It Happened in Davos

We had great success with our "It Happened in Norway" issue — in which we devoted a sizable chunk of the Third Quarter 2010 edition to exploring the provocative move toward mandated gender quotas for corporate boards of directors. The movement got rolling in Norway and has begun extending into other European corporate sectors, including France and Spain. That particular edition was widely acclaimed for its thorough and balanced treatment of this hot-potato topic and has almost sold out all overrun copies.

Well, guess who else is hot on the issue of gender quotas? The powers that be that run the World Economic Forum (WEF), underway this week in Davos. The best report on this development comes from the U.K.'s Guardian newspaper, in its article "Davos Imposes Gender Quota." Here are a few key pointers from the article:

• In an attempt to improve the traditionally dismal gender balance at this month's event, the WEF has for the first time imposed a minimum quota of women.

• The forum's "strategic partners" — a group of about 100 companies including Barclays, Goldman Sachs and Deutsche Bank — have been told they must bring along at least one woman in every group of five senior executives sent to the high-profile event. Strategic partners account for 500 of the 2,500 participants expected this year.

• Relatively few women have benefited from this high-level schmoozing. Women made up only 9-15% of those present between 2001 and 2005. Progress has been made — last year 17% were women.

• Critics may argue that one in five is actually a pretty small achievement, and real progress would call for two or three. Just finding one suitably senior candidate this year, however — given the gender balance in the global business elite — may prove enough of a challenge.

A challenge, yes, but surely one that can be met. If a country like Norway has found a sufficient number of women to populate the 40% mandated gender quota of its major corporations' board seats, then so can the comparative handful of pooh-bahs that descend on Davos.

Of course, the big knock on this Swiss schmoozefest (try saying that five times!) is that it is "more talk and partying than action." Which raises the interesting question: Would the right kind and number of women leaders even be inclined to mosey on over to the WEF shindig, mandate or not? But that is a gender-balance — or, should we say, gender-difference — question for another day.

Directors & Boards cover illustration by Dave Gothard

Founder-CEOs: Proceed with Caution

Larry Page (pictured) may make a fine chief executive of Google Inc. It is not at all unknown for company founders to be exceptional CEOs and, in fact, for some to come back into the role and do good things for their companies, as this Business Insider feature displays. But a fair number of founders have fumbled as operating chiefs. Thus, shareholders have room for concern in the surprise leadership change at Google that finds Eric Schmidt stepping down as chief exec.

Directors & Boards author Randy Thurman served on a board with a founder. It was not a happy experience. He cited it in a classic article he wrote for us in 2000 titled "The Unique Nature of Small-Company Boards."

In many smaller companies the founder is also the CEO or even chairman. On one board where I participated, the founder was the chairman, CEO, president and chief scientist. The company outgrew his executive and scientific ability. Because he was the founder, the board hesitated far too long in addressing his deficiencies. By the time we did, the individual had created numerous problems. When faced with the problems and the board decision to remove him from his executive roles, the founder resigned. It took several years to correct his mistakes. The board (and I was a director) should have acted sooner. The tendency to give founders too much time to overcome their deficiencies is common. The founder usually sits on the board, making candid discussion of his problems difficult. Inevitably it remains a board problem until resolved.

Thurman, who has been in a number of boardrooms in his roles as a chairman, CEO, board director, advisor, and investor — with particular expertise in technology and health care — also offered some cautionary words about scientists on boards:

The scientist as a director can present unique challenges for the small company. This may be more applicable in high-tech or health care industries where there is a prevalence of scientifically and medically trained executives. No one would take anything away from their extraordinary intelligence, educational credentials, scientific skill, and professional accomplishment. But their tendency can be to focus solely on the technical and scientific issues and avoid the business and governance challenges of the board.

In addition, I have observed that science and business executives do not always mix well at the board level. A CEO friend of mine calls it the problem of the "MD-iety." I know for a fact that the scientific types have their own issues about us purely business types, but therein lies the problem and small companies experience more of this conflict of professions. By the way, I am not suggesting that there is no room on small public company boards for the scientist; but, one well-suited scientific director may be just the right number.

Two examples underscore this issue appropriately. The first was a Fortune 500 company where I was on the board. Of nine directors, one was an M.D. and dean of one of the top five medical schools in the country. His presence over many years added value consistently in numerous ways. His contribution was in proportion to the other eight corporate types on the board. In contrast, I sat on a small-company board where the chairman was a Ph.D. and two of the directors were M.D.’s. Their desire to concentrate board time on scientific matters became a detriment. (As a side note, it still amazes how much they disagreed among themselves on scientific matters.) Ultimately, two were asked to step off the board and the one remaining M.D. contributes greatly.

While Google is anything but a small company, it is not much of a stretch to see Randy Thurman's observations having some perhaps worrisome degree of application to the tech giant now with co-founder Larry Page assuming the CEO role. This is a development that thrusts the Google board — and Google owners — into a whole new dimension of leadership monitoring.

When Illness Comes to the Corner Office

Shareholders have every right to worry when a CEO is felled by illness, as Apple's owners are doing right now with the announcement by Steve Jobs of his latest time out for medical treatment.

Close observers of the company and its executive team seem confident in the company's bench strength. Nonetheless, there is still plenty of reason for trepidation. As John Tropman, a Directors & Boards author who has studied the implications of executive illness, wrote in our pages in 2008, "Boards and staff colleagues are left stumbling because, incredibly, there still are no accepted approaches to executive impairment."

In his thorough analysis of the organizational instability created by CEO illness, Tropman identifies three of the leading "bench" dangers:

• Office Distraction — Illness generates succession politics. As the executive’s attention wanes and his or her time becomes attenuated, others with an eye on the “executive prize” begin to strategize for power, influence, and possible succession. Major distractions develop as various executives and cadres strive for current influence and future power. The organization can suffer “mission attenuation,” in which employees begin to rivet their attention on who will be the ultimate “winner” rather than on the objectives of the business.

• Bad Decisions — Illness diverts decision making into backchannels or “non-responsible parties” (e.g., Woodrow Wilson’s wife; a boss’s support person).

• Uncertainty Reigns — Colleagues (superiors, peers, subordinates) experience problems similar to those confronted by the ill person’s family. Bosses do not want to intervene too soon. Subordinates do not want to appear overreaching but also do not want to delay intervention for fear of being faulted for undue delay. Peers are not sure what their role is, or could be, or should be, especially because they might be in line for succession if the ill person cannot resume her duties. Subordinates are perhaps in the most difficult position, because they are climbing up the power grid and anything they say is suspect.

John Tropman is a professor of nonprofit management at the University of Michigan School of Social Work and an adjunct professor of management and organizations at the university’s Ross School of Business. His co-authors on this article, titled "When Illness Comes to the Corner Office" [Third Quarter, 2008], are Robert Winfield, M.D., head of and a practicing physician at the University of Michigan Health Service and the university’s chief medical officer, and Penny Tropman, a practicing social worker, an adjunct professor in interpersonal practice at the University of Michigan School of Social Work, and a principal at Midlife Renaissance, a firm that offers wellness programs for individuals and the corporate market.

Here is a sobering bit of counsel that the three authors offer that should be taken under advisement not only by the Apple board but other boards that face this extremely uncomfortable, and not uncommon (AIG and Sara Lee, e.g., have just gone through this) situation:

Executive illness is a complex and important problem in the executive suite. The idea that one can rely on the executive to take the lead in the handling of his or her own illness is problematic for many reasons, not the least of which is that denial is characteristic of many illnesses. On the other side, “governors” — whether they be board members or staff colleagues — seem woefully ill prepared to take action.

Few options have been thought through and put in place to be readily exercisable. This gap creates and supports indecision and inactivity. Hence, we are faced with inaction on more or less every side, broken only by some dramatic event that forces steps to be taken. We owe our executives, our shareholders, and our organization’s stakeholders better than such stumbling.

Here is a slightly expanded excerpt that we ran in the Directors & Boards e-Briefing from "When Illness Comes to the Corner Office."

ITT: Present at the Creation

ITT Corp. is making its final endgame move in dismantling the historic behemoth that Harold Geneen built in the 1960s and '70s. It will separate its remaining major businesses into three specialized companies serving the industrial products, water treatment, and military equipment industries.

Renowned investment advisor Felix Rohatyn was present at the creation of the corporate empire that Hal Geneen built upon his joining ITT in 1959. He was a close counselor to Geneen and banker on the multitudinous deals that were to come. In fact, Rohatyn brought to Geneen the very first deal that started it all — a small company in California called Jennings Radio Manufacturing, which made vacuum switches and other products for the telecom industry.

Rohatyn recounts that first step in the launch of the ITT conglomerate in his memoir Dealings: A Political and Financial Life [Simon & Schuster, 2010]. It was a deal that came with a certain amount of boardroom drama and had crucial implications for the future of the company, as Rohatyn describes:

Here was an acquisition, I suggested, that made sense for ITT. Not only did it fit into Geneen's plan to build an economic core of American technological concerns, but Jennings was also a company with potential: its engineers were exploring new and profitable areas.

Geneen was intrigued. He ordered his staff to run the numbers and to investigate the science. Very quickly, they agreed: purchasing Jennings Radio made sense. It was a deal with a promising upside. And the $20 million price — a pittance for ITT— was reasonable.

It would be Geneen's first acquisition as CEO, and the first deal we had made together. But my excitement was abruptly dashed. When Hal proposed the purchase to his board of directors, he reported to me with a feisty bewilderment, they were reluctant. The board did not want ITT to make the deal.

Geneen realized at once that more was at stake than simply the acquisition of a small San Jose technology concern. The board was attempting to undermine his control — and all his large plans for the future growth of ITT. With a calm resolve, he gave the board members an ultimatum: either the deal is made, or I will resign.

The board capitulated. With the acquisition of Jennings Radio, the principle was established in the company that what Harold Geneen wanted, he would get. Hal was soon off and running on one of the largest acquisition sprees in American corporate history. And I was running with him.

Now that the Geneen empire is drawing its final curtain, how interesting to see how that first act set the stage for what was to come.

A Tag Line Retired

"Directors & Boards is to the field of corporate governance what Variety is to show business."

That was the judgment rendered 10 years ago by the New York Stock Exchange's nyse magazine, at that time a well-written and designed publication distributed to the Exchange's member companies. In its Winter 2001 issue, the magazine took a look at what was ahead for corporate boards and turned for insight to Directors & Boards as one of its primary sources.

When the article appeared and we saw what was written about us, our reaction was, "What a wise conclusion this authoritative outsider came to." Of course we used the NYSE's Variety comparison as a tag line in our promotional materials and other outreach to the governance marketplace. Beyond the feel-good nature of this commendation, we did feel they got it right — that we were producing a journal that anyone serving on a board or interested in being a director needed to read, just as anyone working in the entertainment industry needed to be reading Variety.

But that apparently is not the case anymore when it comes to Variety. A recent report in TheWrap, an online Hollywood news service, concludes that Variety has lost its once-dominant position in the entertainment must-read hierarchy: "Beset by aggressive competitors and shackled by a paywall in the age of instantaneous news coverage, Variety has become a shadow of its former self," writes TheWrap's Sharon Waxman.

As someone who first started being an avid Variety reader in my teens, I am saddened that it may be sliding into irrelevance. And I am almost inconsolable that it looks like we must retire what has been a venerable descriptor for Directors & Boards. As I read other coverage coming out of Hollywood that traces the ups and downs of the trade papers, it unfortunately appears that Variety is no longer to the field of show business what Directors & Boards is to corporate governance.

Dealmaking: Feeling the Love

This could be an "uh oh" moment. The Financial Times reports today that M&A deal making is hitting the $83 billion level already this year — the busiest start for deal activity in a decade. According to the FT, "U.S. companies are estimated to have $1 trillion in cash on their balance sheets and are expected to come under increasing pressure to put those funds to work or return money to shareholders."

Well, we know where this is headed. Managements are generally loathe to return monies to the owners, and doing deals is ever so much more fun and dynamic. That is where the "uh oh" comes in. And where a good board needs to come in.

Let me turn to Robert Denham (pictured) to amplify.

Bob Denham, as you may recall, parachuted into Salomon Inc. with Warren Buffett to help stabilize the investment firm following its 1991 Treasury auction scandal. He had been a partner in the law firm of Munger, Tolles & Olson, where he had worked for 20 years advising clients on strategic and financial issues, and to which he returned after resolving all the legal and regulatory issues that threatened to destroy Salomon and negotiating the sale of the investment firm to Travelers Corp. for almost $10 billion. When the dust cleared on all that travail, he recorded a set of thoughtful observations on corporate governance for a Directors & Boards article that we titled, "What Should We Expect from a Board?"

When it comes to M&A, here is what, unfortunately, shareholders can often expect:

The board can play a valuable role in connection with proposed acquisitions. Ego, animal spirits, and badly structured compensation systems all conspire to encourage CEOs to love acquisitions even when shareholders should hate them. Vastly more money is wasted on bad acquisitions than on overpaid CEOs.

For a board to be effective here, however, it has to have its own sense of the value of things — the value of their company and the target. While a good investment banker will seek to privately discourage management from a bad transaction or from paying too much, the board is unlikely ever to get a sense of this. If the transaction is being presented to the board, any good management will have found an investment banker to endorse it. There is really no substitute for the board making its own judgments about value, and that is something that many boards are ill-equipped and ill-prepared to do.

With M&A signings already so robust, and with all that cash sloshing around on balance sheets, shareholders can be forgiven for looking ahead trepidatiously at a banner year of "uh oh" moments in dubious dealmaking.

Josh Weston's Math

"The clothes are great, but the governance isn't," writes New York Times DealBook Editor Andrew Ross Sorkin of how the planned buyout of J. Crew is being handled by management and the board. Sorkin's verdict came in his Jan. 3 column devoted to "roasting and toasting" the deal makers of 2010.

Questions abound about CEO Mickey Drexler's influence in driving the deal, especially his seemingly tardy timing in bringing the board into the loop on the discussions he was having with backers to take the company private.

I note that Josh Weston is on the J. Crew board and is a member of the special committee overseeing the deal process. Weston is a former chairman and CEO of ADP Inc. and a veteran public company director. (Before joining ADP in 1970 he was No. 2 at J. Crew.) I was in attendance when he was given an "Outstanding Director" award by the ODX organization in 2006.

He is a past Directors & Boards author. In 1998 I published his article, "A Formula for Prosperity," in which he offered up "10 principles that I have learned that have been most relevant and helpful to me as CEO of a team that achieved [as of that date] 146 consecutive growth quarters." A remarkable record for a remarkable company.

One of his 10 principles always particularly resonated with me, and I think of it again in connection with the J. Crew deal. It was his Principle N0. 9: "The ADP Math Adds Up." Here is what he means:

At ADP, 39 plus 1 equals more than 40 plus 0. What do I mean? Forty plus zero represents the very, very busy person who's got a loaded in-basket while the phone is ringing every 15 seconds. In his 40-hour week, he's busy dealing with all of this stuff, with zero time to think about what he's doing and how he's doing it. A 39-plus-1 person has the same in-basket and phone problem. Nonetheless, he will take one of his 40 hours to think about improving or even eliminating some of what he's doing. A 39-plus-1 person will get a lot more done than a 40-plus-0 person.

I can't imagine that Josh Weston is a happy camper that J. Crew's governance is the butt of an Andrew Ross Sorkin slapdown. Knowing a little bit about him, his track record as an engaged director, and his "formula for prosperity," I think the chances are fairly strong that there will be some Weston math happening in sewing up a deal at J. Crew that will wear well for management and shareholders.

Photo of Josh Weston at time of his article's publication in 1998.

The Cosmic Banana Peel

My holiday reading included the book Bird by Bird: Some Instructions on Writing and Life by bestselling author Anne Lamott (pictured). It was a gift from Directors & Boards lead columnist Hoffer Kaback. Here is a passage that jumped out at me:

"Remember that whenever the world throws rose petals at you, which thrill and seduce the ego, beware. The cosmic banana peel is suddenly going to appear underfoot to make sure that you don't take it all too seriously."

Were truer words ever spoken? We are all familiar with the dynamic: At the moment, or period, of maximum accomplishment, success, recognition, the cosmic banana peel gets underfoot, resulting in disappointment, disdain, even disaster.

It is true in all fields of endeavor, from sports (Brett Favre, anyone?) to entertainment (Tom Cruise?) to, of course, business (BP, Toyota, Mark Hurd).

For board members and top management, a good two-fold resolution for the coming year will be to not get enamoured with your press clippings or glowing analyst reports and, paraphrasing the famous advice of Intel's Andy Grove (re his book Only the Paranoid Survive), be paranoid — of slipping on the cosmic banana peel.

Actually, as I heard it put by another cautious soul, it's not just a question of being paranoid but . . . are you paranoid enough?

Watch your step every step of the way as you exercise leadership and judgment in 2011. Don't let this be the year that you — and your shareholders — take a fall, courtesy of the cosmic banana peel.