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July 20, 2001

Dow Jones Newswires

Proxy Battles Leave CEOs Exiled From Boardroom

By PHYLLIS PLITCH

   Of DOW JONES NEWSWIRES

NEW YORK -- It's a little like the king of the castle being forced to hand over the keys to the front door.

In what seems to be an emerging trend in investor and corporate activism, shareholders have been yanking chief executives from their board seats.

A couple of weeks ago, the long-awaited tabulation of votes in Willamette Industries Inc.'s (WLL) contested board election gave Pacific Northwest forest products rival-turned-hostile bidder Weyerhaeuser Co.'s (WY) board slate the edge. With the victory, one of the trio of directors forced to relinquish a seat on Willamette's nine-member board was chief executive Duane McDougall.

That announcement was followed by the stunner that shareholder dissident Guy Adams was victorious in his proxy contest at Lone Star Steakhouse & Saloon Inc. (STAR), unseating chairman Jamie B. Coulter, who will continue as CEO at the Wichita, Kansas company.

And just as Willamette and Lone Star are coping with their own boardroom coups, a third company could be forced into the same predicament. The latest in this season of rough-and-tumble proxy contests is now playing out at Computer Associates International Inc. (CA). If Texas billionaire Sam Wyly and his slate prevails at Computer Associate's annual meeting next month, their plan is to divide the company into four business groups with four chief executives, none of who would wear a director's hat.

It's rare for a CEO to be shut out of the board, stripped of the power over major corporate decisions that comes with a director's vote. That the overwhelming majority of companies generally eschew such setups under normal circumstances is a testament to the proposition that running a company without having a say in the boardroom can be problematic, governance experts say.

In its board practices survey of S&P 1500 companies released late last year, the Investor Responsibility Research Center found that virtually every chief executive served on the board.

"From an operational standpoint, it's a very difficult situation," said Carol Bowie, director of corporate governance services at IRRC, which noted in a recent newsletter that in some director contests this season, activists were unsuccessful in vanquishing CEOs, including at Morton's Restaurant Group Inc. (MRG), where chairman and chief executive Allen J. Bernstein and two other incumbent directors held onto their seats.

"The CEO is the top management representative, the person who is going to be conveying management strategy and other information to the board," Bowie said. "It's a situation that doesn't lend itself, I would think, to smooth operations."

   Changes May Cause Adversarial Relationships

Bruce E. Beebe, editor and publisher of Directorship, a corporate governance newsletter, said the unusual structure could result in nudging directors to the sidelines, chilling interactions between board members and the man or woman at the top as well as second-tier managers, those in line for succession.

"You create a we-versus-them situation," said Beebe, whose newsletter is published by the Directorship Search Group, an executive search and governance consulting firm based in New York City and Greenwich, Conn.

The way Sam Wyly sees it, however, independent oversight at the top may be just the thing for Computer Associates. The centerpiece of Wyly's battle to replace the current chief executive and the entire board is his plan to create four business units to "enhance CA's ability to effectively compete, innovate, and provide standard-setting customer service and support."

Some aspects of the plan still need to be ironed out, including whether one of the divisions would be designated as a corporate center or possibly even naming a fifth chief executive as a kind of super CEO. However it plays out, there are no plans for any of the chiefs to sit on the board, though, according to Wyly nominee and associate Stephen Perkins.

Perkins outlined various reasons the drastic move is deemed necessary, including in matters of compensation. The Islandia, N.Y., business software maker has faced intense criticism, not to mention litigation, over its stock-option plans, resulting in a Delaware court ordering three top executives to return options worth more than $500 million dollars and a later settlement that cut the giveback roughly in half.

A chief executive should "be held accountable for his performance, and not influencing some committee about whether to grant stock options to the top few people," said Perkins, a former executive of Sterling Commerce, spun out from Sterling Software Inc., the company that Wyly sold to Computer Associates last year.

In proxy contests, adversaries rarely shrink from attacking a perceived weakness on the other side. Computer Associates, which has filed a lawsuit to stop Wyly's effort, is no different.

"Mr. Wyly says he's born-again good governance, but from our vantage point he still looks dead," said Owen Blicksilver, an advisor to Computer Associates, taking aim at a quote from Wyly in a recent Wall Street Journal article.

"He talks about independent oversight. Having the CEO on the board doesn't preclude independent oversight," Blicksilver said. "What it does is destroy decision-making ability and effective leadership. Under these circumstances, what strong independent-thinking CEO would want this job, without having the interaction with the board of directors?"

   Changes At Willamette Won't 'Make Any Difference'

Notwithstanding any behind-the-scenes turmoil that being on the losing end of a proxy contest might engender, Cathy Dunn, vice president of communications at Willamette was blase about its own chief's board exile.

For one thing, it's not the first time the company has operated in that fashion. Because of management changes, McDougall himself served as chief executive for a year and a half without serving on the board, she said.

"He'll interact with the board, just as he did while a director," said Dunn. "Here, whether he's on the board really has no significance for any of us. He could be running the company and be called chief company runner and it wouldn't make any difference."

As for the pending hostile tender offer, she reiterated the company's stance that the $50 a share bid from Weyerhaeuser is "inadequate" adding that there's nothing about installing three new board members that would change management's mind.

Further, the company has no plans in the works to reinstall McDougall to the board.

That's the right attitude, as far as Charles Elson is concerned. Elson is director of the University of Delaware's corporate governance center who sits on three corporate boards himself.

As one of the victors in a proxy contest at Circon Corp. (CCON) in the late 1990s, Elson and a compatriot won board seats at the chief executive's expense. Then he watched in frustration as the board maneuvered to reinsert the CEO.

"Normally, I believe the chief executive should be on the board," he said. "Where shareholder suffrage bumps up against managerial prerogatives, it's a tough one. If shareholders send a message by not electing the chief executive, I think it's inappropriate to put the CEO back on."

-By Phyllis Plitch, Dow Jones Newswires; 201-938-2357; phyllis.plitch@dowjones.com


URL for this Article:
http://interactive.wsj.com/archive/retrieve.cgi?id=BT-CO-20010720-004836.djm

 



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