Are Boards Too Old?

I often get asked, "Where do you get your ideas?" It's a fair question, considering the decades that I have been editor of Directors & Boards.

Some ideas have a very long germination. Let me share the seedling of the idea for the cover story of the Q2 2011 edition of Directors & Boards — "Are Boards Too Old?"

It goes back to the early 1990s. These were tough years for American corporations. One great company that hit a particularly rough patch was IBM Corp. In fact, things got so dicey for Big Blue and investors got so restive that the board did the unthinkable — it eased out the CEO, John Akers, in 1993.

At the 1993 annual meeting, one especially vociferous shareholder got on his feet to charge the board with being "too old." This gent, no spring chicken himself (!), further denounced the directors: "Most of them come from an era of manual typewriters and carbon paper." Ouch!

That made a big impression on me at the time. I wondered: Does this fellow have a point? Could the computer giant have missed a crucial beat or two by not having some younger talent on the board? A study of the average age of the IBM board at that time showed it to be slightly over 61.

The seed was thus embedded.

Over the years I would come across other data, anecdotes, and text references re boards and age, and they all would be like watering this original seedling of an idea.

As the business world hurtles into a new global order, one driven in so many important ways by social media and advanced digital capabilities, the opportune moment has arrived for this seed of a story idea — "Are Boards Too Old?" — to burst forth.

Pictured is W. Clement Stone, business chieftain famous for his "Positive Mental Attitude" success philosophy, who served on a corporate board while in his 90s with Directors & Boards Publisher Robert Rock.

Women Directors: Survey vs. Survey

It has happened again. When I release the results of our quarterly Directors Roster report on new women joining corporate boards — which I did in my blog post of March 8th — I inevitably hear from one or more of the other trackers of board composition. They are puzzled — and, it appears, alarmed.

Their beef is that there is a big disconnect between the Roster numbers and their numbers. The Roster has been documenting for two years now elevated levels of women joining boards — in the fourth quarter of 2010, 38% of new directors were women; for 2010 as a whole, 34% of board appointees we tracked were women. Most if not all other major surveys point to board representation of women still stuck in the mid-teens range, where it has been for years.

"So what's up with your numbers?" I get asked. There is an underlying fear that prompts this question, which is this: the optimistic picture that we present could lull people into thinking that recruiting developments are going along just swimmingly, when in fact all the major surveys of board composition do not seem to bear that out.

I am moved to share my response to the challenge I received after this week's release of the Directors Roster report on women board recruiting:

Dear Colleague,

I do not see the disconnect or discrepancy that you see. Let me explain how I mesh the numbers.

Your data is a snapshot of board composition at a fixed point in time — an annual look at who is sitting on a defined universe of boards.

The Directors Roster data is a snapshot of a quarterly flow of activity at a random universe of boards — companies that happen to have added a new board member.

This is apples and oranges. There is no way to sync these two sets of data to make any sensible matchup.

What we are looking at is velocity — a moving target — and you are measuring an end point.

In looking at the Directors Roster that just hit the street this week, you can see for yourself the flow of activity that we tracked in the fourth quarter of 2010 and the new women directors that came to our attention.

It seems to me that we need both sets of measurements — yours and the Directors Roster — to properly gauge marketplace activity, and I don't really see any conflict in what these two sets of numbers report.

It is understandable that my counterpart is concerned about overly optimistic conclusions that might be drawn from the Roster data. That’s why I feel the urgency to bring other surveys to the attention of the Directors & Boards audience that show how sluggish the progress is of board diversity. Our Roster numbers are useful for adding an important dimension to the discussion of board diversity, but I agree that many questions are left unresolved about the enduring impact of this measure of velocity.

Perhaps it is a matter of time — and it will be a lot of time — before we see the cumulative impact of these elevated velocity levels. But something is going on, and that is where the Roster data plays an important tracking role.

Pictured is Ellen Kullman, chair of the board and CEO of DuPont Co., who has joined the board of United Technologies Corp.

New Directors: The 2010 Class

The numbers are crunched, and here is how year 2010 shaped up for director recruiting.

According to the Directors & Boards Directors Roster, the journal's quarterly and annual reporting of executives named to public company boards, we tracked a total of 420 new director appointments named to 359 company boards.

Here is where the new directors came from, ranked by predominance of backgrounds:

2010's New Directors

1. Retired Executives: 148 (35%)

2. Chairman/CEOs: 84 (21%)

3. Senior Officers: 67 (16%)

4. Finance: 43 (10%)

5. Academia: 30 (7%)

6. Consultants: 28 (7%)

7. Not for Profit: 10 (2%)

8. Legal: 5 (1%)

9. Miscellaneous: 5 (1%)

Total: 420 (100%)

Women: 142 (34%)

Source: Directors & Boards Directors Roster

The number of new women directors gets further comment in my blog post of March 8.

Further detail on the 2010 director class — including names and affiliations of the new board members displayed with the companies who added these individuals — will be provided in the "Governance Year in Review" special issue of Directors & Boards to be published in July. The Directors Roster is sponsored by our close colleagues at Heidrick & Struggles International. Kelly McCarthy is editor of the Directors Roster.

This is the first look at this data.

There are a number of interesting observations to be made about the 2010 director class, which will be the topic of follow-on "Boards At Their Best" postings.

Pictured is Stanley McChrystal, retired U.S. Army general who commanded the U.S. and NATO's security mission in Afghanistan and who is now a senior fellow and teaches a leadership seminar at the Jackson Institute for Global Affairs at Yale University; Gen. McChrystal joined the JetBlue Airways Corp. board in November 2010.

Women Directors: Big 2010 Finish

Here is a key piece of data to announce on the 100th anniversary of International Women's Day:

After dipping back into the mid-20% range in the third quarter of 2010, the recruitment of women to corporate boards rebounded strongly in the fourth quarter. During the October to December period, 38% of the newly elected directors tracked by the Directors Roster were women.

Here is how year 2010 added up for the board recruitment of women:

• Q1: 34% (31 women out of 90 new directors)

• Q2: 36% (41 women out of 115 new directors)

• Q3: 26% (27 women out of 102 new directors)

• Q4: 38% (43 women out of 113 new directors)

Total: 34% (142 women out of 420 new directors)

The Directors Roster is the quarterly and annual record of newly elected directors to corporate boards tracked by Directors & Boards and published as a special feature in each edition of the journal. The data is gathered and written up by Directors Roster Editor Kelly McCarthy.

Year 2010's total for women of 34% is down slightly from 2009's total of 39%, representing 165 newly elected women directors out of an overall 424 board appointments. But 2009 marked a surprising leap from 2008 — when women represented 25% of the total tally of new directors, closer to trend throughout the earlier years of this decade. (For stark perspective, in the mid-1990s when we first started the Directors Roster data tracking, the percentage of newly elected women directors on a quarterly and annual basis was typically in the high single digits or low teens.)

So with one-third of new directors in 2010 being women, it does show that 2009 was not an utter fluke. We will continue to track the numbers closely in the Directors Roster to see how 2011 plays out. But two back-to-back strong years might well indicate that we have entered an era that will be characterized by elevated levels of board recruitment activity for women.

And on that upbeat note I will happily join in celebrating International Women's Day.

Pictured is Margaret Foran, who joined the board of Occidental Petroleum Corp. in 2010's fourth quarter. Peggy Foran is chief governance officer, vice president, and corporate secretary of Prudential Financial Inc.

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.

Gen. Georges Doriot's Holiday Party Advice

I first became aware of Gen. Georges Doriot — a famous Harvard Business School professor who is widely acknowledged as the founder of the modern-day venture capital industry — during a conversation with Barbara Hackman Franklin. I was interviewing Barbara for the "Oral History of Corporate Governance" special 25th anniversary issue of Directors & Boards published in 2001, and this was one of her remembrances:

"I certainly don’t recall corporate governance included in any studies at Harvard, although I still find it amusing today to remember that a course taught by one of the most esteemed members of the faculty, Gen. Georges Doriot, was closed to women. We were warned by our counselling professors not to try to sign up for that course because he didn’t take women. When I ran into him many years later, I told him I had wanted to take his course, and what did he think about not allowing women in his class. He looked right at me and said, 'I’m damn proud of that!' ”

Barbara was a good sport and laughed about it when we talked, but I am sure it was not a laughing matter at the time. As one of the first women to graduate from Harvard Business School (which she did in 1964), she and other high-achieving women missed out on taking a class with this renowned individual. As the New York Times stated in its obituary when the General — as he was universally called because he had been a brigadier general in the U.S. Army during World War II — died in 1987, "for four decades [he] was widely credited with inspiring and training more leaders of American corporations than any other person."

The blog Creative Capital, written by Spencer Ante as a follow-on initiative to his book, Creative Capital: Georges Doriot and the Birth of Venture Capital, listed the "Top 10 Aphorisms of Georges Doriot." It is a marvelous set of observations and guidance.

One in particular is quite applicable to this time of year — the Christmas and New Year's holiday season, when parties and festive occasions are in full swing . . . and wine and spirits are flowing freely. Thus, take heed of the General's counsel:

"Never have more than two cocktails on any occasion. If any information is to be exchanged over whiskey, let us get it rather than give it."

That sounds like prudent behavior for executives of all stripes. (Another of the General's top 10 aphorisms is this: "Do not have a banker on your board — in bad times he remembers he is a trustee of someone's money"; but we won't deign to comment on that eyebrow-arching maxim at this feel-good moment when Christmas is almost upon us.)

So on this note of party etiquette from the General, we will close out the "Boards At Their Best" blog for 2010, and wish all our readers of this blog and of Directors & Boards and the monthly e-Briefings a joy-filled holiday season and my very best wishes for a resoundingly strong year in 2011. Be sure to come back and read us in January.

Photo of Gen. Georges Doriot courtesy of Harvard Business School

Executive Stress: We Have Been on the Case

I venture to claim that there is almost no topic of board governance and leadership that Directors & Boards has failed to address in its 35-year history.

Take executive stress, for example — as in Jeffrey Kindler's stress-related retirement as Pfizer Inc. chairman and CEO, announced last week.

A dip into the Directors & Boards archives — circa 1977, a year after the journal was founded — turns up this article: “Beyond Executive Stress: Board Responsibility for CEO Mental Health,” written by Patricia Aburdene. (Ms. Aburdene went on to co-author the huge bestselling Megatrends series of books, and is now out with Megatrends 2010.)

A pertinent passage that certainly speaks to what just unfolded in Pfizer's boardroom:

A CEO under stress can make a disastrous decision before his condition has deteriorated to the point of breakdown. A tangle of family and marital problems might not affect a chief executive’s performance one iota. But if the business is going downhill too, it could become too much. A strong and competent corporate head is, after all, only human. Says Dr. Gertler of New York’s Stresscontrol Center, “It’s up to the board to keep track of how much stress the CEO is under at any given time” — and how much the CEO is capable of withstanding.

Corporate executives are no more prone to mental problems than any other group and perhaps less so. But because the adverse consequences of mental problems are multiplied by the level in the organization the executive has attained, it is always a cause for concern whenever it occurs among senior management.

At the shop level, it’s hundreds of dollars lost; at the department level, thousands; at the divisional level, millions; and at the corporate level, tens or even hundreds of millions.

The Pfizer board is taking heat now for this sudden succession issue. Did the board wait to long to force the matter? Should the board have separated out the chairman and CEO roles before this to ease the load on their CEO? Such questions naturally arise.

But this incident raises awareness of a little-commented upon role of the board — to monitor the CEO's tolerance for stress and to take action when warranted.

Even in its earliest days Directors & Boards was making this case. But you don't have to be such a longtime reader of the journal to know that we are specialists in pointing boards to the high ground of enlightened engagement with their managements and shareholders.

"The Scream" (2001), illustration by Jean Kristie

Russia House: The Pepsi Formula

In the fall of 1990 Directors & Boards Publisher Robert Rock and I traveled to PepsiCo headquarters in Purchase, N.Y. The reason for our trip? The Iron Curtain was coming down, Eastern Europe was opening up as a new market for U.S. goods and services, and Russia was undergoing perestroika — a thawing of relations with the West — all of which boded promisingly for American companies. We wanted to talk to a leader who knew how to penetrate previously closed-off marketplaces for some lessons that would be useful for our journal's readers in pursuing this historic business-development opportunity.

That meant talking to Donald Kendall.

At the time of our visit, Don Kendall was chairman of the executive committee of the PepsiCo board. Earlier in his career, he was the engineer of PepsiCo's breakthroughs in Eastern Europe and the Soviet Union (and in China, too). You can see him pictured above at left with Soviet Premier Nikita Khrushchev and U.S. Vice President Richard Nixon at the historic U.S. Exhibition in Moscow in 1959, where one of the exhibits was famously a display of Pepsi-Cola. Kendall, then the president of Pepsi-Cola International, arranged for that exhibit. Over the next 13 years, he patiently worked to develop a relationship with Soviet officials. Finally, in 1972, the company signed a breakthrough trade agreement providing for the bottling and sale of Pepsi in the U.S.S.R. — the first foreign consumer product to be sold in that nation. By 1990 it was the leading foreign soft drink in the Soviet Union, widely available in restaurants, grocery stores and from street kiosks, and was also the most widely distributed soft drink in Eastern Europe.

Kendall was elected chairman and CEO of the corporation in 1971 and held those positions until 1986. Bob Rock and I spent an hour with this affable veteran of global expansion, capturing his memories of those very early forays into inhospitable markets — asking him everything from what Moscow was like in 1959 to the intricacies of bartering Pepsi for vodka to lessons for CEOs in venturing abroad.

Of course, this recall of our visit with Kendall is prompted by PepsiCo's bold bid for Wimm-Bill-Dann, an offer of $3.8 billion for a two-thirds stake in the dairy and juice company — the largest acquisition by an American company in Russia.

Here are two of the questions we lobbed at Kendall, and his answers give you a taste of how this Pepsi visionary thought about risk and opportunity.

Directors & Boards: Given the current instability in the Soviet Union, would you encourage your colleagues in major Western companies to enter the country at this time?

Kendall: Absolutely. There is no place with greater opportunity. If you wait until you have stability and convertible currency, the opportunity is going to be gone. When you have an opportunity is when there are problems — when everybody is not running there. In running a business you have to take risks. Where there is opportunity there is always risk. If there were no risks in the Soviet Union, someone else would already have the business. So I don't think instability is something that would stop me from going to the Soviet Union. What is going to happen? They are not going back to what they had before. You might have civil unrest. A lot of the republics may end up seceding from the union. But they are going to have some system that will be different. It probably won't end up like the United States or Germany. It will probably end up more of a socialist country. Nobody knows how it is going to end up. But there will be some structure there in which you can continue to operate. Nobody would have dreamed years ago that you would have what's happened in the Soviet Union today. But I believed back then that given the opportunity, we could be successful. We were successful under the old system, so you know we are going to be very successful under the new system.

Directors & Boards: You even held a PepsiCo board meeting in the Soviet Union way back in 1974 — the first U.S. company to do so. Do you think other boards have begun to embrace the opportunities to be found in the Soviet Union and in Eastern Europe? Or is it more of a curiosity?

Kendall: I wanted the board to understand the opportunities. One of the problems we have in the U.S. with our international operations is that a lot of chief executives don't get involved. Somebody said one time that a lot of chief executives are inclined to travel the 'silk stocking' route — they love to go to London, Rome, and Paris. They won't go over to the Soviet Union and conduct negotiations. This will change over time, but if a chief executive — the decision maker — goes over there, he can get something done. Furthermore, you don't get the enthusiasm for something unless the chief executive gets involved. The same is true in China and in a lot of other countries. You must go there and find out what the opportunities are.

Identifying opportunities, measuring risk, making bold moves, and reaping rewards — that was Don Kendall's 'Russia House' formula for Pepsi's growth and success, being applied again in the Wimm-Bill-Dann deal.

The Annual Meeting as the Art of Romance

As discussed in my previous blog posting, I am underway on a cover story for the first Directors & Boards issue of 2011 that will tee up a major rethink of the annual shareholder meeting — what is wrong with how it is done today and what may be needed to fix it for the governance era ahead.

Which brings me to Steve Ross (pictured).

I have fond memories of Steve Ross from back in the mid-1980s when he was head of Warner Communications. I made some money in Warner stock, which makes for warm recall. And as a shareholder I attended a couple of annual meetings that he ran. I remember them as some of the best annual meetings I have ever sat in on — infused with his outsized "CEO rock star" personality, his ultrasmooth handling of the crowd — and it was quite a crowd in those heady days when a Hollywood studio like Warner Brothers still reigned over the global entertainment industry — and his marvelous presentation of the scope and scale of Warner's businesses.

Connie Bruck, in her superb 1994 biography of Ross, Master of the Game: Steve Ross and the Creation of Time Warner, further amplifies my recall of why Ross was so masterful about so many things in his business dealings — including running an annual meeting. From her book, a telling anecdote, capped by a nicely personal coda:

From the start, Ross prided himself on his shareholders' meetings.

Over the years, he would become more polished, but even in the early days of Kinney Service he came to these events like a natural; showcasing his depth of knowledge about the company, his numerical nimbleness, his salesmanship so consummate that it seemed more about the art of romance than about selling. As he did with other business tasks, Ross made his preparation for these meetings into a game; he challenged his associates to find a question that would stump him, as though he were about to appear on one of his favorite television quiz shows.

He had a strategy for these meetings ("You never play a shareholders' meeting to win, you play to tie") as, it often seemed, he did for everything in life. And once he was on the podium, taking questions from the audience like so many lobbed balls, he seemed to want them to go on forever. "To make him stop answering questions," recalled the company's longtime secretary, Allen Ecker, "you'd have to turn out the lights."

Despite his prowess, however, in later years Ross liked to recount how he had gotten into trouble in one of those early meetings. "We were in the parking business then, and a woman asked why we didn't have a garage at a particular location in Brooklyn," Ross told me. "I gave some response, and she said, 'You're making fun of me because I'm from Brooklyn.' And I said, 'No, no, I'm not doing that at all. I wouldn't do that. I'm from Brooklyn too.'

"Well, after the meeting my mother came up to me. 'Steven.' (She only calls me that when she's angry.) 'Do you know how many years we've been trying to live down that we came from Brooklyn, and now you've come right out and said it, in front of al these people!' "

Hmmm . . . the annual meeting as the "art of romance." Maybe that is one of the fixes that is needed — to have the current generation of chief executives bring a Steve Ross-style verve to this corporate event and return it to a rightful place as a centerpiece for the display of CEO and board leadership.

How to Fix the Annual Meeting

It seems that no one — management, boards, shareholders — is happy with how annual meetings are conducted these days. Annual meetings can be a frustrating and often futile exercise — in meeting statutory requirements, yes, but not much else as a worthy vehicle for demonstrating corporate leadership and facilitating shareholder relations.

Thus, the cover story for the first Directors & Boards issue of 2011 will be:

What’s Wrong with the Annual Meeting . . . and How to Fix It

I am going to seek a roundup of opinion on what to do about the annual meeting. The seed of this article idea was planted this past summer when I was a peripheral participant in a study group looking at "Electronic Participation in Shareholder Meetings" — i.e., the pros and cons of virtual annual meetings and the practices necessary to hold a meeting that meets the needs of all parties. This group was organized by a close colleague, Gary Lutin, through The Shareholder Forum initiative that he chairs.

The virtual annual meeting will be an important dimension of the discussion, and possibly factor in as a "key fix" — or maybe not, depending on the input I get from important players who are doing virtual meetings or thinking of going in this direction. Early adopters, and their shareholders, have had some rocky initial experiences with virtual meetings.

And there may be other fixes that we should focus on for reconfiguring the annual meeting for a coming governance era of heightened transparency and disclosure.

Stay tuned. It should make for a lively lead article in the Q1 Directors & Boards.

Photo: A Johnson & Johnson annual meting from the 1970s, courtesy of Kilmer House.

'One Terrible Cost of Leadership'

It is interesting how J. Crew's Mickey Drexler identified a classic leadership characteristic as one of the things he wished he knew when he started out in business (as per my earlier blog post) — the need to ease an executive out of the organization once it is determined that he or she is not up to the job. As Drexler put it, "Let those who aren't working out go quickly."

I first came across this counsel in an interview I edited that Warren Bennis conducted with Dr. Franklin Murphy, which was published as a Q&A article in Directors & Boards in 1982. Dr. Murphy is not a household name today in the annals of corporate leaders, but he was a major figure in the 1960s into the 1980s. He had a most unusual route to the top of a major corporation. Trained as a medical doctor, he began his management career at the University of Kansas, serving as dean of the medical school and then, at age 35, chancellor of the university. He subsequently spent eight years as chancellor of the University of California at Los Angeles. In 1968 he was personally recruited by Norman Chandler, then chairman and CEO of Times Mirror Co., to be his successor.

In 1982 Murphy was chairman of the executive committee of Times Mirror when Bennis spoke with him on “Starting Corporate Life at the Top,” as we titled the article. Here is the key question and answer that identified a classic test of a leader's ability to act:

Bennis: You’ve been in very responsible positions virtually from the start. Are there any costs of responsibilities?

Murphy: Yes, there’s one terrible cost and it’s the one thing in administration that I find the most distasteful by far — and that is when you have to fire somebody. Having to let go a loyal and capable person who just isn’t up to his job is so painful. I brood about that, but it is a price you pay. You’re not just disemploying an individual, you’re affecting a wife, children, a whole group. I must say, if I’m indecisive about anything it’s in that area. But I’ve learned over time that the quicker it’s done, the better it is for all parties.

As Murphy implies, the removal, while it must be done, can be done with a human touch —another classic characteristic of a leader.

Franklin Murphy died in 1994. Portrait of him shown above was done by Directors & Boards to accompany his 1982 article.

The Dancing Board Member

The holiday shopping season is off to a rousing start. Crowds were strong on Black Friday, and it appears Cyber Monday set new records.

There can be a governance angle in almost anything. When Y&R consumer expert John Gerzema announced in mid-November that he expected Zappos.com, the online merchandiser of apparel and footwear, "to win the online shoe retailing war with its celebrated customer service" this shopping season, I was just reading Zappos.com Inc. CEO Tony Hsieh's book, Delivering Happiness: A Path to Profits, Passion, and Purpose [Business Plus, 2010].

Here is a choice story he tells in the book. Before becoming CEO of Zappos.com, Hsieh headed LinkExchange, a Web design company he cofounded in 1996. That's where this story takes place:

I’m not quite sure how it started, but we had a really fun tradition at LinkExchange. Once a month, I’d send an email out to the entire company letting them know that we were having an important meeting, and that some of our important investors and board members would be attending, so everyone was required to wear a suit and tie on the day of the meeting.

Everyone except for the most recently hired employees knew that it wasn’t a real business meeting, and that they didn’t actually need to wear a suit and tie. The real reason for the meeting was so that we could initiate and haze all the new employees who had joined LinkExchange in the past month.

So once a month, all the newly hired employees would show up to the office dressed up in suits and ties. There they would realize that they were the target of the companywide practical joke. In the afternoon meeting, all the new hires would be called up to the front of the room to complete some sort of embarrassing task.

After an investment by Sequoia Capital, we asked Sequoia partner and our new board member Michael Moritz to attend our initiation meeting, and we called him up to the front of the room along with the other six employees who had been hired in the past month.

After each person introduced himself, we let them know that in honor of Moritz’s presence, we decided that we wanted everyone to move together in unison to the music that was about to be played.

If you’ve ever read anything in the media about Moritz, he’s generally portrayed as an intelligent, introspective, and proper British journalist-turned-venture-capitalist, so everyone was excited to see that he was willing to stand in front of the room with the other new employees. Someone brought out a boom box and turned on the power as everyone started clapping and cheering. And then music started playing. It was the Macarena.

I don’t think that words can every truly describe what watching Moritz being forced to do the Macarena was like. It ranks up there as one of the strangest sights to behold. Everyone in the entire room was cheering and laughing, and by the end of the song I had tears streaming down my face from laughing so hard.

I remember looking around the room at all the happy faces and thinking to myself, I can’t believe this is real.

Two years after cofounding LinkExchange, Hsieh sold it to Microsoft for $265 million. He then guided Zappos from almost nothing to over $1 billion in gross merchandising sales annually, and got it onto Fortune magazine's "Best Companies to Work for List." And then along came Amazon, which bought Zappos in 2009 for $1.2 billion.

This is an impressive case of how creating customer value creates shareholder value, but maybe Tony Hsieh is on to a new tactic for how a board can help create shareholder value — get the directors up dancing in front of the team.

Mickey Drexler at the Met

The J. Crew buyout announced this week calls to mind the time I saw its CEO, Millard (Mickey) Drexler, in action — giving a standout performance on, of all places, the stage of the Metropolitan Opera House at Lincoln Center.

That needs some explaining. So let me back up a bit.

Investor Ronald Baron of Baron Capital Group was holding his firm's annual investment conference at the Met. This was November 2007. I was a shareholder in one of the Baron family of mutual funds at the time, and thus was invited to attend.

This was my first Baron Investment Conference, and I was bowled over by what an event Ron Baron puts on for his investors. The daylong gathering included presentations in the morning by CEOs of companies in which the Baron funds hold sizable positions and who are leaders that Ron Baron and his portfolio managers hold in high regard. During the lunch break, in a tent set up on the Lincoln Center grounds, we ate our box lunches while rocking out to a live performance by Sheryl Crow. After lunch, back in our comfy seats at the Met, came brief remarks by the firm's portfolio managers and a fuller overview of the investment landscape and state of the firm by Mr. Baron. He then turned the stage over to a "surprise entertainer" – who turned out to be Bette Midler. She proceeded to give one of her inimitable songfests. The day then wrapped up with "milk and cookies" with the firm's portfolio managers and analysts. This was not your grandfather's annual meeting.

Now back to Mickey Drexler. This "retail statesman," as the Wall Street Journal called him in its report on the buyout, was one of the CEOs addressing the packed house. His presentation on J. Crew was cleverly couched in the context of "Things I Wish I Knew When I Started Out in Business."

Befitting the setting of this grand opera house, Drexler gave a riveting performance. His "wish list" was full of sound management wisdom that would be widely applicable across industry lines, not just for success in retailing trendy apparel. For example, one of his learnings was, "Let those who aren't working out go quickly." Another: "Old dogs need younger dogs around." He had rich material to amplify each of his management maxims.

Indeed, I was so taken with Drexler's presentation — immediately seeing its potential to be a cover story in Directors & Boards — that I followed up after the conference with his counselors about adapting his remarks into an article. Alas, nothing has come of that . . . yet.

But I am nothing if not dogged in pursuit of worthy additions to the canon of how great leaders lead. It may be hard to pin this down while the buyout process runs its course, but Drexler's "Things I Wish I Knew. . ." deserves to be captured in print — in the pages of Directors & Boards. Then, we will all know what he means, and how we can apply it to our own businesses, when this business dynamo says such things as, "It's All About the Mustard."