Life After Death in the Boardroom
from
May/June 2002
by Joshua Green
It’s a safe bet that former Enron chairman, CEO, and board member
Ken Lay is not on anyone’s shortlist of desirable outside directors.
But that could change. A surprising number of CEOs whose ships hit the
bankruptcy iceberg sail on to other commands. Some of them,
furthermore, preside over another Chapter 11 and continue to
thrive—just as in 1808, 19 years after the unpleasantness on the
Bounty, Captain Bligh faced a second mutiny, survived, and went on to
better things. He retired from Britain’s Royal Navy as an admiral.
Directors of failed companies often seem to enjoy multiple lives, too. Signing off on a fatal strategy doesn’t appear to hurt their standing or prospects as board members elsewhere.
R.H. Macy & Co. provides examples of both kinds of corporate resurrection. In 1986, CEO Edward Finkelstein got his board’s approval to take the retailer private. The LBO backfired, sweeping Macy’s first into Chapter 11 in 1992 and then into the arms of Federated Department Stores Inc. Did the CEO and his board slink away into obscurity? Not a bit. Finkelstein, who remained a director of Time Inc. through its 1989 merger with Warner Communications, went on to become chairman and CEO of CWT Specialty Stores, a women’s-clothing chain. He stayed two years and quit in 1999. The company filed for Chapter 11 protection a few months later. The Macy’s board had included Robert G. Schwartz, a longtime executive at MetLife. In 1989, Schwartz became the insurance company’s CEO and chairman. He stepped down as chief executive in 1993 but remained a director until 2000, when he retired.
One of the 1980s’ most spectacular crashes was that of Baldwin-United, a financial-services firm. After the company declared bankruptcy in 1983, all the outside directors did bow out. But one of them, Philip Beekman, at the time a top executive of Seagram, has served on some half-dozen boards in the years since. He is currently a director of General Chemical Group, Linens ’n Things, a pharmaceutical company named Kendle International—and, since 1999, Sunbeam, the appliance manufacturer that entered Chapter 11 almost two years later. Beekman, now 70, is chairman of Sunbeam’s audit committee.
CEOs who serve as directors of other outfits after their own companies sink have angered many observers, including at least one of their own. “If you can’t run your own company, by what reason should you be on another company’s board?” one chief executive demanded in 1995. The speaker was Albert J. Dunlap—the same Chainsaw Al who headed Sunbeam from 1996 to 1998. Despite massive layoffs, Dunlap failed to turn the company around and was fired. Soon thereafter Sunbeam restated its earnings, triggering various shareholder suits. Its auditor, Arthur Andersen, has agreed to pay the company’s shareholders $110 million to settle a fraud lawsuit.
Do shareholders have a right to be informed of a director’s bumpy past? The Securities and Exchange Commission thinks so. It “tags” folks who were on the boards of companies when they filed for Chapter 11 or Chapter 7, as complete liquidations are known. For five years after an outfit goes into either, its directors must disclose that they were on its board to any new board they’re invited to join and to the shareholders who’ll be asked to vote for them.
There are ways to dodge this scarlet letter. Peter R. Gleason, vice president of research and development at the National Association of Corporate Directors, says that many board members jump ship just before a company files for bankruptcy expressly to avoid being tagged.
Such nimbleness was common during the dot-com meltdown, a period that included the failure of Webvan, the online grocery service. CEO George Shaheen, a former managing partner and CEO of Andersen Consulting (now known as Accenture) and a director of software giant Siebel Systems, resigned from Webvan in April 2001, three months before it filed for Chapter 11. In October, Shaheen, 57—untagged because he wasn’t at Webvan when the shopping cart hit the fan—joined the board of Closedloop Solutions, which provides Web-based financial-planning software. In his case, tagging would have made no difference. For one thing, Closedloop is privately held and not subject to SEC regulations. Even if it were, “the board looked at the body of George’s experience, and his time at Webvan is neither viewed as positive or negative,” marketing VP Doug Barton told Internet News.
Meanwhile, Dunlap may be gone (to Florida), but the sentiment he expressed is back in fashion. Do the heads of troubled companies have the skill and concentration they need to fulfill boardroom duties elsewhere? Consider Norman P. Blake Jr., 60, chairman and CEO of Comdisco, a technology-services company that entered Chapter 11 last July and is now enmeshed in a reorganization. Despite the obvious pressures of his day job, Blake has opted to keep his two outside directorships—at Owens-Corning, which filed for Chapter 11 in 2000, eight years after he joined the board, and at Enron, on whose board he’s served since 1993.
