The Wall Street Journal of December 15, 2009 reported that talks between the B of A and Robert Kelly as the potential replacement for Kenneth Lewis as CEO had ended forcing the Board to reconsider two internal contenders.
The reason cited was pay and it was indicated that Mr. Kelly had sought a pay package of $20 million. But, that is not the only item of concern raised article. The fact that the Board appeared to prefer an outsider to internal candidates is an issue that is worth discussion.
Seeking a $20 million pay package suggests that CEO candidates and CEOâ€™s may have a very overblown view of their worth to a company. They may be copying professional athletes who receive giant pay packages before hitting a home run, scoring a touchdown or sinking a three pointer. But, the athletes are a different story. Their presence on a team is viewed as making a material contribution to the success of the team thus giving rise to ticket sales and TV revenues that more than offset the pay. But, is there any evidence that the hiring of a CEO provides a benefit to the stockholders adequate to offset their extraordinary pay packages? To the extent that there is a shareholder benefit, it would not usually be reflected in the performance this season or next because an operating company has, in place, all of the operating plans for at least the next two years. An operating company is like a battleship in that it takes a long time to turn it around. Accordingly, the contribution of a new CRO, if any, will most likely be reflected in long term future performance rather than immediately. So, it would be reasonable to reward that performance with stock options, with exercise dates far into the future, which would have no value unless the stock price increased over time, in which case the shareholders would win too. But, up front guarantees of outrageous compensation packages make no sense. If a CEO is confident of his or her ability they should be willing to take a risk along with the shareholders and other employees. Insisting in an up-front guaranty is asking to win whether or not the shareholders win.
The other aspect of the search for a CEO is the question of why the Board decided to go outside of the Bank. Kenneth Lewis did not run the Bank alone. He was not a â€œone man bandâ€ and must have had a highly trained team of executives serving under him. It is impossible to imagine that there werenâ€™t several of those executives qualified to take over as CEO. Members of the executive team must be assumed to have known more about the Bankâ€™s business than any outsider could possibly know. Maybe the Board felt that whatever Ken Lewis was criticized for must have tainted all internal candidates. If that is so, then they would have overlooked the fact that the second, third, fourth or 64th in command (the executive team) does not take strong positions against the â€œchiefâ€ and hold on to their positions for long. The Board and not the â€œteamâ€ most probably bear responsibility for the questionable decisions of Ken Lewis due to a lack of adequate oversight on their part. Going outside to find a CEO, in an institution as large as B of A sends the wrong message to the â€œteamâ€ remaining behind. It says that no matter how hard you worked, no matter how qualified you are you are not going to get the top job. Is that a good message for employees to hear? Fortunately, the inability to attract Mr. Kelly or other outsiders has resulted in turning the search focus inward. One must wonder how much shareholder money was spent by the Board on the executive search when there were qualified candidates inside.