The Insider
from Winter 1998
by E. Thomas Wood
Don MacNaughton is a Fortune 500 boardroom version of Woody Allen’s film character Zelig—a figure who seems to have been wherever the action was, throughout a generation of American business.
When Exxon’s board faced the Arab oil embargo, MacNaughton was there. When IBM dominated worldwide computing, he was there. When AT&T underwent its court-ordered mitosis from Ma Bell into many Baby Bells, he was there. Most recently, when federal authorities decided that Columbia/HCA’s youthful and visionary emperor, Rick Scott, had no clothes, MacNaughton was there for Scott’s dramatic July 1997 ouster.
MacNaughton, 81, garnered some of the most impressive credentials of his era in corporate America. Born in Schenectady of Scottish immigrant parents and educated at Syracuse University, he returned to Syracuse for law school on the GI Bill after serving in the Army Air Corps during the Second World War. In 1955, he joined The Prudential Insurance Co. and, by 1970, was chairman of the board.
In 1978, MacNaughton embarked on a second career, becoming chairman and CEO of Hospital Corporation of America and lending his insights to HCA cofounder Thomas F. Frist, Jr. MacNaughton gradually relinquished executive authority and spent several years with a spinoff, HealthTrust, Inc., which was reunited with its parent after the 1994 merger that created Columbia/HCA Healthcare Corp. He retired from the board in May 1998, ending 30 years of service on the boards of blue-chip U.S. companies.
In addition to Exxon, IBM, AT&T, and the two corporations he ran, MacNaughton’s board service also included Johnson & Johnson, SunTrust Banks, an E.M. Warburg Pincus advisory board, and tenures as a trustee or director of the national United Way, the New York Stock Exchange, the Business Council, the Business Roundtable, Harvard Medical School, Meharry Medical College (as chairman), the Wharton School at the University of Pennsylvania, and Rutgers, Syracuse, and Vanderbilt universities.
Phew.
“I loved it,” he insists, answering the inevitable question: Why would any sane person put himself through that many audit committee meetings, management crises, and Sunday-night acquisition votes? “I like to know what’s going on. I like the action of the business community.”
It’s not as though “the action” was always fun to be around. MacNaughton spent his share of time in the hot seat and saw plenty of boardroom blunders. The worst he can recall involved the selection of a CEO at a company he won’t name: “Several board members, including myself, suggested it might be a mistake. It turned out to be a mistake.”
Although his 18 years on the Exxon board ended before the 1989 Valdez oil spill, MacNaughton grappled with thorny issues as a director there and elsewhere. In the seventies, he and fellow Exxon board members endured crises that shook not only the oil industry but also the world economy—first the Arab oil embargo and then the wild fluctuations of energy prices later in the decade.
At the same time, he was attending IBM board meetings where the future of the computer industry was being shaped—though perhaps more by the omissions than by the actions of Big Blue’s leaders. IBM enjoyed worldwide dominance as a producer of mainframe computers during his time as a director, but by the late 1980s, after he left the board, the company was stuck in a strategic quagmire. It has taken years of effort, thousands of layoffs, and major management changes for IBM to regain its old perch as a Wall Street darling.
Moving from the known entity of mainframes into the unknown of PCs and software might have been less risky if done more incrementally, MacNaughton speculates, “but time didn’t allow.” IBM, he says, was “so big, so successful, that it was hard for the outside directors or management to see that what did happen, could happen. It’s easy to criticize them for letting it happen, but I don’t know how you could have stopped it. I can’t see anybody who could have made the moves required to save the company from the mess that it went into.”
At AT&T, MacNaughton was once again part of a directorate facing a challenge whose ramifications extended into the lives of millions of Americans. For years, the telephone monopoly struggled with the possibility, and then with the reality, of a federal court ruling requiring it to split into several competing divisions. Ultimately, the fate of this mighty company was in the hands of a one man, Federal District Judge Harold H. Greene of Washington, D.C., who presided over the antitrust case.
MacNaughton vividly remembers what Charles L. Brown, chairman and CEO of AT&T, told the board one day in 1981: “Well, we’ve got to assume either we’re going to win this case or we’re going to lose it. If we assume we’re going to win it, we should just go on doing what we’re doing. But I think that would be a wrong decision, because I don’t think we’re going to win it. Assuming we’re going to lose, how should we go about preserving the best of what AT&T has got? And what should we be willing to sacrifice?”
The board found Brown’s argument persuasive. In January 1982, the telephone company reached a settlement with the government that resulted in the creation of the seven regional bell operating companies on New Year’s Day, 1984. AT&T kept its long-distance service, manufacturing, and research divisions, maintaining core strengths that had a symbiotic relationship with each other and formed the basis for future success in a reshaped telecommunications industry.
“In a company like that, it took tremendous courage to make that decision,” MacNaughton reflects. “The easy way is just to sit around and try to make things work, even when you know they’re not going to work.”
MacNaughton participated in his last boardroom drama during the summer of 1997, after federal regulators launched a wide-ranging probe into Columbia/HCA’s business practices and FBI agents raided dozens of the healthcare giant’s facilities. MacNaughton would not discuss the situation with Corporate Board Member because of ongoing legal action. In 1997, however, he told Business Nashville magazine that he had been concerned for several months about the “very aggressive” behavior of Chairman and CEO Rick Scott, a self-styled “agent of change” whose efforts to make over the healthcare industry had made him a magnet for controversy—and earned him a spot on Time’s list of the 25 most influential Americans of 1996.
As a former CEO of HCA and the elder statesman of the Columbia/HCA board, MacNaughton undoubtedly wielded considerable influence among the directors in a time of troubles. On July 19, 1997, the board convened by teleconference to discuss the federal raids that had occurred three days earlier—and to deliberate Scott’s fate. “My mind was—I was going to say ‘made up,’” MacNaughton recalled in the interview last year. “My mind was headed in that direction, but I looked forward to the meeting to hear what everybody else had to say, to see if those who disagreed with me had arguments that could switch me. But they didn’t.”
The board met again, in person, late into the night of July 24. The next morning, Scott resigned.
After three decades in the director’s chair, MacNaughton has formulated five touchstones of board membership:
Self-restraint. It’s popular these days, in certain circles, to pooh-pooh the “rubber-stamp” boards of an earlier era. This point of view holds that today’s directors are much more attentive to their responsibilities and liabilities than their predecessors were in the 1960s and 1970s. MacNaughton calls the rubber-stamp label “an overrated charge”—one that he finds “unfair, in light of the experience I had.” As he sees it, those who throw that epithet around fail to appreciate the value of self-restraint in the boardroom.
“I was, and still am, a strong believer in the idea that there should be a clear separation between the board of directors and management,” he postulates. “One of the primary responsibilities the board has is not to interfere with the management of the company.” Then what should the director’s role be? “A director has a responsibility to understand how a company operates, how it makes decisions, and to comment loudly at board meetings as to what he or she thinks of the decisions being made.”
That, and cutting Mr. or Ms. Smarty Pants down to size every now and then. “Management in most big companies has a tendency, which must be fought all the time, to think they know how to do everything better than anybody else does in their industry,” MacNaughton observes. Though he concedes that outside directors can fall victim to the same tendency, he believes he avoided it, adding he was never penalized for what he calls his “nit-picking.” Says he, “I can’t think of any instances where I was mistreated or laughed at by boards.”
Informal communication. In MacNaughton’s view, “a board of directors is really an informal group of people, whose responsibility goes beyond attending board meetings. It’s the director’s duty to be engaged all the time. “Many of the most important suggestions I made to any board were made in telephone calls: ‘What the hell are you doing now? I just read in the New York Times that blah blah blah….’ That sort of thing. It’s a very informal arrangement between top management and a board member. You lose that if you start formalizing the relationship between the board and management too much.”
Cronyism as a virtue. “I think a board ought to have a couple of cronies on it,” the veteran insider urges. “At one of the larger corporations I have talked about, all the directors they had picked were good directors and had done well. But I sensed, as I said to the chairman one day: ‘The only trouble you have with what is otherwise a splendid board, is that you don’t have a crony.’
“You’ve got to have somebody who, like nobody else on the board, can come to you and say, ‘Bill, do you know where you’re headed, going the way you’re going?’ When nobody else will do that, the crony can help you avoid making mistakes. The crony plays a role—if he is a reliable and honest crony.”
A cold eye on fashionable points of view. MacNaughton has little patience for some of the shibboleths held most dear by today’s directors—for example, the accepted wisdom that an exceptional CEO is worth an exceptional compensation package. “These guys get paid far too much money for what they do,” he says. Today’s corporate chieftains get paid the way Carnegie and Rockefeller did, but there’s a big difference: “In those days, the leaders were risk-takers. These guys are not risk-takers. They’re employees, just like the fellow who cleans the floor at night.”
Or, how about the much-discussed increase in job-related risk associated with being a director in these litigious times? Poppycock. Says MacNaughton: “I don’t think it’s true that director risk is much more severe than it was then,” at the beginning of his career. “That was not my experience. In the first place, today, if directors are sued and lose, they don’t pay. The corporation pays.”
Good citizenship. In the 1960s and 1970s, MacNaughton was an outspoken advocate for a high standard of corporate social responsibility. By that standard, the board member is viewed as a moral agent, bearing responsibility for the company’s behavior. “At the time I was expounding those ideas,” he recalls, “there were a lot of people criticizing me for what I was saying.”
“But I thought what I was saying made a lot of sense, and I still think it does,” he reflects. “I cringe when I read about great, successful, large American corporations that listen only to the siren song of the cheap employment or transportation advantages that they don’t have where they are now. It seems to me that, like any citizen of a community, they have a responsibility to do something to keep that community whole. To me, that’s not a complicated idea. To me, it’s a human idea.”
