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When coming second can be a winning ticket

Times Online
The Times
May 28, 2008

When coming second can be a winning ticket

Second place has never been so rewarding, at least for those in senior jobs in multinational companies. The prospect that a few directors might get million-euro bonuses just to keep their bums on their seats, aroused unusual protest at the annual meetings of BP, Reed Elsevier, GlaxoSmithKline and Shell.

It’s not really payment for failure, the usual cry in protests over executive excess, except that it is a sort of failure at a very personal level. GSK wanted to pay a bonus of £2.5 million to Chris Vierbacher because he lost out in the competition to succeed Jean-Pierre Garnier as GSK’s chief. It was a consolation prize.

At Shell, it’s more complicated but still very much about personal pique. Three top executives, Malcolm Brinded, Linda Cook and Peter Voser, are to be paid up to €1 million (£796,000) in restricted shares if they hang around until 2011. The date is crucial, being two years after the expected retirement of Jeroen van der Veer, Shell’s chief executive. We can, therefore, assume that these individuals are not likely to get the top job. If any of them were a leading contender, there would be no need to bribe them to stick around for the biggest promotion of their careers. The Shell board is terrified that the three veterans might pack their bags just as the new chief walks in the door.

Some fund managers acknowledge privately that it is a problem for Shell and they supported the company’s bonus plan. They should look again because the underlying problem is that Shell and many other big companies have a management succession problem that runs deeper than the choice of a new chief executive.

It is inexcusable that large companies can be held to ransom by the implied threat from a few senior executives that they will quit if they don’t get the top job. It’s a new version of “my way or the highway”. It begs the question why these individuals have not groomed their own successors, a key responsibility of anyone in such a senior position. If the world’s second-largest oil company is to be regarded as a serious organisation, there ought to be at least half a dozen individuals capable of replacing the three directors thought to have itchy feet.

Top-executive mobility is a myth, as is the assumption that these jobs are high-risk and, therefore, deserve high pay. Research conducted by Booz & Company suggests that chief executives tend to stick around – the overall turnover is about 14 per cent a year, about the rate of ordinary staff turnover in a fairly sleepy industry. More surprising still is the huge job security enjoyed by chief executives. According to Booz the average rate of a chief being sacked for poor performance is 2 per cent and even among those running the bottom decile of poor-performing companies, the incidence of sacking the boss for failing was only 6 per cent.

What this means is that chiefs don’t suffer from more job insecurity than you or I. Their obsessive concern that a weak share price will cost them their job is nonsense, unless the company’s failure becomes notorious. Most chief executives are recruited from the ranks (only a fifth are outsiders, says Booz) and sit tight until retirement, or boredom, causes them to flee.

Why, then, do we need to pay senior executives so well and, more importantly, why do we lavish them with equity? There is an almost universal belief among fund managers that those in the top jobs in listed companies must be treated like investors, notwithstanding the evidence, which indicates that in large companies these men and women are just staff and not always the best staff.

They are lifers but we reward them with highly geared bonuses that pay out on relatively short-term share-price performance, as if they were private equity investors, bottom-fishers, chancers or corporate raiders. Let us be clear: the chief of a Shell, a BP, a GSK, or a Deutsche Bank is not an entrepreneur. He is at best a highly skilled administrator with professional qualifications and large experience in the nuts and bolts of running a business that we, as investors, hope will still be intact ten years from now.

If these men and women who lead our top companies were truly entrepreneurs, imaginative risk-takers driven by the main chance, they would have quit their jobs a long time ago to do something more exciting, such as setting up their own business. Instead, we are so often left with the dogged, the patient but political, the uninspired opportunists who climb the greasy pole, clinging as hard as they can, so frightened are they of falling down.

Sarkozy’s gallic gag

Nicolas Sarkozy seems to have lost his marbles, again. The French President is suggesting that we cut VAT on fuel in order to give consumers a bit of a break. Even as he spoke, the European Commission was mulling over France’s budget deficit, which suggests that his comment was a sort of French joke.

Even so, his remark points to one of the key problems in the current furore over oil prices. Few seem to have understood that dear petrol is a good thing as it will depress consumption and encourage us to buy more fuel-efficient cars and might just spur manufacturers to make better cars.

What the President is proposing is as good as a subsidy for us to consume more oil than we can afford. There are countries, such as India, China and most of the Gulf states, that subsidise petrol and their rampant extravagance is a big cause of our energy problems. and its also non-profit sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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