I want to tell you a story about corporate governance, a mistake I made, and the lessons learned.
Years ago, I was a member of the Board of Directors of a publicly traded company. Our CEO and senior management presented us with a take-over offer from another company. We did our due diligence, and we determined that the deal was in the best interests of our shareholders, and we approved the buy-out.
But, here was the mistake. The Board acted as a passive recipient of the CEO's proposal, leaving us only with the ability to "take it or leave it" or perhaps suggest minor modifications. We had not insisted on an opportunity to participate in the negotiations independently of the CEO while discussions were going on with the ultimate purchaser or with other possible suitors.
Part of the deal included a very generous payout for the CEO and a few other senior managers. That payout added no value to our shareholders, and indeed reduced the value to them. In essence, we had let the self-interest of the CEO drive a portion of the transaction that reduced its value to the public. We had not recognized the potential for a conflict of interest, to the detriment of the people we were supposed to represent. We failed in an aspect of governance responsibility.
I believe that this problem may be common in corporate takeovers. If a Board does not do its job properly, the public is left only with the power of elected officials or regulators to make sure that this kind of conflict of interest does not result in personal gain for a CEO and reduced value to the public.
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14 comments:
Good Story for others. Thanks for being open and sharing.
Tim McMahon
A Lean Journey
http://leanjourneytruenorth.blogspot.com
You should start a betting pool where readers can pick two dollar amounts - the direct and deferred payouts that the Caritas CEO will receive when that transaction is completed. It will be many millions.
Hi Mr. Levy - interesting note. I guess I would be more interested in your interpretation of the "why" behind this mistake - why are boards not interested in the final details of major deals like this, why do boards place so much trust in the CEO for what might arguably be the most important activity a company undertakes, why do boards not review (or neglect to approve) the final terms of a company's sale with particular scrutiny on potential conflicts of interest?
From Facebook:
Bob: I am involved w/ 2 start ups and I take my position very seriously and when I signed the NDA, I took it very seriously and I consider it a honor and resonsibility. I have a great working relationship w/ the founders and the CEO and I try to be proactive.
Alycia:
It is this kind of refreshing honesty and willingness to learn from prior actions that makes you such a respected leader!
Stuart: I believe that leaders are those who learn from their mistakes, and are willing to share those learnings. When I meet an "executive" who claims s/he has never made a mistake, credibility is lost. Executive, perhaps, but leader ... nope.
Steve,
I'm not sure. Maybe it is just a desire to get along and go along. Also, Boards tend to trust the CEO and feel somewhat beholden to him/her for their position on the Board in the first place. Also, they usually have stock in the company and will benefit from the takeover and may not want to rock the boat.
One might say the same about boards of hospitals, both tax-exempt and not, Paul. Many people on boards of hospitals do not apply the same degree of care to their role as board members as they do in their "day jobs." I'd love to hear some reflections about your experiences as a CEO in getting the board to which you report to be more active and engaged. As a former CEO myself, there's an inherent tension between wanting the board to be appropriately involved and active, and be the resource that they should be, and keeping them out of the way.
I also wished you'd said something in your post about thinking about this particular issue as the Caritas deal is on the table. Seems more forthright and honest, which are two qualities I admire about your blog.
Paul,
While you didn’t mention the size of the deal, I think most large sales of public companies these days involve investment bankers who provide fairness opinions and comparative value analysis showing multiples of earnings, cash flow, EBITDA, etc. that similar companies are currently selling for in the marketplace or were acquired for by other companies. Often, unsolicited or hostile competing bids emerge if another acquirer thinks it can offer a higher price and still add value for its shareholders if and when it completes the transaction.
One of the more contentious aspects of many mergers is which CEO will run the combined company. The CEO who loses out, usually from the acquired company, is often paid off to facilitate the transaction. The payoff usually takes the form of immediate vesting of stock options that otherwise would still have had several years to go before vesting and/or the trigger of change of control golden parachutes which provide eligible members of senior management with up to three years of salary and bonus compensation. While it would be better for shareholders if these compensation packages were smaller or even non-existent, they are a relatively tiny percentage of the total transaction value in most cases. I’m not convinced that most Board members are in a good position to add significant value to a merger negotiation under most circumstances. On the other hand, I’ve never served on a Board either.
http://peureport.blogspot.com/2010/04/30-annual-returns-still-target-for-peu.html
Private equity enters health care. Courtesy of Alan P. on The Health Care Blog.
nonlocal
In the academic hospital setting of Harvard, where Chairs of Departments are independent physicians (agents), I have wondered why there is not also more accountability of Department Chairs to the board. I suspect that most boards have no sense of how departments are being run, and whether to the detriment of the institution at large. This may be the CEOs job, but they are not fully beholden to him/her either. What do the best boards do in this situation?
Anon 10:13;
In the current organizational system of the typical hospital (whether academic or community), I would strongly disagree with having the clinical department chairs "fully beholden" to either the CEO or the Board. While the balance of power is a delicate issue, it is necessary to protect the interests of both the patients and the institution. I have been in a hospital where the CEO's increasing disregard for the clinical aspects of care in favor of financial concerns, against the progressively loud objections of the medical staff, eventually led to several incidents of adverse patient care and provisional loss of JC accreditation and censure by the state.
One cannot allow either the administration nor the medical staff complete power over the other. This will be the challenge of any future arrangements such as ACO's. Looking to the clinic models of Mayo, Cleveland and Geisinger may be of help.
nonlocal MD
To be perfectly honest I should clarify my comment above. There are some department heads who are physician entrepreneurs more concerned with the business/$$ side of their departments than with patient care. We have all encountered these and personally, I abhor them. My comment above was meant to apply to the more usual physician department head who, although perhaps exhibiting some less than diplomatic personality traits , probably has his/her patients' best interests at heart.
And so does a normal CEO, but his/her primary concern, as it should be, is the success of the institution. It is these two imperatives which need to be balanced.
nonlocal
Anon 7:10,
I don't have the details about that deal.
Or your general point, I have an excellent Board here, in terms of expertise, understanding the difference between governance and management, and holding the CEO accountable.
Anon 10:13,
It is not the job of the Board to hold the department heads accountable. That is the CEO's job, and the Board in turn can hold the CEO accountable.
Nonlocal,
Sorry, but the departments heads also need accountability to someone. But, if anyone thinks they have complete power in that relationship, they live in a dreamworld.
Paul;
Re-reading my comments I don't see where I advocated department heads not having accountability to anyone. (I interpreted "completely beholden" as = "reports to".) And one might argue that many Boards are beholden to the CEO, not the other way round. However, your last sentence describes the situation as it should be, frustrating as it may be to both parties.
nonlocal
Someone is looking at this, anyway.
You see, I never give up.
http://www.modernhealthcare.com/article/20100324/WEBINAR/303249996/-1
nonlocal
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