12/08/97 COMMENTARY: AT&T: HOW TO TURN A DUD INTO A DYNAMO

Return to main story

COMMENTARY: AT&T: HOW TO TURN A DUD INTO A DYNAMO

When David W. Johnson arrived at Campbell Soup Co. as CEO seven years ago, he knew that a strong board could greatly aid his efforts to turn around the sleepy company. He was right.
Under Johnson's leadership, Campbell became a luminous performer and a pioneer in enlightened corporate governance. He recruited more independent directors and empowered the board to take a prominent role in strategy and succession. Johnson was so right, in fact, that C. Michael Armstrong, AT&T's new chairman and CEO, would do well to head down the road to Campbell's headquarters for a chat.
WHO CARES? Armstrong inherits a board of directors that has little, if any, credibility. Under former Chairman Robert E. Allen, the board was widely seen as an ineffective, cozy club better suited for the distant past. Four out of every 10 of the money managers and governance gurus who responded to BUSINESS WEEK's poll singled out the AT&T board as among the worst in Corporate America. No other board got as many negative votes. ''At AT&T, directors have gone from one disaster to another, and they just don't seem to care,'' says Nell Minow, a principal of investment fund Lens Inc.
Through a series of strategic miscues, harmful acquisitions, and a yearlong succession fiasco, this board failed to exercise effective control over Allen. Its deference to the powerful CEO has been very costly: AT&T has racked up one write-off after another, and its shareholders lost out on the biggest bull market ever.
To rebuild credibility, Armstrong sorely needs to overhaul his board and make it into a proactive, independent partner in his turnaround effort. Luckily, investor pressure already has started the process. Within the past two years, AT&T has turned over a third of its outside directors. The newbies--the CEOs of Eastman Kodak, Johnson & Johnson, Chevron, and Caterpillar--are respected leaders with the savvy and toughness to speak up.
There's still a need, however, to pump more fresh blood into this 12-member board. Armstrong should start by getting rid of four directors who collectively own just 10,088 shares of AT&T stock--much of it given to them by AT&T--even though they have accumulated a total of 50 years on the board. Former CBS CEO Thomas H. Wyman, Columbia University ex-President Michael I. Sovern, and consultants Donald F. McHenry and Kathryn Eickhoff have never made a substantial economic commitment to AT&T or its shareholders. That's in stark contrast to new director George M.C. Fisher, Kodak's CEO, who bought nearly 5,000 shares a month before coming aboard.
Armstrong shouldn't stop with this group, however. Director Walter Y. Elisha's public statement that ex-President John Walter lacked the ''intellectual leadership'' to head AT&T was a big error in judgment. Even if the comment is true, it was Elisha and his colleagues who rubber-stamped Allen's choice to begin with--after making what many view as the blunder of not interviewing any other candidate for the job.
CANDOR. Once Armstrong cleans house, he needs to set up a governance committee and formal measures to make sure the board will work hard for shareholders. AT&T must abolish all benefits programs for directors and pay them in stock. It also should set substantial stock-ownership targets.
AT&T's board, moreover, needs a formal process of evaluating its own effectiveness and that of individual directors. To help Armstrong do the job he's capable of, all outside directors should meet once a year without him, spurring them to evaluate his progress candidly--and offer frank criticism if something goes awry.
Finally, Armstrong needs to employ his directors in efforts to rebuild the company's reputation with investors. Independent board members should embark on visits with him to AT&T's major institutional investors, if only to promise that they now clearly have the shareholders' interests at heart. It's the kind of advice Armstrong would likely hear from Johnson at Campbell.
By John A. Byrne

Return to main story