Why Wall Street Should Be More Like the NFL

Friday, January 2, 2009

By: Matt Egan

If Rick Wagoner had been strolling the sidelines as the head coach of the Detroit Lions for the past eight years instead of presiding over General Motors (GM: 4.11, 0.18, 4.58%), how long would it have taken before losing season after losing season resulted in an eventual pink slip?

While fans of the National Football League’s first ever 0-16 team (see: the 2008 Lions) and other disappointing franchises have the luxury of starting the 2009 with a new chief executive, most investors aren’t as fortunate despite equally dismal performances from their corporations.

Why can’t Corporate America adopt the sports world’s low tolerance for losing by handing out pink slips before stock meltdowns, billion-dollar bailouts and near-death experiences?

“It would be wonderful, but it’s not quite that simple,” said Jeffrey Little, author of Understanding Wall Street, citing corporate governance structure.

“In sports, when there is a poor performance, you can’t fire the players. They’re the ones who have the golden parachutes, not the coaches,” said Stephen Greyser, a sports marketing professor at Harvard Business School. “But one can fire the coaches, who represent the public symbol of the team and thus always remain a candidate for the guillotine.”

Within hours of the close of the 2008 NFL season, four head coaches were fired, bringing the total coaching casualties to seven, or roughly 22%. The most shocking of the firings was easily Mike Shanahan, who had previously led the Denver Broncos to their only two Super Bowl victories.

Patience for head coaches is even thinner in the National Basketball Association, where six head coaches were fired in the first two months alone. The median length of an NBA coach’s tenure is just 1.3 seasons, compared to 2.88 in the NFL, according to The New York Times.

“The only time a coach feels really secure is when he’s also the owner,” said Greyser, noting that hasn’t happened since Connie Mack sold pro baseball’s Philadelphia Athletics in 1954.

On the other hand, major corporations like General Motors, Lehman Brothers and Citigroup (C: 7.29, -0.17, -2.28%) chose to retain their CEOs despite those companies’ awful performances.

For example, Wagoner’s GM has seen its shares lose 97% of their value since he took the helm in 2000. In fact, the auto maker needed a controversial government rescue just to make it to 2009. Despite those results, GM’s board of directors has refrained from replacing Wagoner.

GM is “one of the most mismanaged companies ever,” said Little, who called it “ridiculous” that Wagoner still has his job.

To be sure, today’s CEOs hardly deserve all of the criticism for the poor results given the current economic downturn.

“Why penalize the CEOs for something that is driven by something from so many years ago? Are they really responsible for this?” said Kulwinder Verma, director at recruitment firm Michael Page Human Resources. “The collapse of the market right now is the result of years of over-inflating and over-investing.”

There are a range of reasons why America tends to have more patience with captains of industry like Wagoner and former Lehman CEO Dick Fuld than head coaches like Eric Mangini, formerly of the New York Jets.

At the forefront, corporations have a mostly democratic setup where shareholders elect the board of directors who in turn search for, hire and fire the CEO.

In contrast, the owner of an NFL team is an “absolute monarch,” who has the power to remove the head coach as he or she sees fit, said Tom Flannery, a managing director at executive search firm Boyden.

To voice their displeasure with a CEO, shareholders have the right to dump their stock or vote out the board of directors.

In sports, “the owner is usually one person and he doesn’t have the luxury of just selling his stock tomorrow,” said Little.

There are also major differences in how success is defined for CEOs versus head coaches.

“For so many years executives have been paid huge amounts of money based on just turning a profit. That works in a good market but what happens in a bad market?” said Verma.

Verma also notes that CEO “compensation is driven by performance, but it’s over a longer period of time.” In sports, head coaches “have a very definitive time frame under which they are being scrutinized.”

Given the scores of offensive and defensive coordinators, college coaches and unemployed former coaches, it’s also considerably easier to find a successor for a head coach than a CEO.

“If you are looking for a CEO for a multi-billion dollar corporation, you are really going to fish in a pond with people working in the same size companies…Because you don’t want to set them up to fail,” said Verma.

It’s possible that Wall Street can take a lesson from the accountability offered in the sports world.

“I think shareholders need to be more proactive and I think boards need to be more representative of the shareholders,” said Flannery.


Contact:

Max De Paola
Michael Page
203.905.5253

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