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Corporate boards flexing muscles, 14.3.05


Two star chief executives get fired by their boards. Three directors of a cable TV company get ousted in a spat with the chairman, who happens to be the largest shareholder.

Why does it seems so many people in corporate America are itching for a fight? Because in a post- Enron world, boards of directors are pushing their CEOs hard. And some CEOs are pushing back.

'We've seen a real sea-change in the proactivity of boards since the corporate scandals' of a few years ago, Lance Jon Kimmel, an expert on corporate law at SEC Law Firm in Los Angeles, said. 'Some boards are scared that if they don't act, they could face liability from regulators or shareholders.'

Corporate directors are undergoing a reformation in trying to shake their rubber-stamp image of the past.

'Corporate boards, in general, are struggling with their role, and it goes beyond Hewlett-Packard and Boeing,' said Chris Hodges, co- founder of Ashton Partners, a Chicago strategic investor relations firm that counsels small and midsized companies. 'I've had board members who wanted to participate in the writing of a press release, all in the spirit of Sarbanes- Oxley.'

The Sarbanes-Oxley Act of 2002 was designed to increase the transparency of what companies do behind closed doors with strict auditing and disclosure guidelines regarding any events that could affect a company's performance.

It was enough to startle many a director who in the past earned tens of thousands of dollars for serving on prestigious boards, flying around the world to attend meetings and enjoying the clubby perks of the inner circle.

Those days are gone.

Directors today not only have the company's lawyer in the board room, they also have outside counsel taking minutes and providing advice, said Curt Hockemeier, chief executive of Arbinet-theXchange, a New Brunswick-based provider of voice and Internet services for communications companies.

"You can't take a chance that two years from now there will be a miscommunication about what the board did today," said Hockemeier, who serves on his board as well as on the board of Cedar Point Communications, a New Hampshire maker of communications gear.

Good outside board members are in strong demand, he said. "Even in private companies, I see independent directors being brought aboard early in a company's history," he said.

Boards are wasting no time in taking action. Just last week, airline maker Boeing fired Chief Executive Harry Stonecipher in part because of e-mail he wrote to an employee with whom he was having an affair.

The week before, Cablevision Systems Chairman Charles Dolan sacked three directors after they and his son, CEO James Dolan, tried to halt the elder Dolan's pet project, a money-losing satellite TV venture.

And last month, HP forced out star CEO Carly Fiorina after five years of lackluster performance and a rocky acquisition of Compaq.

It took an independent director to shake things up at HP, which declined to comment for this story. Patricia Dunn, who was named chairman of the Palo Alto, Calif., company, started asking tough questions and didn't like the answers, according to published reports.

HP's board acted in the best tradition of corporate governance, said Lawrence Hamermesh, associate professor of law at the Widener University School of Law in Wilmington, Del.
<>"This is where the board says, 'We are the boss, we have the vision, and if we don't like the way things go, we will pick a new CEO,'" he said.

The roots of today's board activism were set in motion in 1992 at General Motors, which hadn't ousted a chief executive since the Roaring '20s. John Smale, an independent director, led a board revolt to remove CEO Robert Stempel after the auto maker posted a $4.5 billion loss. The aggressive move by Smale, former head of Procter & Gamble, took Wall Street by surprise because GM's board was considered the consummate rubber stamp.

"That was extraordinary in its day," Lawrence Mitchell, a professor of law and expert on corporate ethics at George Washington University Law School in Washington, D.C., said. "GM was perceived by most people as the first big salvo of corporate governance."

But then came the excesses of the late 1990s when boards at companies such as Enron, WorldCom and HealthSouth failed to oversee the executives running the show leading to a series of financial scandals.

Of course, financial miscues are one thing. At Boeing, Stonecipher was a victim of the strict regulations he imposed to help clean up the aerospace company's image after a government contract scandal involving a former Air Force official.

"Boeing is clearly holding its executives to a high ethical code, and that is to be applauded," Bruce Munck, a corporate attorney for Davis Munck, a Dallas law firm, said.

However, he finds it difficult to believe the board only found out about Stonecipher's affair just days before it forced him to resign.

"I can't imagine your CEO can have an affair with a co-worker and nobody knew about it," he said. "How can Boeing have serious control over their CEO when they didn't even know he was messing around?"

A Boeing spokesman said the board "is very active and very engaged, and when this information came to light, it took swift and decisive action."

The action by Charles Dolan at Cablevision, which declined to comment, might seem like a throwback to the days of the imperial chairman, experts said.

Still, investors who buy shares in a family controlled company such as Cablevision, Ford or Tyson must understand not all stockholders are treated equally, Henry Boerner, managing director of Rowan & Blewitt, a Mineola, N.Y., investor relations firm, said.

"No matter how you feel about the future of cable, you are still a minority shareholder," the former head of communications for the New York Stock Exchange said. "One of the risks you take is that family preferences come first."


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"We shall need compromises in the days ahead, to be sure. But these will be, or should be, compromises of issues, not principles. We can compromise our political positions, but not ourselves. We can resolve the clash of interests without conceding our ideals. And even the necessity for the right kind of compromise does not eliminate the need for those idealists and reformers who keep our compromises moving ahead, who prevent all political situations from meeting the description supplied by Shaw: "smirched with compromise, rotted with opportunism, mildewed by expedience, stretched out of shape with wirepulling and putrefied with permeation.
Compromise need not mean cowardice. .."

John Fitzgerald Kennedy, "Profiles in Courage"


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