As the firm’s stock price crumbled and its earnings declined, the board of directors for the American Express Company made the most important decision a board can discharge: ousting the top executive. The board announced that chairman and CEO James D. Robinson III would leave his CEO spot, with a caveat: He would remain chairman, and he would also grab a new position, chairman and CEO of brokerage house Shearson Lehman Brothers.
But that initial move 15 years ago outraged major shareholders, including some usually reticent board members. Three of them—including Rawleigh Warner, an American Express director for 20 years and former chairman of Mobil Corporation—resigned within days.
William G. Bowen ’55 was seated in the front row at the tumultuous behind-closed-doors drama. After opposing the board’s vote to allow Robinson to remain as chairman, he tried to persuade Warner to remain on the board. ”There were difficult moments in the American Express boardroom when Robinson’s status was being debated,” writes Bowen in his latest book, The Board Book: An Insider’s Guide for Directors and Trustees. “I decided to stay on the board. My reasoning … was this drama was not over.”
He was right. Less than a week later, the directors voted again. This time, they removed Robinson as chairman of American Express and Shearson Lehman Brothers while stripping him of his board seat.
Though the 1990s were no picnic in the world of organizational governance, as the American Express example indicates, the list of troubles engulfing corporate boards and CEOs has been an epidemic in the 21st century. Billions of dollars in shareholder wealth has evaporated, thousands of jobs have disappeared and once-powerful companies—remember Enron and Worldcom?— have vanished because of corporate skulduggery. Oftentimes, CEOs have been tossed out of sinking companies while embracing pay packages worth tens of millions of dollars. All might have been avoided had directors probed more and—while enjoying salaries of $200,000 or more for eight board meetings a year at the nation’s biggest companies—had they been less obsequious to the executive who appointed them.
Bowen’s deep history in organizational governance proffers him unique insights that can be found in his new The Board Book. Aside from serving on boards of major U.S. corporations such as American Express, Reader’s Digest and Merck (during litigation over the painkiller Vioxx), he has also served non-profits, from the mighty Smithsonian Institution to a small liberal arts college called Denison. He’s also been on the other side of the table, holding accountability to boards as president of Princeton University from 1972-1988 and then as head of the non-profit Andrew Mellon Foundation. His relationships with various directors and trustees through the decades have allowed him to tap the thoughts of well-known board veterans, such as former Federal Reserve Chairman Paul Volcker, to share in his book.
Bowen penned a similar work in 1994, called Inside the Boardroom: Governance by Directors and Trustees. Why the follow-up? “There have been monumental changes since then,” he said. “In the for-profit sector, there’s been a much greater awareness to protect against bad behavior. Wake-up calls, such as the Enron debacle, have helped change the way people think.”
Mark Dalton, head of Tudor Corporation and chairman of Denison’s Board of Trustees, sits on a host of other boards as well. He plans to buy 100 copies of the book to distribute to various directors and trustees.
“It’s a book that’s likely to be relevant for decades,” Dalton said. “Because of his wealth of experience, it offers a better perspective than one written in lawyerly tones. It’s the kind of book that when I think of how to construct a board, I’ll pull it out and look at the chapter of how to build a board.”
In the 230-page work published by W.W. Norton & Company, Bowen focuses on a number of themes, including Dalton’s reference to how to build a board (hint: it’s not with friends); how to compensate a CEO, and how to replace a CEO.
Bowen sets forth a number of improvements he believes could help all boards:
• Appoint a lead director in companies where one person is both chairman and CEO. The lead director, who chairs meetings of independent directors and who helps develop agendas for board meetings, ensures that the chairman/CEO does not gain an unacceptable amount of power.
• Appoint a lead director in companies where one person is both chairman and CEO. The lead director, who chairs meetings of independent directors and who helps develop agendas for board meetings, ensures that the chairman/CEO does not gain an unacceptable amount of power.
• Institute a CEO evaluation that is well-designed and broad; boards should “judge not just what results were achieved, but how they were achieved.”
• Refuse to let a former chairman and/or CEO remain on the board after his successor is named.
• Dictate mandatory retirement at a specified age.
• Make use of executive sessions, which are best executed when inside directors and CEOs do not attend (as long as topics to be addressed don’t require their knowledge). The sessions “encourage directors and trustees to be more open in expressing concerns.”
• Ensure that non-profit compensation is higher for top executives.
Above all, Bowen believes the most important factor in organizational effectiveness—whether a company is profit or non-profit—is the working relationship between the CEO and the board. “The CEO and the board need to realize they have complementary responsibilities,” he said. “A healthy respect is necessary, but so is a healthy tension.”
When the relationship disintegrates, or when the CEO simply is not performing to shareholders’ expectations—it is up to the board to act. But, Bowen points out, courage can be in short supply among a dozen or so directors. “Very often, it becomes obvious at some point something has to be done, but it’s tough for boards to summon the courage,” said Bowen, who in his book credits Rawleigh Warner during the James Robinson saga for stepping up and saying “what was on the mind of a number of other directors.”
During crises, board members can be thrust into unexpected positions. As the Vioxx recall and subsequent lawsuits that cost the company hundreds of millions of dollars were rocking Merck in 2005, the board elected Richard Clark as CEO. At the same time Bowen—chairman of Merck’s governance committee and the special committee investigating the development and marketing of Vioxx—was named to an executive committee that served as chairman of the firm for a transitional period. “Outside observers questioned whether this unseemly beast could walk, never mind run,” writes Bowen. “The arrangement worked well … Clark and the Merck board judged the experiment a success.”
Granted, Bowen’s board life hasn’t been all roses. Once, he was unseated as a director by shareholders’ proxy vote (at NCR, when it was being taken over by AT&T). And when he ran Princeton during the tumult of Vietnam, a trustee leaked information about a controversial figure set to receive an honorary degree (future U.S. Secretary of State George Schultz) before Schultz had even been told about it.
“It’s just due to accidents of life that I’ve served in a number of highly contentious situations,” said Bowen. And those situations—along with a clear writing style and informed view of how boards should operate —have helped forge a must-read book for any director or trustee who wants to build an effective organization.