Here Come the Rookies
from
Summer 2001
by
Ann Reilly Dowd
You might not expect to find Priscilla
Presley, former Mexican President Ernesto Zedillo, and Tom Croskey, a
23-year veteran of General Motors, as members of the same club. But
they are. Like others portrayed on these pages, all have joined boards
of U.S. public corporations in the past 12 months, part of a rookie
class of players in a game that has become far more challenging—and
risky—than ever before.
Most new directors hail from the executive ranks, academe, or professional firms, and have made it to the boardroom on merit. If the likes of Presley and Zedillo suggest a traditional boardroom taste for celebs and politicos, get ready for a surprise. Presley, for example, is a proven businesswoman (see page 33).
Today’s competitive business climate and demanding shareholders have companies wringing every last dollar’s worth out of their rookies. And that’s changed the way many are recruited. “In the past, the good ol’ boys would ask each other: ‘Who do you know?’” says Michael Nieset, managing director of board services at Christian & Timbers, an executive search firm. “But that’s a mindless way to go about it these days. Increasingly, companies are taking a strategic approach to hiring directors, asking themselves where they’re headed and what expertise the board will need in the future. Boards use search firms to help them figure out the holes, and then plug them.” One of the biggest holes, as Corporate Board Member reported in its last issue, is overseas experience. Says Ted Jadick, managing partner of search firm Heidrick & Struggles: “A sitting CEO who is a global player is the hot commodity.”
At many companies, the CEO is still the chief recruiter. But even CEOs are finding it tough to sign up folks who are both willing and qualified. Holding a boardroom seat has become extraordinarily demanding. According to the National Association of Corporate Directors (NACD), a conscientious board member devotes up to 225 hours a year—more than a month of eight-hour days —to each directorship he or she holds, and more if committee work is involved. Meanwhile, mounting media scrutiny, investor activism, and shareholder litigation all but guarantee increased risk and liability. This is particularly true for outside directors who serve on audit committees (see following story). Says Nell Minow, an activist shareholder and editor of thecorporatelibrary.com, a website for directors: “People love to be on boards. It’s exciting. But this is a gift horse whose teeth you should count before accepting.”
The search for new directors is made still more difficult by two big changes: First, boards themselves may soon be getting larger. More than half of the 148 boards surveyed by search firm Spencer Stuart last year said they’d prefer to see 12 to 14 directors, up from today’s average of 11.5. Some 20% thought a group of 15 or more would be best. This would reverse a longtime trend toward smaller boards. Second, the traditional hunting grounds, notably the corner offices where CEOs hang out, are increasingly off limits. Top executives are under pressure from their own boards to cut back on their commitments. Similarly, at many companies rising stars are either actively discouraged (as they are at GE) or banned (Berkshire Hathaway) from accepting seats on outside boards.
Retired CEOs also once fed the boardroom talent pool, but their attraction is fading. According to the Spencer Stuart survey, boards are looking for younger members. Five years ago, the average age of directors was 61. It’s 60 now, and the average age of new board members is 55.
So where do these new recruits come from? According to Spencer Stuart, 23% have backgrounds in financial services or investment banking, another 23% in high tech and communications, and 15% in consumer goods and services.
Many potential directors are identified by headhunters, where the good ol’ boy network is alive and well. But every so often luck plays a role, as indeed it always has. “For me it was a freak deal,” says Philip Yeilding, 41, a physician’s assistant. Yeilding found his first board seat in 1997 while looking for office space in Princeton, Texas in a building that was owned and partly occupied by Horizon Pharmacies, a then-private drugstore chain. “I asked the receptionist who was in charge,” Yeilding recalls. “She pointed me to Rick McCord, Horizon’s president. We struck up a conversation and found we had a lot in common. I was consulting in the home health business as a second job; he wanted to diversify his board.”
According to Yeilding, Horizon’s directors were all on the premises and McCord called a board meeting on the spot. “I stepped out to the 7-Eleven for a cup of coffee. When I came back, he said: ‘Hey Philip, you’re on.’ Then he added, ‘Heck, it’s noon. Let’s eat.’ So we all went out to the local Rip’s for chicken-fried steak.”
Yeilding admits to a steep learning curve. Since joining the board, he has been through Horizon’s IPO, 49 acquisitions, an Internet drugstore launch, and revenue growth from $28 million to $132 million. But the values he shares with his fellow directors have helped ease the way. “We were all from small Texas towns and had very similar thoughts in terms of supporting local communities,” says Yeilding. “There was just a personality and vision match, which made it easy to get information and grow in the job.”
With any new job, it’s best to learn from the experiences of those who came before. Bonnie Hill, 59, a former consumer affairs adviser to the first President Bush, recalls that when she joined the board of Niagara Mohawk Power in 1991, “other directors often used acronyms which were foreign to me, and sometimes the same letters stood for completely different things.” For example, in Washington, D.C., DOT stands for the Department of Transportation. She found that in the business world it also stood for “date of termination.” So she requested a glossary of terms. Says Hill, who now also serves on the boards of Hershey, Home Depot, and AK Steel Holding: “Don’t be afraid to ask questions.”
Richard Koppes, who as general counsel of CalPERS, the pension-fund goliath, had sat cheek-to-jowl with directors of many underperforming companies, had a different surprise when he joined his first board, Apria Healthcare, in 1998. The home health care provider had a new chairman—Ralph Whitworth, head of Relational Investors, an activist shareholder group. “At my first board meeting, half the board was forced out by Whitworth,” says Koppes. “Then we brought in new management and spent a lot of time reformatting the governance of the company. More and more, being on a board is no longer just an honor; it’s a job.”
These days, anyone who accepts a board seat is apt to face a hail of fastballs. In addition to the new responsibilities of the audit committee, directors also must oversee the implementation of Regulation FD, which restricts companies from selectively sharing information, such as providing analysts but not individual investors with earnings forecasts. Repricing options, executive and board compensation, and mergers and acquisitions are evergreen challenges.
How does a rookie avoid striking out—and make the most of his or her first season? Here’s some advice from boardroom veterans and other experts in the governance game:
CHECK OUT THE TEAM BEFORE YOU SIGN UP.
That first call from a recruiter has got to be exciting. Visions of sitting next to Bill Gates at your first board meeting dance through your head. Not so fast. Landing on the wrong board can be worse than never serving at all. “The thrill of rubbing shoulders with the big names on the board gets old pretty quickly,” says Roger Raber, executive director of the NACD. “Some boards look great on paper, but in reality are dysfunctional. You need to understand the company and the dynamics of the board interaction before you sign on.”
Due diligence can save you precious time, aggravation—and even your good name. Read all the company’s financial reports, as well as those from outside analysts. Check particularly for any lawsuits or proxy battles that may be pending—and whether the company offers adequate directors and officers (D&O) insurance. “I learned of an environmental lawsuit against one company after I joined the board,” recalls Hill. “Now I ask about lawsuits first.” Also ask for the board’s corporate governance guidelines, which outline its operating principles. If it doesn’t have any, that could be a red flag signaling a mismanaged board. Take the pulse of the board by talking to current and retired members and reading the minutes of recent board meetings. “If everything’s approved unanimously, I’d be concerned that these are a bunch of management yes-men,” says Raber. “Alternatively, if the votes are all 5-4, the board may be so split it can’t function at all.” And if no one will show you the minutes, you may want to just say “No, thank you.”
Finally, suggests Andrea Redmond, managing director of search firm Russell Reynolds Associates, “Ask yourself: ‘What can I contribute to this board and what can I learn from it?’ If you can’t answer those questions—and feel good about your choice—this one is probably not right for you.”
DON’T SKIP SPRING TRAINING.
You wouldn’t let a chauffeur fly the corporate jet, yet an astonishing number of companies still assume new directors will learn their critical role of protecting shareholder value on the job. “Most companies assume their directors will learn by osmosis,” says Jay Lorsch, who co-authored Pawns or Potentates: The Reality of America’s Corporate Boards and chairs Harvard Business School’s director education program. “I believe strongly that directors need to be more assertive in getting help from management and other board members. Learning a company is complex and time consuming. But directors must do it.”
A few farsighted outfits such as Pfizer, Texas Instruments, Unocal, Target, and Home Depot have well-developed training programs designed to familiarize directors quickly with the company. But for the majority of companies where learning is still catch as catch can, veteran members counsel newcomers to bone up on the company and the marketplace by reading articles and analyst reports, attending industry conferences, and, most important, insisting on face time with the CEO and top management. It is crucial that the new director get a chance to see these executives actually operate, says Lorsch, not just to understand the major issues before the board but also to get the lay of the land in terms of personalities and capabilities.
In addition, corporate governance experts say, rookies should dig into the best boardroom practices by attending seminars offered by the NACD, leading business schools like Harvard, Wharton, and Stanford, and large institutional investors like the Wisconsin State Pension Fund. (For what you can expect from such an educational experience, see box on page 40.) “Run afoul of good corporate governance practices and you could end up in a nasty board story in the Wall Street Journal,” warns Patrick McGurn of the proxy research firm Institutional Shareholder Services. “More than ever, there is a downside to serving on corporate boards.”
PLAY TO YOUR STRENGTH.
Learning the company, the industry, and the personal dynamics of the board takes time—as much as a year, say many veteran directors. But rookies can establish their value on the team early in the game by playing to their strengths. After all, these days most are recruited to fill a knowledge gap on the board. So remind your fellow directors why they picked you in the first place. “If you’re coaching football, you can’t send 13 quarterbacks onto the field,” says Christian & Timbers’ Nieset. “Each member of the team needs to know his position, and play it.”
That’s precisely what scientist Harold J. Ravechè, president of the Stevens Institute of Technology in Hoboken, New Jersey, did when he joined the board of First Jersey Bank in 1989. “Almost immediately, I could see a role in helping bank personnel reach out to the local community to improve K–12 education,” recalls Ravechè, whose Institute had developed a program to train K–12 teachers on how to use computer technology in math and science education. “It was a real, neat fit.” As time went on, it was Ravechè who also brought the bagels to the board’s breakfasts, and played a key role in helping the bank shape its use of technology to improve its bottom line.
Haven Cockerham, senior vice president of human resources for R.R. Donnelley & Sons, found his niche on the board of Harris Bank soon after he was recruited last year. Says Cockerham: “The chairman did a nice job of putting me on the human resources committee, where I was comfortable making a contribution right away. So I had a good level of confidence from the start.” That, in turn, helped Cockerham make broader contributions as the board reshaped the company’s growth strategy. “As you come to understand the company and the thinking of management and the board, your ability to think critically becomes more important to the board than your knowledge of any one subject,” he says.
GET READY TO WORK UP A SWEAT. One of the most common surprises rookies encounter on their first board is how much work being a director really involves. After all, the average board only meets eight times a year. But the preparation that goes into becoming an effective member of the board dwarfs the actual meeting time. Says Heidrick & Struggles’ Jadick: “Most first-time directors come back to me six months or a year later and say: ‘Wow! I knew this would take a fair amount of time, but I didn’t realize just how much.’ And that’s if it’s business as usual. If something abnormal happens like a takeover or a legal issue, then board members work a lot harder.”
FIND TIME FOR BONDING—AND FUN. Most boards pack so many briefings and decisions into their formal meetings that it’s virtually impossible to find time to brainstorm and bond. But veterans say that informal socializing and swapping of war stories can build a level of understanding and trust among directors that makes the formal work much more productive. “At Atlantic Energy, the directors made a point of having dinner together the night before the board meeting,” says Ravechè, who joined that board in 1990 before the company merged with Delmarva Power & Light to form Conectiv, where he remains a director. “It was extremely important, because we were not under a time crunch,” says Ravechè. “Over dinner and drinks at the bar afterward, we talked about creating a business enterprise to invest in energy-related technology. The result was that the company helped finance a new technology fund that proved very successful. In some ways, I believe the brainstorming at dinner and the bar laid the groundwork for that success.”
Ravechè has carried on the tradition of premeeting dinners with the board of Cirrus Logic, a semiconductor manufacturer where he also is a director. He sets aside the day before the meeting to visit with key employees, from design engineers to college recruiters to sales and marketing managers. “I’m fascinated by the semiconductor industry and the strategic niche that Cirrus occupies in the entertainment business with its cutting-edge e-books and DVDs,” he says. “Last time I was there I heard a new product where the sound quality was so incredible that if I closed my eyes, I thought I was in Carnegie Hall. It’s just such neat stuff!” Is he a kid in a candy shop? Says Ravechè: “If you can’t find a board whose business you’re really excited about, it’s not worth the time. You’d be better off working to grow your bonus at your day job.”
MAKE SURE YOU CAN FIRE THE COACH.
As a director you’re not just a player on the team—you represent the owners, i.e., the shareholders. So you always have to put their interests first, even if that means firing the CEO. That lesson became ironically concrete for the University of Delaware’s Elson. He was recruited to the board of Sunbeam by Al “Chainsaw” Dunlap, then chairman and CEO, specifically because of his expertise in corporate governance. But when the board realized there were huge problems within the company, “we looked around the room and agreed it was time for Dunlap to go,“ Elson told Corporate Board Member at the time.
If you can’t bring yourself to pull that trigger, you’re probably not board material. Says Koppes, who helped replace the ousted management at Apria Healthcare: “It’s a primary responsibility of the board to hire, oversee, and sometimes fire the CEO. If you think you’d have trouble firing him, say he’s a friend or a golfing buddy, then you probably shouldn’t join the board.” Or as they say in the locker room: No guts, no glory.
GM Veteran Goes to Bat for Medscape
TOM CROSKEY, 45
Director of Employment Cost Analysis, General Motors
Term: Three years
Committees: Audit
Compensation: None. He got options on 30,000 shares with a strike price
of $2.75 but gifted any gain to GM, which is the automaker’s policy.
Tom Croskey is not lacking for lofty degrees. He has a BA from Michigan State University in accounting and finance, an MA from Central Michigan University in industrial management, a degree from the Northwestern University Executive Development program, and he is a certified management accountant.
His recent challenge at GM: to get doctors to write more legibly. That’s a big deal for an outfit providing health insurance for 1.2 million people. Inaccurate billing, often due to poor penmanship, costs GM millions a year. In 2000, Croskey put together an alliance with Medscape, a Hillsboro, Oregon provider of digital health records and online health information, that will provide doctors with personal digital assistants (PDAs) to write prescriptions and to store patients’ records. Croskey is happy with the alliance so far and says it has attracted “unbelievable interest from physicians who want to be a part of the pilot program.”
Croskey himself attracted interest among Medscape’s top executives, and in February he was invited to join the board. “We look forward to drawing on his wisdom and experience,” says Medscape chairman Mark Leavitt. “Our strategic partnership with General Motors is of the highest importance, and Tom Croskey will help us ensure that the alliance operates smoothly and successfully.”
Croskey once turned down an offer to join the 35-person board of Blue Cross Blue Shield of Michigan because he thought it was too big. Medscape’s nine other directors are just the right number, he says, allowing for one-on-one time with each of them. In addition, says Croskey, “The CEO spent a bit of time telling me what was hot and what was currently boiling at the company.” by Jessica Fourneret
Handspring Taps Wireless Wiz
WILLIAM KENNARD, 44
Senior Fellow, the Aspen Institute in Washington, D.C.; Managing
Director of Global Telecommunications and Media Investing Strategy, the
Carlyle Group; former Chairman, FCC
Term: Three years
Committees: not determined as of 6/1
Compensation: Signing bonus; options on 37,500 shares at $13.10 ($9.33
stock price on 6/1) plus options on 11,250 shares per year, awarded
after annual meeting.
As chairman of the Federal Communications Commission from 1997 until early this year, William Kennard helped shape policies that led to a dramatic increase in the use of wireless phones, the Internet, and broadband technology. So joining the board of Handspring, a manufacturer of handheld computers in Mountain View, California, wasn’t exactly a stretch. “I want to assist them as the company transforms its product into a wireless communications device,” explains Kennard. Says Donna Dubinsky, Handspring co-founder and CEO: “Bill brings to our board extraordinary breadth and depth in the field of wireless communications, an area of increased focus for us.”
A self-described Internet junkie who now has a bit more time to spend with his one-year-old son, Kennard was recruited by venture capitalist John Doerr, who is a board member and one of Handspring’s founding investors. The two worked together while Kennard was at the FCC looking for ways to bring technology into the schools, especially in low-income areas. Kennard’s respect for Doerr helped persuade him to join the company. “John has emerged as one of the most effective advocates in the business community for bridging the digital divide,” says Kennard.
The rookie director’s mission is to make the Internet, among other wireless devices, attainable to all. “I am convinced that Handspring will continue to be a leader in this area, which, ultimately, will make the Internet more accessible, more affordable, and more user friendly,” Kennard says. To make sure he’s an informed director, the former FCC chairman is meeting with employees at all levels of the company to get up to speed on the various components of its business.—J.F.
H.J Heinz Attorney Signs on at Nash Finch
LAURA STEIN, 39
Senior Vice President and General Counsel, H.J. Heinz
Term: Three years
Committees: Compensation, nominating
Compensation: $22,000 a year and options on 2,500 shares per year. Her
first strike price: $22.06 ($23.94 stock price on 6/1); $1,500 per
board meeting; $750 per committee meeting attended; $125 per month for
service on each committee.
Laura Stein is the youngest rookie on our list, though she’s had a decade of legal experience in the business world. She started as a lawyer in the business department of Morrison & Foerster, a San Francisco law firm. She spent seven years working in the legal services department of the Clorox Co., where she became assistant general counsel of regulatory affairs. She joined Heinz last year.
Executive search firm Spencer Stuart identified Stein as a potential director for Nash Finch, a food processor, and CEO Ron Marshall liked her immediately. “She is an excellent addition to the Nash Finch board of directors,” says Marshall. “We are proud to have someone of her credentials on our board, and her perspective will be invaluable as we grow this company.” The feeling was, as they say, mutual. Stein found Marshall to be “a dynamic and bright CEO who is making top-to-bottom changes to enable future growth.”
She’ll bring more than legal smarts. “Through my work at H.J. Heinz, I have a combination of legal, business, and international experience in the food industry, which is something I think Nash Finch found attractive,” says Stein. “In my role as general counsel at Heinz, I already attend board meetings, so I have a very good understanding of the role of a director, including the important fiduciary responsibility to shareholders. It’s a wonderful opportunity.” Nash Finch has the added advantage of being based in Stein’s hometown of Minneapolis.
The rookie attended her first board meeting in April and says Marshall and other Nash Finch board members have gone out of their way to teach her the ropes. The board can have little doubt she’ll soon be speaking their language. Why not? Stein is fluent in Italian, Spanish, Mandarin Chinese, French, and Portuguese. by Joshua Green
Timberland drafts do-gooder
BILL SHORE, 45
Founder and Executive director, Share Our Strength, an antihunger, antipoverty organization in Washington, D.C.
Term: One year
Committees: Compensation
Compensation: Signing bonus, options on 10,000 shares (strike price not
disclosed); $25,000 per year; $1,000 per board meeting; $500 per
committee meeting.
Should Timberland ever have the need for crisis management, it’s got just the man: Bill Shore was a campaign adviser to Sen. Gary Hart during his 1984 run for the White House that ended with the infamous Donna Rice caper. Shore says his life changed later that year when he read an article about the number of people expected to die in Ethiopia that summer and subsequently founded Share Our Strength (SOS). The organization went on to mobilize corporations such as American Express and Tyson Foods to contribute their resources to fight hunger and poverty. Over the past 10 years, for example, American Express has raised more than $42 million for the crusade to end hunger, partly by donating two cents to SOS every time one of its cards was used. For its part, Tyson pledged to donate 6.5 million pounds of chicken last year to community services around the country.
Timberland CEO Jeff Swartz, 41, a scion of the company’s founding family who has known Shore for several years, identifies his new director as “a distinguished champion of social justice. By adding him to our board, we signed our commitment to be a for-profit enterprise that takes its societal responsibilities seriously.”
Shore relishes his new assignment at the Stratham, New Hampshire-based footwear and apparel company most famous for its sturdy, cold-weather boots. He says it will allow him to spread his “share your strengths with others” philosophy. And Swartz, he says, “is interested in the concepts of community wealth and social justice being more fully integrated into the governance of his company, which is already extremely active on community and social issues.”—J.F.
Metro-Goldwyn-Mayer catches a star
PRISCILLA PRESLEY, 56
President, Rockster Records Inc.
Term: One year
Committees: not available
Compensation: $25,000 per year, of which she opted to take 50% in
common stock; no board meeting fees. MGM also awards sporadic stock
options to directors and pays different amounts for committee service.
Members of the compensation committee get $4,000 per year.
Most people associate Priscilla Presley with her high-profile and sometimes controversial roles: former wife of Elvis; mother of Lisa Marie; Michael Jackson’s former mother-in-law; member of the church of Scientology. She’s made fewer headlines in her role as a skilled businesswoman—a reputation she secured when she helped turn Presley’s cash-strapped estate into a multimillion-dollar business. “Priscilla is a natural for MGM,” says Jack Soden, CEO of Elvis Presley Enterprises (EPE). “She brings a valuable mix of financial and entertainment savvy. Over time, she’s had the opportunity to deal with the entertainment industry from the inside and outside, which has brought her a unique perspective.”
Back in 1982, after the IRS hit The King’s estate with a $10 million inheritance tax bill, Presley invested the remaining $560,000 in Graceland, Presley’s Memphis home, and opened it to the public. Though considered a daring move at the time, the Graceland investment was recouped after just 38 days and has gone on to gross millions of dollars every year since. Priscilla’s farsightedness is enshrined in the book The 50 Best and Worst Business Deals of All Time. Says the book’s author, Michael Craig: “Priscilla Presley took the dwindling Elvis Presley estate, figured out how to take all those people who were hanging around outside the gates of Graceland, [and] charged money to let them in.”
EPE expanded into other businesses, including worldwide licensing of Elvis-related products; the development of Elvis-related music, film, video, television, and stage productions; and the management of Elvis’s substantial music publishing assets. “From a fiduciary point of view, what Priscilla has done is tremendous,” Soden says. “She developed a business plan and grew the company from a single employee in 1982 to more than 400 today. She has a great mix of instinct, heart, and financial savvy that will serve MGM well.”
Adds Alex Yemenidjian, MGM’s chairman and CEO: “Priscilla’s professional achievements in both the business and entertainment sectors make her a superb addition to the MGM board.”—J.G.
Union Pacific, Procter & Gamble: A Doubleheader
ERNESTO ZEDILLO, 49
Former President of Mexico
Term: Union Pacific, one year; P&G, three years
Committees: Finance at Union Pacific; public policy at P&G
Compensation: Union Pacific, $60,000 per year; P&G, $55,000 per
year. Last year, Union Pacific awarded directors options on 3,600
shares at $49.88 ($56.77 stock price on 6/1). P&G gave its board
members options valued at $20,000 in the fiscal year ending June 2000.
The shares have dropped 39% since then.
By appointing Ernesto Zedillo to their boards, Union Pacific and Procter & Gamble swapped one world leader for another. Dick Cheney
