The Need for Executive Assessments

Any decision regarding engagements, staffing and positioning of senior managers and executives has extensive consequences and strategic impact on the organization.

But a problem is that you can only see if an engagement decision was right after considerable time, because it takes a long time before the results will become visible and in many cases executives and the organizations they work for harvest the outcomes of their activities considerably time-shifted. Typically months or even years have passed by.

With rising level of the position, competencies such as analytic skills, strategic thinking, management competencies, customer orientation, social competencies, entrepreneurial thinking are getting more important for the aptitude appraisal and the engagement decision.

That's why conducting executive assessments using simulations instead of just using a self-report by the candidate before you decide if a candidate is capable and will be successful is a good idea. Such approach is much more reliable than a traditional interview process.

Optimal CEO Tenure and Clever Incentives

I just stumbled into an interesting short research finding in HBR of March 2013 "Long CEO Tenure Can Hurt Performance". Professor Xueming Luo, Vamsi K, Kanuri and Michelle Andrews report results from a study they did among 356 US companies between 2000 to 2010 analyzing the correlation between CEO tenure (length of time serving) and total shareholder returns.


The researchers found that CEOs create most shareholder value in their first years and argue this is mainly due to 2 factors:
- The firm-employee dynamic - This keeps improving the longer a CEO serves, growing shareholder value.
- The firm-customer dynamic - This strengthens only for a time but then it weakens.

The optimal length of tenure reported (for this group of companies in this period) was 4.8 years...

Boards of Directors are advised to keep a close eye on the amount of time and energy a long-tenured CEO spends on the firm-client relationship and focus incentives plans for such CEOs on consumer and market information and results. This will help to keep them focused on learning on client/market characteristics.

Executives cash in, regardless of performance

Hewlett-Packard Co.'s Carly Fiorina, recently muscled out of her job over lackluster performance, walked away with an exit package worth $42 million. Boeing Co.'s Harry C. Stonecipher, pushed out over an affair with a female employee, nonetheless is eligible for retirement benefits of about $600,000 per year. Franklin D. Raines bowed out under heavy pressure in December following accounting problems at Fannie Mae. But the firm says he is now owed $114,393 per month in pension benefits.

At many other corporations untouched by scandal, pay continues to climb whether performance is great, lousy or middling.

"Even though the escalation of pay has often been justified as necessary, when you look at the details, that is not the case, because much of the pay is not all that sensitive to performance," said Harvard Law School professor Lucian A. Bebchuk, author of the new book "Pay Without Performance."

"Our view is that pay is much less connected to performance than investors commonly recognize," he said. Read on".

Bestselling Executive Compensation Books

Boardroom culture and EC

Arthur Levitt Jr. (former chairman of the U.S. SEC) states in the Wall Street Journal of November 23st, 2004 that "The single greatest impediment to the restoration of confidence in corporate America is continuing instances of extravagant non-performance-based compensation. These huge paydays bolster a system in which executives have incentives to manage the numbers for short-term gain and personal payout, and not manage their business for long-term growth and shareholder value". (...) "The boardroom culture is fraternal, rather than skeptical. Therein lies the crux of the problem".

Levitt's statement reminds me of something President Bush bush said 2 years ago: "At this moment, America's highest economic need is higher ethical standards - standards enforced by strict laws and upheld by responsible business leaders" (Corporate Responsibility speech, July 9th, 2002)".

State Controller calls for CalSTRS on EC

State Controller mr. Westly called on June 28th, 2004 for the State Teachers' Retirement System (CalSTRS) to set responsible standards to encourage companies to link the pay of top executives to long-term company performance.
In a letter to Chairman Mr. Lynes and other CalSTRS members, Steve Westly calls for the fund to develop a comprehensive strategy on the issue, including developing a corporate governance watch list for poor performing companies.

This is the full letter of Mr. Westly:

------------------------------------------------------
STEVE WESTLY
California State Controller


June 28, 2004

Gary Lynes, Chairman and
Members, California State Teachers Retirement System
7667 Folsom Boulevard
Sacramento, CA 95851

Dear Chairman Lynes and Members:

Excessive EC is a significant concern for all
shareholders. Although we have made some meaningful improvements to
our proxy voting guidelines, CalSTRS has no comprehensive strategy for
holding companies accountable for their EC policies. I believe that we must
aggressively engage on the issue.

First, we need to look at EC as a comprehensive
program, not just a set of guidelines to use when voting proxies. The
foundation of our program should be four simple concepts:

1. EC policies should link a substantive
portion of compensation to achieving key performance targets;

2. EC policies should be fully transparent to
shareholders and should be regularly submitted for shareholder
approval;

3. EC should be evaluated over an appropriate
time period (e.g., three to five years), not at just a single
point; and

4. E. contracts should be disclosed in easy-to-understand
language in the proxy statement to allow shareholders to
evaluate the link between pay and company performance.

Second, CalSTRS needs a corporate governance watch list that focuses
on excessive C. We should make clear that companies that
are underperforming their peers should not be overcompensating their
executives. Similarly, CalSTRS should recognize companies with model
EC policies as the leaders that they are.

Third, CalSTRS should engage other institutional investors and
corporate C. consultants to establish "best practices" for
corporate governance. By pursuing an EC strategy
beyond casting votes at shareholder meetings, CalSTRS will have real
impact on public companies that will result in real payoffs for our
fund.

I will be addressing this issue at the July CalSTRS meeting. I look
forward to hearing your ideas about EC and steps
that CalSTRS can take to bring about meaningful reform in this area.
If you would like to discuss these ideas before the July meeting,
please call Toni Symonds at (916) 445-2636.


Sincerely yours,


STEVE WESTLY
California State Controller

Fetch the tar and feathers

This year of stunted stock market growth seems to have ignited the smoldering anger of investors and employees. Many news articles mention boards having increased their paychecks and bonusses, while simultaneously slashing corporate costs and laying off thousands of employees.
Is the behavior of CxO's "the ugly side of capitalism" as some people claim and is it about time we "fetch the tar and feathers", or are investors just venting off their emotions after a period of below-average stock returns? Should we place our bets on encouraging ethical behavior or will new accounting rules and stronger governance standards lead company executives and directors to "reconsider executive compensation programs"? Or should we be careful in allowing these kind of things to influence the fundaments of our market economy?