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