The Issue: When a Takeover Creates Conflicts

Smurfit-Stone's parent was bought out by a group that owned rival papermakers. Some directors wound up serving two masters. They had to go

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It can be a little awkward in the boardroom when several directors are not only insiders but competitors, too. That's precisely the predicament that Patrick J. Moore, now chairman and chief executive of packaging company Smurfit-Stone, faced in 2003. The company had been created a few years before when the No. 1 paperboard company, Stone Container, merged with the No. 6 player, Jefferson Smurfit—the U.S. subsidiary of a family-controlled Irish paper outfit. The board of the new company had representatives from both the old Stone and Smurfit companies.

The arrangement seemed to work, until a private equity deal muddied the waters. In the spring of 2002, Chicago private equity heavyweight Madison Dearborn Partners launched a leveraged buyout of Dublin's Jefferson Smurfit Group, which was still the majority shareholder of Smurfit-Stone. The complicating factor: Madison Dearborn already held a large stake in Packaging Corp. of America, a main industry rival. Because of the buyout, Michael Smurfit, who was Smurfit-Stone's chairman at the time, and the other Jefferson Smurfit-affiliated directors were caught in a conflict of interest.

By June, 2002, when the deal went through, Smurfit-Stone CEO Moore was in a thorny spot. Smurfit-Stone, like other paper companies, was struggling with slack demand and oversupply. Plus, the company was still digesting its sizable acquisition of smaller paper company St. Laurent, which it had bought in 2000. It was carrying a hefty debt load and barely making a profit—hardly an auspicious time to find a new board.

A Draconian Move

But there was little choice. The Sarbanes-Oxley bill had just become law, and the regulations about board conflicts were explicit, remembers Moore. The Smurfit-related directors had to go, even though it meant huge board turnover in one fell swoop. At the 2003 annual meeting, "we effectively lost half our board," says Moore, who subsequently took the chairmanship. "While it was a draconian move, it was something that we really had to do." The upside: It gave the company the chance to go after directors with specific skills. These carefully chosen directors have helped Smurfit-Stone with its strategic transformation, according to Moore.

In fact, Moore is two-thirds of the way into a major restructuring, which will result, he says, in a leaner, meaner company—one better equipped to compete in a challenged industry. By 2010, Smurfit-Stone will have a third fewer workers, facilities, and equipment. "It's a top-to-bottom transformation," he says.

Moore has sought to simplify the company's strategy as well. Smurfit-Stone, headquartered in Chicago but with offices in St. Louis, has pared back its focus to concentrate on container board, used to make cardboard boxes, and corrugated containers. Shoppers everywhere have probably unknowingly used Smurfit-Stone products in the packaging of any number of consumer goods from the likes of Procter & Gamble (PG) or Anheuser-Busch (BUD), for example. There's obviously still work for Moore&Co. to do: Last year, Smurfit-Stone had sales of $7.4 billion, but posted an operating loss of $103 million.

In addition to the turnover in the boardroom, Moore has welcomed plenty of new faces among the management ranks. Currently, about half of the senior managers at Smurfit-Stone are "either new to the company or new to their responsibilities," he says. He adds that, in some operational areas, as many as 60% of line managers are new to the job. "Over the last couple years we've been in a position to bring in some real great talent from both inside and outside of the industry," Moore says. "We've got a lot to do still in 2008."

Hindo is BusinessWeek's Corporate Strategies editor in New York .