News: Analysis & Commentary: CORPORATE GOVERNANCE
THE RUSH TO QUALITY ON CORPORATE BOARDS
Why more U.S. companies are scrambling for top-notch outside directors
Is good corporate governance contagious? Last fall, Harvey Golub accepted an outside directorship for the first time since he became chief executive officer of American Express Co. in 1993. Golub joined the respected board of Campbell Soup Co. Now, Golub is searching for two high-powered outsiders to bolster his own company's comparatively lackluster board. AmEx is looking for "CEOs who come from stellar shareholder-value companies," according to Dennis C. Carey, vice-chairman of SpencerStuart, which is conducting the search.
Golub has plenty of company. All sorts of big, name-brand U.S. companies are suddenly scrambling to add marquee directors to their boards. SpencerStuart and other recruiters are awash in assignments from outfits looking for outside directors: SpencerStuart is conducting 150 director searches, up from 60 two years ago. And companies are not only adding more outsiders but also vastly upgrading their requirements. Figureheads, celebrities, and yes-men are out: The new prototype is a forceful, knowledgeable executive--preferably a CEO. "Boards are trying to find directors that better reflect the dynamics of the business," says Gregory E. Lau, executive director of corporate governance at General Motors Corp., which last year added the CEOs of Eastman Kodak, Compaq Computer, and ABB Asea Brown Boveri to its board.
Companies want outside directors who can take an active role in helping guide the business and who will reassure--or at least placate--restive investors. In a recent survey of 50 large institutional investors, McKinsey & Co. found that stockholders were willing to pay 11% more on average for the shares of companies considered well governed--that is, companies in which outsiders constitute a majority of the board, own significant amounts of stock, are subject to formal evaluation, and are not personally tied to management.
NETTLESOME. There can be an immediate payoff from announcing the intention to beef up a company's board. Just ask Time Warner Inc. The media conglomerate, which recently ranked 22nd from the bottom on BUSINESS WEEK's list of America's 25 worst boards, announced on Feb. 11 that nominees for its board elections in May would include two prominent CEOs: Stephen F. Bollenbach of Hilton Hotels Corp. and Gerald Greenwald of UAL Corp. Bollenbach is a well-practiced dealmaker who knows entertainment from his stint as chief financial officer of Walt Disney Co. Greenwald took part in the restructuring that saved Chrysler Corp.
Time Warner Chairman Gerald Levin stresses that bringing in Bollenbach and Greenwald was his idea. "[I wanted] active CEOs with a real financial orientation," Levin says. Investors applauded: Time Warner's shares jumped nearly two points, to 41 1/2, on Feb. 11. "If [Time Warner Director] Beverly Sills spoke up, who would listen? Who cares?" says Sarah Teslik, executive director of the Council of Institutional Investors. "But when you put a Bollenbach on the board, you better believe they'll listen."
On the same day, Dow Jones & Co., another beleaguered giant, unveiled a plan to add three outside directors, CEOs all: the suddenly omnipresent Golub of AmEx, Frank N. Newman of Bankers Trust, and William C. Steere Jr. of Pfizer. Dow Jones's move wasn't wholly voluntary. CEO Peter Kann was under pressure from his most nettlesome critics--Elisabeth Goth and William Cox III, two members of the family that controls Dow Jones. Unhappy with the decision to invest an additional $650 million in Telerate, they each submitted a list of proposed directors. Cox's list included Nathan P. Myhrvold of Microsoft Corp. and Jim P. Manzi, former CEO of Lotus Development Corp. None of their nominees was accepted, but the changes have apparently placated the two family members, at least for now.
TOUGHER. At WMX Technologies Inc., CEO Phillip B. Rooney learned the hard way how much investors want stronger boards--and management. As part of a restructuring plan announced on Feb. 4, WMX installed a new outside director--Paul M. Montrone, CEO of Fisher Scientific International Inc.--and hired Heidrick & Struggles Inc. to recruit two more outside directors by its annual meeting in May. The makeover plan disappointed Wall Street, however, knocking already depressed WMX stock down 10%. George Soros, whose fund-management firm controls 5.2% of WMX's shares, demanded four seats on the board and urged Rooney to step down as president and CEO.
On Feb. 18, Rooney complied. He stepped down and is being replaced temporarily by Chairman and former CEO Dean Buntrock. Meanwhile the WMX board is searching for a new, outside CEO. "The ultimate test of whether WMX has gotten the message," says Nell Minow, a principal of Lens Inc., another dissident WMX shareholder, will not be who it chooses as CEO but whether it fills the two outside directorships with top-notch names.
Few companies have overhauled their boards to better effect than Dynatech Corp. This maker of telecom gear revamped its board after John F. Reno became CEO in 1993. When he arrived, the board consisted of the two founders plus some academics and consultants--many of them retired or near to it. "The old board, though it had some fine people, had an extremely small knowledge of our business," says Reno.
Revitalizing Dynatech's board was a key element of Reno's strategy, which involved selling off 25 peripheral businesses and remaking the company as a smaller, more profitable, and better focused operation. He and an ally gradually replaced seven of the nine old directors: The new board consists almost exclusively of CEOs or ex-CEOs in high tech. Peter van Cuylenburg, who joined last year, was once chief operating officer of NeXT Computer Inc. and is a former CEO of Mercury Communications. L. Dennis Kozlowski, CEO of Tyco International Ltd., is a mergers-and-acquisitions ace. Since 1993, Dynatech has seen its share price quadruple.
With success stories such as Dynatech, it's no wonder good outside directors are hard to find. After all, the best CEOs have their own companies to run. And the new rule of thumb among management experts is that an active executive should sit on no more than three outside boards. "We are suffering a lot of rejection," says Roger M. Kenny of headhunters Kenny, Kindler, Hunt & Howe. In the end, CEOs who ignore the growing emphasis on tough outside directors are likely to end up feeling the same way.By Anthony Bianco and John A. Byrne in New York, Richard A. Melcher in Chicago, and Mark Maremont in BostonReturn to top