Thursday, May 01, 2008

Simply Appalling: Good judgment seems to have been short-circuited in the Circuit City boardroom

From Directors & Boards E-Briefing, May, 2008:
A perennial mystery to this longtime governance observer is how a board can seemingly sit silently by and watch a management trash a business. This seems to be what’s been happening at Circuit City Stores Inc. A year ago the company announced a turnaround plan. A centerpiece of the plan was laying off a slew of more experienced salespeople, to be replaced with lower-paid hires. But get this: Those who lost their jobs could reapply for their old jobs, at the lower pay, but had to wait 10 weeks to do so. That’s simply appalling.“That’s the most cynical thing I’ve heard about in a long time,” said Peter Cappelli, in a critique of the plan published by the Wharton School’s Knowledge@Wharton newsletter. Cappelli is a management professor and director of Wharton’s Center for Human Resources . Another Wharton professor, Daniel Levinthal, termed the layoff plan “a massive de-skilling” of the company. I’m all for companies doing what they feel they must do to survive. But let’s be mindful of what Peter Drucker said: “The purpose of a business is to create a customer.”When a company takes steps that are repellent in its treatment of its human resources — its work force and its customers — is it really a business anymore? Or a business that should stay in business?I didn’t write about this abhorrent policy at the time. My personal response was to vow never to set foot in a Circuit City store again, and to leave it at that.I did wait for the follow-on announcement that the current board members all submitted their resignations — so as, in the spirit of their approved turnaround plan, to allow management to replace them with a newer, younger board, which would be paid a lower retainer and fees than the old directors received. Less experienced? Who cares about that? And the current board, after a cool-down period, would be allowed to reapply for their old seats, at the lower scale, of course. Funny … I missed that announcement. Did you, too?Well, a year has gone by, and Circuit City is now much in the news. Perhaps my personal reaction was shared by similarly offended spirits. The turnaround seems to have run aground. Circuit City’s results are punk, the stock price has collapsed, and a hedge fund, which has called the turnaround effort “disastrous,” is at the board’s throat. Then, in a bizarre turn, in mid-April Blockbuster Inc. weighed in with a merger proposal. That’s being charitable to call it bizarre. It’s also being called “crazy,” “reckless,” and “looney” by deals analysts.All I can hope is that there were some dissenting voices in the boardroom — “What are they thinking?!” —when management unveiled the HR components of its turnaround plan. It must be a sad day in the life of a director when he or she sees the company’s business and reputation about to be trashed.

Jim Kristie is the editor and associate publisher of Directors & Boards.

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