BUSINESSWEEK ONLINE : DECEMBER 4, 2000 ISSUE
COVER STORY

Clubby Boardrooms 'R' Us


Last year, when then-CEO Robert Nakasone was shown the door, many investors became concerned that the primary problem at Toys 'R' Us Inc. (TOY) might not have been operational woes but a personality conflict. At issue, say former executives and investors, was that Michael Goldstein, chairman of the board and Nakasone's predecessor, didn't like the way the new guy was shaking things up. Today, with John Eyler settled in the corner office, some observers still worry that the board may be too heavily influenced by Goldstein and company founder Charles Lazarus and that Eyler may not have the freedom to make much-needed changes.

Goldstein firmly denies that he exercises undue influence. He blames Nakasone's departure on a difference of opinion with the board and poor company performance. But Goldstein maintains that Eyler is in charge now. As proof, he points to his own plans to step down as chairman by June, with Eyler taking his place--a condition that Eyler set before accepting the CEO job. Eyler insists the board has been only helpful since he arrived.

DIVIDED LOYALTY. But the presence of two ex-CEOs on the board leaves some critics shaking their heads. John M. Nash, president of the Center for Board Leadership, says a CEO should step down from a board once he leaves day-to-day management to avoid divided loyalties among board members. The danger, says Nash, is ''always having the old CEO second-guessing the new.'' And it doesn't help that there are no chief executives from other large companies on the Toys 'R' Us board to balance the company's former CEOs.

Compounding the question of who's running Toys 'R' Us are the hefty paychecks that both Lazarus and Goldstein have drawn from the company. Lazarus has received more than $35 million since stepping down as CEO in 1994 under a consulting deal outlined in the company's Securities & Exchange Commission filings. Goldstein is being paid $300,000 a year as a consultant to Toys 'R' Us, documents show, and for the five months last year when he was interim CEO, his salary rose to an annualized $900,000. ''They're both being compensated at levels which suggest the company is looking to them for leadership,'' says James E. Heard, CEO of Proxy Monitor, an adviser to institutional investors on governance issues.

Lately, the board has made some progress toward establishing more independence. Howard W. Moore, who had been Lazarus' general merchandising manager in the 1980s and who runs a consulting firm whose clients have included major Toys 'R' Us suppliers, stepped down this year. Such close ties to a company can compromise a director's independence and are important to disclose in proxies, board experts say. But recently, Toys 'R' Us didn't disclose them. Also missing from filings until this year was the fact that long-term board member Robert A. Bernhard, who also recently stepped down, owns 25% of a company that has rented space to a Babies 'R' Us store in Tulsa for $334,000 a year since 1996.

Goldstein and Eyler are now searching for three new outside board members to add to the ranks--at least one of whom, Eyler says, is likely to be a CEO of another company. He says one of them could be named before the end of this year, the other two in early 2001. Maybe then the Toys 'R' Us board will look less like a private playhouse.

By Nanette Byrnes in New York

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