“Wow! The Opportunity of a Lifetime”
from May/June 2003
by Julie Connelly
The big question: Why on earth would he want to do such a thing? Like other directors who join the boards of troubled companies (see the following pages), he had his reasons, it turns out. Stephens, 60, calls himself “a retired CEO,” lumping himself with those whose “biggest fear is that we would go brain-dead. We want to stay active; we don’t want to start the dying process.” Moreover, he learned a lot at Manville—“stuff you don’t want to have to learn twice,” he says—that he thinks would be a valuable contribution to other companies.
But lurking beneath such logic is a far more powerful motivator: He loves the action. Stephens left Manville in 1996 after pulling it through its darkest hour, and then became CEO of MacMillan Bloedel, the long-ailing Canadian paper company. He pounded that laggard into shape and married it off to Weyerhaeuser Co. in 1999. What’s left? He has faced up to the fact that despite all the time he’s put into his golf game, he’ll never make the senior tour. “Has anyone ever asked me was I crazy to go on a certain board?” he says. “Oh, yeah! But there’s the thrill of the hunt.”
At a time when it’s increasingly difficult to recruit directors for established, well-regarded companies, outfits like Tyco International, WorldCom, and Enron have been beating the bushes for board members with Stephens’ grit. And to an amazing extent, they have been finding them. The whole 11-member board of Tyco International will turn over at its annual meeting this spring. Enron has a completely new set of directors, albeit four of them rather than nine. WorldCom has just retained Pearl Meyer & Partners to figure out compensation arrangements for the recruits it is eyeing.
Some good directors, men and women with reputations to maintain, are willing to join the boards of troubled companies. What distinguishes them is that they are not afraid to meet trouble head-on. In that sense they are like those intrepid lawmen of the Old West, ready to strap on their six-shooters to clean out the nest of bad guys who are terrorizing the town. Raymond S. Troubh, now chairman of Enron, says he reacted “favorably and quickly” when offered a seat on that board in November 2001, soon after the company hit its iceberg. It took him just two days to make up his mind. “Some people can’t bear to be involved in battles,” says Troubh, a professional director who sits on eight other boards. “I think it’s a real strength not to be afraid of litigation. Turnarounds are something I’ve done before, and I’m not scared of them.” Those turnarounds include Hercules Inc. and Triarc Cos.
Like Stephens and Troubh, directors who join the boards of troubled companies are generally familiar with the dirty work of turnarounds, either as board members or, more usually, as executives. For example, Bettina Whyte is a general manager at AlixPartners, a New York City turnaround consultant. In 2002 she joined the board of Washington Group International, the old Morrison Knudsen construction company, which had just emerged from bankruptcy.
One of Tyco’s new overseers is Jerome B. York. He was part of the fabled resurrection team at Chrysler under Lee Iacocca, winding up as chief financial officer, and then joined Lou Gerstner as CFO to coax IBM back from the land of the living dead. For the past three years he’s been chairman and CEO of Micro Warehouse, a computer retailer in Norwalk, Connecticut, that has also provided on-the-job training in fixing problems. “We took it over in January 2000 and did not have a 10-quarter recession in our planning,” York says. George Buckley, 55, another Tyco recruit, is the CEO who salvaged Brunswick Corp. in Lake Forest, Illinois, famous for its pleasure boats and other recreational equipment.
Dicey situations attract active directors who like the fast pace and the premium on quick decision-making while Wall Street yaps at the company’s heels and lenders threaten to pull the plug. “In practice, good directors have choices, so why would they choose a troubled company?” asks William E. Mayer of Park Avenue Equity Partners, a private equity firm in New York City. “Challenge has to be part of it. Who wants to do something boring? People want to be involved, to do something interesting, and to have a voice.” Or as Robert Dangremond, a turnaround specialist at AlixPartners and a sometime director of troubled companies, puts it: “To sit in quarterly board meetings of a stable company and be told that profits and sales will be up 3% next year—take me away! And take me away in a white coat!”
Directors enjoy a lot of satisfaction when a sick company returns to robust health, and they burnish reputations for being the Michael DeBakeys of corporate coronary disease. The money is not too shabby either, assuming they can help the company solve its problems or bring it out of bankruptcy with some kind of viable business. “I wouldn’t have gone on the Nextera board for nothing,” says James Coriston, 62, a former vice chairman of PricewaterhouseCoopers. He became a director of the publicly traded economic consulting company in Cambridge, Massachusetts, last September, shortly after it had returned to profitability. “If you are going to do this for nothing, do it for a nonprofit. But if the company is in business, you should expect to be compensated.” Coriston receives a $30,000 annual cash retainer and a $1,000 meeting fee, plus options on 7,500 shares.
Option grants are normal for most boards, of course, but “for any company that has lost 80% to 90% of its value, there’s a big upside,” says Roger Kenny, managing partner of Boardroom Consultants, an executive recruiting firm in New York City. Julie Daum, who runs the board practice at the search firm Spencer Stuart, also in New York, notes that at a troubled outfit, while the amount of cash is similar to what a director would get elsewhere at a company of the same size, “there is larger stock compensation.”
Consider the options doled out by Spectranetics Corp., a small company in Colorado Springs, Colorado, that finally put behind it a legal battle with its former CEO. “We’re operating with no debt, and we’re profitable now,” says chairman Emile Geisenheimer. The company has promising laser technology for opening blocked leg arteries. To keep it on the road to recovery, Geisenheimer invited Martin Hart, 68, a Denver businessman, to join the board. Geisenheimer believed that Hart had what it took. Among other things, his pick was an early investor in Pizza Hut and Taco Bell, and sold them both to PepsiCo. Part of the bait: Hart, who was elected to the board last November, got options on 45,000 shares, then trading at around $3 each. If he’s still on the board three years from now, he’ll receive options on another 45,000 shares. There’s no retainer, but meeting fees are $2,500. Moreover, says Geisenheimer, “we’re also looking for stock purchases—asking our directors to make them to put some skin in the game.” In mid-March Spectranetics shares were still at $3.
A company in Chapter 11 bankruptcy protection can’t offer stock options, so turnaround directors have to take all their compensation in cash, in the form of meeting fees that must be agreed to by the creditors’ committee and approved by the court. Peter Fitzsimmons, a principal at AlixPartners, estimates that such fees can range from $2,500 to $10,000 per meeting. “Good directors don’t have a lot of time, and everybody knows this,” he says. When boards that used to meet quarterly start getting together monthly or more often, and when there are weekly conference calls in between, those fees can add up.
Compared with other professionals offering counsel to the bankrupt, however, directors don’t appear to be making a killing. According to The New York Times, Richard C. Breeden & Co., a firm founded in Greenwich, Connecticut, by a former chairman of the Securities and Exchange Commission, is billing WorldCom about $300,000 a month for its advice.
What may be most surprising about directors who sign on with troubled companies is the way they view the risk they are so willing to undertake. In fact, they don’t really seem to think there is much risk. There isn’t a one of them who would join the board of a company that didn’t have a good directors’ and officers’ insurance policy, of course, but no one seems to bring up the subject of liability until late in the recruiting phase. The first question any prospective director asks might be expected to be “What kind of insurance do you have?” but it almost never is. Says Craig Smith, a partner at the recruiting firm Christian & Timbers in Menlo Park, California: “The first conversation you have is about overall fit—what the company is looking for, the background of the director, and why he or she can bring value. But were I to say, ‘No, there is not sufficient D&O coverage,’ the potential director would say to me, ‘Then why are we having this conversation?’”
The increasing threat of shareholder lawsuits resulting from last year’s Sarbanes-Oxley Act and other reforms suggests that it is a great deal more risky than in the past to join any board. But in fact, provided they exercise their duties of care and loyalty, most directors are still protected by the business-judgment rule. “There may be more litigation, honest directors may get sued, but they won’t be hit with judgments,” says Enron’s Ray Troubh. Moreover, when new directors come on board after all the bad news is out and the stock has fallen from $100 to $5, the only blame that can be laid at their door is that they failed to save a dying man. As investment banker William Browning of Cronus Partners in South Norwalk, Connecticut, explains: “If someone comes into the emergency room with 12 bullet holes in him and dies 15 minutes later, it’s hard to sue the physician for malpractice.”
The way these directors assess risk is through their fingertips. They read bylaws, financials, and auditors’ management reports, naturally, but the quality of the people they’ll be working with is what counts. Before York joined the Tyco board, he had a long meeting with the new CEO, Edward Breen. “What I liked about Breen was that he was enthusiastic and highly motivated to fix Tyco. His outside track record, coupled with my personal impressions, made me think he could do it,” York says. He also talked to Tyco’s new CFO, its internal auditor, and John Krol, former CEO of DuPont and the longest-serving of the directors who moved in to replace departed board members after the fall of chairman and CEO Dennis Kozlowski. York concluded that they had established all the right priorities for fixing the problems.
Are there some outfits that are just too toxic even for these veterans? Several mentioned tobacco companies and situations in which there is reason to suspect fraud. It’s also next to impossible to recruit directors for companies teetering on the edge of bankruptcy. Andrea Redmond, a managing director at the executive search firm Russell Reynolds, did manage to round up three candidates for a financial company about 10 months before it jolted everyone by going under. “Even though they did a lot of due diligence, they had no idea what they were getting into,” she says. “But they learned a lot from it, and one of them told me recently she’s not sorry she did join the board.”
Turnaround directors stress how much they learn from their troubled companies. Like Tolstoy’s unhappy families, each situation turns out to be different. Asked how being on the Enron board has affected him, Troubh says, “It’s been extremely hard work and tremendously serious. And it’s been a growing-up experience.” This from a 76-year-old.
Even after directors recount particularly grisly experiences at certain companies and you ask them if they’d do it again, their eyes glitter and you know what’s coming. Why, just look at Tom Stephens, willing to dive back into asbestos!
