Monday, November 05, 2007

CEO Executions Dangerous Precedent

Merrill (MER) blew off O'Neil. Citigroup (C) tossed out Chuck Prince. Who is next? What is next? While they have created a lot of copy for the media the executions themselves are creating some dangerous precedents. Wall Street has been blindly following some fancy computer models that suggested certain types of risks are in-correlated. The models were wrong. Now Wall Street is blindly following the model of executing supposedly offending CEO's because of gross mistakes.

It's easy to go to a lynching. You know find a rope and a strong tree and then hang someone. The lynch mob mentality never came up with an adequate workable plan for the future. Its all rear view mirror mentality.

Here is what the lynchings may do in the future.

1. Will boards continue to isolate themselves from the CEO so they can hang them if needed. Sort of like a mission impossible scenario where the secretary of state will disavow all knowledge. If so, CEO compensation will continue to have a high component for suicide risk.

2. Will CEO's attempt to fiddle the books to avoid reality and avoid the wrath of boards that will want blood payments for mistakes?

Boards are elected to represent shareholder interests. If CEO's screw up with the approval of the board we have a wholesale governance problem. CEO terminations should be reserved for individual performance problems.

Shareholders need to consider how to complain when the CEO appears to have difficulty?