COLUMN ONE : Leading the Boardroom Revolution : Ironically, top executives are being forced out by ex-CEOs known for total control at their own firms. Pressured by shareholders, boards of directors are no longer rubber stamps.
Like the Over the Hill gang back in the saddle for one last shootout, an elite band of senior executives is kicking up a dust storm as it rides to the rescue of some of America’s largest corporations:
* Proctor & Gamble’s ex-Chief Executive John Smale teams up with super-lawyer Ira Milstein to lead a board revolt at General Motors--and is named chairman for his trouble.
* Ex-Mobil boss Rawleigh Warner fires the first shot against American Express Co.’s James Robinson III--and former Squibb Chairman and Chief Executive Richard Furlaud finishes him off.
* Johnson & Johnson’s ex-CEO James Burke coaxes IBM Chief Executive John Akers to announce his departure, then takes charge of the committee searching for his successor.
It is heroic stuff--and the makings of high drama, given the clubby ways of the typical American boardroom. But the reality is that these grizzled veterans of the corporate corral are reluctant cowboys.
In effect, they are the hired guns of big shareholders--primarily America’s pension funds--who cannot run these troubled companies themselves but have the firepower to operate through the current and former executives who serve as corporate directors.
As CEOs, many of these men were autocrats who would not have brooked interference when they were running their companies. As directors of other firms, they were representative of an elite often criticized for letting management ride roughshod.
So it is more than a little ironic that these old hands--reacting to pressure from shareholders, criticism from an increasingly assertive financial press and a healthy dose of ego--should emerge as agents of change in the corporate suites.
Smale, Warner, Furlaud, Burke and the like are “neither rabble-rousers nor boat rockers,” says Roger M. Kenny, a partner in Kenny, Kindler, Hunt & Howe, an executive search firm in New York that helps companies select directors.
But one thing is clear, he says: “The rubber-stamp board is a thing of the past.”
It is a thing of the very recent past.
After years of inactivity, IBM’s board sputtered into action only after the computer giant lost more than two-thirds of its market value and Fortune, Business Week and the Economist all had called for Akers’ head. Burke, for one--who led Johnson & Johnson through the wrenching Tylenol tampering episode--had been on IBM’s board since 1980.
At American Express, Warner launched his offensive against Robinson after the company suffered a long series of embarrassments related to its unsuccessful attempt to diversify into a “financial supermarket.”
And at General Motors, Smale took on Chairman Robert C. Stempel six years after the basic case against GM’s archaic management style was made--publicly and persuasively--by Ross Perot, who resigned from GM’s board in disgust when he failed to rally other directors.
Shareholder activist Robert Monks--co-director of the LENS fund, which invests in companies it wants to shake up--likens the behavior of directors and executives at such firms to that of people coping with terminal illness:
First there is denial, then negotiation, then acceptance and resolution.
In denial, the CEO tells the board that nothing fundamental is wrong. Sometimes the directors believe him.
In negotiation, the CEO agrees to sell off some operations, close some plants, perhaps launch an early retirement program. This is supposed to reduce costs and allow the company to return to profitability and a confident future. But it usually does not--because drastic change, such as dumping the CEO, is avoided.
“You’re not only dealing with a job,” says Nell Minow, a Washington lawyer who is Monks’ co-director at LENS. “You’re dealing with the CEO’s image of himself,” she says--with a leader confronting failure possibly for the first time in his life.
In the last year or so, for instance, visitors to Westinghouse Chairman Paul E. Lego report that he could spend hours essentially saying the company’s mounting troubles were not his fault. Lego finally was ousted last week in a board coup organized by former Defense Secretary Frank C. Carlucci, who now runs a Washington, D.C., investment banking firm.
Instinctively, outside directors are disinclined to rub their peers’ noses in their shortcomings. “The most forceful, loudmouth CEO can be quiet as a stone on someone else’s board, reasoning, ‘I know how I want my directors to defer to me, so I’ll defer to this guy,’ ” Minow says.
In the 1980s, a force existed to break the directors’ code of silence. Corporate raiders--with their threats of hostile takeovers--served to discipline corporate managers.
“But everybody with a conscience realized that this was not the right way to deal with corporate inefficiencies,” explains Howard Sherman, senior vice president of Institutional Shareholder Services, which provides information and analysis on issues of corporate governance. And as corporate takeovers waned, “that set a lot of directors, managers and consulting firms to thinking about redefining the role of outside directors,” Sherman said.
More important, the decade of corporate buyouts opened the eyes of companies’ owners to their real influence.
Sixty years ago, Adolf A. Berle and Gardiner C. Means published “The Modern Corporation and Private Property,” which argued that only management could run U.S. business, because ownership--scattered among individual shareholders--had become dispersed and powerless.
For decades, they were right. Corporate democracy was a mockery, epitomized by the charade of the annual shareholders meeting, at which managements and their director allies held a majority of proxies. The CEO was all-powerful.
But today, share ownership once again is concentrated. Pension funds, with a total of $1.5 trillion invested in common stocks, own roughly 20% of all shares in U.S. business--including more than 50% of the shares of the largest corporations. Management guru Peter Drucker, in a 1991 article in the Harvard Business Review, called the rise of pension funds “one of the most startling power shifts in economic history.”
Yet as they grew in power, the funds’ options, paradoxically, became severely limited.
It was impractical to dump stock in a company when they became impatient with management because a big sale could cut 5% or 10% or 15% off the issue’s price in a single day. And then the fund would just have to make another, similar investment.
They could threaten to side with takeover artists in their proxy battles. That is what happened throughout the ‘80s--in the case of Crown Zellerbach, which was acquired by Sir James Goldsmith and dismembered, for instance, and at numerous other companies.
But takeover battles were antagonistic and bruising. Worse, they often resulted in unproductive leveraged buyouts, in which the managements of target companies protected their firms from takeover--and themselves from the loss of their jobs--by piling on debt. Rank-and-file workers, in the meantime, suffered as companies slashed their payrolls and liquidated operations to pay off the borrowings.
In any event, the era of the buyout passed as the ‘80s’ drew to a close. Pension fund managers, such as the California Public Employees Retirement System and the New York state and city employee pension funds, began taking their cases to companies directly, in a firm but businesslike way.
They began winning attention--and respect--in 1989 when they defeated a pair of anti-takeover measures championed by Honeywell Inc.’s management. In 1991, Baxter International abandoned plans to build a manufacturing plant in Syria after institutional holders asked whether the company was kowtowing to the Arab boycott of Israel.
Pressure from pension funds also helped force Texaco to add an independent voice--former New York University President John Brademas--to the company’s board of directors. The funds demanded a say in General Motors’ consideration of a successor to longtime Chairman Roger B. Smith. They certainly were major players in the movement late last year to dump Stempel, Smith’s successor.
Outside directors are the mechanism through which the big funds operate; legally, they cannot exercise their power directly.
“Big shareholders are in a delicate position vis-a-vis management,” Minow explains. “The contract you have with your share of stock forbids you to engage in micromanagement of the company’s affairs. In return you have limited liability.”
If the pension fund bosses themselves asked pointed questions of the management--and then bought or sold stock after hearing the answers--they could be accused of insider trading. They also own stock in competitors, so they could be accused of leaks.
Instead, they put the squeeze on outside directors in a kind of corporate democratization. Just as voters show their impatience with the politicians in Washington, shareholders show theirs with the business Establishment.
“The most important change of recent years is that directors can be embarrassed publicly if they do nothing and the company declines,” Minow says. “It’s impossible to sit there now.”
Sherman, of Institutional Shareholder Services, says: “There is a growing awareness among the men and women who serve on boards of directors that their jobs are just that--jobs, not perks or rewards for distinguished careers, but jobs.”
Nor is the assignment wholly unappealing to tough leaders, many of whom are retired from the posts that gave them their power. “At this point, they have nothing to lose but their reputations,” notes Kenny, the executive search consultant.
It is nice to be considered important, after all.
“Call it the senior statesmen syndrome,” says Hicks B. Waldron, himself the former CEO of Avon Products Co. and now chairman of Boardroom Consultants, which assists corporations searching for board members. “There’s no other way to explain it. When a man like Jim Burke, who ran his own company so superbly, speaks, fellow directors listen.”
