Friday, August 28, 2009

FMC's Bob Malott Stepped It Up

The news that FMC Corp. was joining the S&P 500 stock index this month brought to mind a former chairman and CEO of FMC who wrote one of the hardest-hitting articles on director responsibilities that I have published as editor of Directors & Boards.

Robert Malott (pictured) was his name, and we titled his article — to perfectly reflect the no-nonsense nature of his commentary — "Directors: Step Up to Your Responsibilities."

Malott joined FMC, which we described in the article as one of the world's leading producers of chemicals and machinery, in 1952. He was elected CEO in 1972 and chairman of the board in 1973. He retired in 1991, but stayed on the FMC board as chairman of the executive committee and also was serving on the boards of Amoco Corp. and United Technologies Corp. when we were working together in 1992 to publish his article.

How about these four pointers of Bob's for showing what it means to step up to your responsibilities:

• "If a CEO wants strong board members, he will get them."

• "If a CEO wants the board involved, it will be."

• "If the CEO feels the board role includes tough-minded evaluation of his own performance, the board will oblige."

• "And if the board chooses, evaluates, and rewards a CEO on the basis of shareholder value, the directors will get a CEO who puts shareholder value first."

Beautiful stuff. And Bob also tells in his article a candid story about how he came to lead FMC:

"I was invited to become FMC Corp.'s chief executive office in a very civilized manner. The chairman of the board's search committee invited me to dinner in San Francisco, and over drinks broke the news. I was the board's choice for the top job.

"My response rather startled the director. Instead of the usual, 'I am honored by the board''s confidence in me, etc.' I replied flatly, 'How do you know that I'm the man you want?'

"No board member had asked me what I stood for, or what I would do as CEO. As it happened, I had a number of plans, most of which represented a significant break with the status quo. The directors needed to know about those plans. They needed to accept them. They needed to give me the authority to move forward decisively, without being routinely second-guessed. And they needed to hold me accountable for achieving what would now be mutually agreed-upon goals."

Something makes me think that the board never regretted its choice, however naively made, of Bob Malott as FMC's CEO. As the company steps up to inclusion in the S&P 500, let's give a nod to its past leader who not only stepped up the company's governance but, even more, stepped up Corporate America's governance thinking and practices.

Wednesday, August 19, 2009

Stephen Cooper on Why CEOs Fail

Stephen Cooper has just parachuted into yet another troubled situation — Metro-Goldwyn-Mayer Inc., where he will be helping to lead a recovery of the film studio. This "turnaround guru," as the Wall Street Journal called him, has made several appearances in the pages of Directors & Boards, most notably as a cover story author in 2002 with his article,"Why CEOs Fail."

It appears from the initial reports of the ouster of MGM CEO Harry Sloan that the challenge ahead is a balance sheet one, trying to get out from under a mountain of debt piled on in an LBO five years ago. But in reviewing Cooper's article, in which he laid out what he termed "the six key factors that can lead a company into troubled waters," it's worth highlighting the one that, of all six, he reserves special mention:

"By far the single most critical factor responsible for CEO failure is management denial. It is not unusual in my business to receive a call midweek from a company that suddenly finds itself unable to meet Friday's payroll. How does this happen at large, multinational companies run by skilled people, who presumable have operating and financial controls in place?

"In my experience, surprises of that magnitude are fueled by an ongoing management mindset that leans on reactive excuse-making rather than proactive ferreting out of problems.

"Ironically, it can be a company's very success that lulls a CEO into complacency. And in complacency are sown the seeds of mistaking symptoms for causes, shunning bad news, and avoiding tough decisions."

Cooper was serving as interim CEO of Enron Corp., heading that historic salvage operation, when he wrote those words for us. MGM is no Enron, but it is yet again a prominent example of what Cooper says he has seen over and over in the many "meltdowns" he has worked on — "a combination of systemic flaws, strategic errors, and human failings ... exacerbated by weaknesses in current corporate governance practices."

I wish him well in the MGM revival, but something makes me think there won't be a lot of new lessons learned in this turnaround. He, and we, have seen this picture before. It's called "Why CEOs Fail."

Sunday, August 16, 2009

'Mad Men': The Board Invitation Scene

The TV series "Mad Men" returns today for its third season. I am a fan — I like the show's 1960s milieu and ad agency setting. The '60s was my coming of age decade, and one of my early jobs was in an ad agency. Not all of the show's plot lines grab me, but when the episodes turn their attention to the conduct of business, the writing and acting can be surprisingly on the money.

As in this scene from last season. Listen in. The three principles involved are Don Draper, the ad agency's creative director, and Roger Sterling and Bertram Cooper, the agency's two senior co-partners. After his role in winning a lucrative new account, Martinson's Coffee, for the agency, Draper is summoned to a meeting with the two senior partners.

Cooper: "Sit with us."

Draper (sits down in a chair facing them): "Thank you."

Sterling: "Jim Van Dyke of Martinson's Coffee was thoroughly impressed. He's inviting you to join the board of the Museum of Early American Folk Arts."

Draper: "That's nice. What is it."

Sterling: "It doesn't exist yet."

Cooper: "But I've seen the opening exhibit. Whirlygigs" (waves hands).

Draper: "Do they need a campaign?"

Cooper: "No. Philanthropy is the gateway to power."

Draper: "If you say so."

Sterling: "We need you to continue your excellence in advertising, but also to start treating this like part of a bigger business, which it is."

Draper (looking a bit puzzled): "I will."

Cooper: "Do you understand what this means? You're going to be wearing your tuxedo a lot more. It's time for the horse to catch the carrot."

Cooper asks Sterling to leave the room. Then the senior statesman of the firm (wonderfully played by Robert Morse) draws Draper into his most paternal confidence.

Cooper: "Would you agree that I know a little bit about you?"

Draper: "A little."

Cooper: "There are few people who get to decide what will happen in our world. You have been invited to join them. Pull back the curtain ... and take your seat."

From a pop culture TV show, an unexpected insight about governance: a board invitation as recognition of one's arrival at a new stage of leadership and as entree to a whole new sphere of influence.

The illustration above, thanks to an interactive feature of the show's website, is yours truly — my personalized icon as a "Mad Men" character.

Tuesday, August 11, 2009

The Board Equivalent of 'Mission: Impossible'

I wrote about Harvey Golub being elected to the board of AIG back in May of this year when his nomination was announced. At that time I revisited a past cover story he authored for Directors & Boards and highlighted several of his beliefs about best-practices board leadership that seemed particularly pertinent to the AIG setting — including this one: "Never surprise the board. Never ask it to vote on a complicated issue without explaining its nuances and risks." My conclusion at that time was that AIG was fortunate to have him as a new board member to help it emerge from the rubble, if such a feat is possible.

Well, Mr. Golub, who retired from American Express in 2001 after seven years as chairman and CEO, has now been named chairman of AIG. That's cause for even greater optimism for the chance of a reemergence of this once-mighty firm. "Harvey Golub is one of the most experienced and respected executives in the financial services industry today, known for his leadership, integrity, and business acumen," said outgoing AIG Chairman Edward Liddy of his successor.

On this auspicious occasion, I can't help but dip back into that article for some more archival Golub wisdom on board practices. As an example of his frankly confronting the toughest of challenges, he addressed what many chairman, CEOs, and directors have found to be a "third rail" in the boardroom — trying to get rid of a director. Here is what he had to say:

"Sometimes a board member just doesn't work out. He or she does not focus on the major issues, or fails to devote sufficient time, or is unable to work with the rest of the board in a collegial fashion. How to deal with this problem?

"More often than not, trying to remove a board member smoothly is the corporate governance equivalent of 'Mission: Impossible.' It is one of the more divisive steps that one can take on a board, one that can poison an atmosphere so as to not make it worth the effort.

"The one time I found that the American Express board was having a problem with a director, I discussed the issue with a senior board member. We talked about the options for dealing with that director, and both of us concluded that seeking his departure from the board would not be worth the internal difficulties it would cause."

That's a candid admission. He writes in his article that he favors either time limits or age limits as a way to address the problem. Some shareholders might not be happy to know that a board is tolerating an underperformer and is just waiting him or her out. But board effectiveness demands a degree of board collegiality. And board chairman survival requires not stepping on any third rails ... or taking on, as Golub calls it, a "Mission: Impossible."

This from the fellow who just became chairman of AIG. "Mission: Impossible," anyone? We stay tuned in.

Friday, August 7, 2009

Wild Blackberrys in the Boardroom

I don't allow any kind of cellphone use in my classes. Students don't make phone calls, but it's the texting and message checking that drive me nuts, and that's what is verboten. When I'm in front of the class, I'm the chairman of the board calling the meeting to order. Full attention and engagement is required.

I do share with the class the experience I had attending a directors' conference at a leading university in New York City. I had a seat in the back of the room. There was a high-powered panel on stage — standout board leaders addressing substantive matters. But as I looked around the room from my sweeping vantage point in the back, all I saw were accomplished executives hunched over their Blackberrys scrolling away and texting furiously. So much for attention being paid to the governance thought leadership being conveyed on stage. A shameful sight, I thought at the time — and still think so. My students get the message.

From anecdotal tales of how widespread Blackberry use is during board meetings, I fail to understand how board chairmen tolerate it. Not every chairman does. I was glad to hear that there is at least one chairman who doesn't allow cellphones in the board meeting. In an interview I did with Rick Goings (pictured), chairman and CEO of Tupperware Corp., for the cover story of the Q2 2009 issue of Directors & Boards, he told me this about his board practices: "No Blackberrys during a board meeting. I've sat in on some board meetings at other companies and everybody is on their Blackberrys. Our board members don't do that." Good for him for having such a policy.

And now comes the Financial Times story, "Why Email Must Disappear from the Boardroom." It makes a persuasive case for banning Blackberrys in the board meeting. Among its pointers:

• "Attention is a scarce resource. Indeed, some management thinkers have described it as the scarcest resource in most organizations. Splitting attention between two tasks is something people simply do not do well."

• "When a corporate director starts replying to an email, which task is receiving attention: the message or the meeting? The most plausible answer is the message, which means that the director who is working on his email is dedicating scarce resources to something other than that for which shareholders are paying. If your lawyer billed you for time spent working on someone else's project, it would be considered negligent at best."

• "In our experience, we are witnessing more and more situations in which board members are expressing outrage at some of their colleagues' inappropriate use of their wireless devices. ... In the light of such complaints, the preponderance of scientific evidence, the fiduciary responsibilities of directors and the obvious conflicts between reasonable duties of care and multitasking, we offer this modest proposal to improve the state of corporate governance worldwide: all board should disclose that they have a 'no wireless device' policy during meetings."

Failure to put in such a policy, concludes the FT critique, "should result in lost support for the board and its individual members." And, by extension, it should result in greater support for board chairmen like Rick Goings who have a policy of demanding full attention and engagement from their board colleagues.

Tuesday, August 4, 2009

An M&A Tale from the Drake Hotel

Today's news about PepsiCo concluding a long-running offer to buy out two of its bottlers for almost $8 billion caps a nifty little run of recent M&A action. Add in Sprint Nextel Corp. acquiring Virgin Mobile USA, Bristol-Myers Squibb buying Medarex, and IBM nabbing SPSS Inc., and we have some impressive green shoots presaging a pickup in deals activity. These deals are nicely timed to tie in with the just-released "Mergers & Acquisitions 2009" Boardroom Briefing — the quarterly single-topic special reports issued by Directors & Boards.

Back to the PepsiCo deal. According to this report in the Wall Street Journal, after months at the negotiating table it took the CEO of PepsiCo inviting a director of Pepsi Bottling Group to her home, where they hashed out the final price, to make the deal happen. "Real deals are struck between people, not institutions," notes the WSJ. Rightly so.

I had that observation told to me personally 25 years ago from one of the most savvy dealmakers I ever met. "The most important facet of any transaction is to establish a personal relationship between the seller and the buyer — not as companies, but as individuals," said a fellow named William Fishman. When I met him in the early 1980s Fishman had built, over the course of the previous four decades as a serial acquirer, a multibillion-dollar company called ARA Services — now known as Aramark Corp. "Until the seller has faith and believes the buyer," Fishman added, "the transaction is a very cold and probably unsuccessful one." This is a story he told me to powerfully illustrate this fundamental law of M&A:

"I well remember one transaction where I had worked the better part of three years on acquiring a company in Chicago that we desired very much, and I wasn't getting anywhere. The company was a competitor, so there was a natural amount of skepticism and hostility between us.

"But one day I just happened to take this fellow whose business we were trying to acquire to a restaurant in the Drake Hotel in Chicago. The waiter came up — I knew the waiter, I had been there often — and my guest looked at the waiter and, in the middle of his sentence, broke out in tears weeping. Well, it turned out that the waiter had waited on my guest's father back on the West Side of Chicago, and had always taken good care of his father — who had just recently died.

"This fellow had a tough, hard shell, but he wasn't hard inside. When I understood what he was crying about, that's when he and I began to relate. Those are the kinds of things that get into an acquisition that finance people don't always understand."

End of Bill Fishman's story. But it seems to be the start of a new chapter in PepsiCo's growth for CEO Indra Nooyi. Yes, there are financial, legal, strategic, and tactical dimensions to getting a deal done. But ... never forget the human element. Click here to get access to a copy of our Boardroom Briefing "M&A 2009" report.

Saturday, August 1, 2009

Harold Geneen and David Ricardo: Two Clear Thinkers on Pay Controls

The Corporate and Financial Institution Compensation and Fairness Act of 2009 was approved on July 31 by the House and sent to the Senate. It's a package of pay-regulating provisions, including a say on pay vote for shareholders and measures aimed at compensation committees and the pay arrangements of top executives. Said one of the House members, "The bill that passed out of Committee today reins in excessive compensation and ends the perverse incentives that caused too many executives to engage in overly risky behavior."

Well, we'll see about that. Much more ink to be spilled and rhetoric to be aired before this legislative initiative is signed into law in present or altered form.

In times of regulatory zeal to clamp down on executive pay — and there have been many such times in my 28-year tenure here at Directors & Boards (in fact, I hardly know of any extended period when there was no political pot-stirring over CEO pay) — I like to turn to one of the late and great masters of American capitalism for some clear thinking. That fellow is Harold Geneen (pictured), who ran International Telephone and Telegraph Corp. from 1959 until 1977, its glory days as a world-beating conglomerate.

I just wrote a personal reflection of Geneen, who died in 1997, for my editor's note in the July e-Briefing, the Directors & Boards monthly newsletter. I also included in the newsletter a key passage from a past article that I published by him that offers some of the most rational advice you will read on paying a top executive.

The following observation of his didn't make it into the above-cited advisory, but it concluded his original full-length article that I published right before he died 12 years ago. It's a warning that has extra urgency now that this House-backed bill is wending its way to the Senate:

"The government shouldn't shoulder in with social engineering solutions. David Ricardo, the 19th century economist, got it right in 1817: 'Wages should be left to the fair and free competition of the market, and should never be controlled by the interference of the legislatures.' "