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
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
"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
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 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
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
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; email@example.com
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