The Wall Street Journal-20080204-Theory - Practice- Should Companies Pick CEOs From Their Boards-- Independent Directors Often Have Experience- But Perspective Is Key
Return to: The_Wall_Street_Journal-20080204
Theory & Practice: Should Companies Pick CEOs From Their Boards?; Independent Directors Often Have Experience, But Perspective Is Key
Full Text (807 words)In the latest version of management musical chairs, outside directors are moving inside as chief executive officers.
More than a dozen U.S. companies have installed independent board members as permanent CEOs since late 2004. They include Boeing Co., Delta Air Lines Inc., Bristol-Myers Squibb Co., Sun-Times Media Group Inc. and Owens-Illinois Inc. The trend will accelerate, predicts Mark D. Ketchum, a Newell Rubbermaid Inc. director who was named CEO in 2005, initially on an interim basis.
Several factors are spurring such appointments, recruiters and management consultants say. Boards are quicker to fire poorly performing CEOs, often before potential internal successors are ready for the job. Many of these companies have deep-seated problems, making it harder to recruit outsiders. And increasingly, there's a deep pool of outside executives in the boardroom.
Mr. Ketchum was elected to Newell Rubbermaid's board in December 2004, a month after the then-55-year-old executive retired from a long career with Procter & Gamble Co. He says board service helped his transition to CEO of the Atlanta consumer-products maker because of his ties with fellow directors and insights into operations.
Some investors disagree. They contend that a chief chosen from the board signals cronyism and weak succession planning. A director's comfort with a colleague obscures "a clear view of the individual's suitability to be a successful CEO," says Richard Breeden, an activist investor and former chairman of the Securities and Exchange Commission.
Mr. Breeden cites Zale Corp., a tarnished jewelry chain where he owns a stake of more than 18% and snared a board seat last month. In 2006, Zale named Mary "Betsy" Burton, an outside director, its CEO. She stepped down in December, shortly after the retailer reported a wider loss for the quarter ended Oct. 31. Ms. Burton lacked "the relevant experience for the job," Mr. Breeden says.
Ms. Burton disagrees, noting that she previously was interim or permanent CEO of seven companies and led retail turnarounds.
Mr. Ketchum's experience at Newell Rubbermaid addresses the benefits and risks of tapping an independent director as CEO. Chairman William Marohn says Mr. Ketchum impressed him as a potential chief before Mr. Ketchum joined the board because he had run a $12 billion P&G unit, about twice the size of Newell Rubbermaid.
Mr. Marohn confirmed his hunch during the newcomer's initial board meetings. Mr. Ketchum argued that the company, whose products include Sharpie pens, Graco strollers and Irwin power tools, should tailor products more to consumers' needs than to those of retailers. "We had an opportunity to see Mark in a way we would not have seen by interviewing a candidate for a day," Mr. Marohn recalls.
In October 2005, CEO Joseph Galli quit after his turnaround plan stumbled. Mr. Ketchum agreed to be the interim CEO.
He quickly concluded that Newell faced more and bigger problems than he previously thought. Issues looked different "from the other side of the boardroom table," Mr. Ketchum says. Among other things, he thought the company needed a major "cultural change," including reducing expenses and narrowing its portfolio of brands.
By the end of 2005, Mr. Ketchum told fellow directors that he wanted the permanent CEO job. He got it in February 2006, turning former board colleagues into his new bosses.
Mr. Ketchum worried about shifting strategy too quickly. "You can't walk in and say, 'I know you agreed to this strategy before, but it's stupid,'" Mr. Ketchum said. "I would have to change their minds in a tactful way."
He met privately with veteran director Cynthia Montgomery, a Harvard business professor, to learn more about research into strategy and about her boardroom views. He sought advice from a consulting firm and an advertising agency he had used at P&G.
Directors spent six months and most of three board meetings debating whether to shift to more-consumer-focused marketing. Mr. Ketchum believes he prevailed partly because he agreed to change course again if the board decided it was necessary.
The company's Graco brand of baby products typifies the shift. Newell Rubbermaid previously worked with retailers to choose fabric colors and patterns for car seats, high chairs and other items. Today, company design teams use consumer focus groups and similar tactics to discern which fabrics and designs please shoppers. Sales growth of Graco products has accelerated, and Newell Rubbermaid last month reported a 3.1% increase in fourth-quarter net income.
Mr. Marohn hopes Mr. Ketchum will become chairman or just a director again after serving as CEO. But it isn't easy for a director-turned- CEO to regain a pure board role. Ms. Burton says Zale had planned to appoint her vice chairman after two years as CEO, but "a new CEO isn't going to want a former CEO looking over their shoulder," she says. She quit the board, too.
Mr. Ketchum concedes he probably won't remain on the board after he's no longer CEO.
