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As regime changes go, the resignation of Sanford I. Weill as chief executive of Citigroup (C
) was deeply unsatisfying. Instead of abdicating his role as chairman when he steps aside in January, Weill, 70, will remain in that position until 2006. That leaves the new CEO, Charles O. "Chuck" Prince III, in a power-sharing arrangement with one of the most towering figures in Corporate America. By having Weill stay on as chairman, Weill and the Citigroup board have committed a cardinal sin of corporate governance -- creating an ambiguous chain of command. Says Nell Minow, editor of the Corporate Library, a governance Web site: "What you have now is a CEO who is neither gone nor forgotten."
As a rule, separating the roles of CEO and chairman is something governance experts applaud. But filling the chairman's position with a "lingering CEO" presents a host of problems. The new CEO may be undermined by the old, who is now in a perfect position to second-guess the new chief's strategy and direction. The board will often remain loyal to the old CEO -- who may have built up decades of goodwill among directors.
SORRY HISTORIES. And particularly if the old CEO makes it clear that he intends to remain active, as Weill has done, it creates two power centers in the company, hobbling management. Ideally, governance experts say, outgoing CEOs should toss the new chief the keys -- as Jack Welch did with his successor at General Electric (GE
), Jeffrey R. Immelt -- and not look back.
For a cautionary tale on the dangers of power-sharing arrangements, Citi need look no further than its own recent history. In 1998, when Weill merged Travelers Group into Citicorp, he became co-CEO with John S. Reed, resulting in a distracting power struggle that ended two years later with Reed's departure.
If that's not enough, the Citi board should consider Xerox (XRX
) After G. Richard Thoman was named CEO in 1999, his predecessor, Paul A. Allaire, remained as chairman, undermining Thoman's authority at every turn and ultimately ousting him as CEO in 2000. At Dow Chemical (DOW
), Newell Rubbermaid (NWL
), Maytag (MYG
), and elsewhere, former CEOs who have remained on the board have replaced their handpicked successors after they encountered problems.
DEEP BENCH. The reason many companies keep their former CEOs on as chairmen is simple. Leaders like Weill, who have held the reins for many years, have a deep understanding of the company that boards are loath to give up. Keeping the former CEO as chairman ensures the new chief has a sounding board with a reservoir of institutional knowledge. During the transition to a new leader -- even one who has been around for nearly two decades, as Prince has -- this can be invaluable.
But in Citi's case, the board had many options. Its deep bench of management talent and largely independent board provide a number of candidates for chairman. Even Citi insider Robert E. Rubin, the former Treasury Secretary and Goldman Sachs (GS
) co-chairman who joined Citi four years ago as a top adviser, would have been a better choice. He has much of the board experience and none of the baggage.
Or Citi simply could have given Prince both titles, and appointed a lead director to preside over meetings of the board's outside directors, as Tyco International (TYC
) and Walt Disney (DIS
) have done. Another alternative: The directors could have kept Weill as chairman for a six-month transition period, as many companies do, and then given him a contract to advise the new CEO.
"HIS INFLUENCE WILL CONTINUE." True, for some directors and investors, the idea of keeping Weill on board for the next three years is a comfort, particularly as Prince is light on operating experience. After all, Weill built Citi into the world's biggest financial-services company, with $1.1 trillion in assets -- and he is the operational genius who has delivered a 26% average annual return since forming Citigroup in 1998. Former Securities & Exchange Commission Chairman Arthur Levitt Jr., who worked with Weill for 13 years at the brokerage firm Cogan, Berlind, Weill & Levitt, says Weill's continued presence should reassure Citi shareholders. Says Levitt: "Many of the talents he had to bring to bear are still going to be there, and his influence will continue to be felt."
But that, experts say, is exactly the problem: His influence will continue to be felt. Prince already has a tough job ahead of him if he's to keep Citi growing. Having Weill peering over his shoulder won't make it any easier. If Weill wants what's best for Citi -- and he should, given his $1 billion stake in the company -- he shouldn't wait. He should cut the cord now.
Lavelle covers management for BusinessWeek from New York
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Copyright 2003, by The McGraw-Hill Companies Inc. All rights reserved.
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