Boardroom Power Plays Increase: Outside Directors Leading Charge For More Control

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If F. James McDonald saw the irony of the situation, he didn't let on.

It was the former General Motors Corp. executive, an outside director at troubled Kmart Corp., who made the dramatic January announcement that the board had chosen a non-executive director, Donald Perkins, as the next company chairman. Mr. Perkins succeeded Joseph Antonini, who remained president-CEO.

The shake-up paralleled the GM board's 1992 uprising that resulted in outside director John Smale being named chairman.

Mr. McDonald, who served as president-chief operating officer of GM from 1981 to '87, refused to draw any parallels. Perhaps he didn't want to suggest Mr. Antonini was on his way out the same way GM Chairman Robert Stempel was eventually deposed.

But a lot of other interested observers say it was the high-profile GM boardroom revolt that ushered in a new era of outside director activism, leading to actions like the installation of Mr. Perkins, former chairman-CEO of Chicago's Jewel Cos. grocery chain, as Kmart chairman.

"GM's actions empowered a lot of other companies," said Kayla Gillan, assistant general counsel of the California Public Employees' Retirement System, the nation's biggest public pension fund. "Before GM, it was hard to argue against that incestual relationship where the board is closely aligned with the company's management."

Boardroom activism is now spilling over into the operation of publicly held ad agencies (AA, Jan. 30). The prime example is Saatchi & Saatchi Co., where the board in December ousted co-founder Maurice Saatchi as chairman.

Even when boards aren't changing chairmen, they are responding to pressure from major investors to keep close tabs on operations.

"I've never seen boards more activist, especially in areas like succession planning and management development," said Ted Jadick, managing partner of search company Heidrick & Struggles' Board of Directors Practice, New York.

It's rare anymore for management to have a majority say on a board. For instance, Ziff-Davis Publishing Co. last month established a 13-member board including seven outsiders; among them are former Secretary of State George Shultz and Creative Artists Agency Chairman Michael Ovitz.

There are 14 Fortune 1,000 companies that have non-executive chairmen, according to Directorship, a Greenwich, Conn., research, consulting and publishing company. Besides GM and Kmart, the list includes Compaq Computer Corp., custom jewelry marketer Jostens and Armco, a Pittsburgh steel company.

"It is a strong remedial move which says that there are very compelling problems that relate to the duties of the chairman who happens to be the CEO," said Peter Garrett, senior VP-publisher, Directorship. "The outside chairman can bring a new independence or hardheadedness to reviewing the performance of management."

Outside chairmen have long carried weight at computer marketers, where boards often include venture capitalists that helped start the companies and still have money at stake.

At Compaq, venture capitalist and Chairman Benjamin Rosen forced the ouster of founder and President-CEO Rod Canion in 1991. Mr. Rosen, sensing that Compaq needed to drastically alter its focus on Fortune 500 sales and pricey high-end PCs to compete in a changing market, promoted Chief Operating Officer Eckhard Pfeiffer to CEO.

With Mr. Rosen watching closely-and, some say, calling the shots-Mr. Pfeiffer has received accolades for managing a phenomenal corporate re-engineering.

Mr. Pfeiffer hired a new ad agency (Ammirati & Puris/Lintas, New York), slashed costs so Compaq could slash prices and charged hard into the booming consumer and small-business markets. Last year, Compaq swept into the No. 1 spot in U.S. and worldwide PC sales. Compaq's 1994 sales reached $10.9 billion, triple the level when Mr. Rosen switched CEOs.

The jury is still out on whether Mr. Smale can help engineer a turnaround at GM. But insiders say the man who retired as P&G chairman-CEO in 1989 hasn't hesitated to offer the automaker the marketing expertise acquired in his P&G days.

Mr. Smale also was directly involved in last year's decision to reach outside GM to fill its top marketing position. The carmaker picked Ronald Zarrella, who had been president-chief operating officer at Bausch & Lomb Corp., for the job as VP-group executive in charge of North American sales, service and marketing.

In the GM and Kmart cases, shareholder revolt gave directors a mandate to shake up top management-a sign that institutional investors have taken a bigger role.

The California Public Employees' Retirement System, with assets valued at $80 billion, has been a leader in raising corporate governance issues. Kmart was one of the nine underperforming "focus companies" the pension fund singled out last fall.

Ms. Gillan defended the pension fund's role, saying it has a mandate as a California state agency to maximize investment returns.

"The investors' job is to elect directors," she said. "The board's fundamental duty is to oversee management for the benefit of shareholders. If the CEO controls the nominations to the board, you have to ask how does the board criticize management."

Bradley Johnson and Keith J. Kelly contributed to this story.

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