Wednesday, July 18, 2001

By BILL VIRGIN
SEATTLE POST-INTELLIGENCER COLUMNIST

Corporate directors are well-trained to recite the noble-sounding mantra that their primary job is to look out for the shareholders' interests, that the investors are really their bosses.

But what if shareholders don't like the job those directors are doing in looking out for their interests? If those directors are really the shareholders' employees or representatives, can they be fired?

Technically, yes.

Realistically, no.

Two recent cases of shareholders actually firing directors are the exceptions that prove just how uncommon, and difficult, it actually is.

Exhibit A: Lone Star Steakhouse & Saloon, a Wichita, Kan.-based Nasdaq-traded company at which a dissident stockholder won election to the board. He did so despite holding just 1,100 shares, and despite the fact that the board member he ousted was Lone Star's chairman and chief executive.

Exhibit B, and closer to home: Willamette Industries, where shareholders voted in a slate of three directors over the incumbent directors, including (again) the company's chief executive.

We media types love to play connect-the-dots to draw a picture of a trend, no matter what bizarre outline we draw when we link them. That won't work in this case, even though there are only two dots, and geometric theory says you ought to be able to draw a line between the two.

One reason is that the circumstances in the two cases are so dissimilar. The Lone Star case involved a longtime critic of the company's weak financial performance and executive raises and bonuses.

The Willamette situation is the result of a hostile takeover bid from Weyerhaeuser Co., which has been unable to get Willamette to negotiate. Weyerhaeuser needs directors sympathetic to its cause to either pressure Willamette to bargain or to defuse a deal-killing poison pill.

Almost no one contends that Willamette's directors have done a bad job in running the company; historically, Willamette has been one of the standouts of the highly cyclical forest products industry. Weyerhaeuser is arguing that shareholders could do even better by joining the companies.

The other reason is that there are only two dots. If anything, they're the exceptional dots that prove the rule of the surrounding universe: Shareholders almost never get to give directors the boot, even those who richly deserve it.

Which is also about the only way shareholders can change the direction of a company in America, adds Robert Monks, a longtime activist on corporate governance issues. Sure, shareholders can submit all the resolutions they want, a cumbersome process that's often ineffectual even if the resolution passes. In Britain, 10 percent of a corporation's shareholders can call a meeting; it's virtually impossible to do so in this country, he says.

American corporate law is designed to protect entrenched management, and nowhere is that better illustrated than in the rules designed to thwart alternative board candidates, Monks says; the expense and regulatory burden is on the challengers (pay for printing and mailing your own proxy materials, navigate the intricacies of the law without running afoul of the Securities and Exchange Commission), while management gets to use the corporate treasury in its defense.

That's why board challenges generally work only "where very big money is committed" -- very big money like Weyerhaeuser, for example. "For an ordinary citizen coming in off the street and saying, 'I want to run for the board,' I have to tell you, that is a loser."

And even if a challenger, big or small, gets on the board, it may not produce the intended results. Weyerhaeuser has just three seats on Willamette's board; unless the remaining Willamette shareholders change their tune, Weyerhaeuser will have to wait a whole year for another election before it can achieve a majority. As one analyst notes, that's exactly why companies stagger board terms; it gives them even more time to wait out the opposition.

Very occasionally, a challenger gets the results he wanted; Monks says that happened to him when he ran for the board of retailer Sears, Roebuck a decade ago. "I just wanted to get enough votes that they couldn't ignore me."

He didn't get elected, but Sears did make changes. Locally, Bellevue's First Mutual Savings Bank settled a multiyear dispute with a group of shareholders who wanted the company put up for sale by putting one of the dissidents on the board; a year later, the company bought out the dissidents' shares, as well as those from other investors who wanted out.

When the corporate ship hits the iceberg, it's the chief executive who is relieved of command. CEOs should be held accountable, but they shouldn't be alone in feeling the pain. Directors who are comfortably coasting to retirement from board service should not be allowed to get away with simply jettisoning their executive hiring mistakes.

Directors frequently enjoy extended board tenure; they ought to be grilled regularly about what they've produced for shareholders during those long stays: Why didn't you recognize the company was adrift? Why didn't you spot the icebergs?

Such close grilling, and the improved performance it might spur, would be good news for the shareholders, big and small, who own the boat.

It would also be good news for the employees down in steerage who, whenever the captain and directors put the vessel onto the rocks, are the ones most likely to be left treading water.