Power changers

CEOs no longer have the monopoly on power they once had. Gradually their hold has eroded as authority has shifted into the hands of owners.

“There’s no question that CEOs of public companies in the US have less unrestricted, unilateral power than they did 15 years ago”
-Mark Nadler

CEOs seem to be having a hard time of late. Not only are salaries being questioned, it now seems some are losing their grip on power. Many are seeing their authority diminishing as shareholders make a stand and seek to become more involved with the decision-making process. Only nine percent of Fortune 500 companies forcibly removed their CEOs in the early 1990s, but the trend is growing and with more power slipping from the hands of CEOs into those of boards and shareholders, none can afford to be complacent.

“There’s no question that CEOs of public companies in the US have less unrestricted, unilateral power than they did 15 years ago,” says Mark Nadler, Partner at Mercer Delta Consulting. “Boards of directors have more legal authority and societal support than ever before to aggressively pursue their role as stewards of shareholders’ interests.” Indeed, the structure of the board has evolved into a much more sophisticated entity. In addition, there has also been a transformation in shareholder voting, resulting in a more even distribution of power. The result is that there is no longer such a monopoly on power by a minority. “Increased sophistication and activism combined with a declining view of the paternalism of management has fueled this shift,” agrees Professor Charles Elson, Chair of Corporate Governance and Director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

Giving shareholders more power may eventually mean that they will have a bigger say when it comes to issues such as CEO pay, an issue that has stirred much controversy in the media of late. “Soon shareholders may have more input in the decision-making process,” acknowledges Douglas Branson, Chair in Business Law at the University of Pittsburgh. “If we adopt proposals floating around for shareholder nomination of candidates for director, and if we adopt proposals similar to those in Australia and England (where shareholders cast advisory votes each year on senior managers’ pay packages) shareholders will have more power.”

More input in this way can be beneficial for a company, encouraging management diligence and a much more open and transparent climate within the organization. “The changes are very positive because they have created a much greater culture of accountability within the organization, which in the long-term creates a better result,” explains Elson. “If people feel accountable they tend to act in a much more effective fashion. What this has done is forced CEOs to become much more accountable to their boards and the boards to be much more accountable to the investors.”

Despite the obvious benefits that a more democratic system can have, a different view is that internal power shifts can also have a negative effect and rob the organization of some vital direction. “Many are questioning whether a growing and disproportionate emphasis on legal compliance and fear of shareholder litigation may be discouraging the kind of bold, entrepreneurial leadership that so many companies badly need,” warns Nadler. Another downside could be the emergence of internal power struggles. “By and large, shareholders are apathetic, and rationally so,” says Branson. “Giving shareholders more power may result in substitution of the tyranny of one minority (senior managers and directors) to the tyranny of another minority.”

In the majority of cases, shareholders take a backseat when it comes to the daily running of operations and leave this entirely to the discretion of the CEO. After all, shareholders cannot themselves run the day-to-day operations for the company. “When shareholders begin to micro-manage the day-to-day organization then this will be highly problematic,” warns Elson. “The shareholders should insist they elect a board of directors who reflect the views of the owners. However, they have to give the board and managers significant leeway. The board has to give the management leeway in its day-to-day running of the company. CEOs run the company, whilst the board oversees management and the shareholders are there to insist that the board acts in the interest of investors.”

Of course, the relationship between the CEO and board of directors at every company is different. However, in many companies it is clear there has been a more balanced distribution of influence –which, in most cases, is likely to result in greater accountability and a more open environment. In future, what is a certainty is that CEOs will have to ensure they are sensitive not only to their own concerns but ultimately, and most importantly, to those of their board and investors.