Sex, Lies, and Shareholder Lawsuits
from Winter 1998
by William S. Rukeyser
Dread is what you and every other director have been feeling for days about this board meeting. The CEO has misbehaved in the workplace, at a time when he was already defending a lawsuit alleging similar misconduct. He used his influence and office resources to keep the incidents quiet, lied about them to his colleagues and the board, and trashed the corporate attorney who accused him.
On the other hand, profits are up.
To hear directors almost unanimously tell it, the situation is painful but the decision is easy: that CEO has to go. They tend to focus particularly on the lying. Not every moral lapse, sexual or otherwise, leads to dismissal, though in recent years alleged sexual misconduct has loomed large in the downfall of a president of Staples Inc. and CEOs of Astra USA Inc. and W.R. Grace & Co., among others. But board members, who depend on the CEO for information about the business, are particularly unforgiving about being lied to.
So corporate directors, probably more than others, have tended to deplore Congress’s seeming reluctance to deal decisively with President Clinton’s misdeeds. And with reason. “There’s a higher level of sensitivity and a greater tendency to prompt action in corporate boards than there is in the political arena,” says Howard Baker, who has studied such situations both up close as vice chairman of the Senate Select Committee on Watergate, as White House Chief of Staff, and lately as a director of Pennzoil, United Technolo-gies, Federal Express, AT&T, and Waste Management.
To be sure, Congress may ultimately act strongly, and corporate boards have been known to equivocate, too. Even a lowlife CEO can be hard to dislodge if he or she owns a lot of the company’s stock or has stacked the board with sycophants. And corporate boards, unlike Congress, not only love secrecy but are often able to maintain it. That can insulate companies from reality, aggravating blunders ranging from Exxon’s mishandling of the Valdez oil spill to Microsoft’s early encounters with the Justice Department. But privacy unquestionably helps when the boss needs ousting. As a former director of a Fortune 500 company puts it, “Who knows how a board might cut a deal to get the guy out of there? It wouldn’t necessarily be clear why he left.” He adds emphatically: “I think corporate boards have nothing to learn from Congress.”
Boards may be more decisive than Congress partly because some forces that directors normally consider disadvan-tages can be advantages in this kind of crisis. For example:
Fear of lawsuits. As Howard Baker notes, “There’s a direct parallel between the responsibility to a voting constituent on the one hand and the responsibility to shareholders on the other. But political constituents seldom bring derivative lawsuits.”
Fear of regulatory action. As directors suspect, the feds lie in wait for private companies that condone various forms of misconduct by employees high or low. Even Congress has subjected itself to many of the regulations that apply to private-sector workplaces, and the Supreme Court ruled this year that federal employees can be fired for denying misconduct that is later proved to have occurred. Only the president and the vice president are exempt from the regulations that govern the bureaucracy.
Dwindling board perks. Tradition-ally, CEOs and directors have had an almost umbilical relationship, although it wasn’t always clear who was the baby, whereas the president and Congress are constitutionally independent and even adversarial. But it’s not as great a deal to be a director as it used to be. Pensions and other benefits that used to make many directors desperate not to endanger their board seats by offending the CEO are diminishing, just as legal and shareholder pressures not to shill for the CEO intensify. These trends clarify thinking when the board has to act against the boss.
Lack of polls. Boards frequently check in with big shareholders, and when they don’t, big shareholders may harangue directors about significant corporate moves. But few, if any, corporations engage in the minute-by-minute polling of constituent opinion that regularly enervates the body politic. In its absence, directors confronted by an errant leader sometimes just have to swallow hard and do what they think is right.
