When The CEO Dies, Should We Blame The Board?

The death of CSX Corp. CEO Hunter Harrison this past week has the corporate governance community chattering over the board’s negligence, according to The Wall Street Journal: “It was a classic triumph of short-term thinking,” according to Renny Ponvert, CEO of Management CV Inc., “…now, they’re stuck with a consequence.”

As a general finding, I would disagree.

The board can’t always know the CEO’s health. I recall serving on a board in which the CEO underwent routine cosmetic surgery to tighten up the jowls that embarrassed him when he was on CNBC. The CEO did not alert the board about his surgery because he felt there was no danger to his health.

But the outcome was anything but routine when the surgeon nicked an artery and the CEO nearly bled to death, spending two weeks in intensive care.

The CSX board knew about the health issues when they reached out to Hunter Harrison, the famed railroad CEO, but was uncertain about their nature and severity. So, it asked Harrison to undergo a simple board administered medical review, the equivalent of an annual physical which executives do all the time. But he declined, offering instead a statement from his physician that gave him a green light to perform his duties as CEO.

“Pressure from an activist investor, an openness to radical change, and a CEO vetting process that was not transparent led to what is now seen as a fatal mistake of corporate governance.”

But should it have signaled a flashing red light to the board?

The answer depends on the diligence the board performed when they accepted the physician’s statement or whether other circumstances influenced their decision. Then, was all of this transparent to shareholders?

There are a number of legitimate reasons an executive will refuse to be examined by a board appointed medical examiner. These include privacy or lack of confidence in a new team. But in their zeal to make the hire, the board failed to draw a line in the sand that would not be crossed: put an independent medical counsel between their duty as shareholder guardians and their lack of medical expertise, obtain an objective review of the findings, and subject it to a board vote.

With respect to other circumstances, it also appears the board was cowed by an activist investor.

The roaring 80’s greenmailers have morphed into a kinder, gentler, more angelic shape, better known as activist investors. According to Business Insider, people like Pershing’s Bill Ackman, Dan Loeb’s Third Point, and those ever-greenmailers, Nelson Peltz and Carl Icahn, are leading the charge and their returns are changing the way boards do business — or else they change the board.

The proven formula for the activist investor is a simple one: attack the weakest member of the herd. Then, install a new CEO with turnaround credentials, change out the board and management team, and within three years expect a 50% return. It’s a nice formula when everything works as it should.

In the case of CSX, the investor was Paul Hilal of Mantle Ridge who had elbowed his way onto the board and was the strategist behind the turnaround plan. The magic ingredient was getting Harrison Hunter as the CEO.

If the board had searched the world, they would not have found a more experienced or capable railroad executive. Hunter Harrison had everything it takes to perform the turnaround at CSX: passion, drive, reputation for excellence, ruthlessness, except for one thing: robust health. Pressure from an activist investor, an openness to radical change, and a CEO vetting process that was not transparent led to what is now seen as a fatal mistake of corporate governance.

Before he died and while he was still believed to be recovering, Harrison told the Wall Street Journal, “Don’t judge me by my medical record, judge me by my performance.”

Shareholders and their plaintiff lawyers will be sure to say the same to the board. We will judge you not by your medical decision, but by its results.