Revolt in the Boardroom

Alan Murray

• Publisher: HarperCollins e-books
• Year: 2009
• ISBN:
  9780061753206
• Topic: Business
• Subtopic: Business History
• Index: Business

Throughout the 20th century, American corporations were governed by autocratic, almost unaccountable chief executives. Their word was law and the only check on their power was a board of directors composed of their friends and allies.

Then, in a stunning reversal, a momentous series of firings deposed the heads of some of the world's best-known companies: AIG, Morgan Stanley, Boeing, Hewlett-Packard and Pfizer, just to name a few. Formerly unchallenged CEOs found themselves under fire, often from their own handpicked boards. The number of deposed executives is astonishing. In 2004, the leaders of 600 companies were asked to leave. That number more than doubled in 2005 and reached 1, 400 companies in 2006.

Flexing new muscles, directors are assuming new and unfamiliar responsibilities. In Revolt in the Boardroom, Alan Murray reveals the inner workings of the new seat of power. Using the access afforded to him by his influential Wall Street Journal column, Murray tells the story of three seminal board revolts—the now-famous Hewlett-Packard drama, the ousting of Boeing's Harry Stonecipher and the end of the reign one of the world's most autocratic executives, Hank Greenberg at AIG.

Murray goes further to chart the history of the corporation, the rise of governance and the effects of the new power gained by outside institutions like hedge funds and interest groups. Through it all, Murray shows how the job of chief executive has rapidly and permanently changed. Leaders like A. G. Lafley and Jeff Immelt govern instead of rule, build alliances and support instead of dictating direction and pay careful attention to a broader range of stakeholders than ever before.

Revolt in the Boardroom is the first look at the new world of corporate power and the last word on the transformational events of the last two years.

CHAPTER ONE

REVOLT IN THE BOARDROOM

1

On Monday, January 10, 2005, Carly Fiorina sat at the very pinnacle of corporate power.

Since 1999, she had been chairman and chief executive of one of the world’s most storied technology companies, Hewlett-Packard, which employed 150,000 people and brought in revenues exceeding $80 billion a year—roughly the economic output of Nigeria. She had doubled those revenues by engineering a controversial merger with Compaq Computer Corporation in 2002—a merger that had been contested publicly by Walter Hewlett, son of one of the company’s revered founders. It had been a grueling, vicious and highly personal battle for her.

But she had won.

In the process, Carly Fiorina had proven herself to be one of the most talented business leaders of her generation. She was charismatic and compelling—able to win the hearts and minds of audiences large or small. As one executive who worked with her at Lucent Technologies Inc. put it, “She could sell ice to Eskimos.” Because of that skill, she was now widely heralded as the most powerful woman in business. She traveled the world, giving hundreds of public speeches, and frequently graced the covers of business magazines. She made such an impression on the public consciousness that, in many business circles, she could be easily identified by one name alone.

She was Carly.

Her position and her power—like those of her colleagues at the very top of the corporate pyramid—in some ways rivaled the position and power of great rulers. At the turn of the century, CEOs were unconstrained by powerful ministers or legislators, unchallenged in meaningful elections, unencumbered by burdensome constitutional constraints, and usually unthreatened by rebellious underlings. The previous century had seen the flattening of political hierarchies throughout the world. But at the giant corporations that spanned the globe, controlled much of the world’s commerce and generated much of the world’s wealth, the CEO still sat on top of a clear hierarchy, and his or her strength and authority remained largely unchallenged.

CEOs’ pay mirrored that power. Fiorina brought home an annual paycheck that was 20 times that of President George Bush. In her leisure time, she cruised on her large, private yacht.

Particularly in the United States, CEOs like Fiorina were used to getting their way. Technically, they were appointed by, and reported to, their boards of directors. But many, like Fiorina, held the title of Chairman of the Board as well as Chief Executive. They set the board’s agenda and controlled much of the board’s access to information. They benefited from a business culture, developed during the 20th century, that held that strong, even autocratic, CEOs offered the best route to business success. The successful CEO wasn’t first among equals; the CEO was boss.

In Fiorina’s case, this position of power was particularly sweet because she was a woman. The ranks of corporate power, far more than the ranks of political power, had remained the province of men throughout the 20th century. When the elite members of the Business Council held their regular meetings, there were seldom more than one or two women in the crowded room—or for that matter, more than one or two African Americans. In recent years, a few prominent women, like Meg Whitman of eBay Inc. or Anne Mulcahy of Xerox Corporation or Andrea Jung of Avon Products, had broken through the glass ceiling and made it to the top. But at the beginning of 2005, those women were still scarce enough to be counted on the fingers of two hands. Among Fortune 500 companies, no more than 10 had female CEOs.

Testosterone ran particularly strong in the telecommunications world, where Fiorina made her career. In spite of its nickname, “Ma Bell” and her progeny were overwhelmingly male enterprises. As a young executive at Lucent, an offshoot of AT&T, she suffered the indignity of a boss who once introduced her as “our token bimbo.” (“You will never do that to me again,” she told him afterward.) She had once attended an all-male sales lunch at a club where scantily dressed women danced on the tops of tables. Her male colleagues had suggested she skip the lunch, which they had arranged, but she refused, arriving in her most serious-looking business attire. The dancers said they wouldn’t dance at the table “until the lady leaves.” Later, when Lucent bought Ascend Communications—a company with a legendary cowboy culture—some at Ascend were critical of their new acquirers, saying the Lucent sales force “didn’t have any balls.” Fiorina appeared onstage at the first joint sales meeting in cowboy boots and with a pair of her husband’s socks stuffed in the crotch of her pants, declaring to the stunned Ascend team, “Our balls are as big as anyone’s in this room.”

But for Carly, that was all in the past. Now she sat where the men had sat before her. She enjoyed the pay and the perks and, most important, the power that came with the job of chairman of the board and chief executive officer of one of the world’s great corporations. She had triumphed in a man’s world.

Or so she thought.

But on January 10, 2005, that world was changing.

Without Fiorina’s knowledge, members of her board of directors had held a series of highly unusual telephone conversations in December and early January to discuss their dissatisfaction with her leadership.

The company certainly had its problems. Its stock was flagging—55 percent below where it had been when Carly took over in 1999. And it had failed to meet its financial projections for the third quarter of 2004, which ended July 31—prompting complaints from Wall Street analysts. Neither problem suggested crisis. All technology stocks were trading well below their breathless levels of 1999, and many companies occasionally missed their financial targets. Indeed, Fiorina liked to point out that before she took over, HP had missed Wall Street’s earnings expectations for nine quarters straight. Moreover, she had acted quickly to address the third quarter situation—firing three top sales executives whom she blamed for the miss, and coming up with a plan for moving forward.

Still, some of the directors were increasingly uneasy. They had problems with Fiorina’s management style. The firing of the sales executives, they thought, had been clumsily executed, and seemed designed to absolve her of any responsibility for the third quarter miss. Moreover, Carly had become imperious, they thought—disdainful of the analysts on Wall Street who criticized her, disdainful of her employees and fellow executives. She had centralized power in her office, then gone off making speeches and traveling so often that some of her own team complained she wasn’t available when decisions had to be made. Members of the board wanted her to delegate more power to some of her top executives, or bring in new ones. Whenever they suggested that, however, she responded with icy silence.

Most important, the directors felt Fiorina was disdainful of them. In the wake of the corporate scandals, all boards were under pressure to take their jobs seriously. But Fiorina, they felt, wasn’t willing to take their concerns seriously. She didn’t want to be influenced by them.

So finally, the board decided to send a delegation of three directors to have a serious talk with Carly, and detail their concerns. A meeting was set for the afternoon of January 10.

Imperiousness, arrogance, reluctance to share power—these sins of Carly Fiorina’s were hardly unknown among the CEOs of corporate America. At times, they even seemed to be requisites of the job. In the past, they hardly would have been sufficient crimes to spur a board to fire the CEO. Boards of big companies had tended to be close, clubby affairs—filled with the friends and associates of the CEO, and prone to act only when absolutely necessary.

But the seismic plates under the corporate landscape were shifting. And Carly Fiorina was about to become a victim.

2

If any CEO ever deserved the adjective “imperial,” it was Hank Greenberg. As 2005 began, he had been CEO of American International Group for three remarkable decades, building his company from an obscure, second-tier insurer to the largest insurance company in the world, with revenues of $100 billion.

The 79-year-old Greenberg ruled AIG like his personal fiefdom, with absolute authority. He was a hands-on manager, likely to get involved in any part of his sprawling business at any time. And when he did, there was no questioning his judgment.

His power extended beyond the confines of his company. He consorted with leaders of government around the world, advising them on how to do their jobs even as he was seeking their help in doing his. His company’s extraordinary generosity to think tanks as well as political campaigns gave him instant entrée to all the most powerful players in Washington, and he used that entrée liberally. Through most of his career, his reputation was not that of someone who broke the rules; rather, of someone who made the rules. He had played a major role in writing the tax laws governing investments in Bermuda, where some of his company’s most important operations were based. According to Chinese officials, he personally negotiated the final details of the historic 2001 agreement that allowed China into the World Trade Organization (and allowed AIG to continue running wholly owned subsidiaries in China). As for the government regulators watching over his enterprise—well, as one former Securities and Exchange Commission official put it—Hank Greenberg never hesitated to call.

Hank Greenberg was a fighter. He had fought his way to the top. His father had owned a candy store on New York’s Lower East Side, and died when Hank was just five. His mother remarried a dairy farmer, who lived in upstate New York, and Hank grew up milking cows before dawn each day.

He enlisted in the U.S. Army in 1942, at age 17—using a fake birth certificate to circumvent the requirement that enlistees be at least 18. He was part of the invasion force that landed at Omaha Beach in Normandy, and part of the force that later liberated the Dachau concentration camp.

After the army, he joined an obscure insurance company, American International Group, that had its roots in Shanghai, China, where it had been started by Cornelius Vander Starr. Impressed by Greenberg, Starr put him in charge of U.S. operations in 1962, and Greenberg began to expand rapidly the company’s business through the use of insurance brokers, rather than costly agents. In 1968, at a dramatic meeting in Bermuda, Starr named the ambitious Greenberg as his successor, to the surprise and dismay of many longtime AIG executives. In 1969, Greenberg took the company public.

Greenberg fashioned himself as the ultimate risk taker, going where other insurance companies dared not go—selling kidnapping and ransom coverage, for instance, or insuring against earthquakes and floods or writing policies for oil rigs and satellites. He traveled the globe, building up such a deep network of contacts that Ronald Reagan’s administration once offered him a top spot at the CIA. He was a fierce competitor, not only in business, but also in winning the allegiance and cooperation of governments. He behaved and was treated like a head of state. Indeed, AIG was very much like a sovereign nation, with its own diplomatic arrangements, its own economic rules, and with one man very clearly in charge.

For the shareholders of his company, the results could not have been better. Under his guidance, AIG’s market value rose from $300 million to $170 billion. Its share price had tripled in the previous decade alone.

Even at 79 years old, Greenberg was a model of mental and physical fitness. He lunched daily on seafood and vegetables, worked out regularly on his StairMaster, and was an avid tennis player and skier. His employees knew he was loyal, but also ruthless. Mistakes weren’t tolerated. He had his own elevator, guarded by his own security detail. At some meetings, Greenberg’s butler would serve him hot tea in a china cup, and serve the others nothing. Executives traveling with him had to use the small pilot bathroom in the front of the corporate jet; the large fancy one in the back was reserved for Greenberg, his wife and their Maltese dog, Snowball.

For a while, Greenberg attempted to make his empire a dynasty. He had two sons in the business—Jeffrey and Evan. Jeffrey was the older, and had responded to his father’s relentless expectations by becoming a perfectionist. A track star at Choate, and a graduate of Brown University and Georgetown Law, he set out to work outside his father’s empire. Evan responded by dropping out. He ran away from a series of boarding schools, ending up at Stockbridge, an alternative school for troubled children of wealthy families. After that, he became a drifter, working as a cook and bartender in Colorado.

Both sons were eventually lured back to AIG, where they found that their father held them to an even higher standard than he set for their peers. He wouldn’t hestitate to berate Jeffrey and Evan in front of others. They rankled under the pressure, and eventually both left, after it became clear to them that their father had no intention of retiring. Jeffrey left in 1995, after his onetime drifter brother Evan was given equal status in the company. Evan left in 2000. Both went on to run other companies in the insurance business.

Greenberg paid himself lavishly for his efforts—$7.5 million cash in 2003, plus options valued at $26.2 million. There was no accounting for the many perks that went with the office. He vacationed at an AIG-owned resort in Vermont, or on a yacht owned by an AIG-related company and kept in Florida. In his mind, there was no clear division between what belonged to the company and what belonged to him. And he was accountable to no one. Or so he thought.

He had a board of directors, of course, but it was a board whose members he had handpicked. He liked bringing on once-powerful people from Washington, as a way of cementing his influence there. President Ronald Reagan’s top economic adviser, Martin Feldstein, was a member, as was President George H. W. Bush’s top trade negotiator, Carla Hills, and President Bill Clinton’s defense secretary, Bill Cohen. Also on the board was former UN ambassador Richard Holbrooke, who was widely thought to be in line for the secretary of state job in the next Democratic presidential administration.

Board members were treated lavishly. A seat on the AIG board was considered a plum assignment, in part because it was easy—under Greenberg, the company was a perennial success—and in part because the pay and perquisites were so generous. In 2005, a director received a $40,000 annual retainer, plus an additional $5,000 per committee he or she served on. On top of that, directors were given 500 shares of AIG stock, worth another $30,000 or so, and an option to buy another 2,500 shares at a fixed price, earning them another $25,000 if the stock increased by $10.

One of the biggest benefits of being on the AIG board came from the generous charitable contributions made by the Starr Foundation, named after AIG’s founder, C. V. Starr. In theory, the foundation was independent from the company. But in fact, Greenberg was its chairman, and used the contributions to extend his power and reach.

Ellen Futter, for instance, had been a director of AIG since 1999, and sat on the committee that determined Greenberg’s compensation. She was also president of the American Museum of Natural History. The year she joined the board, the Starr Foundation committed $10 million over two years to build the museum’s C. V. Starr Natural Science Building. Greenberg’s personal foundation gave $50,000 to the museum in 2002 and 2003.

Richard Holbrooke, former U.S. ambassador to the United Nations, became an AIG director in 2001. He also served as chairman of the Asia Society, which was heavily supported by AIG. In 2005, the company paid a total of $539,743 to the Society.

After the scandals at Enron and WorldCom, when public companies came under pressure to name “lead” or “presiding” directors to help guide the board’s deliberations, Greenberg turned to the person on the board he trusted most: Frank Zarb, the former head of the National Association of Securities Dealers. Greenberg didn’t like the idea that someone other than he would have a leadership seat at the board table. He particularly didn’t like the idea that the board would meet in “executive” session, without him present. In fact, Greenberg thought the whole idea of independent directors was a bit silly. With Zarb in the lead role, though, Greenberg could at least take comfort that he had a longtime friend and business partner leading the boardroom discussions.

In the wake of the problems at Enron and WorldCom and Tyco, AIG also came under the scrutiny of regulators. The scandals had embarrassed the Securities and Exchange Commission, and left them with more resources and more determination than ever to crack down on corporate accounting shenanigans. In 2002, they began looking into PNC Financial Services Group, which had entered into transactions with AIG designed to get $762 million in underperforming loans and volatile venture capital investments off PNC’s books. The transactions looked suspiciously like those that had been used by Enron to clean up its books. They were accounting shams.

Then in 2003, the SEC accused a small Indiana cell phone distributor, Brightpoint, of goosing its profits with a sham insurance policy, also supplied by AIG. In this case, the insurance company was found to have backdated the policy, and to have ...