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Spring Cleaning

Time Magazine: Spring Cleaning: Europe’s CEOs are biting the dust as a more American-style shareholder activism reaches the boardroom


Monday, May. 17, 2004

The board at Shell knew it needed to do something, and fast. A shocking revelation in January — that the world’s third largest oil company had overstated its proven petroleum reserves by 20%–was pummeling its stock price and angering shareholders. Regulators on two continents had started investigations. So in early March the board acted, ousting Philip Watts, who had been managing director of the Anglo-Dutch company for almost seven years and chairman since 2001, and replacing him with Jeroen van der Veer, president of Shell’s Dutch sister company, Royal Dutch Petroleum. A quick cure for all those headaches?

Hardly. Just six days after Van der Veer took the helm, internal memos leaked to the press suggested that other top Shell executives still in office, including Van der Veer, may have known about the reserves problem as early as two years ago. Van der Veer vigorously denied the charges but failed to calm the jangled nerves of Shell’s institutional investors. And so the company was forced to ask itself an unpleasant question: How many times can you fire your CEO in a year?

After an inquiry by an outside law firm, the Shell board gave what it hopes is the definitive answer: Just once. It said the probe had uncovered “disturbing deficiencies” in company practices, and announced the replacement of chief financial officer Judith Boynton. And for the third time this year, the company reduced the figure for its oil reserves. Van der Veer was spared. “We have complete and unreserved confidence in [his] leadership,” the board said, although the internal inquiry handed further ammunition to a swarm of U.S. lawyers who have filed class actions against the firm. Shell said the company is accelerating its review of management practices but made it clear that it considers the reserves issue settled. In a statement, Van der Veer said the report “draws a line under the uncertainties that have surrounded” Shell’s accounting for reserves.

Really? Some of Shell’s biggest shareholders aren’t satisfied. Peter Montagnon, head of investment affairs at the Association of British Insurers, which includes some of Britain’s biggest institutional investors, says Shell needs to put in place “a governance arrangement that provides for proper accountability and no longer tolerates chronic underperformance.”

Boardroom drama like that at Shell is becoming more common in Europe. Being a chief executive officer these days is a bit like being on a reality-TV show: no one knows who will get voted out next. In the past month alone, London-based SSL International, maker of Durex condoms and Scholl foot products, replaced its CEO. German tech company Infineon unexpectedly lost its blunt-speaking CEO, Ulrich Schumacher. He said he was leaving for “personal reasons,” but it’s clear that the board and shareholders were dissatisfied with the company’s performance. An interim chief, Max Dietrich Kley, now runs the company. A revolt by French shareholders led to the ousting of Eurotunnel’s chief executive, Richard Shirrefs, and its board. Former travel executive Jacques Maillot leads the motley band of characters trying to keep Eurotunnel, an absolute money pit, out of bankruptcy.

Over the past two years, chief executives of 17 of the euro zone’s 50 biggest public companies have been replaced, with almost half leaving under pressure. (That number doesn’t include a cluster of large British, Swiss and Swedish firms where heads have also rolled.) Those include financial giants like Germany’s Allianz and Credit Suisse of Switzerland; media titans, such as France’s Vivendi Universal and Germany’s Bertelsmann; and a bevy of telecom behemoths, such as France Telecom, Deutsche Telekom and Britain’s Cable & Wireless.

The purges signal that corporate boards and shareholders across Europe are fast catching up with the U.S. in refusing to tolerate scandal, sustained losses or other indications of poor management. In a study published last year of 2,500 publicly traded companies, consulting firm Booz Allen Hamilton found a sharp increase in CEO turnover — and it is Europe’s chief executives who are the biggest losers. From 1995 to 2002, the frequency of CEO succession in Europe increased 192%, compared with a rise of just 2% in North America, where company bosses have traditionally enjoyed less job security.

The days when CEOs in Europe could count on cozy relationships with boards, governments and financial institutions to protect them are gone. In part, that is a reaction to the irrational exuberance of the late 1990s, when CEOs like Jean-Marie Messier of Vivendi acted like rock stars and paid themselves accordingly, and to the scandals that have enveloped European firms, such as Italy’s Parmalat and the Dutch retailer Ahold, which owns a number of U.S. grocery chains. But the change also reflects the influence of American-style investor activism and the growing clout of U.S. pension funds in stock markets across the Continent. “The performance culture has come to Europe,” says David Newkirk, a Booz Allen senior vice president.

What are today’s companies looking for in a shiny new CEO? Talk of vision and synergies has been replaced almost everywhere by a laser-like focus on profitability. Debt and heavy-handed micromanagement are out; sustainable earnings and delegation of authority are in. Some corporate crises, such as Parmalat’s, may be too big for any mortal to solve completely and point to the need for broader regulatory changes. But the new boys — women remain rare in the top jobs in corporate Europe — are under enormous pressure to untangle the failed legacy of their predecessors as fast as possible. Here’s a look at key factors that help determine whether spring cleaning in the CEO’s suite is enough to turn a company around.

The Need for Speed

One obvious yardstick of success or failure is stock price. The companies whose stock is bouncing back the fastest are usually those whose new leaders have acted most quickly to tackle their core problems. In Britain, Cable & Wireless stock is up 50% since Italian turnaround expert Francesco Caio took over a year ago. He swiftly shed unprofitable operations his predecessor had bought in the U.S., including a big Internet hosting business, but had been reluctant to sell when they didn’t pan out. At ailing insurer Royal & Sun Alliance, Andy Haste, 41, the CEO who took over last year, wasted little time in raising $1.8 billion in fresh capital and cutting 20,000 jobs. In Switzerland, Credit Suisse stock has risen about 40%, easily outperforming most rivals, since the bank ditched Lukas Muhlemann at the beginning of last year and replaced him with two bank veterans, Oswald Grubel and John Mack. They quickly took major write-offs to deal with festering operational troubles. The jury remains out on some of the new CEOs, including Michael Diekmann at Allianz and Giuseppe Morchio at Fiat.

No Rock Stars Wanted

The brash, swashbuckling style of fallen supermen like Messier — who referred to himself as a “master of the world” and published two autobiographies, one while he was CEO and a sequel after he was ousted — has been consigned to history, for now. “The extreme case of ‘the company, c’est moi’ is behind us,” says Booz Allen’s Newkirk. At engineering giant ABB, based in Zurich, Jurgen Dormann stunned senior managers by telling them in one of his first meetings after taking office in September 2002, “I don’t like to work too hard or take decisions. You do that.” It was a playful way of signaling that he intended to delegate operating management to his subordinates, and it marked a dramatic change for a company whose former leader, Percy Barnevik, imposed a rigid top-down culture.

Dormann’s breath-of-fresh-air approach continued with a companywide email urging staff members to stop making PowerPoint presentations for one another. “Consider this,” he wrote. “Somewhere among the dazzling presentation techniques … I sense a creeping loss of substance.” That struck a chord. “Bravo!!! I am so tired of executives jamming phony presentations down my throat,” a U.S. regional manager e-mailed back.

Debt Is Bad …

Nothing on corporate balance sheets so symbolizes the excesses of the 1990s as the towering debt left behind by fallen CEOs who couldn’t control their acquisitive urges. Accordingly, their successors are deleveraging. The prize for the biggest reduction goes to Thierry Breton, a sometime science-fiction novelist who moved from Thomson to take over France Telecom in September 2002. He is paring the France Telecom work force by about 22,000, or 15%, mainly through attrition, and he has linked the pay of thousands of managers to tough performance targets. Debt tumbled from $66.7 billion to $51 billion in his first year, in part because Breton persuaded the French government and bondholders to put up fresh capital. Coming in a close second is Jean-Rene Fourtou, 64, a drug-industry veteran who took over France’s teetering Vivendi two years ago, and is turning it around (see next story).

… But Excess Is Worse

Executive compensation has become a hot button for investors, who are increasingly unhappy about overpaying for underperformance. By U.S. standards most European executives aren’t lavishly paid, but they have been trying to catch up. Not anymore. The board of British drug firm GlaxoSmithKline cut the pay package of CEO Jean-Pierre Garnier last December after shareholders voted it down at the annual meeting. (He still earned $5 million last year in salary and bonus, a 14% raise.) Even at Ahold, which was in need of a white knight following an accounting scandal last year, the new CEO, Anders Moberg, faced a storm of criticism over his guaranteed $1.68 million bonus for each of his first two years. That was on top of a $1.68 million salary and stock options as well as a hefty exit package. Moberg, a Swede who formerly ran Ikea, eventually agreed to take a lower salary and link his bonus to the firm’s performance. At Germany’s Bertelsmann, one of the first moves by Gunter Thielen when he took over in August 2002 was to abolish the office of the chairman and the post of chief operating officer. Both had been created by predecessor Thomas Middelhoff in an attempt to consolidate power at the firm. “Thielen came in and said, ‘Decentralize,'” says a senior Bertelsmann official. “More than anything, that restored calm.” Thielen, a 24-year company veteran who also runs a small sausage factory in Saarland and a dental lab on the side, won a power struggle with the chairman of the company’s supervisory board over plans to merge Bertelsmann’s music division and Sony — and in January had his contract extended by two years, to August 2007.

There’s no guarantee, of course, that any or all of these steps will shelter a new CEO from investor wrath or ensure long-term success. Rakesh Khurana, an assistant professor at Harvard Business School, finds it troubling that even after boards fire a CEO, few engage in self-criticism. “It’s not clear whether we’ll be witnessing any dramatic reconsideration of what went wrong,” says Khurana, author of an acclaimed book criticizing the phenomenon of celebrity CEOs, Searching for a Corporate Savior.

By the same token, the management skills needed to restore a crisis-ridden company to profitability may not be the same as those required for years of sustainable growth. “CEOs don’t singlehandedly turn around a large organization,” says Paul Coombes, a director of corporate governance at McKinsey & Co. “The problem is that strategies change at a fast rate and need to keep adapting quickly, but organizational changes of a lasting sort require a great deal of patience.” That may be. But at least the new boys know where they stand: if they mess up, they’ll be out of a job fast, just like the ones they replaced.



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