"Of Course You Should Put Your Friends on Your Board"
from Summer 1999
by Bill Saporito
Don’t get me started,” says Martin Davis, laughing. “I’m going to have another 65 enemies before this is over.” Of course, getting the former Gulf & Western chairman started is exactly what we want to do, as he is a man whose constitution won’t abide dissembling. You always get it direct, no waiting.
Even so, when you punch his name into one of those Internet search engines, you can almost hear the world’s servers straining to find a trace of him over the last couple of years. As managing partner of Wellspring Capital Management in New York City, Davis, 72, is a gentleman banker nibbling at a deal here, a deal there. “We’re a private company. We don’t need our name in the papers,” he says. The irony is intended and obvious, for Davis, who at one time labored as a press agent for Hollywood legend Samuel Goldwyn, used the media effectively as a CEO and seemed to relish the sport of reporter jousting. That was then.
Also back then—1989, to be precise—was Martin Davis’s most public hour. He emerged as the spoiler of a planned merger between Time Inc. and Warner Bros. A G&W bid for Time did kill the deal as planned in that it forced Time to buy Warner for cash and stock—a transaction that crippled the publishing giant for years with a $12 billion debt. But Davis never got the company—the late Warner chairman Steven J. Ross did. Soon thereafter, Davis sold Paramount to Viacom after another highly charged scrap in which cable retailer QVC tried to buy Paramount from under Viacom. Davis now sits on the board of National Amusements, Viacom’s parent. But about all Davis and Time Warner have in common these days is a neighborhood. The media giant’s headquarters soar above Rockefeller Center not a block from Davis’s own second-floor office.
Davis isn’t surprised that Time Warner has finally delivered the value it promised so long ago—although it did take the company nearly eight years to produce it. He and Time Warner CEO Gerald M. Levin (who was then vice chairman and the chief strategist) shared the same vision for Time—the publishing company would either have to acquire or be acquired. They simply disagreed on merger partners. Without any bitterness, Davis suggests that Time-Paramount would have been profitable long before Time Warner.
When it comes to corporate governance, we can report that Mr. Davis is defiantly out of date, albeit with a few notable exceptions. The trend today is to recruit directors who are independent to the point of being the CEO’s adversaries—which Davis opines is “one of the dumbest things that has ever been invented.” Should the CEO invite his friends to join the board? Of course, says Davis. Who else is in a better position to tell the emperor that he has no clothes? But won’t that create a pliant board? So what if it does? he asks, as long as the board puts the shareholders’ interests first. Conjure all the new rules you want, he says, “but a board is still what you, the CEO, make it. I consider it meaningless to say, ‘We’ve got to have more independent directors,’ and so forth. What is important is to have independent thinkers around you, whether they are insiders or outsiders.”
Davis’s view of governance comes from the perspective of a career that has had two very distinct chapters, which happen to parallel two major trends in corporate strategy in the last part of this century. In 1966, he was running Paramount Pictures when it was bought by G&W, a wildly diversified conglomerate that Mel Brooks once referred to as “Engulf & Devour.” In addition to Paramount, G&W owned South Puerto Rican Sugar Co; New Jersey Zinc; American Auto Parts; a finance company called the Associates Corporation of North America; and Simmons Mattress, which made the products everybody could use when they got tired of trying to manage the mishmash.
Gulf & Western had been assembled by Charles Bluhdorn, a fiery Austrian who started his empire with a manufacturing outfit called Michigan Bumper. “That was a different era,” recalls Davis. “We as good as printed our own currency. We had two classes or three classes of warrants, then four classes of preferred. All were board approved, but I question whether any board understood half the things that were going on in those days.” G&W wasn’t alone, of course. ITT and others were also going the conglomerate route, under the notion that the perfect portfolio could buck different business cycles and produce a predictable earnings stream, even if the wheels fell off a couple of operations. Today, “GE’s the only one left,” says Davis, “and after Jack Welch retires, who knows what will happen?”
Davis says he became disenchanted with the strategy, which was not yielding much in the way of stock appreciation. And by the mid-70s, a bearish market had killed the value of stock as currency, cutting off the avenue of buying earnings. Profits sagged, and management was hard-pressed to turn it around, although not for lack of trying. Explains Davis: “There were a few of us who were flitting from business to business [zinc to sugar to cigars], but we weren’t running anything. We were there sticking our fingers in the dike all the time. We understood the businesses, but management can’t possibly do it all. I don’t care if they are all geniuses, they can’t realize the full value of it and the market recognized that. And the market said, ‘Therefore, you get a four times multiple.’”
Davis, who joined the G&W board after it bought Paramount, made his differences known to both Bluhdorn and the rest of the board. He got nowhere and recognized that his time was running out at G&W. What nobody knew was that Bluhdorn’s time would run out first. In 1983, he died suddenly of a heart attack aboard a corporate plane and Davis succeeded him as CEO. Six months later, Davis became chairman.
Within a month he was into the second chapter of his corporate governance evolution—one that made him a charter member of the shareholder value movement, an idea that has gained momentum only in the years since. Davis’s new strategy for G&W was to fashion a media giant out of the conglomerate. He dumped the old name, sold off all the corporate misfits, renamed the operation Paramount Communications, and set out to strengthen the core holdings, including publisher Simon & Schuster. He added Madison Square Garden, a company that owned the Knicks and the Rangers.
With a couple of exceptions, Bluhdorn’s former directors went along with all of this, willingly following Davis’s divestiture of all they had voted to assemble and agreeing to reshape the new company along the lines he wanted. “The board would follow Bluhdorn, he was the CEO,” Davis says. “That same board now followed me. We built the skyscraper, and I wanted to tear it down. So everyone took the elevator to the top floor and they came down a few floors with me.”
Was the board independent? Even by today’s measure it was, insists Davis, because it was split almost equally between inside and outside directors. Was it so weak that it merely submitted to the will of a powerful CEO? Not at all, he says, noting that several directors such as Herb Neyland, a founder of G&W, and Grace Fippinger, from New York Telephone, made vital contributions to the turnaround. “Without board support and without board involvement,” Davis says, “I couldn’t have gotten it done.”
And anyway, so what if the board is a pushover, as long as the results are there? “There are some boards, many boards, that turn out to be rubber stamps. But there’s nothing wrong with a rubber stamp just as long as the directors understand what they are doing.”
In Davis’s view, “You can’t have a lousy board and a great management.” Look at AT&T, he suggests. The board currently has largely the same membership that it had two years ago, when the company was floundering. What’s the difference between then and now? C. Michael Armstrong, the dynamic chairman and CEO now teaching Ma Bell to dance. “The board today is a far better board because there’s a fabulous CEO running it.”
In the old days, CEO-friendly boards abounded, of course. Go back to the board of Capital Cities/ABC, Davis suggests. It was run by CEO Tom Murphy. A friendly board? You bet. It included not only CapCities/ABC president Daniel Burke but Leonard Goldenson, a founder of ABC, who was close to 90 years old when the company sold to Disney. By today’s rules, notes Davis, those men might not be offered directorships. “But at Cap Cities/ABC, they were utilized properly and they made great contributions, because Murphy knew how they should be run.”
Which brings us to the friends-and-family debate. When it came to reshaping the Paramount board, Davis did not hesitate to bring in people he knew well. Personal friends such as Jim Patterson, a little-known Canadian entrepreneur, “was diametrically against everything we were doing at the old Gulf & Western,” Davis points out. He was not known to anybody, he was a stranger, and he was independent, whatever independent is, but a friend of mine. No question about it. But he was a great director.”
Davis gave all of his outside directors free rein to drop in on the company’s businesses at any time. He abhors the idea that board members should get clearance prior to talking to operating executives. “To have a director say, ‘Gee I was out here in Dallas and I saw something there that you ought to get at,’ is the most asset-building thing you can do,” Davis says. He cites Pfizer as a company that regularly gets board members to interact effectively with operating executives. “A good director should be involved in the company. Show me a CEO who says directors should stay in the boardroom, and I’ll show you a company that’s doomed.”
After the failed bid for Time, for which Paramount took an $80 million charge, and the sale to Viacom, Davis’s board was criticized for being too close to him. Guilty as charged, he concedes. “You’re damned if you do and damned if you don’t, so you do what you have to do to get the job done—period. If you’re running the company by public perception, you better watch out. Because results do count.” The score under Davis: The share price increased from $4.75 to about $82 during his 12-year tenure, an increase that beat the Dow by a multiple of three.
Davis accepted only two outside board seats during his years at Gulf & Western and Paramount, one at Primerica, the one-time financial supermarket that’s now part of Citigroup, and the other at RJR Nabisco. He did so at the behest of friends, Primerica’s CEO Gerald Tsai and RJR’s chief Ross Johnson. Both men knew, or should have known, that they could expect no favors from Davis. Davis showed his independence as part of the special committee at RJR that ultimately sold the company to KKR, rather than to Johnson’s investment team.
But the willingness of friends to make trouble, says Davis, is exactly why you should have them on your board. “There’s a difference between expecting a personal friend to be a crony and trying to put together a good quality board. You expect friends to support you if you’re right, but you also expect them to kick your ass if you’re wrong. Believe me, my rear end had a couple of kicks in it too, and my friends on the board were right to do it.”
