Board of Governors
Hewlett-Packard is the latest of many public companies embroiled in scandals resulting from boardroom misbehavior or negligence. Private companies, free of S.E.C. regulation, generally escape such damaging media exposure, but are their Boards any more responsible than those of Enron, WorldCom, Tyco et al.? If Directors can’t stand up to management in a public company, how can they be bold enough to govern a private one, where the Chair is not only the founder but the majority owner and parent of would-be successors?
Many of us recommend that our clients treat the Board of Directors as a serious governing body, bringing the experience and greater objectivity of outsiders to the benefit of the shareholders. But how often do we see Boards that add real value to the enterprise—even when they seat several smart non-family Directors? This humble blogger invites your comments on that question.
One of the few public companies I’ve consulted to had an impressive group of outside Directors—who seemed to be little more than window dressing, good enough to fool the thousands of shareholders who traded this Fortune 500 company’s stock on the New York Stock Exchange.
Dan, 78, had built his father’s string of Ohio stores into a retail empire, marketing the brand brilliantly and taking its holding company public thirty years ago. When I met him, Dan was Chairman and CEO, his wife Marie, 80, was President of the operating company that accounted for most of their sales (though not their profits), one son was nominal President of the other major business, and his younger brother, 40, reported to Marie, in charge of U.S. sales.
I thought I was being brought in to help with succession planning—help the parents let go—but the problem turned out to be more complex than a brilliant entrepreneur’s resistance to retiring.
The sons had a plan: Dan should yield the CEO title to elder brother, and Marie, while keeping her title of President for public image purposes, should give up operational control of that business to the younger brother. Both brothers would report to the Board. A key motivation for this plan was the sons’ recognition, agreeing with all four top managers I interviewed, that Marie’s impulsive, autocratic directives in a billion-dollar business she only superficially understood was threatening to tank it.
What the sons didn’t know, or refused to acknowledge, was that the long-time senior managers didn’t consider either of them any more adequate to lead the company than their mother was. It was those managers, under Dan’s leadership, who had built the company’s reputation. A couple of their colleagues had recently retired, but the four, all in their fifties, struggled to remain loyal to the founder they admired, working around Marie’s imperiousness when she was there and her absence on vacations about half the time. Each of them more or less told me he or she would take an early retirement the moment Dan stepped down, if the “boys” were given anything more than titular status.
Clearly, this would be an important matter for the Board. It consisted of the four family members (an older sister neither worked nor was a Director), plus five distinguished outsiders. Two of them were former Governors, one a Republican and one a Democrat, of different states. At least one of those, I knew, had been President of his own family’s business before entering politics. Two other Directors were businessmen, one with a Wall Street background and the other a man Dan had known for many years. The fifth was President of a well-known sectarian university of which Dan was a Trustee, and to which he and Marie were major benefactors.
Two of the senior managers shared another concern that also might have troubled a fiduciary Board: Dan and Marie were milking the company. His salary of over two million a year may have been within the range for a business of this size (this was nearly 20 years ago), but Marie’s only slightly lower salary was out of line with her contributions to the business. Worse, they used the company jet more for personal travel than business; the company paid for home remodeling, their personal art collections, and a “retreat center” in St. Thomas that saw minimal use for business meetings; and both sons’ salaries were far out of line with their positions (unlike the salaries of non-family managers).
I didn’t last long as consultant in this case. The pointed questions I raised with Dan and Marie were unwelcome. Before our last meeting, however, I did have the opportunity to talk by phone with one of the outside directors, the retired CEO of a private company in the same industry. He made it clear that he was well aware of everything the executives had told me. Wasn’t the Board concerned about those matters? I asked. “A few of us are,” he said. “Bob ______ [the other independent Director] actually brought up the matter of all the personal expenses and asked if the auditors had been aware of them, or if our tax lawyers rendered an opinion.”
“And …?”
“Bob said that without some such outside opinion, ‘I don’t know if I’m comfortable serving on this Board if the budget is approved that way.’ Dan just stared him down, quietly, and said ‘Do let us know what you decide.’ ”
The man recounting this didn’t indicate that he shared the other Director’s doubts about remaining on the Board. I didn’t lecture him, but he must have got the drift of my thoughts.
I’d like to be able to report that the company’s performance and share price went to the dogs or that the family failed to maintain its control into the next generation, as a result of the Board’s weakness. All I know is what’s in the public record. The older son is listed as Chairman and CEO. Dan and Marie have both passed away. The company is thriving, still publicly owned and family controlled.
Was that an unusually ineffective Board? Does it matter?
copyright reserved 2006, Kaye Family Business Associates, Inc.
Many of us recommend that our clients treat the Board of Directors as a serious governing body, bringing the experience and greater objectivity of outsiders to the benefit of the shareholders. But how often do we see Boards that add real value to the enterprise—even when they seat several smart non-family Directors? This humble blogger invites your comments on that question.
One of the few public companies I’ve consulted to had an impressive group of outside Directors—who seemed to be little more than window dressing, good enough to fool the thousands of shareholders who traded this Fortune 500 company’s stock on the New York Stock Exchange.
Dan, 78, had built his father’s string of Ohio stores into a retail empire, marketing the brand brilliantly and taking its holding company public thirty years ago. When I met him, Dan was Chairman and CEO, his wife Marie, 80, was President of the operating company that accounted for most of their sales (though not their profits), one son was nominal President of the other major business, and his younger brother, 40, reported to Marie, in charge of U.S. sales.
I thought I was being brought in to help with succession planning—help the parents let go—but the problem turned out to be more complex than a brilliant entrepreneur’s resistance to retiring.
The sons had a plan: Dan should yield the CEO title to elder brother, and Marie, while keeping her title of President for public image purposes, should give up operational control of that business to the younger brother. Both brothers would report to the Board. A key motivation for this plan was the sons’ recognition, agreeing with all four top managers I interviewed, that Marie’s impulsive, autocratic directives in a billion-dollar business she only superficially understood was threatening to tank it.
What the sons didn’t know, or refused to acknowledge, was that the long-time senior managers didn’t consider either of them any more adequate to lead the company than their mother was. It was those managers, under Dan’s leadership, who had built the company’s reputation. A couple of their colleagues had recently retired, but the four, all in their fifties, struggled to remain loyal to the founder they admired, working around Marie’s imperiousness when she was there and her absence on vacations about half the time. Each of them more or less told me he or she would take an early retirement the moment Dan stepped down, if the “boys” were given anything more than titular status.
Clearly, this would be an important matter for the Board. It consisted of the four family members (an older sister neither worked nor was a Director), plus five distinguished outsiders. Two of them were former Governors, one a Republican and one a Democrat, of different states. At least one of those, I knew, had been President of his own family’s business before entering politics. Two other Directors were businessmen, one with a Wall Street background and the other a man Dan had known for many years. The fifth was President of a well-known sectarian university of which Dan was a Trustee, and to which he and Marie were major benefactors.
Two of the senior managers shared another concern that also might have troubled a fiduciary Board: Dan and Marie were milking the company. His salary of over two million a year may have been within the range for a business of this size (this was nearly 20 years ago), but Marie’s only slightly lower salary was out of line with her contributions to the business. Worse, they used the company jet more for personal travel than business; the company paid for home remodeling, their personal art collections, and a “retreat center” in St. Thomas that saw minimal use for business meetings; and both sons’ salaries were far out of line with their positions (unlike the salaries of non-family managers).
I didn’t last long as consultant in this case. The pointed questions I raised with Dan and Marie were unwelcome. Before our last meeting, however, I did have the opportunity to talk by phone with one of the outside directors, the retired CEO of a private company in the same industry. He made it clear that he was well aware of everything the executives had told me. Wasn’t the Board concerned about those matters? I asked. “A few of us are,” he said. “Bob ______ [the other independent Director] actually brought up the matter of all the personal expenses and asked if the auditors had been aware of them, or if our tax lawyers rendered an opinion.”
“And …?”
“Bob said that without some such outside opinion, ‘I don’t know if I’m comfortable serving on this Board if the budget is approved that way.’ Dan just stared him down, quietly, and said ‘Do let us know what you decide.’ ”
The man recounting this didn’t indicate that he shared the other Director’s doubts about remaining on the Board. I didn’t lecture him, but he must have got the drift of my thoughts.
I’d like to be able to report that the company’s performance and share price went to the dogs or that the family failed to maintain its control into the next generation, as a result of the Board’s weakness. All I know is what’s in the public record. The older son is listed as Chairman and CEO. Dan and Marie have both passed away. The company is thriving, still publicly owned and family controlled.
Was that an unusually ineffective Board? Does it matter?
copyright reserved 2006, Kaye Family Business Associates, Inc.
posted by Ken Kaye at 11:09 AM
3 Comments:
So--what's the problem?
This is an interesting case with the added information that the sons became the execs of the companyand apparently successfully. It suggests that a consultant has to be as skeptical of competent managers' opinions as of the family members. I wonder if the loyalty of the managers to the dad made it impossible for them to be objective about the sons. There is a reason that incoming high level execs bring in their own people -or, the sons and the father would have had quite a bit of work to do to transfer that loyalty if it was even possible. Your story reminds me that a consultation often turns up problems beyond the ones the consultant is asked in to help solve, and then we can be in a pickle! JK
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Sorry for offtopic
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