By Joe Cahill
March 5, 2017 - Caterpillar is about to get something it has needed for a long time.
No, not another visit from federal agents like those who raided the Peoria HQ on March 2. And no, not an end to the four-year sales slide that has slashed annual revenue by more than 40 percent at the soon-to-be Chicago-based heavy-equipment manufacturer. That's likely to continue for another year.
What the beleaguered bulldozer behemoth will get is a chairman who doesn't also serve as CEO. When Chairman Doug Oberhelman retires on March 31, the title won't pass to Jim Umpleby, who succeeded Oberhelman as CEO on Jan. 1. Instead, outside director David Calhoun will become chairman.
Caterpillar joins a growing number of big public companies that have separated the two roles. According to a 2016 study by Spencer Stuart, nearly half the companies in the Standard & Poor's 500 Index divide the titles, up from less than one-quarter 15 years ago.
More important, an independent chairman positions Caterpillar's board to oversee Umpleby more effectively than it monitored Oberhelman, whose disastrous expansion campaign left the company badly exposed to steep cyclical downturns in its key markets.
After taking the helm in 2010, Oberhelman dramatically enlarged Caterpillar's manufacturing capacity as surging commodity prices stoked global demand for mining and oil-drilling machinery. He also rattled off acquisitions, including Cat's largest ever, the $7.6 billion purchase of mining-equipment manufacturer Bucyrus International in 2011. Cat paid a 32 percent premium to Bucyrus' stock market price as commodity prices approached a historic peak.
By 2013, commodity prices were plunging and mining companies were pulling back. Equipment orders evaporated, turning Caterpillar's newly acquired mining operations into a financial millstone. Oil prices soon followed, sapping demand for Cat's drilling gear. Sales of construction equipment also sputtered as global economies stalled.
Shareholders suffered as revenue plummeted from a 2012 pinnacle of $65.9 billion. Caterpillar shares have fallen 15 percent since then, while the S&P 500 has risen 73 percent.
Oberhelman isn't the only one to blame. Caterpillar directors failed in one of their primary responsibilities—overseeing management's use of shareholders' capital. By 2015, one analyst estimated Caterpillar had amassed enough manufacturing capacity to support $100 billion in annual revenues, more than two and a half times the $37.5 billion it's expected to book in 2017.
Cat is now slogging through the costly process of eliminating that excess capacity. Headcount is down by nearly 30,000, and 20 plants are slated for closure. Write-offs and restructuring charges have passed $3.7 billion, with more to come.
Yes, hindsight is 20/20. But Caterpillar's fate was far from unforeseeable. Heavy machinery markets are notoriously cyclical. Boom becomes bust as surely as spring begets summer.
Yet Caterpillar directors approved Oberhelman's gravity-defying game plan. Worse, they rewarded him richly even as his strategy unraveled. His compensation totaled $50 million between 2013 and 2015. Figures for 2016 haven't been released yet.
A stronger board might have reined in Oberhelman's strategy and his pay. But a board can't do its job effectively without proper governance tools, including an independent chairman.
"The board is there to monitor management," says corporate governance expert Charles Elson of the University of Delaware. "It doesn't make sense for the person being monitored to chair the board that's doing the monitoring."
Splitting up the roles is the right structure for all public companies at all times. Caterpillar shareholders should be pleased that an independent chairman will lead the board's oversight of Umpleby. The new CEO faces many tough decisions, and nobody knows if he'll make the right calls, especially under the apparent scrutiny of federal agents. But at least he won't be reporting to himself.