from Second Quarter 2009
Corporate Board Member
by John R. Engen
More than 5,100 directors resigned at least one of their board seats in 2008, according to Audit Analytics, a Sutton, Massachusetts, firm that tracks such numbers. That was roughly the same count as in 2007, but up 25% from 2006.
Almost 3,900 of those who stepped down didn’t give a reason, while at the other extreme, 78 publicly disclosed that they were leaving because of “disagreements with management or policies,” says Audit Analytics. Many of the rest used familiar phrases like “personal reasons,” “pursuing other interests,” and “too many commitments” to explain their departure. However, Joseph Cyr, Audit Analytics’ vice president of marketing, thinks that whether they gave a reason or not, many of the departing directors had been at loggerheads with their companies’ CEOs. The resignations come on top of an increase in the number of chief executives who are quitting outside boards to spend more of their time running their own companies, as Corporate Board Member reported in our last issue. They certainly add to the challenge of keeping board seats filled.
“Things are getting more tense in this environment,” says Gerald Czarnecki, 68, chairman and CEO of Deltennium Group, a consulting company in Boca Raton, Florida, who sits on the board of State Farm Mutual Automobile Insurance Co., among other outfits. “When companies have to lay off people and are struggling for survival, board members start asking tougher questions. That makes disagreements more likely.”
Disputes have centered on all kinds of issues, from executive pay and long-term strategy to allegations of wrongdoing. Among the directors who became embroiled in them last year and stepped down:
- Four independent board members at Ariad Pharmaceuticals Inc.—Michael Kishbauch, 60, CEO of Achillion Pharmaceuticals; Sandford Smith, 62, executive vice president of biotechnology company Genzyme Corp.; University of Vermont biochemistry professor Burton Sobel, 71; and Elizabeth Wyatt, 61, a former Merck & Co. executive—resigned over how the company had handled matters including the buyout of a subsidiary. The four charged Harvey Berger, 58, the CEO and an inside director of the Cambridge, Massachusetts, company, with taking “self-interested, combative, and obstructionist actions.” Berger called the assertions “false and misleading.”
- Jeffrey Reynolds, 51, president of Broadway Operating Co. in Lubbock, Texas, quit the board of TBX Resources, saying the Dallas energy company “is illiquid and management has not presented an ongoing business plan.” TBX declined comment but said in a February filing that it had “negative working capital” and had sold its primary source of revenue. “These factors raise substantial doubt about the ability of the Company to continue as a going concern,” said the filing.
- W. Michael Driscoll, 62, chairman of the audit committee of Emerson Radio Corp., left the board, citing $50 million of “egregious related-party transactions” with companies owned by its majority shareholder, a Hong Kong conglomerate. Although his committee had begun instituting reforms, Driscoll, a former CEO of Ithaca Technologies LLC, wrote to the board, “I cannot continue to devote the time and energy necessary” to finish the job. Two weeks later director Norbert Wirsching, 71, a former CEO of consumer-electronics firm Capetronic Group, left the board as well, charging that “management is less than enthusiastic to embrace financial controls and shows a cavalier attitude towards related-party transactions.” The company declined to comment.
- Three directors of Proton Laboratories Inc.—Don Gallego, 57, chairman of water distributor Aqua Thirst; Greg Darragh, 50, a former regional vice president of insurer Commercial Union Life; and land developer Jed Astin, 62—bailed from the struggling maker of water-electrolysis technology in Alameda, California. They complained that chairman and CEO Edward Alexander, 57, had issued himself 4.25 million shares “without authority and against the wishes of the majority of the directors.” Company officials called this “a simple error” and canceled the deal. Alexander remains chairman but is no longer the CEO.
Some directors who’ve quit are still on other boards. Of the Ariad Pharmaceuticals directors who resigned, for example, Sobel continues to serve as a director of Arca Biopharma Inc. and Clinical Data Inc. and Wyatt is on the Medicines Co. board.
Boardroom battles aren’t inherently bad. Indeed, most boards have an occasional dustup. “The most effective boards encourage the surfacing, debate, and resolution of disagreements,” says Elaine Eisenman, dean of executive education at Babson College in Massachusetts and a board consultant. “Disagreement is healthy, natural, and positive.”
When those tiffs are serious enough to force a resignation, however, they can lay bare to public scrutiny all kinds of previously private board discussions and dysfunction. Since 2004, the Securities and Exchange Commission has required companies to file an 8-K within four days if a director leaves because of “differences involving company operations, policies, or practices.” The filing must include management’s description of the problem and any correspondence from the director about his or her departure from the board.
Roughly two-thirds of dispute-related resignations are attributed to governance concerns such as CEO pay, the quality of the financial information directors get, or the timing of special meetings. Many of the rest involve disagreements over strategy or operations, according to a 2008 study by business professors Anup Agrawal of the University of Alabama and Mark Chen of Georgia State University. But the root cause is most always some sort of personality clash. “The one common denominator is that almost all of them involve a power struggle between the CEO and at least one outside director,” Chen says.
The study, which looked at inside and outside directors, spans all disclosed disputes between 1995 and 2006. It found that clash-related resignations are most likely when the CEO is either a newcomer to the company trying to establish his position or a longtime executive who feels “more powerful relative to board members” and entitled to ram through his or her own agenda.
Some of the reasons directors give for their resignations contain colorful language. Stephen Moses, vice chairman of Galen Capital Corp., a McLean, Virginia, merchant bank, resigned in 2006 as chairman of AcuNetx Inc., a small medical-technology company in Superior, Colorado. He charged in a letter that then-CEO Terry Knapp “responds to suggestions, or worse, criticism, with McCarthy-like investigations” and “stifle[s] dissent and/or creative advice with tyrannical conduct.” AcuNetx’s filing stated that the other board members “disagree with the assertions of Mr. Moses.”
One of the most vituperative letters came from Roy E. Disney when he stepped down as vice chairman of Walt Disney Co. in 2003. He demanded the resignation of chairman and CEO Michael Eisner, who he charged had transformed his brother’s company into a “rapacious and soulless” enterprise. Eisner, now 67, resigned as CEO and a director in 2005. Roy Disney, 79, returned to the board that same year, albeit as a nonvoting emeritus director.
Investors take a hit right after board-member resignations. Share prices fell an average of 6.1% in the 11 days after a director resigned, the professors’ study found, and a steeper 10.3% if the departing director was an insider. This doesn’t surprise Agrawal. Most resignations “come from the boards of companies that are already troubled,” he says. “And things usually don’t improve when the director leaves. In fact, they get worse, and now the issue has been made public.”
Since most board members own at least some shares, there’s plenty of incentive to sweep disagreements under the rug—something encouraged by the negligible-at-best penalty for failing to file an 8-K. Computer giant Hewlett-Packard did not disclose that two directors had quit its board in 2006 to protest chairman Patricia Dunn’s authorization of wiretaps of various directors’ phones in an effort to stem boardroom leaks. The SEC investigated the failure to file once the story made news, but ultimately required only that HP file a belated 8-K.
Say what you want about old-style golf outings, retreats, and other board social functions, getting to know fellow directors in a casual setting encourages the collegiality needed to make it through rough patches. But what if you find yourself irreconcilably at odds with the CEO and other board members? Should you just suck it up and serve out your term? Not according to Gerald Czarnecki, who argues that a director has a fiduciary duty to speak out and resign, giving a public explanation if “you think the decisions being made are bad enough and you’re not being heard.” In today’s tough economic environment, more board members are likely to be feeling just that way.