Management Turnover as Change Agent

Friday, May 9, 2008

Credit Crisis - Corporate Governance = Splitting of CEO and Chairman, Wachovia

Yesterday, Wachovia WB (NYSE) took the Chairmanship away from Kennedy Thompson the bank's CEO.  The change came shortly after the company's loss was twice as large as expected.   Thompson finds himself in real hot water.  The credit crisis continues to impact the bank. According to a story by David Mildenberg for Bloomberg,
"Ken Thompson is in a very hot seat,'' said Jaime Peters, an analyst at Morningstar Inc.  "People are starting to call for his head the same way that they were calling for Chuck Prince's at Citigroup,'' Peters said, alluding to how Citigroup Inc. replaced CEO Charles O. Prince after posting a record-fourth quarter loss. Morningstar rates Wachovia at three out of five stars, similar to a hold rating, she said.
The bank's lead independent director, Lanty Smith, assumed the chairman's position.  While the change meets with standard governance requirements, I am skeptical it will make a real difference in the running of the bank.   Smith is known as a recent supporter of Thompson. According to story by Rick Rothacker in the Charlotte Observer,
The change elevates a director who has stood behind Thompson in recent weeks -- and who has also faced criticism himself. The shift comes at a critical time for Thompson, the bank's CEO since 2000 and a fixture on the Charlotte civic scene.

Smith has said in recent weeks that Thompson has the board's full backing. The bank said neither was available for comment Thursday. Asked whether the move signaled any change in the board's confidence in Thompson, Phillips-Brown noted that he maintains all of his duties running the company.

In his role as lead independent director, Smith assisted the chairman, approved meeting agendas, served as a liaison between independent directors and ran any meetings in which the chairman wasn't present. Now, as non-executive chairman, he will be in charge of all board matters and preside over its meetings.

Smith has served on the board since 1987, taking the lead director spot in 2000. He is also chairman and CEO of a Raleigh merchant bank. While Thompson has absorbed most of the heat during the bank's recent travails, Smith also has come under attack.
The only good news for Thompson is he is smart enough to read the tea leaves and can be expected to work hard to save himself and the bank.  The splitting of the chairmanship and CEO positions in this situation is just window dressing and should give Thompson more time to save himself.  According to a story in the Atlanta Business Journal,
Nell Minow, co-founder of The Corporate Library, a research firm specializing in corporate governance, said proposals to split the chairman and CEO roles often come up at companies that have encountered problems.

"In companies where the shareholders have lost some confidence, that is one of the go-to strategies for change," she said. "It's a way for shareholders to begin a very important conversation. It gets people's attention.
We will just have to wait and see what happens over the next few months.

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