Is shareholder democracy an oxymoron?

Do you want to unseat a CEO? On the surface, the two best reasons for doing so are stock shock and cooked books. But thanks to constraints on shareholders’ power, they can only toss the CEO through very specific tactics.

Recent events illustrate the point. Carly Fiorina at HP and Michael Eisner at Disney are among those deposed due to weak stock market performance. Phillip Purcell appears to be at risk due to Morgan Stanley’s weak stock. And Hank Greenberg at AIG lost his job on the back of an expanding accounting scandal as did executives at WorldCom, Enron and others.

If stock shock was the real reason behind these CEO ejections, however, then surely Wal-Mart’s Lee Scott, Cisco’s John Chambers, and Microsoft’s Steve Ballmer would also be out of their jobs. After all, Wal-Mart stock is down 24% since Scott took over as CEO in January 2000, Cisco’s stock is off 78% from its all-time high in January 2000 and Microsoft stock has tumbled 60% since Ballmer took the top spot from Bill Gates in January 2000. Granted, it is easy to blame the bursting of the tech bubble for this stock drop.

But these companies have all done well financially under their CEOs. Wal-Mart’s 2004 revenues of $285 billion are up 49% and its net income of $10 billion climbed 67% since 2000. Cisco’s 2004 revenues of $22 billion are up 16% and its net income of $5 billion climbed 85% since 2000. And Microsoft’s 2004 revenues of $37 billion are up 61% while its net income of $8 billion has declined 13% since 1999. This financial performance does not seem to explain these companies’ loss in stock market value.

But it certainly begs the question of why some CEOs get a pass for presiding over huge losses in stock market value and others get fired for them.

If you want to depose your company’s CEO, the Disney, HP, and Morgan Stanley cases suggest three tactics:

• Exploit the conflict between heirs and new blood. In some cases, the founders’ heirs lack the skills needed to run the business but they still hold much of the stock. At Disney, Walt’s nephew Roy Disney remained on the board and got involved in animation operations. While he helped bring in Eisner in 1984, he also helped push him out. At HP, the co-founder’s son Walter Hewlett’s resistance to Carly Fiorina’s Compaq acquisition was futile, but Hewlett was ultimately proved right. And the eight grumpy old men of Morgan Stanley leading the effort to dethrone Purcell represent the old guard that could not keep Morgan Stanley independent -- and sold out to Purcell’s Dean Witter;
• Tap into anger at the CEO’s autocratic management style. In the interests of shaking things up and asserting control, the ousted CEOs incurred substantial ill will among employees and heirs. At Disney, Eisner angered scores of executives in many different parts of the company due to his unwillingness to give others credit, his tight-fisted ness, and his decisions to pass on projects, such as Survivor and American Idol, which became huge successes. Fiorina succeeded in annoying HP rank and file with her use of perks and her scapegoating of lower level executives for problems she caused. And at Morgan Stanley, the departure of talented executives in the wake of Purcell’s aloof, hardheaded management style contributed to the anger of the eight grumpy old men.
• Use guerilla dissidence to overcome the power of a CEO-stacked board. Corporations hire and fire CEOs in a unique mixture of shareholder democracy and autocracy. At Disney, large shareholders on the board were able to oust its CEO in 1984 and bring in Eisner. But Eisner stacked the board with supporters and fired dissident board members in order to keep his job. Ultimately, the two dissident directors who brought Eisner in were able to outmaneuver him. But it remains to be seen whether Eisner will retain control over his designated successor, Bob Iger. At HP, Fiorina quickly lost control of the board as Silicon Valley veteran Tom Perkins, abetted by HP veteran Richard Hackborn, was able to bring to a head the board’s dissatisfaction with Fiorina’s performance – forcing her resignation. And at Morgan Stanley, it remains unclear whether board members loyal to Purcell, including the McKinsey Mafia Four, will be able to overcome the power of the eight grumpy old men’s 11 million shares and the negative impact of continued hemorrhaging of Morgan Stanley’s high level talent.

As the cases of Wal-Mart, Cisco Systems, and Microsoft demonstrate, shareholder democracy is somewhat of an oxymoron.

These three companies have put in strong financial performance despite losing stock market altitude. Since it is hard to demonstrate a link between financial performance and stock price, it remains to be seen whether HP, Disney, and potentially Morgan Stanley shareholders ultimately benefit from replacing their CEOs.

What is clearer is that they’ve stumbled their way towards exerting some corporate influence.