The Directors Chair

36 Listed / /Spring 2012

www.listedmag.com

The Directors Chair

The board as wingman

In The Directors Chair with David W. Anderson: Robert L. Crandall, chair of Celestica Inc. and former CEO and chair of AMR Corp./American Airlines, shares some strong thoughts on CEOs and boards working closer together
Photography by Alex vs. Alex

Robert Crandall is best known globally for being the CEO and chair of AMR Corp. and American Airlines Inc. through much of the 1980s and 90s. He played a central role in making American the leading innovator in the industry and directed its rise from domestic carrier to major international airline. But Crandall has also had a lengthy Canadian presence, sitting on the board of Celestica since 1999, becoming chair in 2004. Here, in an exclusive interview with Listed contributing editor and governance expert David W. Anderson, Crandall outlines three primary criticisms of corporate governance today. In particular, he draws on his personal experience to challenge the conventional nonsense that says company operations are none of a directors business. He says its up to CEOs to do more to educate their boards. e more directors know, Crandall says, the more a CEO benets from their advice.

Robert L. Crandall
Primary role Chair, Celestica Inc. (retiring spring 2012) Additional roles and organizations Director, GoGo Inc. Former chair and CEO AMR Corp./American Airlines Inc. Former director Halliburton; Anixter; i2 Technologies Inc.; American Express Co.; US West Inc./MediaOne; Clear Channel Communications Inc. Education BA, University of Rhode Island; MBA, Wharton School Honours kHoratio Alger Award (1997) kTony Jannus Award for outstanding leadership in the commercial aviation industry (2001) kL. Welch Pogue Award for Lifetime Achievement in Aviation (2004) k Wright Brothers Memorial (2004) kInducted into the Business Travel Hall of Fame (2011) Current age 76 Years of board service 30

www.listedmag.com

Spring 2012\ Listed \

37

The Directors Chair

U.S. business history. You ran AMR/American Airlines for 13 years, overseeing its remarkable expansion and success in the 1980s and 90s. Since then, youve served as a director of several public and private companies, including as chair of Celestica in Canada. How has your experience as a CEO made you a better director? Robert L. Crandall Being a successful CEO shapes your view of how other CEOs ought to manage. e experience of running a company has provided me a template against which to measure the performance of management. ats vital, because the board is there to judge managements performance. Performance is the bottom line and it must be judged in both absolute and comparative terms. ere are many managements who succeed in absolute terms but which fall short when measured against the accomplishments of their competitors.
David W. Anderson What specifically do you look for in a CEOs Robert L. Crandall My expectation is that the CEO will apply high David W. Anderson You are counted among the legendary leaders in David W. Anderson Youve been a consistently erce critic of boards from a vantage point few others have. Yet much has changed since Enron made governance front-page news. How do you critique the state of corporate governance today? Robert L. Crandall Ill agree that boards are doing better than a decade ago, but its a low bar. Sure, there have been improvements in how boards function, but there is more window dressing than substance. I have three main criticisms, which if addressed, might begin to bring real change. First, boards arent really holding management suciently accountable. Secondly, boards o en arent suciently knowledgeable of the business to play a fully engaged role. And thirdly, boards are not functioning well from a compensation perspective. David W. Anderson Lets examine those points in turn. Wheres the aw in management accountability to boards? Robert L. Crandall e greatest failure of boards is that they dont focus suciently on performance metrics. How many boards really know about the quality of their products and the satisfaction of customers relative to competitors? Boards dont explore these questions in sucient detail. Too o en, a singular focus on nancial metrics lulls directors into complacency and keeps them away from the operational metrics where early warning ags may exist. e habit of using nancial reports as the only measure of success has led to spectacular failures. Directors need to ask questions about how the company is operating in a more demanding way than they do now. is means broadening their interest beyond nancial metrics to lots more operational metrics. I mean, for example, that it should have been fully obvious to GMs board, for many years prior to the companys bankruptcy, that GM was doing all the wrong thingsbuilding the wrong cars, paying above market wages and benets, and falling further and further behind others on quality measures. David W. Anderson Are there any particular performance metrics boards should look for to better understand the core of the business the operations? Robert L. Crandall Boards need to insist on performance metrics that are relevant to the nature of the business and on comparing those performance metrics to those of competitors. Until boards raise detailed performance related questions, they cant truly measure managements performance. And that means, I think, that boards need lots more information than managements typically provide. Boards have the ability to cause management to gather and present this information to the board, but seem inclined to use it only when there is some sort of crisis. Boards have to move beyond that mindset, and insist on in-depth, detailed operating information on a continuing basis. David W. Anderson Would developing an independent research capability address your second criticism of how boards currently governnamely, that boards lack sucient knowledge of the business to be fully eective? Robert L. Crandall An independent board research capability probably isnt the answer. Lets understand the issue here: a board needs to have an in-depth understanding of the businessfrom competitive pressures to technological challengesto participate fully in a dialogue with management on strategic planning and performance metrics. If the board doesnt know enough, it simply cant understand the implications of the data and form its own judgment. e only way a board will have sucient knowledge of the business is if the CEO fully understands the issuesmany do notand takes the time to educate the board about what those issues are and how the company is dealing with them. e
www.listedmag.com

performance to make your judgment?

standards to the work he or she expects from subordinates and the company as a whole, and will expect the board to apply similarly high standards to the CEOs performance. In particular, I expect the CEO to have a comprehensive knowledge of the companys aairs and to answer most questions directors pose without needing to do much follow-up research and without needing to call o en on subordinates. If the CEO doesnt know the answers, I get concerned because it means he or she is not asking the same questions and isnt deep enough into day-to-day operations. Of course, its important for the CEO to expose the board to his or her subordinates and I see the competence of those subordinates as a reection on the CEO, providing another means of assessment.

How many boards really know about the quality of their products and the satisfaction of customers relative to competitors? Boards dont explore these questions in sucient detail
David W. Anderson Are there personal characteristics of a CEO that provide you with insight into performance, or by which you gauge a CEOs credibility? Robert L. Crandall I want to see condence, crisp and well-reasoned decision-making and an ability to choose leaders. I expect the CEO to be personally involved in all substantive corporate decisions. If the CEO relies too much on subordinates, I think it shows a lack of condence and o en reects an inappropriate degree of delegation. e board is paying the CEO to run the place. David W. Anderson If you think CEOs are at risk of over-delegating,

do you think the same of boards? Do boards give CEOs too much leeway? Robert L. Crandall Yes, I think CEOs tend to over-delegate and as a generality, expect too much delegation from their boards. But boards let them get away with it. As a result, boards are at the mercy of their CEOs, who o en share lots less information than they should.
38 Listed / /Spring 2012

The Directors Chair

board can encourage this, but the CEO has to make it happen. If management wants a meaningful dialogue with the board, the CEO will take time to teach the board the business. In a sense, running an airline was a great advantage; as our board members rode around on the planes, the employees told directors exactly what they thought about management and about how the airline was doing relative to its competitors. at openness encouraged directors to be more educated and management to be more transparent because we couldnt hide the real issues.
David W. Anderson Are you encouraging directors to take the initiative Robert L. Crandall Yes. The mindset holding back most boards is

to talk to employees directly?

leaders in your condemnation of current pay practicesand rarer still for advocating much higher marginal tax rates on highincome earners. Why do you feel so passionately about pay? Robert L. Crandall A lot of CEO compensation granted by boards is clearly excessive. Go back 30 years and youll nd a typical CEO made 30-40 times average compensation at the company, not 300 times as we see today. Are CEOs that much better now? Is the market for CEOs that much tighter? No. Simply, boards are not doing a good job of controlling the rate of pay for executives and are far too timid about acknowledging that losing a CEO who wants to be paid more probably isnt the end of the world.

the notion that running the business is separate from governing the management process and that operations are none of the directors business. What could be more their business than how the company is run? is illustrates the constant tension directors face: needing to know whats going on in order to do their job but being told not to intrude on managements turf by asking irritating questions. Boards lose both ways by being criticized for being too involved or a er the fact for not knowing enough.
David W. Anderson To many directors and CEOs, what youre advocat-

Directors who ask pointed questions are o en accused of micro-managing when they are actually seeking to take responsibility for understanding the events they are asked to evaluate
has the considerable change in executive pay youve noted had other implications that concern you? Robert L. Crandall Two other consequences of excessive executive pay bother me. e rst is the increasing level of societal income inequality. Today, we seem to be living in a world that is shaped by the idea the people at the top are entitled to an outsized share of the rewards. e people who actually make the company work are, as a consequence, getting a smaller share of the pie. is is not right by any standard of fairness or morality. When you take away fairness, you undermine the work ethic and the belief in potential upward mobility that makes a society work. Heres the reality: my phone company is a good company not because of the CEO but because of the guy who comes to x the line at my home. Its the same in the airline business. e frontline worker is key, but you wouldnt know it today. Secondly, at the management level, excessive CEO pay can have a debilitating impact by understating the value of the corporate team. Yes, the CEO makes a real dierence by setting the tone, needs to be an eective leader and is hopefully the most competent and creative member of the senior team. But there are lots of competent people in management. Paying the CEO multiples of what his or her subordinates earn has an adverse aect on peoples ability to function as a team. When you come to CEO succession, everyone knows that whoever prevails in the contest to lead will receive several times the compensation earned by others. is makes the competition to become the leader more intense than is healthy, and makes it hard to keep other valued executives. Overall, these disparities and inequalities undermine both eective management and eective governance. David W. Anderson, MBA, PhD, ICD.D is president of The Anderson Governance Group in Toronto, an independent advisory rm dedicated to assisting boards and management teams enhance leadership performance. He advises directors, executives, investors and regulators based on his international research and practice. E-mail: david.anderson@taggra.com. Web: www.taggra.com.
Spring 2012\ Listed \ 39

ing will sound like a violation of the cardinal rule of governance that boards are told to follow: nose in, ngers out. Robert L. Crandall Unhappily, that nonsense is widely accepted as a truism. e problem is that boards dont see themselves as performance critics and too o en feel they are supposed to be cheerleaders for management. Directors who ask pointed questions are o en accused of micro-managing when they are actually seeking to take responsibility for understanding the events they are asked to evaluate. Im amused at how o en, a er things go wrong, the board and the CEO replace people further down in the organization. ats not taking responsibility for being the boss. would you advise a CEO to work with a board seeking greater engagementor simply to get the most value from directors? Robert L. Crandall My advice is simple: educate your board comprehensively so that the board knows everything you know. e best way to take advantage of a boards experience is to give the board exposure to managements analysis and the competing opinions before major decisions are made. In large companies in particular, the analytical work done to support decisions tends to be extensive and professional. Being immersed in these data allows the board to bring its expertise to bear. What o en happens, though, is the board gets presented with just a summary of the analysis and managements conclusion, so theres little opportunity to add value. Rather than keeping the data and applying your own judgment in isolation of the board, benet from its experience by allowing the boards judgment to be brought to bear on the same data. is is a rare experience for any board. e CEO may nd his or her conclusions dier from those of the board, but a condent CEO wouldnt be concerned and a competent CEO wont nd that happens very o en. A condent and competent CEO ought to take full advantage of a board by educating it extensively. If the board doesnt comprehend key issues in the business, its view on strategy wont be relevant whatever their experience.
David W. Anderson e third major criticism of governance you identied was excessive executive pay. Youre a rarity among business
www.listedmag.com

David W. Anderson Beyond this inecient use of shareholder money,

David W. Anderson Looking at this from the CEO perspective, how