What went wrong at AMD by Eleanor Bloxham @FortuneMagazine January 14, 2011, 10:13 AM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons The AMD board’s ouster of CEO Dirk Meyer on Monday caught many by surprise and highlights the need for better succession planning and communication between CEOs and their boards. By Eleanor Bloxham, contributor Surprises. CEOs don’t like them from their CFOs, boards don’t like them from their CEOs, and shareholders don’t like them from boards. But, all too often, boards deliver them. Dirk Meyer, Former CEO of AMD The board at chip maker Advanced Micro Devices AMD ousted Dirk Meyer, its CEO, on Monday*, a surprise to investors and not a welcome one to many commentators as it had looked as if AMD might be getting on the right track and pulling out of a slump. AMD spokesperson Drew Prairie says the need for new leadership stemmed from a desire to “accelerate company capabilities.” “It’s the long term trajectory we are trying to shift. There is strong faith by the board that our CFO can guide us forward while the CEO search is conducted,” Prairie says. Corporate boards are responsible for assessing whether they have the right CEO, not only for the moment, but also for the long term. How can they uphold this responsibility with fewer upheavals? Is there a way for boards to minimize tensions and create smoother transitions? AMD has experienced several issues related to the definition of its roles, according to public documents, which may have heightened the surprise. Take succession planning. The AMD board’s corporate governance guidelines place the responsibility for succession planning on the CEO. Another section of the guidelines says that the board will determine if the plan is satisfactory. While the guidelines say the board shall choose the CEO and other executive officers annually, it does not mention a succession process. In the proxy for investors, the board’s role in succession goes unmentioned, other than the compensation committee’s role to “provide compensation and benefit programs that … support career development and succession goals.” Succession is not listed in any of the committee charters except for the audit and finance committee’s responsibility to “review human resources and succession planning for the accounting and finance groups within the Company.” By not establishing an active, ongoing role for the board in the succession process, the AMD board neglected its responsibility to ensure a successful succession and perform an ongoing evaluation of Meyer’s performance. (This, of course, requires the board to begin this process the first day the CEO is on board — and not wait for problems to develop.) The role of the chair, if there is a separate chair, must also be clearly outlined. Although the governance principles and bylaws provide some role definition, AMD’s proxy and governance principles don’t suggest a strong commitment to the chair role. Instead, the use of a separate chair is described as contextual and related to the current needs of the company. While this approach might easily be viewed as flexible, it can create an issue for a CEO who views the chair role as a position to be earned rather than a separation required as a matter of good corporate governance. Over-compensating the chair can further confuse how involved the chair will be. At AMD, the board chair is highly compensated. According to its 2010 proxy, Bruce Claflin earned $726,940 in cash and stock, roughly double the amount earned by Intel’s INTC chair. With Meyer’s dismissal, Bruce Claflin has taken on the title of executive chair, rather than independent chair, with an additional pay boost of $55,000 annualized during the transition, in addition to 10,345 restricted stock units and perhaps more if determined by the board’s compensation committee.* This kind of compensation comes across as pay for failure to have a succession plan in place. Claflin’s move to executive chair makes it even more critical for the AMD board to clearly define the role of chair at this time and going forward. Other common reasons for faltering board management relations are a lack of effective communication among the independent board members and mechanisms to provide timely performance feedback to the CEO. Although AMD’s corporate governance principles for 2010 require quarterly executive sessions of the independent directors, AMD spokesman Drew Prairie says the independent directors only met three times in 2009. Quarterly meetings are not frequent enough for independent directors to meet and nip issues in the bud. Meeting less often than that is clearly not enough. Independent directors need to meet separately at each meeting — some boards do this both before and after the meeting. Frequent communication among board members and feedback to the CEO provide opportunities to address issues before they snowball. A separate chair has the responsibility to make sure this happens. Clearly, the independent AMD board members should have been meeting often in 2009 to solidify their own relationships with each other, given the appointment of three new members and Clafin as chair that year. One of the new directors, Waleed Al Muhairi, 35, is not considered independent and serves on no committees but is on the board because of an agreement with investors giving them the right “to designate a representative to our Board of Directors.” This arrangement is problematic because all directors should be on the board to represent the best interests of all shareholders and stakeholders. If even one director’s role is unclear, it can negatively affect the board’s working relationship. AMD spokesperson Drew Prairie says that this practice is common among private equity firms, listing the boards of Spansion, Avago, Jazz Pharmaceutical, and Zhone as examples. We may never know all of the details behind Meyer’s surprise departure from AMD. But there are measures corporate boards can take to reduce the likelihood of having to take these kinds of sudden and drastic actions, including basics like coming up with proper role definitions and opportunities for open communication that encourage cooperation. For many boards today, this continues to be easier said than done. Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance, a board advisory firm. *Editor’s note: Meyer was ousted Monday, not Tuesday. Additionally, Claflin’s pay increase was originally calculated incorrectly in this article. The sentences have been corrected.