American Express – Corporate Governance Case
American Express Chairman/CEO Influence and Outcomes 7/30/2011 Table of Contents American Express Overview3 James D. Robinson3 Success and Failures of Robinson3 Board Of Directors4 Decisions Required4 Candidates for CEO Position5 Robinson’s Strategy5 Decisions Of The Board5 Problems Faced By American Express6 Solution7 Lessons Learnt7 References7 American Express Overview American Express Company (American Express), incorporated in 1965, is a global service company The Company’s principal products and services are harge and credit payment card products and travel-related services offered to consumers and businesses around the world. American Express Company and its principal operating subsidiary, American Express Travel Related Services Company, Inc. (TRS), are bank holding companies. It is principally engaged in businesses comprising four reportable operating segments: U. S. Card Services, International Card Services, Global Commercial Services, and Global Network & Merchant Services.
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Its range of products and services includes charge and credit card products, expense management products and services, consumer and business travel services, stored value products, such as Travelers Cheques and other prepaid products, network services, merchant acquisition and processing, point-of-sale, servicing and settlement, and marketing and information products and services for merchants, and fee services, including market and trend analyses and related consulting services, fraud prevention services, and the design of customized customer loyalty and rewards programs.
In November 2010, it acquired Accertify Inc. , a provider of solutions that help merchants combat fraudulent online and other card-not-present transactions. James D. Robinson In 1977, James D Robinson was appointed CEO and Chairman of American Express. He continued to hold this position till 1992. He outlined a vision of a financial empire that would offer all things to all people: charge cards, insurance brokerage services, money management, private banking. It would be unlike any other company ever formed, offering cradle-to-grave financial care for anyone in the world, anywhere in the world.
The potential synergies were awe-inspiring: Shearson mutual funds and Fireman’s Fund insurance offered to American Express card holders; American Express travel planning offered to Shearson’s Wall St clients. The combinations seemed endless. In his tenure he also strengthened the board with 17 new members making the board to become 19 members strong. The corporate governance of the organization was therefore assumed to be mature enough for clients, markets and shareholders to put in their trust. Success and Failures of Robinson
American Express soon launched a strategy of acquisition in 1980s. It went through enlarging the empire through takeovers to many organizations and big brands in the financial world. Some of examples are: • 1981 – Shearson, at a cost of nearly $1 billion • 1981 – The Boston Company • 1983 – Edmond Safra’s Trade Development Bank • 1984 – Investors Diversified Services • 1984 – Lehman Brothers Kuhn Loeb • 1987 – E. F. Hutton & Co. There were other instances where American Express could not turn the mark the deal successful; examples are: • 1977 – Philadelphia Life. 1987–88 – Disney • 1987–88 – The Book-of-the-Month Club. • 1979 – McGraw-Hill. While all the goals and acquisitions were targeted to increase the profitability of the organization, there were some major setbacks arising due to this: • AmEx’s 36 years record of increasing profit broken in 1983, as Fireman’s fund declared $242m loss bringing down the company’s profit. • Trade Development Bank was sold and an additional $8m penalty paid to Safra because of Robinson’s negative campaign against him. • Boston Company confessed accounting fraud of $30m in 1988. ‘The Boston Fee Party’ campaign was launched by Boston Restaurants by completely boycotting AmEx cards. • An innovative product called ‘Optima’ cards caused $112m loss to AmEx. • Shearson stock fell down to 1/3rd, and AmEx had to buy all its remaining shares. Shearson’s CEO Mr. Peter Cohen was fired. Board Of Directors In 1992, American Express had one of the largest board in USA. It contained 19 board members and only three of these were company employees. With majority as independent and non-executive directors, AmEx’s board was also an admirable one. Some of the Directors on the board were: Mr. Rawleigh Warner and Mr. Richard Furlaud – 2 most senior board members. (These two members joind board in 1972, before Robinson was appointed as CEO/Chiarman. ) • Mr. Howard Clark (Robinson’s predecessor as CEO), was not a board member but was a regular attendee of meetings. • Drew Lewis, CEO of Union Pacific . • Henry Kissinger, the former secretary of state. • F. Ross Johnson, the impetuous ex-CEO of RJR Nabisco. • Vernon Jordan, the civil-rights lawyer. Decisions Required Warner brought to light evidences of setbacks that had befallen AmEx under Robinson’s leadership.
He pointed out many events proving this, which All this had a cost of billions of dollars to shareholders: • Attempted takeover of Philadelphia Life Insurance Co. in 1977. • Aborted mergers • Problems at Shearson • episodes involving Safra and RJR Nabisco • the losses from Optima • the erosion of the card’s market share. All this was insisting that Robinson should now be moved out from the CEO position. But his left board with questions: Candidates for CEO Position With the decision of “Whether the CEO should be an existing American Express person or external one? still pending, board had a luxury to look into all sort of candidates in the corporate world. The top few candidates in the list were: 1. Harvey Golub Mr. Harvey Golub was a front runner in the organization with proven prodigy in his assignments so far. Golub had moved to TRS after a spell as chief of IDS, the Minneapolis-based fund management group bought by AmEx in 1984. He achieved stellar performance at IDS and was a lead figure in TRS’s renaissance, responsible for a $1 billion cost-cutting plan and a more flexible approach to merchant charges. He was known to be Robinson’s first choice . Sir Colin Marshall, President of British Airways An effective leader and has handled British Airways in its growth phase. But he was ruled out amidst the uproar in market about British scandal in which the airline had admitted a “dirty tricks” campaign against Richard Branson’s rival Virgin Group. Sir Colin Marshall was named responsible for this event. A negative image of his therefore led to elimination from AmEx’s CEO nominations list. 3. Frito-Lay, Chairman Roger Enrico He himself pulled back his candidature, citing his lack of interest in American Express work. Robinson’s Strategy
Robinson had a twofold strategy to maintain his position in the organization. He made suggestions to board which can take care of the demands of board to change the CEO/Chairman of organization, and secretly maintain his powers in organization. His proposal – • Agrees to resign from CEO positions, but wants to stay as part of the company (as Chairman). • As Chairman he can help Harvey to work well in new role. Since Robinson has served 16 years as CEO of organization, he wanted to help Harvey and make sure he manages the org well. • Feels personal obligation to uplift Shearson business, so asks for appointment as CEO of Shearson.
Decisions Of The Board Board of AmEx comprised of a good 19 directors. 2 were appointed in 1972, well before Roboinson was appointed as CEO and Chairman. Other 17 were appointed in tenure of Robinson’s Chairmanship. Robinson made good use of this opportunity and handpicked the suitable candidates who can cause less trouble to him in operations. He further maintained a very good, friendly and close to personal relations with all the directors. This also came in handy to influence the directors when the decisions were required from their side.
More or less Robinson was able to keep the board on his tunes and make decisions of Corporate Governance easy for him. In the wake of CEO role transition required, he was again using the tactics to bring majority of the directors to his side through informal meetings, lavish dinners etc. , but all under the name of information sharing events. Apart from this, he could also influence directors through existing interlocks with directors on board, only a few to mention are – • Furlaud sat on the board of American Express, and Robinson sat on the board of Bristol Myers Squibb, Furlaud’s old company, where Furlaud was still a director. Robinson serve on the board and the compensation committee of Union Pacific directly responsible for setting Drew Lewis’s pay who was CEO of Union Pacific. • Council on Foreign Relations featured Kissinger and Furlaud, along with Robinson and Charles Duncan. • Kissinger also sat with Beverly Sills on the board of Macy’s, and with Armstrong at the Center for Strategic and International Studies. All these factors were very well utilized by Robinson to influence a majority of directors on the board.
There were a few directors on the board who were out of his reach but the opposition never reached the majority, and the board reached the decision which was well proposed by Robinson – • Robinson – continues as Board Chairman • Harvey – Appointed as CEO of American Express • Robinson – Appointed as CEO of Shearson And hence a spiral hierarchy structure came into existence which was completely illogical to even a layman and probably never existed ever in the corporate history – “Subordinate is also the Boss of his Boss” Problems Faced By American Express
With this decision coming to picture, American Express was set to bear the wrath of the world. The board was influenced in the decision and this was not hidden at all. The decision itself was very immature for an organization of stature of American Express and there was no digestible justification that could cover it. The outcomes were – • Media sent out the message of cheating aloud in public. • Shareholders went crazy with distrust planted by company. Stock price dipped for 13% within first two days of this announcement. • Clients, due to diminished credibility, turned stone faced to any proposal coming from American Express sales teams. Employees and management, especially at Shearson, were left in shock and could not decide how to cooperate with such decisions. More to add Shearson was a troubled entity and could not find how Robinson would help now being a CEO of it when he was always in power being CEO of American Express and there was no solution provided. Their hope of a fresh breathing space and direction of a someone new in command was also shattered by this decision. Solution As markets continued to criticize this kind of reshuffling in hierarchy, the organization as a whole was going in deep troubles and only person happy was Robinson.
Harvey was well appointed by him as CEO of AmEx but very soon Harvey realized that his tenure is subject to his real thinking abilities and can’t be mentored reign. Harvey eventually had to put his foot down and ask Robinson to step down from his roles in organization. This was backed by the circumstances faced by organization. He was also particular of making no compromise and hence rejected the yet another proposal by Robinson which mentioned that he can resign from Chairmanship but wants to be at Shearson CEO position.
After his stepping aside, Mr, Furlaud was appointed as Chairman of Board. Lessons Learnt • Lack of independent decisions of Directors of Board was a huge cost to the organization. • Influence of Chairman on board made a very valuable decision go for a toss, which could be judged immediately by markets but not by learned directors. • Interlocks should have been restricted by government policies. References • http://people. forbes. com/profile/james-d-robinson/20799 • http://www. marketwire. com/press-release/ • http://www. nndb. com/people