The Sarbanes-Oxley Act of 2002 missed something. The Public Company Accounting Reform and Investor Protection Act of 2002 did not include, as it relates to “Investor Protection,” the elimination of the CEO’s ability to become both the CEO and Chairman of the Board of Directors. Want to protect shareholders from White Collar Crime? Separate the two roles. Why separate the two roles? One accounting principle has a lot to say about it, separation of duties. To better understand why these roles should be separated, an understanding of corporate governance is appropriate.
Executive Board vs. Supervisory Board
All publicly held companies in the U.S. have two distinct boards: The Executive Board and The Supervisory Board.
The Executive Board is comprised of Officers such as the Chief Executive Officer (CEO), the Chief Financial Officer (CFO), the Chief Information Officer (CIO), and the Chief Operations Officer (COO), to name a few, to handle the day-to-day operations of a company.
The Supervisory Board is comprised of the Board of Directors, which is a body of elected or appointed persons who oversee the activities of a company. When the CEO is also the Chairman of the Board, the individual is now given the two most powerful and influential roles of a company. This creates little to no accountability that is internal to the company, only external i.e. Government Regulations. Although the individual is accountable to the shareholders, what can the shareholders do after the fact? By then, the CEO/Chairman has already moved on to the next company.
CEO Compensation Is Decided By The Board
Just think, if you are the CEO of a company, who determines your compensation? Well, if you guessed the Board of Directors, you are correct. See the problem yet? When the CEO is also the Chairman of the Board, the CEO has great power and influence when it comes to determining their salary, stock options, and overall compensation. If the Chairman is deciding the total compensation of the CEO, the hands of the shareholders’ are tied.
A Closer Look At A CEOs Total Compensation
Former CEO of AIG William McGuire is an example of a CEO that was not the Chairman of the Board. In 2005, McGuire received for one year, $128,400,000 in total compensation.
That’s:
$10,400,000 per month (12 months per year), or
$2,418,605 per week (4.3 weeks per month) or
$60,465 an hour (40 hour work week)
The number that astounds most is that the CEO made over 60k an hour. At over 60k an hour, that’s more than the average American’s annual household income. Can you imagine what this CEO’s total compensation might have been had he been both the CEO and Chairman of the Board? If the roles are split and the Board of Directors believes the total compensation is excessive, at that point they have the authority to change the CEO’s compensation instead of having their hands tied by the Chairman if the individual is also the CEO. Boards do vote on issues but one thing is undeniable, the Chairman has a substantial amount of influence.
Companies Where CEO Is Also Chairman
What do the following companies have in common? AIG, GM, and Chrysler…they’re all in financial trouble. What else do they have in common? They have CEOs who are also the Chairman of the Board. The list goes on as far as companies that do not split the roles of the CEO and the Chairman of the Board.
Stats: Europe
Let’s take a closer look at Europe. In Britain, 95% of companies have the roles split. A survey completed by Christian & Timbers showed that 97% of European executives believed that the CEO should not be the Chairman of the Board. To note, shareholder returns were reduced by 5% in companies that split the roles. In America, only about 20% of companies have the roles split and some 85% of executives believed the roles should be split. Although the Company’s returns may be lower, the one thing shareholders should be thinking is:
At least the Company is not going bankrupt as a result of Corporate Governance Breakdown.
Solution: to create more accountability and establish an atmosphere of Corporate Governance, separate the role of the CEO and the Chairman of the Board.
About the Author:
Paul Gillett is an auditing consultant and author. If you would like more information on auditing solutions, go to: http://auditsolutions.blogspot.com or email: phgillett@hotmail.com. You may reprint this article electronically or as a hard copy as long as the author's resource box remains intact, with the active links included.
Friday, November 14, 2008
Tuesday, November 4, 2008
The Best CEO Insurance Plan
Credentials Don’t Solve Business Problems, Problem-Solvers Do
Some of the smartest people you meet may have credentials, and some may not have credentials. How many times have you met someone who has a degree/credential in one area, but is working in the complete opposite field? A hundred years ago, higher levels of education were available to the rich, predominantly. In today’s corporate arena, it is almost unheard of to hire someone that has no college degree. This shift has caused individuals to seek out degrees instead of learning how to solve real-life problems in the business world.
Some of the smartest “business decision-makers” have little or no credentials. Many of these are small business owners that are solving real business problems on a daily basis without the ‘latest and greatest’ credentials offered by the professional world. Just how important are the small business owners? The statistics give a more accurate depiction of this point. Consider the Small Business Administration’s statistic on private firms; small businesses provide jobs for over half of the nation’s private workforce, and small businesses are job creators accounting for over 99% of all firms (www.sba.gov).
Just think in your own mind, how many of those small business owners have great and recognized degrees/credentials. Most of the successful small business owners I know have no credentials and are well off. When hiring someone, it is not always best to hire someone that has the credentials, rather, hire someone that can solve real business problems and offers solutions.
Hire problem-solvers!
Mistake: Not Hiring Out Of The Box Thinkers
This point holds especially true when a business needs to grow. Don’t get me wrong though, all growing companies will need in-the-box thinkers to handle the monotonous tasks that need to be completed in everyday business activities. However, most often overlooked by hiring managers are the out-of-the-box thinkers that cannot only perform the job required, but a step further as well. A step further says that when business is transacted, all business activity is subject to improving upon. In our global economy, growing businesses cannot afford to ignore improving upon the company’s pre-existing business model. For example: an out-of-the-box thinker, in the course of their work would say, “wait a minute, there is a better way to handle this situation when it arises again…” instead of saying, “well, that’s not my job and I’m not paid to think about how to improve this business, it’s not my responsibility.” Most people that think like this feel like they have no duty to improve the business because improving the business will do them no good. On the contrary, I have worked in a company where good ideas are recognized and rewarded with compensation in the form of a bonus.
HR may assist in the administration of hiring, but only you know what and who is the best fit to obtain the position, and my guess, it’s the person that sees beyond their own box.
Management By Walking Around
Managers/Owners of a business can greatly benefit by this style: managing by walking around. Do a lot of professionals know about this style? Yes. Is it practiced as much as it should? Probably not. The most likely reason is because managers may think, ‘since the business world has gone mostly to electronic communication, walking around and giving “face-time” is inefficient and time consuming so why not send out a mass email to those that work under me?” Thinking this way will not only make your clients feel neglected and as if your time is more valuable than theirs, it will also create an environment of less accountability because you’re never seen by your employees.
In the long run, ignoring employees will yield unhappy employees.
Unhappy employees will yield no passion for their work.
No passion for their work will yield poor work product.
Poor work product will eventually lead to the downfall of the company.
No company means, no job and no paycheck. Trying to please everyone is impossible, but managing by walking around sure does help.
Solution: come out from behind the keyboard and at a minimum, be “seen” by employees and customers. For greatness to be achieved, management must provide an environment of greatness.
Some of the smartest people you meet may have credentials, and some may not have credentials. How many times have you met someone who has a degree/credential in one area, but is working in the complete opposite field? A hundred years ago, higher levels of education were available to the rich, predominantly. In today’s corporate arena, it is almost unheard of to hire someone that has no college degree. This shift has caused individuals to seek out degrees instead of learning how to solve real-life problems in the business world.
Some of the smartest “business decision-makers” have little or no credentials. Many of these are small business owners that are solving real business problems on a daily basis without the ‘latest and greatest’ credentials offered by the professional world. Just how important are the small business owners? The statistics give a more accurate depiction of this point. Consider the Small Business Administration’s statistic on private firms; small businesses provide jobs for over half of the nation’s private workforce, and small businesses are job creators accounting for over 99% of all firms (www.sba.gov).
Just think in your own mind, how many of those small business owners have great and recognized degrees/credentials. Most of the successful small business owners I know have no credentials and are well off. When hiring someone, it is not always best to hire someone that has the credentials, rather, hire someone that can solve real business problems and offers solutions.
Hire problem-solvers!
Mistake: Not Hiring Out Of The Box Thinkers
This point holds especially true when a business needs to grow. Don’t get me wrong though, all growing companies will need in-the-box thinkers to handle the monotonous tasks that need to be completed in everyday business activities. However, most often overlooked by hiring managers are the out-of-the-box thinkers that cannot only perform the job required, but a step further as well. A step further says that when business is transacted, all business activity is subject to improving upon. In our global economy, growing businesses cannot afford to ignore improving upon the company’s pre-existing business model. For example: an out-of-the-box thinker, in the course of their work would say, “wait a minute, there is a better way to handle this situation when it arises again…” instead of saying, “well, that’s not my job and I’m not paid to think about how to improve this business, it’s not my responsibility.” Most people that think like this feel like they have no duty to improve the business because improving the business will do them no good. On the contrary, I have worked in a company where good ideas are recognized and rewarded with compensation in the form of a bonus.
HR may assist in the administration of hiring, but only you know what and who is the best fit to obtain the position, and my guess, it’s the person that sees beyond their own box.
Management By Walking Around
Managers/Owners of a business can greatly benefit by this style: managing by walking around. Do a lot of professionals know about this style? Yes. Is it practiced as much as it should? Probably not. The most likely reason is because managers may think, ‘since the business world has gone mostly to electronic communication, walking around and giving “face-time” is inefficient and time consuming so why not send out a mass email to those that work under me?” Thinking this way will not only make your clients feel neglected and as if your time is more valuable than theirs, it will also create an environment of less accountability because you’re never seen by your employees.
In the long run, ignoring employees will yield unhappy employees.
Unhappy employees will yield no passion for their work.
No passion for their work will yield poor work product.
Poor work product will eventually lead to the downfall of the company.
No company means, no job and no paycheck. Trying to please everyone is impossible, but managing by walking around sure does help.
Solution: come out from behind the keyboard and at a minimum, be “seen” by employees and customers. For greatness to be achieved, management must provide an environment of greatness.
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