Companies & Industries

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

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."

When an upheaval sunders your board, it's a chance to think hard about what skills are best going to benefit the company

The governance issue Smurfit-Stone Chairman and CEO Pat Moore describes—suddenly losing half his board because a private equity deal created conflicts of interest for several directors—meant a loss of knowledgeable board members and left the company scrambling to replace them. But such a situation has a real upside, too:

Most CEOs inherit the boards of their predecessors, and many spend their first few years angling to remove the underperformers and add directors whose expertise would be genuinely helpful to the company. While the situation may initially have seemed daunting, Moore was in a position many other CEOs would envy.

Start with a "Blank Sheet" Approach

Any CEO in this situation needs to work with the governance committee, which is responsible for director recruitment, to make sure those empty board seats will be filled with new directors who optimize the board's composition. Start with a blank sheet of paper and this mindset: If the company had no directors and were about to do an initial public offering, what skills and experience would you want to make sure were resident at the board table? You need to think about issues the company will probably be dealing with in the next three to five years.

Optimal board composition can and should differ widely from company to company: All boards need a financial expert. Most find it helpful to have at least two directors with a background in their industry. And nearly all find the perspective of an active or recently retired CEO of a comparably sized company to be a real asset.

But after that, boardroom expertise should reflect corporate strategy: If international expansion is fueling corporate growth, this should be reflected in board composition. If growth is linked to R&D or technology breakthroughs, directors with a background in the relevant science can be critically important. If M&A is the pathway, directors who understand different aspects of doing deals and integrating acquired companies can be invaluable.

Once they've agreed on what optimal board composition looks like, the CEO and the governance committee can see what skill sets they already have from remaining board members and determine where there are gaps. If there are more "gaps" than spare chairs in the boardroom, they'll have to make some decisions about priorities or look for people who can do double duty.

Set Up an Off-Site Meeting

Moore's situation at Smurfit-Stone is similar to what a Midwestern utility I worked with went through when it spun off its largest business unit. Half the board went with the new company, and half stayed with the parent. Having replaced the lost directors with some outstanding new recruits, the company wanted to capitalize on the talent at its board table and make the most of its first off-site with a "new" board.

Before this off-site, I interviewed all of the board and executives who regularly interface with the members. Among other things, I asked longer-serving board members and executives about the areas where they felt the previous board had been particularly effective—and where this new board could be even better.

I also asked new directors about their expectations and what they saw as priorities in the next 6, 12, and 18 months. This provided the basis of a terrific dialogue at the off-site, which accelerated the board's development and aligned the board and management on some important issues, including how the board and senior execs would engage on corporate strategy, how they could streamline the board agenda, and how they could modify packages of preparatory reading material to make them less cumbersome.

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

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