Companies don't benefit from imperial CEOs

It's been a rough few months for imperial chief executives. The credit meltdown claimed titans Stan O'Neal at Merrill Lynch and Chuck Prince at Citigroup. On Monday, Wachovia's Ken Thompson was forced to walk the plank.

One day your word is law to the quivering proles in the cubicles downstairs, the next day, you're just another unemployed American. Well, not quite.

Thompson will reportedly get $1.45 million in severance, plus $7.25 million in stock awards. The others received even more lordly parting gifts.

Which brings us back home to Washington Mutual's Kerry Killinger, who is being forced to relinquish the title of chairman, while he will continue as chief executive.

This can't be comforting considering Wachovia's Thompson was similarly whacked in early May, replaced as chairman by an independent director.

At Washington Mutual (do you, like me, gag on the too-cute-by-half "WaMu"?), the new chairman will be Stephen Frank, the lead independent director and former chairman and CEO of Southern California Edison (and caught in the middle of California's 2000 power crisis).

The thrift is also beginning a search for new independent directors.

Killinger has no lack of supporters in Seattle. One told me, after a critical column: "I think Mr. Killinger should be commended for attempting to keep Washington Mutual independent. ... He could have easily caved in to the rumored proposal by JP Morgan of $8 per share but decided to go a different route."

Hear hear. But the fact is Killinger was in charge as the company grew too fast, made a series of strategic blunders and recklessly plunged into the subprime-lending fiasco. In all this, a cozy board of directors constantly supported him.

Yet it was all bound to change when Washington Mutual was forced to grab a $7 billion lifeline from outside investors. The cozy days were done.

If Thompson is any hint, Killinger may soon be done, as well, whether he is allowed to coast into retirement or is suddenly done in by fresh revelations of trouble. Worries that the Wachovia move foreshadows a new bombshell helped drag down the Dow industrials Monday.

The best outcome: Washington Mutual permanently separates the two jobs and becomes a leader in corporate governance.

Even back in the 1980s, shareholder activists and academics urged companies to separate the jobs of chief executive and chairman, as well as to have more independent directors.

The CEO is the top manager. But the chairman of the board should represent the larger interests of shareholders. He or she ideally is an independent director and can act as a check on the chief executive.

An independent chairman, for example, might have stopped Thompson from risking Wachovia's future by acquiring mortgage lender Golden West Financial in 2006, when the signs of a housing and credit bubble were already abundant.

Yet America spent the 1990s worshipping at the altar of the imperial CEO, who held the title chairman as well, as if by divine right. CEO pay began its rise to imperial levels, no matter the company's performance.

The model here was Jack Welch at General Electric. Rubber-stamp boards became the norm. These corporate celebrities wrote books that not only promised to unlock the secret of business success, but even personal enlightenment.

Of course, it's easy to be a genius in a bull market. When scandal and corporate missteps brought on the 2001 recession, the centralized corporate-leadership model showed its worst weaknesses.

Enron, WorldCom, HealthSouth, Tyco International and others lacked independent chairmen and boards.

Congress passed reforms focused on the bookkeeping, but few companies emerged into the 2000s with independent chairmen, or even independent judgment.

The problem is all-powerful CEOs don't always act in the best interests of shareholders. This is on display with the disconnect between CEO compensation and performance.

In 2007, as the company's plight was clear, Killinger's board granted him some $13 million in stock and options, atop his annual $1 million base salary. His decision to forego a bonus hardly seems heroic as thousands are laid off, the dividend is slashed and shareholders have seen the stock plummet from nearly $45 to $9 in a year.

Nor do imperial CEOs always act for the long-term health of their companies. This was the point of last week's unsuccessful effort to split the chairman and CEO jobs at Exxon Mobil.

Dissident shareholders, including the Rockefellers, argued that the current imperial CEO refused to invest enough in alternative energy.

Exxon, of course, is awash in profits.

Facing a shareholder revolt of no small power, Washington Mutual and Wachovia have the opportunity to break the imperial model, split the jobs and bring independent judgment to the toughest calls.

What a concept.

Jon Talton is a journalist and author living in Seattle. For more than 20 years he has covered business and finance, specializing in urban economies, energy, real estate and economics and public policy. You may reach Jon Talton at jtalton@seattletimes.com