For every high-profile, high-octane example of a Michael Eisner or a Hank Greenberg being pushed aside as chief executive, there are tales like the one at K2 Inc.
The board of the Carlsbad-based sporting goods manufacturer had determined that a new chief executive was needed. The CEO at the time, Richard Rodstein, had been with K2 for 16 years so long that many considered him to be the company.
That may have been the problem.
"It was not that he had done a bad job," insisted Richard (Dick) Heckmann, who was chairman of K2's board when the decision was made to let Rodstein go. "He's a good guy and a smart guy. It was just a difference in philosophy. He may have just been there too long."
Heckmann said he took Rodstein out to dinner, and that's where he told him he would be taking over as chief executive. "Painfully, gentlemanly, he saw that the board was in favor of the change," Heckmann said. A week later, Rodstein moved out of his office and onto his second career. He now serves on the board of several companies in the L.A. area. (Rodstein did not return calls last week.)
It's not easy being on top anymore. Between the exacting requirements of the Sarbanes-Oxley regulations and increasingly impatient shareholders and gadflies, CEOs of all sized companies are being probed and pulled apart in ways unheard of just a few years ago.
"Sometimes you forget that senior leadership sets the whole tone," said Alfred Osborne, associate dean of the Harold Price Center for Entrepreneurial Studies at UCLA, who is also a K2 director. "It can be what frees everybody or what shackles everybody. I can't emphasize enough the importance of having the right leader."
'You will destroy this company!'
In the case of an imperial CEO, that's easier said than done.
Greenberg built American International Group Inc. into a worldwide insurance giant easily swallowing up sizable companies such as L.A.'s SunAmerica and International Lease Finance so perhaps it was inevitable that he would consider himself and the company one in the same. As he was about to be ousted, various news reports had him shouting by phone to the AIG directors: "If you get rid of me, you will destroy this company!"
Eisner also came to believe that he was the company, epitomized by his micro-managing style and a board made up largely of friends and family that let him get away with pettiness for years. Only after he forced out directors Stanley Gold and Roy Disney did all the hubris and intimidation get back to him (not helped at the time by a faltering stock price).
"CEOs are much more vulnerable than they were in the past and if they've behaved badly, they are in greater danger," said Barbara Kellerman, research director of the Center for Public Leadership at Harvard's Kennedy School of Government. "One has to be particularly attentive to CEOs who thought they were impervious to all kinds of criticism particularly those who stay on the job too long."
One obvious reason for the backlash is financial. Directors, as never before, find themselves personally liable for whatever wrongdoing may have taken place by the chief executive they voted in. In a WorldCom settlement earlier this year, 10 former directors agreed to pay $18 million of their own money in a $54 million settlement with investors. The direct payments equal about one-fifth of each one's personal net worth.
"For the first time you have board members paying out of their own pockets," Kellerman said. "Of course, boards are notoriously to blame for not paying close attention. Now they are fiscally liable, let alone humiliated and embarrassed, if a CEO goes bad on their watch."
Some company boards are even required to meet without management present, a prospect that could make any CEO imperial or otherwise feel a bit unsettled.
Sidney Finkelstein, a management professor at Dartmouth College's Tuck School of Business, believes the Sarbanes-Oxley Act set the stage for CEOs to be put under increased scrutiny, although he's not sure how widespread Corporate America's newfound religion has become.
"I'm sure there are plenty of other companies with longtime CEOs that continue to glide just beneath the radar and, if they have boards of directors that are clubby, we wouldn't expect to see much change there," said Finkelstein, author of "Why Smart Executives Fail." "Still, change comes even to outposts of business at some point."
After studying the traits of CEOs over the past six years, Finkelstein has identified seven habits that make them "spectacularly unsuccessful." They include trying to dominate a business environment, identifying too closely with the company, having all the answers, eliminating dissenters, obsessing over a company's image, underestimating obstacles, and relying too heavily on what has worked in the past.
CEO running high
Jill Barad, the former CEO of El Segundo-based Mattel Inc., had remarkable success promoting Barbie dolls, but she made a disastrous foray into educational software that crippled the company and ultimately led to her ouster.
Kellerman brands Barad an incompetent leader because she didn't have the skills to be a CEO, failed to develop a group of dependable allies before taking the top job, and had a difficult personality that resulted in run-ins and the creation of enemies.
In her book, Kellerman offers examples of rigid leadership (Viacom Inc. Chairman Sumner Redstone); callous leadership (Martha Stewart) and insular leadership (Exxon Mobil Chairman Lee Raymond).
Not surprisingly, recent CEO turnover has been high. The number of chief executives who left their jobs jumped 25 percent in March from a year earlier, according to the outplacement firm Challenger Gray & Christmas. That matches the record high set in October 2000 and marks the fifth consecutive month of increased CEO turnover.
In the first quarter of 2005, 324 CEOs left their companies, an 87 percent jump from a year earlier. "Many of those who resigned were actually forced out by directors in very public boardroom brawls," said John Challenger, chief executive of Challenger, Gray & Christmas. "Never before have we seen so many corporate leaders publicly fighting for their positions and visions against boards, shareholders and analysts who are fighting back with unprecedented vigor. It's not that such battles never occurred in the past. It's that they took place behind closed doors."
But Steve Weinberg, a journalism professor at the University of Columbia-Missouri and the author of a biography of Occidental Petroleum Corp. founder Armand Hammer, said the penchant among executives for spending corporate money remains rampant today.
"I think autocratic natures tend to come out in major ways when a person ends up running a gigantic corporation and has a lot of resources at their disposal," Weinberg said. "Hammer mostly was spending taxpayer money and corporate money not his own money but he made it seem like his own."
For all the pressures, there still are plenty of local chief executives who retain enormous power with their boards, including Univision Communication Inc.'s Jerrold Perenchio, KB Home's Bruce Karatz and Occidental's Ray Irani.
"Anybody who thinks their company's success is primarily attributable to themselves has a serious problem that can only lead to excess and trouble," said Karatz, who downplayed the presence of "imperial CEOs" in U.S. companies.
"Imperial CEOs are out because we've seen some of them do outrageous things," he said. "There are people who run companies who really do believe they've been fortunate enough to surround themselves with the right people."
Karatz is quick to point out that even executives such as Eli Broad, his former boss who spun off KB Home and sold SunAmerica to AIG, have become successful in part by listening to others.
"As strong as Eli is, as determined as he is to get his way, you have to give him credit for recognizing the moment when he decided it was time for me to be chairman and he faded into the sunset," Karatz said.
Yet Karatz is opposed to a mandatory retirement age he thinks people are living longer and taking better care of themselves and to splitting up the titles of chairman, president and chief executive. These are two issues likely to take center stage in the ongoing debate on CEO performance.
Of the 20 largest publicly traded companies in Los Angeles, ranked by market capitalization, only two Public Storage Inc. and Hilton Hotels Corp. have divided the chairman and chief executive positions.
Public Storage is the only company in the top 20 with three top officers.
Harvey Lenkin, who is president and chief operating officer, said splitting job titles depends largely on the circumstances and history of each company. Public Storage Chairman R. Wayne Hughes owns 36 percent of the outstanding shares.
"He can be whatever he wants to be," Lenkin said with a laugh. "But I think it's good to have the checks and balances at a big company. There's so much to do and no one person can know it all."
Lenkin said he's not surprised that executives are under more scrutiny, given the scandals of the past few years. He also thinks the media has played a prominent role in scrutinizing even demonizing powerful executives.
"CEOs are in the hot seat right now because some have been found doing what they shouldn't be doing, but I think it has more to do with individual circumstances than anything else," he said. "Still, scrutiny is always a good thing. These are public companies. Public shareholders need to have the confidence that management is doing appropriate things, so management must live in a fish bowl."
Certainly, there have been many embarrassments whether it's Dennis Kozlowski being accused of cheating Tyco International Ltd. out of millions by forgiving personal loans taken from the company, or Boeing Co.'s chief executive Harry Stonecipher being fired for having an affair with a company executive, or Bernard Ebbers' failed attempt to convince a federal jury that he wasn't aware of financial irregularities at WorldCom.
"When something goes wrong today, you see it on television 24 hours-a-day," said Kellerman, who believes technology has played a key role in the downfall of many corporate executives.
"The change wrought by information technology has made a huge difference in the culture," she said. "Now shareholders, the lay public and the press are quite emboldened to go after these people in ways they didn't a few years ago."
Stan Crum, a retired vice president and controller of Hughes Aircraft, believes that the Sarbanes-Oxley Act of 2002 particularly the separation of the audit and consulting functions of accounting firms has been largely responsible for reining in the outlandish behavior of many CEOs.
"The personality of every company takes on the personality of the CEO," he said. "So if you look at someone like Dennis Kozlowski at Tyco, who was an imperial ruler, it was possible for him to do some of this stuff with his accountants before the regulations were strengthened."
But even lower-profile companies have been under watch.
K2's board had been worried about the company's performance for about a year. Osborne called it an evolving concern. "Things don't happen overnight, but the awareness grew," he said. "At some point you realize that the plan management is proposing isn't what you're looking for."
The manufacturer of skis, snowboards and skates seemed to be stagnating in a moving sporting goods market. Though it was diversified into fishing and boating gear, the company as a whole was not poised for growth at least not to the boards' liking.
Directors were hungry for a growth strategy.
"You used to take what the CEO said for granted," Heckmann said. "Now, people tend to dig a lot deeper and ask a lot more questions."
Though a slow economy was partly to blame for the financial troubles, Osborne pointed to a management that was slow to react to a changing market: The company was late in moving its bicycle manufacturing to China, and ramped up investment in scooter manufacturing just as the trend began to fade.
Heckmann said part of the problem was that Rodstein had been at the company for too long. "Everybody gets used to you if you know a player can't go to their right, you play them on the left side," he said, explaining that employees get lulled into complacency.
Osborne said there were a lot of conversations among directors between meetings that year, and some frank discussions within the compensation committee, where a performance review is part of the discussion.
At a board meeting in the summer of 2001, former Vice President Dan Quayle, who is still a board member, asked a question that crystallized the board's decision, according to Heckmann.
"He asked: 'If we were going to hire a CEO, would this be the CEO that we'd hire?'" Heckmann recalled. "'And if the answer is no, then you have to do something about it.'"
Once that realization is made, said Osborne, "things tend to happen rather quickly."
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