Why Not Treat CEOs More Like NFL Coaches - and Fire the Losers?
And while coaches no doubt enjoy some of the same excitement as the fans at that opening kickoff, those gridiron generals also face a special sort of angst. They're about to spend months of working 16-hour days, sleeping in their offices, running drills, reviewing game footage, and devising strategies that they hope will lead to the Lombardi trophy.
But the odds are much higher that they'll end up fired.
Talk About Job Insecurity
Last year, eight out of 32 NFL coaches -- 25 percent -- were sacked after the season ended, and seven were dismissed in each of the previous two years. Three of those fired last year had even led their teams to Super Bowls at one point during their tenure.
In sports, where the mantra is "What have you done for us lately?" sometimes all it takes is a couple of disappointing seasons -- or even one. Andy Reid, Ken Whisenhunt and Lovie Smith were all fired last year despite having taken their teams to a Super Bowl. Reid was dumped by the Philadelphia Eagles despite having led his team to one Super Bowl and five NFC Championship games during his 14-year tenure, a record that would be considered outperforming in any other industry.
Of course, high standards should be expected. The NFL is big business: The combined value of its 32 teams adds up to $37.4 billion, making it the most valuable sports league in the world.
As the effective CEOs of these teams, with full control of on-field operations and part of a tiny inner circle with major input in personnel decisions including drafts, trades, and free-agency signing, the head coaches are in charge of billion-dollar brands and deserve both the blame and the credit.
But compared to the titans of industry in corporate America, the NFL is just a piddling bit player.
Corporate 'Coaches' and Cushy Contracts
If the entire NFL were a publicly traded company, size-wise, it would rank No. 101. For market-watchers, then, the treatment of NFL coaches prompts an interesting question: Why are publicly traded companies so much more lenient on CEOs?
Unlike the NFL, the vast majority of corporate CEOs leave their jobs to retire or pursue other interests. In fact, on average, just 2 percent of CEOs at large corporations are dismissed each year, according a study by Wharton professor Lucian Taylor.
Talk about job security. Compare the tenure of coaches verses corporate heads, and which job would you rather have? Going into this season, the average NFL coach has just 3.2 years at the helm of his current team, compared to 8 years for the average CEO of a company trading on the S&P 500.
Based on the low firing rate and longer stints at the helm, it seems that chief executives at public companies -- the people in charge of the businesses investors entrust hundreds of billions of dollars of their hard-earned savings to -- are judged much more complacently than their counterparts at leading football teams.
Why Are Pink Slips So Rare Wall Street?
Taylor sees the problem as a corporate governance issue, with CEOs becoming too entrenched, which happens when the board of directors sees a personal cost in firing them, and thus shirks its duty to protect shareholder interests.
If boards acted appropriately, Taylor argues, about 13 percent of CEOs would be fired each year.
While poor corporate governance is surely part of the problem, as is the incestuous pool of business leaders who often serve on multiple boards and in leadership positions, problems with performance measurement may be a more direct cause for the lack of CEO firings.
In football, the performance metrics are obvious. You either have a winning record in the regular season, or you don't. You either make the playoffs, or you don't. And if you can't ever manage to win a Super Bowl, the whole world knows it. The success of each season is judged accordingly.
In the corporate world, the metrics are less clear.
The most often cited metric of company/CEO performance is shareholder returns. If your stock outperforms, you're doing a good job; if it doesn't, you're not. But this ignores a number of factors and can encourage short-sighted behavior. It also subjects judgment entirely to market perceptions.
What Do You Have to Do to Get Fired Around Here?
With that in mind, here are a few suggestions for errors that should qualify CEOs for termination. Pink slips should be handed out for those who...
1. Make boneheaded judgment calls
Just as coaches are harangued for bad play calls or poor draft picks, so should CEOs be judged for their decision-making ability, perhaps the most important qualification for a leader. CEOs need to have a vision for the company, and recognize trends ahead of the market.
For example, Ballmer insisted the iPhone would never gain significant market share because it was too expensive, leading to one of the worst business responses of the 21st century -- Microsoft's failure to adapt to mobile technology.That was just one of many blunders during Ballmer's career, which included showing up late to cloud computing, as well as a number of questionable acquisitions.
When Ballmer made his surprise retirement announcement last month, the response from the "fans" was loud and clear: Microsoft shares jumped 7 percent on the news.
2. Make shareholders suffer from long-term underperformance
General Electric (GE) CEO Jeffrey Immelt may have had big shoes to fill when he replace Jack Welch, who made the company the most valuable on the market. But 12 years later, he has yet to prove himself as an adequate leader.
Under his stewardship, GE has shown a lack of the innovation that was a hallmark of Welch's tenure, and Immelt's decision to grow the conglomerate's financial wing proved misguided in the wake of the financial crisis. A year or two may not be enough of a time window in which to assess management, but 12 years certainly is. With a gap like that, Immelt has failed in his task to deliver shareholder returns.
3. Consistently miss earnings estimates
Earnings estimates are largely derived from the company's own projections, so consistent misses indicate an inability to either execute plans or anticipate markets.
Westport Innovations (WPRT) has been around since 1995, led by founder and CEO David Demers, but it has yet to make a profit. Excitement has built for the natural-gas engine maker in the last few years, but financial performance has lagged.
In nine of the last 10 quarters, Westport has missed analyst estimates, often by a significant gap. In 2012, Westport delivered revenue of just $353 million, even though management guidance predicted it would pull in $400 million to $425 million as late as its second quarter of that year. The drop was due to concerns about fueling infrastructure. Demers may be difficult to replace, but results like that call for a change.
It's Time to Level the Playing Fields
CEOs of distinct and very different businesses may not be as interchangeable as football coaches. But at least in the NFL, coaches are held to high standards, and fans never hesitate to call for heads to roll after a disappointing season.
Fans are right to expect high performance. After all, these coaches are paid millions of dollars a year and are supposed to be the best-qualified candidates culled by an extremely selective process.
You could say the same for CEOs. If we demand only the best as football fans, shouldn't we do the same as investors?
Motley Fool contributor Jeremy Bowman has no position in any stocks mentioned. The Motley Fool recommends Westport Innovations. The Motley Fool owns shares of General Electric, Microsoft and Westport Innovations.