Bill Gates for making so much money. The problem is paying those enormous sums to CEOs who fail to perform.
Our capitalistic system is based on taking risks and being rewarded for success - not guarantee big payouts to charismatic CEOs that destroy shareholder value.
But how can anyone justify the CEO of Home Depot, who lost market share and shareholder value, walking away with a $200 million termination settlement? That’s not capitalism – that’s a rip-off. Or the CEOs of Morgan Stanley and Hewlett-Packard losing their jobs and getting multi-million dollar packages. The public ought to be outraged by these inequities.
Many boards have put the CEO least at risk, and their employees most at risk. If CEOs won't take the risk, they shouldn’t be well compensated. And when they fail to perform, they should go away without any added compensation.
The problem starts with failing to develop future CEOs internally, and having to go outside to find a corporate savior who negotiates a guaranteed, no-cut contract that pays off even if he fails.
Why should CEOs have contracts anyway? The CEOs of General Electric, Goldman Sachs or Exxon don’t have contracts. They get paid to perform. When they perform, they should be well paid.
To correct CEO compensation, boards need to put their CEOs at risk, without contracts, and offer them significant incentives for long-term performance. That’s the American way, and that’s the way to restore the trust in corporate leaders.
PBS NBR Commentary #2: "Wall Street Versus Main Street" July 19, 2007 (view video)
For the past decade we’ve had a big problem in the corporate world, but no one will name it. The problem is that many leaders believe they are more responsible to Wall Street than they are to Main Street. But it's Main Street where the customers live and where the money is made.
The only way to create long-term value for shareholders is to create superior value for your customers. That comes from motivating your employees to create great products and superior customer service. That’s why companies like Target, Johnson & Johnson, and PepsiCo have been so successful in sustaining their growth.
But companies whose primary focus is on Wall Street, and meeting its short-term goals, are never going to create long-term value. Wall Street may focus on quarterly earnings, but it still takes five years or more to discover a drug, design a semiconductor, or create a breakthrough like the i-pod.
You simply can’t do it overnight. If you don’t stay focused on your True North, you’ll get buffeted by the winds of change, and wind up capitulating to playing the short-term game. At Medtronic, it took a decade to create breakthrough products that restore millions of people to health, but that’s how we created $60 billion in shareholder value– not by responding to Wall Street.
Unfortunately, many corporate leaders don’t have the patience or the vision to do that. They bow to Wall Street, keep shifting strategies, and wind up destroying their value.
Authentic leaders stay focused on creating great value for Main Street customers. And that’s how they create long-term shareholder value. Authentic leaders who focus on Main Street will out-compete every time those who only worship Wall Street.
I'm Bill George.
PBS NBR Commentary #1: "The Need for Authentic True North Leaders" June 28, 2007 (view video)
For the past five years we've been facing a crisis in corporate leadership. The Gallup poll says only 22 percent of the American people trust their leaders. That's not just a problem, that's a formula for disaster, because our entire system of capitalism is built on trust.
Many leaders have breeched the trust given them when they were chosen to lead our great companies. It turns out these leaders are primarily interested in taking as much as they can out of the company – money, fame, power and glory. Instead of takers, we need givers whose goal is to serve all their constituencies: their customers, employees, and shareholders.
All too often boards of directors choose the wrong leaders to run our corporations. They select them more for their charisma than their character, for their style rather than their substance, and for their image rather than their integrity. Well, if we choose people for charisma, why are we surprised when we don't get character?
Boards need to stop searching for corporate saviors from outside the company, and get back to developing leaders within their companies – leaders that have the character, substance, and integrity to build companies for the long term. We need authentic leaders who can empower people throughout the organization to step up and lead, and who are committed to serving all their constituencies.Only when we have authentic leaders will we be able to regain the trust of the American people, as well as the trust of customers, employees, and shareholders – and only then can companies create long-term, sustainable value.
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