It’s been almost 40 years, but real-life boards seem to be getting the message Holden was sending. Corporate America has just come through a year of palace coups, which brought power struggles to new lows or highs. At General Motors, American Express and IBM, chief executives fought to hold on to their jobs, only to be replaced by someone new or even by one of the board members who used to do his bidding. In this spring’s annual meeting season, more fireworks are expected. But now, during a pause in the action, many in the corporate community are wondering what comes next. Boards have shown they can take action when the going gets rough. But today’s directors, experts say, usually lack the ability–or the stomach-to take action well before losses, layoffs and even bankruptcy lawyers strike. The next step for corporate America: remake your boards.
A refresher course would be a good start. At many companies, for instance, directors seem to have forgotten that they are supposed to represent their constituents: the shareholders. “Every director I know gives [that] lip service,” says John J. Byrne, who recently resigned from the AmEx board in the midst of a power struggle that led to the resignation of CEO James Robinson III. “But less than 20 to 30 percent act that way.” Instead, directors have tended to be golfing buddies handpicked by the CEO who engage in mutual back-scratching.
Now “corporate boards are waking up like Sleeping Beauty after a hundred-year nap,” says Anne Hansen, deputy director of the Council of Institutional Investors, an activist group. It’s not a kiss that is waking them, but rather a few slaps in the face. The takeover mania of the 1980s first put the spotlight on boards, as shareholders demanded that directors worry about them, not the CEO who could lose his job. Judgments against directors accused of mismanagement shot up, pushing insurance premiums up 914 percent since 1982, according to The Wyatt Co., a consulting firm. Recession and competition added new pressures. When stocks fall, profits falter and plants close, people want to know who’s to blame. In the past, complaints about corporate performance provoked one reply: don’t like the stock? Sell it. But most stock now is held in big blocks by big investors, like pension or mutual funds, and selling can disrupt markets. So activists such as Ralph Whitworth of United Shareholders, lawyer Ira Millstein, who helped topple GM’s Robert Stempel, and Robert Monks, who took on Sears, have been agitating for change.
Some companies didn’t need such prodding. Dayton Hudson, which runs stores like Marshall Field & Co., is in some ways a model; it has term limits for directors and meets regularly without the CEO, to raise hard questions in private. But even Dayton Hudson’s innovations aren’t enough for reformers. The board of the ’90s, they say, should do more:
The CEO runs the company. But the CEO should answer to directors, and directors to shareholders. This has been more theory than reality because many CEOs recruit good friends. One answer is to separate the jobs of CEO and chairman, and make the latter an outside director.
The ideal director is “not a brother, not a lawyer who could get businesses from the company,” says Hansen. Companies have always had both " inside" directors-including the CEO-and “outside,” or so-called independent directors. But they aren’t always so independent. Director Henry Kissinger, for example, has served on at least one board of a company that has also awarded his company lucrative consulting contracts. And many directors serve on each other’s boards. Such cozy relationships get much of the blame for boards’ passivity.
Headhunter Paul McKinnis says that companies used to ask questions like, “Is he free the second Tuesday of the month?” Now he gets more specific requests like, “We want a CEO with real-estate experience, who competes in global markets and has made radical changes in manufacturing.”
Even with careful recruiting, tenure is an issue. A board position shouldn’t be “a sinecure for someone who’s 80 years old and dozes through meetings, even if he doesn’t snore,” says consultant David Swinford. Older directors may not understand the latest in technology or customer demands, say consultants. One answer: term limits. Dayton Hudson requires directors to retire after 15 years, or when they reach 65. Byrne, the former AmEx director, recommends a seven-year limit.
Companies that indulge in “what Hollywood calls “stunt casting’,” says activist Nell Minow, get more marquee value than expertise. Critics howled, for example, when Revlon chief Ronald Perelman named Nancy Reagan to its board, even though the company is private. AmEx’s Robinson once told Dale Hanson, the head of Calpers, the California pension funds, that he had to have a big-name board “because we’re a worldclass company.” Hanson retorted, “What we want is a hardworking board.” Not everyone agrees on who is a merely decorative director. Diva Beverly Sills, now on the boards of AmEx and R.H. Macy, among others, did get management experience running the New York City Opera. But critics say that isn’t enough.
Traditionally, women and minorities were big names or came from nonprofit organizations, universities and government. Even if they could contribute, they were often treated as tokens. But now more women and minorities have had real management opportunities and are able to offer more.
Directors in the biggest companies fetched an average of $38,000 in 1992, not including travel expenses or stock grants, says Spencer Stuart, a consulting firm. They may get even more, as companies require them to attend more meetings and serve on fewer boards. Also popular is rewarding them with more stock to inspire responsible actions. Sears now requires directors to hold at least 1,000 shares. But Salomon Inc. chairman Robert E. Denham says the number of shares isn’t what counts; the stake has to make a “meaningful” difference to the director’s net worth. Many experts believe that change is accelerating. “There was a time when it wasn’t considered nice to discuss another board and its failings,” says Millstein. These days peer pressure works in reverse. If you aren’t tough, you get a black eye. But some are less optimistic. There’s plenty of resistance; the Business Roundtable, a CEO group, objects to some of the new Securities and Exchange Commission rules giving shareholders more power. Even those who believe in change aren’t crazy about taking action. Take John Byrne, the former AmEx director who calls himself a “convert” to the new wave in. What about his own company, Fund America? Byrne admits that he is both chairman and CEO and has five directors, “all of whom are good friends.” Will he follow his own advice? “No,” says Byrne. “I like it just the way it is.”
