Saturday, January 14, 2017

The Age of the Imperial CEO: The Case of Fred R. Johnson at RJR Nabisco

Fred R. Johnson, former CEO of RJR Nabisco, was known “for the fleet of corporate jets that ferried him to celebrity golf events and other luxurious perks he awarded himself.”[1] The key words here being awarded himself, for Johnson epitomized the sort of imperial CEO that made an oxymoron out of the notion that the corporate board is to serve as an overseer of corporate management in corporate governance. Awarded himself should be the oxymoron, for such a conflict of interest runs against the logic of any viable business calculus.

That Johnson had “scant interest in the daily corporate grind” should also be an oxymoron, for the principle role of a CEO is to manage business.[2] “He was not strategic,” said John Greeniaus, who ran the Nabisco business under Johnson.[3] This too should be regarded as an oxymoron, given the salience of strategic management in a CEO’s role. At some point, the business under such a CEO had to have taken a hit. For example, that offices “were abruptly moved, [and business] units [were] suddenly sold” could not have been good for the bottom-line.

How could such a condition be permitted to go on in a major company? The corporate governance was undone, as Johnson handed out free plane rides, lucrative fees, and consulting contracts—each one representing a conflict of interest for the board members. Even though the board finally said no to Johnson’s attempt at a leveraged buyout because in part he would “reap outsized profits from the deal,” he received $53 million in golden parachute payments after he resigned as the board went with another takeover bid.[4] The golden parachute should have been regarded as an oxymoron, and yet the payments attest to just how easy the CEO had had it.

My point is simply to ask, at what expense? How is it that a major company would even hire a man who was little interested in strategy. Wouldn’t this have shown through in the interviews? When he put cigarettes and cookies together in the same company, wouldn’t it have dawned on the board that the two areas were not a good fit? To be sure, the snacks and cigarettes were broken apart in 1999, but wouldn’t such an acknowledgement have naturally reflected on the CEO? Even so, he received $53 million in golden parachute payments. 

Clearly, this case suggests that the system by which corporations are governed is vulnerable from a business standpoint.  To be sure, decreasing marginal utility means that it would take a lot of money to improve the happiness of a rich CEO, but does a board need to pay so much heed to this dynamic, which flies in the face of sound compensation management. As for Johnson, Greeniaus describes the man as being “like a really intelligent six-year-old in a sandbox.”[5] Just because it would take a lot of money to interest a spoiled rich kid does not mean that boards should become enablers; it is not as if adults would not take the job.

[1] James R. Hagerty, “F. Ross Johnson,” The Wall Street Journal, January 7-8, 2017.
[2] Ibid.
[3] Ibid.
[4] Ibid.
[5] Ibid.