Board Games

By THOMAS McCARROLL

His company was bleeding rivers of red ink, and his shareholders were openly critical of his abilities as a manager. But John Akers, chairman of IBM, defiantly rejected calls for his resignation. Even as late as December, he claimed to have the complete backing of his board of directors. But at an acrimonious board meeting last week -- the first since the company reported a record loss of $5 billion for 1992 -- Akers changed his tune. After an emotionally charged meeting with the seven members of the powerful executive committee, Akers, 59, informed the fully assembled board of his decision to step down.

Three days later, the board of Westinghouse Electric summoned embattled company chairman Paul Lego. Dogged by heavy losses and stockholders' criticism, Lego had fallen out of favor with the board. After a spirited argument, the CEO announced his immediate retirement.

On Saturday, American Express announced that its chairman and chief executive officer, James Robinson III, was resigning after a bruising battle with his board. Two months ago, the board at American Express moved to sack him after a long string of blunders and miscues. Robinson initially agreed to step down when a successor was found. Then, after a divisive battle, Robinson faced down the board and early last week held to the chairmanship, picking his chosen successor, Harvey Golub, as chief executive. Three dissident directors resigned. Robinson's triumph lasted just four days, during which Amex stock dropped 13%. Investor groups began to call in. On Friday, yielding to pressure from all sides, Robinson gave up. "We made what we thought was the best decision, the right decision. However, it led to unnecessary confusion in the minds of some investors and the press," he said, and finally resigned.

While Akers, Robinson and Lego all claimed they decided to step down willingly, most analysts believe they were pushed out. Says Ralph Whitworth, president of the United Shareholders Association: "They had no choice."

Last week's three ousted chairmen thus joined a long line of executives who ) have fallen prey to the most significant new trend in American corporate governance since the takeover mania of the 1980s: boardrooms, as they discovered, are ceasing to be clubby havens for beleaguered executives. Puppets no more, directors are responding to financial and legal pressures from angry shareholders by rising up against management in open revolts that would have been unthinkable a decade ago. While such boardroom activism is nothing new at smaller companies, where directors tend to hold large ownership stakes, it is now spreading to top FORTUNE 500 corporations that are struggling to cope with tough times. In their willingness to take on bloated corporations and entrenched management, directors have become oddly reminiscent of the takeover artists they so feared a few years ago. "Corporate boards are taking up where corporate raiders and hostile takeovers left off in the 1980s," says John Nash, president of the National Association of Corporate Directors.

In stepping down, Akers, Robinson and Lego add their names to a growing list of chief executives who have been unseated by their boards, including Joseph ("Rod") Canion at Compaq, James Ketelsen of Tenneco, Tom Barrett at Goodyear and Paul Kazarian of Sunbeam-Oster. Perhaps the most famous boardroom putsch took place at General Motors last October, when the board ousted chairman Robert Stempel after he failed to revive the sagging automaker. Two weeks earlier, the board at Digital Equipment Corp. -- the nation's third largest computer maker -- deposed company president and founder Kenneth Olsen after huge losses forced DEC to revoke its 35-year-old no-layoffs policy. Analysts say restless boards at Sears, Champion International, Citicorp and Tandy may soon stage coups of their own.

Taking on the boss is a radical departure from the role typically played by corporate boards. Selected by the CEO, board members have long been viewed as part of an old-boy network, and coddled with the same cushy perks and privileges as the top brass. Even now, in spite of the new activism, corporate boards are basically an interlocking fraternity of golf buddies and corporate insiders. Two-thirds of board seats, for instance, are filled by chief executives of other companies whose loyalties tend to be with their fellow CEOs. James Robinson may have prevailed as long as he did in large part because he picked 17 of the 19 American Express directors, including Union Pacific CEO Drew Lewis (on whose board Robinson sat). Says Abraham Nad, publisher of the newsletter Directorship: "It's a you-scratch-my-back, I'll-scratch-yours kind of relationship."

But that clubbiness is now being replaced by fear. Shareholder lawsuits against corporate directors, for instance, are increasing more than 20% each year, largely as the result of bank and thrift failures. Shareholders prevail in about 80% of the cases. Damage awards rose 25% last year, to an average of $10 million. Last month the directors of the failed First RepublicBank in Dallas were forced to pay $22 million out of their own pockets to settle government charges of misdeeds.

The potential risks are enough to frighten away some would-be directors. R. David Thomas, chairman and founder of the Wendy's fast-food chain, turned down an offer to be a board member at Jefferson Savings Bank in Ohio because of possible legal and financial liabilities.

Another source of fear is institutional investors. While unseating corporate directors is even more difficult than dislodging political incumbents, big investors are using their vast holdings to put pressure on board members. At the Westinghouse annual meeting last November, shareholders led by the giant California Public Employees' Retirement System (Calpers) cast 7% of their ballots against the slate of directors picked by the company -- a sharp departure from the usual 99% support given to board members by shareholders. At Sears, about 6% of shareholders withheld votes from management-picked directors, while at Pacific Enterprises a record 16% opposed the slate of directors put up by management. Says Richard Koppes, general counsel for Calpers, the nation's largest public pension fund, with $72 billion in stock holdings: "It's a chain reaction: we pressure the board and the board pressures the CEO."

As a result, board members are taking the job more seriously. Though it was once common for an individual to sit on as many as 10 boards, directors now typically serve on a maximum of four. More important, board members now want to involve themselves in the nitty-gritty of corporate affairs, from basic strategy to succession planning for the CEO. They are increasingly probing into new areas: computer security, political contributions and social issues.

Directors are also showing more independence. A survey of corporate directors commissioned by Calpers, for example, found that 35% of some 600 board members surveyed thought corporations should split the roles of chairman and chief executive. The outside directors at General Motors did just that last November. The study also revealed that 98% of directors thought that the board should evaluate a CEO's performance at least once a year. A growing number of companies, including Honeywell and Dayton Hudson, already require annual CEO evaluations.

Board members urge shifting even more power to outside directors. Outside directors outnumber insiders at big firms 3 to 1, in contrast to 2 to 1 a decade ago. IBM plans to transfer control of its compensation and nomination committees to outsiders.

This new breed of directors is shattering yet another inveterate corporate practice by turning to outsiders to replace outgoing CEOs. Michael Walsh, former chairman of Union Pacific Railroad, was recruited by the Tenneco board to succeed CEO James Ketelsen, and John Smale, former chairman at Procter & Gamble, replaced GM's ousted chairman Robert Stempel. The IBM board is expected to bring in an outsider to succeed John Akers, marking the first time in the company's 79-year history that a non-IBMer will occupy the top spot. Among the rumored candidates for the job: Apple Computer CEO John Sculley, former NCR chairman Charles E. Exley Jr. and retired Hewlett-Packard president John Young.

Analysts predict that the 1990s will be an unprecedented period of board activism. Says Thomas Neff, president of Spencer Stuart, an executive-search firm specializing in directors: "The horse is out of the barn. Directors have watched what their peers are doing and they're saying, 'Hey, if it can happen at GM, it can happen anywhere.' "

What's taking place, says John Kotter, professor of management at Harvard Business School, is a fundamental change in boardroom dynamics. The totem-pole hierarchy, with the CEO on top, is being replaced with a "power triangle," with the CEO, shareholders and board sharing power almost equally. For once sheltered managers, the message is clear. In the activist 1990s, there will be no comfy sinecures and no automatic votes of confidence.