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NewsNotables – Issue 47

Ethical Breaches Pose Dilemma for Boards: When to Fire a CEO?

The Wall Street Journal, February 16, 2006
An admission that the chief executive officer of RadioShack Corp. misrepresented his academic credentials highlights a dilemma for corporate directors in the post-Enron, Sarbanes-Oxley world: What type of ethical breach requires dumping a top executive?

After two days of sticking by David Edmondson, RadioShack directors said they will retain outside counsel to investigate the matter. The board acted on response to a statement from Edmondson in which he admitted he had “clearly misstated my academic record.”

Governance experts say revelations of ethical lapses put directors in a difficult position. Such breaches require a swift response, but expressions of doubt over a top executive’s tenure can send shares plummeting. So board responses to alleged ethical missteps often remain opaque, even in an era of supposedly greater transparency. Directors have the responsibility to carefully look into anything that might reek of malfeasance or inappropriate conduct. At the same time, the board has to have courage and not get stampeded into a decision before the facts have been examined.

Some ethical lapses that once may have been overlooked now can topple CEOs. A couple recent examples are: Last year, Boeing directors ousted former CEO Harry Stonecipher after they learned he was having an office affair with an employee and had sent inappropriate email. In 2002, the CFO of Veritas Softeware Corp. resigned after directors learned he had lied about having an MBA from Stanford University.

Comment: Directors should justifiably worry that such incidents can suggest broader problems with integrity, honesty, and judgment. If an executive isn’t truthful about his or her academic credentials, directors should be concerned about any report they receive from the executive.

RadioShack CEO Quits After Probe

The Wall Street Journal, February 21, 2006
After the probe, mentioned in the prior article, the RadioShack board accepted David Edmondson’s resignation. Leonard Roberts, RadioShack’s predecessor as CEO, said the move was necessary to restore the company’s credibility. “One of the most important things we have as a corporation is integrity and trust and we know we have to restore that back to the public,” he said.

Comment: Well said.

Fewer Chiefs Also Serving as Chairman

The New York Times, March 17, 2006
Disney did it. So did Fannie Mae, Hewlett-Packard, and Dell. Most companies in Britain split the responsibilities of chairman and CEO and now, more and more American companies are doing the same. According to executive recruiting firm Russell Reynolds Associates, 29 percent of the companies in the S & P have separated the jobs, up from 21 percent five years ago.

Some, like Disney, were forced by shareholders to separate the roles. Others, like Dell, did so to give a hard working president a promotion to chief executive. Others want to let a new chief executive grow into the job under the watchful eye of the former one, serving as chairman. Splitting the roles by itself does not ensure good governance. Chairman who were once the chief executive are hardly independent voices.

Management specialists argue that too many corporate disasters can be traced to concentrating power at the top. On the other hand, many shareholders prefer to keep the roles combined. Despite public outrage over the rich retirement package that the board of General Electric granted to John Welch, G.E.’s former chairman and chief executive, shareholders voted to let Jeffrey Immelt, who succeeded Mr. Welch, keep both titles. Many companies now have “lead” or “presiding” directors overseeing committees that deal with compensation and other sensitive areas.

Comment: Splitting the roles of CEO and chairman work for some companies and not for others. Each company should put the concept on the table and make the decision that is best for the company.

Death by Smiley Face: When Rivals Disdain Profit

Richard Siklow, New York Times, April 3, 2006
There is another breed of rival lurking online for traditional media, and it is perhaps the most vexing yet … These are new-media ventures that leave the competition scratching their heads because they don’t really aim to compete in the first place; their creators are merely taking advantage of the economics of the online medium to do something they feel good about. They would certainly like to cover their costs and maybe make a buck or two, but really, they’re not in it for the money. By purely commercial measures, they are illogical. If your name were, say, Rupert or Sumner, they would represent the kind of terror that might keep you up at night: death by smiley face.

A fascinating new entrant to the field is LaLa.com, a music-swapping site introduced last month. Bill Nguyen, the man behind several Silicon Valley start-ups, is one of LaLa’s founders. As far as Mr. Nguyen is concerned, making money is not the key. Pursuing his labor of love is enough reward in and of itself.

Maybe the lesson for media companies is to keep your friends close but to keep those friendly menaces even closer.

By Roger Eigsti
Board President,
Institute for Business, Technology, and Ethics

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