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No Fair Shake For Shareholders

In too many instances, investors face inadequate management supported by an ineffective board. It’s time to reappraise the accountability system.

Shareholders in corporate America cannot get a fair shake in the absence of effective corporate leadership. The takeover phenomenon clearly indicates the inadequacy of traditional corporate leadership. In many instances the takeover is accomplished by individuals who have had little or no experience in corporate management, and who would not have been given serious consideration as candidates to fill the CEO position. Despite their lack of managerial experience, they have been frequently able to provide substantially higher returns to the shareholders than those available from highly paid corporate managers. It is a sad commentary on our corporate leadership that highly talented, but inexperienced, outsiders can provide superior shareholder benefits.

Often, the entrenched management appears to be more interested in perpetuating their positions through a wide range of legal and contractual measures rather than meeting their primary responsibility of enhancing shareholder value. A classic illustration is the takeover of leadership at GAF.

On April 19, 1983, the GAF Shareholders’ committee for new management, led by Sam Heyman, sent a letter to GAF shareholders headlined “Time for New Leadership.” It called for the election of a new slate of directors to replace the CEO, Jesse Werner, and his fellow directors. Forbes magazine described GAF as having “one of the worst corporate performance records in American industry.” After a long and costly struggle the shareholders’ committee was able to oust the old GAF board of directors and elect a new slate.

Under Heyman’s leadership, the result has been a dramatic turnaround in the fortunes of the company and its shareholders (Heyman had no prior experience in corporate management). When the committee was formed in March 1982, the GAF common stock price was $8.63. In less than three years after Heyman took over, the price had more than quadrupled. Compare this impressive increase with the statement made in the April 19 letter, that there had been an 80 percent decline in GAF common stock prices (adjusted for inflation) over the past 18 years under the old management.

The story of GAF may be an extreme example, but inadequate corporate leadership is all too prevalent in American industry. The shareholders of a corporation are entitled to excellence in leadership. That is what they pay for and what they should get. Unfortunately, the rapid escalation in the compensation for corporate executives has not assured excellence in performance. At GAF, for example, the CEOs’ compensation had increased substantially despite “one of the worst corporate performances in American industry.”

In many situations, inadequate management is supported by an ineffective board of directors. This combination perpetuates the status quo-which means the shareholders continue to suffer. Many key employees are also shareholders. Nothing is more important in the business of a corporation than assuring leadership and managing the CEO. The board of directors represents the shareholders and is responsible to them. Often, the board fails to perceive the need for leadership action.

Shareholders can elect a strong board by voting for strong directors. Unfortunately, this is often not the case. Many times, the only candidates are those presented by the CEO and they are neither strong, nor independent. The incumbents are nominated regardless of merit and supported by large institutions that hold blocks which are voted mindlessly for the management slate. Thus, the concerned individual shareholder is effectively disenfranchised and cannot assure a strong board.

Carl Icahn has stated that, “The problem we have in our managerial society today is that there is no accountability, because corporate democracy is a travesty.” Except when someone like Icahn comes along, or a few others, and really holds them accountable, management really operates without any constraints.

Absent a Sam Heyman, this situation can only be corrected by the CEO, members of the board, institutions that hold large positions, or the government. The best scenario for the individual shareholder 1 is a strong board and CEO. A strong board assures a strong CEO and delegates the authority necessary to manage the business, while monitoring management performance and making final decisions on major commitments.

The leadership of a corporation should be reviewed annually. The CEO who has served well in the past may not be the right leader for the future. It is in his best interest to recognize when a change in leadership is needed and to recommend this change. By doing so, he can enhance the value of his own equity position. Jesse Werner of GAF would have been financially better off had he recommended new leadership.



There are a number of reasons why an entrenched CEO fails to take action to establish a strong and independent board of directors.

First, the CEO often does not fully appreciate the importance of a strong board in assuring the long-term future of the company. Second, it is difficult to weed out ineffective board members. Third, it takes time and effort to recruit strong board members. This has become increasingly difficult as litigation involving directors has become more prevalent-and insurance is either not available or prohibitively expensive. However, the principal reason may well lie in the personal characteristics of the CEO.

One common characteristic of a CEO is a well developed ego. Ego is essential to the confidence and self-assurance that enables him to rise throughout the organization. During his upward struggle, there are adversities and misfortunes, a boss to appraise his performance and peers to provide a continuous reminder of fallibility. However, once the CEO title is awarded, he stands alone at the top of the organization chart, often with no one to debate his viewpoints or calibrate his actions.

Everyone within the company is his subordinate. Many outside the company defer to his wishes; these include vendors, bankers, consultants, lawyers, politicians, and public servants. All want to earn his support so they tend to tell him what he wants to hear.

In larger companies, his time is conserved by limousines, jets, and helicopters. Some years ago at Rockwell, one of the board members used to fly to board meetings in a large corporate jet-a Gulf Stream II. Al Rockwell arrived in a much smaller jet-a Sabreliner. Then Rockwell obtained a much larger jet-a BAC 111. When the 111 was parked next to the Gulf Stream 11, it was clear which was the larger aircraft.

Most CEOs are excellent salesmen. Good salesmen themselves are often easy to sell. After receiving the plaudits and accolades of supporters and sycophants, the CEO often begins to believe that he is truly a superior being, indispensable as the leader of the business. And the immense power of the CEO position exerts pressure on others to support his views.

Some CEOs begin to think of the company as “their” company. One exception: When Al Rockwell was CEO of Rockwell International, their names did not appear on the front door. It is the shareholders’ company-and the CEO should be ever mindful of that fact.

In Chrysler’s darkest days, Lee Iacocca had a lot of freedom. One of the restrictions imposed by Chrysler’s creditors was the elimination of corporate jets. This was not well received by the CEO. It may be more than coincidental that once Chrysler became profitable and paid off its loans, it acquired Grumman Aerospace, which makes the world’s most expensive jet.

Arthur Collins of Collins Radio fame is a technical genius. Starting as a high school boy in Cedar Rapids, Iowa, he built a very successful company. As the company prospered, he was able to finance its growth simply by requesting the money. His board of directors was largely an inside board which did not adequately challenge his management style. As a result, he continued to spend heavily in pursuit of advanced technological goals. Ultimately, the company ran out of cash and Collins lost control of the organization he founded. Fortunately, the new management restored a substantial value to his stockholdings.

There is much to be said in favor of a healthy ego for the CEO. However, there is not a great distinction between a healthy ego and a closed mind that borders on arrogance. To consider a broad perspective, it is essential that the CEO’s views, plans, and performance be subjected to rigorous review. It should be conducted by an able, informed, objective, independent, and supportive body. The only group that can fully satisfy that need is a strong, enlightened board. Unfortunately, the unenlightened CEO may perceive the board to be a limitation on his freedom instead of a valuable, constructive force dedicated to enhancing shareholder values.



It is human nature to rebel against any restrictions on our freedom. Thus, a natural tension exists between a strong board of directors and the CEO. This can be a powerful force for progress if directed toward superior corporate performance. It can be a negative force if the CEO attempts to relieve this tension by making the board ineffective.

At Bekins, the CEO had a high energy level and a well-developed ego. The interaction between the CEO and the board created more effective leadership for the company. Unfortunately, the CEO began to take criticism of his ideas as a personal affront. It got to the point where he said that he could not work with one strong board member. His attempt to force the resignation of that board member was unsuccessful, but reduced the effectiveness of the board/CEO relationship.


Chairman of the board. Frequently, the CEO has the added authority of “chairman of the board,” with no clear cut delineation between his responsibilities as chairman and as CEO. If there were, it would be evident that there is a conflict of interest between the two. The chairman exerts great influence upon the board by controlling the number, time, and place of meetings; the agendas, the committee structure and the selection of chairmen. He frequently determines the management slate of directors-and thus the makeup of the board which is supposed to oversee his performance. For example, when a subject is being discussed, he can call on supporters of the program before he calls on opponents. Another technique is to seat “inside” board members, or strong supporters of the chairman on either side of the chairman. Thus, strong supporters are placed in the control positions; opponents may be seated at the far end of the table.

In other words, the CEO-in his role as chairman-is able to exercise substantial control over the board-the only group that can effectively control the CEO himself.

The inside board. The CEO may convince the board that other employees should be added to the board. The presence of employees tends to diminish its potency, as it is unlikely that anyone whose career is dependent on the CEO will vote against him. Also, each employee occupying a seat on the board deprives the company of a strong outside influence.

Ceremonial board. The obvious risk of having directors with substantial outside obligations is that they generally are unable to spend time on the affairs of the board, and cannot thoroughly evaluate management proposals or suggest alternatives. The result can be a “rubber stamp” board that simply votes in favor of everything.

Selection of board candidates. The CEO has a major influence on the selection of new directors. He can make certain that none of the candidates will be “disruptive” or have the “wrong chemistry”. The CEO may look for people who will support his own ideas, not those who will provide objective critiques, different perspectives, and new alternatives.

In one company, the CEO suggested a member of the local community for a board seat. The individual was very pleasant and had developed a positive relationship with the CEO. However, the board insisted they meet with the proposed candidate both formally and informally. Once they did, it became apparent that the candidate would not bring the needed skills, contribution, or independence to the board. In this instance, the CEO recognized the inadequacy of his candidate and withdrew the nomination.

Limitation on time. In some large companies the time available for board matters is limited by the schedule set by the chairman. At Chrysler, the board met from 10 a.m. until lunchtime. The period before 10 a.m. was reserved for committee meetings. For a company this large and complex, this schedule did not provide adequate discussion time. A dinner was held the night before, ostensibly to discuss the affairs of the company. However, the “discussion” was largely a monologue by the chairman.

One reason for abridged board meetings is the fact that members are busy and often travel to attend the meetings. Efforts of a chairman to shorten the meeting are often well received by many members. Board members who have to run to catch a plane are nearly always outside members. As they depart, the percentage of inside directors increases. Long board meetings with important matters to be considered at the end of the agenda are frequently overweighted by inside directors.

Approval methodology. Normally, board approval is required for a number of major items, such as large capital expenditures and changes in strategy. It is, however, relatively simple for the CEO to avoid the inconvenience of a thorough board review. This can be achieved by pre-committing portions of the project, or by planning a time limitation on approval which precluded alternative considerations. Another approach is to present a number of requests and ask for a single approval for all.

Consultants. Often, the matters to be presented to the board are prepared by outside consultants retained by management. A wise consultant is well aware of the views of the CEO. At Rockwell, McKenzie was engaged to recommend executive compensation to the board. This practice provided a vehicle for presenting management’s view to the board and it put McKenzie in the position of influencing the compensation of the officers.

How to assure a strong board. It is very difficult to establish and maintain a strong board of directors. If the CEO and/or the board members do not take the initiative, it will not happen-unless someone like Sam Heyman takes action, or a strong external force intervenes. However, there are

a number of steps that can be taken, and , even a single, enlightened director can initiate the process. The completion of any one of these actions will facilitate additional action.

Outside board. Ideally, there should be no employees on the board of directors other than the CEO. Employees can make their full contribution to the deliberations of the board without occupying a seat.

Separate chairman. The CEO should not be chairman. The chairman should be an outside director with sufficient time to devote to board matters. There should be a position guide for the chairman. He should be compensated adequately for his capabilities and the time required. He must eliminate ineffective board members and attract strong new ones. He should assure a mechanism for appraising the performance of the board. Since members are often CEOs themselves, their egos can present a problem when their performance is appraised. This will be a difficult objective to accomplish. A large percentage of major U.S. corporations have usurped the title of chairman for the CEO.

When an individual has the combined title of chairman and CEO he often pays little or no attention to his responsibilities as chairman. One way to highlight those duties is to have two separate position guides, one for chairman and one for CEO. An individual who is chairman as well as CEO should be appraised separately on performance in each position.

Committee structure. All board members should serve on at least one committee. The structure should adequately cover all of the board’s responsibilities in depth to assure protection of shareholder interests. Among the committees are: audit, compensation, nominating, and strategic planning. The CEO should not chair any of them.

The selection of the chairmen is particularly important, since they can exert substantial influence. They should be selected by a nominating committee, not by the CEO.

CEO appraisal. The board should establish a method for regularly appraising the performance and adequacy of the CEO. When a company is privately owned, the owners pay very close attention to how well the leadership has performed. There is no hesitancy in replacing leaders who are not doing the job.

Historical performance should be measured against opportunity as well as against plans or budgets. The position guide and mutually agreed upon objectives can be helpful in appraising CEO performance. In one company, a thorough review was given to the CEO. His reaction was, “You have stabbed me in the back.” In this situation, the CEO’s opinion of his performance was substantially different from the perception of the board. He had great strengths in some areas of current operations, but was completely inadequate in providing for the future. Since the board should take a long-range view of the business, it is essential that they measure the CEO on his current actions in making the necessary investments to assure future growth. No manager can have a longer range view of the future than that of his manager. Thus, if the view at the top of the company is short range, it forces a very short-term perspective throughout the organization.

There is a second appraisal that a board should make: that is, the role of the CEO to provide forward-moving leadership. Many circumstances can change in the life of a company which dictate a different type of future leadership. In one G.E. division, the principle criteria for future leadership became the ability to participate adequately in political and legal affairs. Historically, the requirement had been for low-cost manufacturing. It is essential that the board take time to appraise the current status of the business, its environment and its future outlook and then decide whether or not incumbent leadership is adequate.

The board cannot operate effectively unless it has a timely flow of information. It is the chairman’s responsibility to assure that board members are properly informed. The information should include not only written material, but also discussions with key members of management, audit firms, and consultants. Internal auditors, for example, should communicate directly with the audit committee.

Director nominees. Potential new directors should be selected and screened by a nominating committee of outside directors. While the CEO should be encouraged to identify candidates, he should not make the final selection.

One of the most important criteria in selecting board members is their willingness to contribute adequate time to the affairs of the company. Arbitrary rules on retirement age and expected length of services can severely and unnecessarily limit availability of outstanding board members. For example, a mandatory retirement at age 70, coupled with a five-year service requirement, virtually precludes anyone over 65. Since 65 is standard retirement age, it eliminates retirees-the more likely board members to have the time.



Some directors feel they should let the CEO have complete freedom unless they are ready to fire him-or “if it ain’t broke, don’t fix it.” Both imply that the board should do very little unless the company is in trouble. An alert and independent board can identify early warning signs and take action before the break takes place.

Computervision, for a number of years, was the leading company in CAD /CAMS. The excellence of their product offerings and their rapid growth in the marketplace enabled them to post dramatic gains in revenue and profits. However, despite the impressive financial performance, there were indications of trouble. Computervision was losing market share and new competitors were entering the field.



The investors in a company are entitled to excellence in leadership. However, in too many instances, they have inadequate management supported by an ineffective board of directors. The shareholder has no means to remedy the situation. Each member must look at the company and its management as an owner, and assure actions that will optimize owner values. One enlightened director can often make a significant difference.

There are several actions the director can take:

·               Assure effective leadership for the board of directors itself. A position guide and an annual appraisal for the Chairman of the board can start the process.

·               Filling new board seats with members who are capable, independent, objective, and available. A first step in this direction may be to insist that the nominating committee (made up of outside directors) identify and select new board nominees.

·               Assure an adequate appraisal of the historical performance of the CEO against material such as operating plans, position guides, and objectives. The chairman of the compensation committee should lead in this endeavor.

·               Establish an annual appraisal by the board of directors on the incumbent CEO’s ability to provide adequate future leadership. This should be discussed in executive session.

·               Initiate a formal review of corporate strategic plans to confirm that the proposed actions assure optimum shareholder value.

·               Oppose any action that tends to entrench the board and the management, and thus, to deny alternative courses of action to shareholders.

If the CEO is unenlightened, the enlightened board will replace him. If neither is enlightened, the shareholders will not get a “fair shake” unless both directors and management are displaced by an external force.

Robert C. Wilson is a principal of the California-based Wilson & Chambers-a venture capital investment firm that also provides consulting and board recruitment services. Wilson is former president, chairman, and CEO of Memorex and former president, director and CEO of Collins Radio, and has served in senior executive positions at G.E. and Rockwell International, where he was a director. His past and present board memberships include: Chrysler, GAF, Storage Technologies, Western Digital Corp., Computervision, Southwall Technologies, Syquest and Photonics Corp., among others.

About robert c. wilson