November 12, 1995

The Corporation: BOARDROOMS

ARE THESE 10 STRETCHED TOO THIN?

Is it just coincidence? Lilyan H. Affinito sits unobtrusively on the boards of some of the biggest companies in the U.S. and is paid nearly $300,000 a year for her trouble. But quite frequently, the companies she serves come down with a bad case of financial malaise. Kmart Corp. atrophied for years before ousting CEO Joseph E. Antonini in March—years after worried shareholders first got on the company’s case. Tambrands Inc. bounced CEO Martin F.C. Emmett in 1993 after the market share of the company’s only product, Tampax, plunged—as the board voted itself a pay raise. Affinito, a retired executive of a sewing-pattern company, also sits on the boards of Caterpillar, Jostens, Lillian Vernon, and Chrysler.

To be sure, Affinito, who did not respond to repeated requests for comment, is not solely responsible for the misfortunes of any of these companies. But as a director, she is partly responsible. And she’s not the only one: To a remarkable degree, the boards of the country’s most troubled companies share an overlapping cast of directors.

VICTIMS OF STATISTICS? Who are some of the directors with the least-distinguished track records? BUSINESS WEEK looked at the 120 companies targeted since 1992 by either the California Public Employees’ Retirement System (CalPERS) or the Council of Institutional Investors. Both groups judge a company’s performance against that of its industry peers. CalPERS also considers the company’s corporate-governance record before placing it on the list. Those who served most often on the boards of these companies, especially outfits targeted in multiple years, won a spot on the final ranking (table).

The worst track record, by this measure, belongs to Affinito. Frank C. Carlucci III, the former Defense Secretary, came in at No.2; and John L. Weinberg, senior chairman of Goldman Sachs, ranked third. The companies on whose boards he served all restructured, cut costs, and developed strong strategies, says Weinberg. As the economy has recovered, [they] are doing extremely well.

Some of these directors may be victims of statistics, because each serves on a large number of boards. But that’s also part of the problem, say corporate-governance gurus: CEOs who dislike board supervision actually prefer directors who are spread thin, says Charles M. Elson, a law professor at Florida’s Stetson University. If you sit on many boards, it’s probably a sign that you’re not a very good director.

Somewhat surprisingly, Berkshire Hathaway Inc.’s Warren E. Buffett, perhaps the most lionized figure in American business, won a place in the rankings. Despite his large stakes in both USAir Inc. and Salomon Inc. both repeat targets of the shareholder groups, Buffett’s presence on those boards failed to turn the tide. Earlier this year, he quit the USAir board and wrote down the value of his investment in the airline. And on Oct. 19, Buffett announced he planned to cash out $140 million of his $700 million of Salomon’s preferred stock rather than convert it to common shares.

Oddly enough, directors who have been at the scene of multiple corporate meltdowns suffer almost no perceptible harm to their reputations. A poor track record does not make a director any less desirable to other companies looking to fill vacant board seats, says Charles M. Ferry, chairman of the search firm Korn/Ferry International. The board is seldom held accountable for what has happened at these companies, he notes. Generally, the CEO carries the burden of the company that has failed.

ILL-EQUIPPED. And while much of that burden should rest with the CEO, ineffective boards are the root of much of the trouble. That’s the view of chemical-industry entrepreneur Jon M. Huntsman, who has served on the boards of several public companies—and has declined invitations to join about a dozen others. He now serves only on the Bankers Trust New York Corp. board. Huntsman has been disturbed by the low wattage of the dialogue in boardrooms. Most directors I have met are ill-equipped, at best, to be advising companies, he says. What particularly alarms Huntsman are directors who sit on a multitude of boards, deriving fees and making a living from board to board. One has to ask what their real contribution is.

Particularly galling to some shareholders is that outside directors emerge unscathed from a corporate train wreck, since they typically hold few shares and suffer no harm to their reputations. It shows that the reputation of the company does not seem to rub off on the director. I think it should, says Nell Minow of the Lens Fund, which invests in underperforming companies and then agitates for improved performance.

The days of the Teflon director may be ending. Shareholder activists, who have caused a sea change in the dynamics of corporate governance in recent years, think the repeated presence of so many of the same directors at troubled companies is not an accident. They predict that the track records of directors will take increasing prominence as shareholders seek to hold their representatives accountable for poor performance. If lightning repeatedly strikes, one begins to wonder whether there is a reason, observes Joseph A. Grundfest, formerly at the Securities & Exchange Commission and now a Stanford University law professor. In the old days, people weren’t paying attention to individual directors’ track records and how many other disasters they have been associated with. That is going to change.

Minow and other activist shareholders say that there is momentum building for a way to judge the effectiveness and competence of corporate directors. Minow envisions a database that ranks directors like you rate bonds, from AAA to junk. Already, almost 18% of the largest boards cull ineffective directors every year, says Korn/Ferry. And with increasing attention paid to the performance of individual directors, the day may soon come when they are ousted as regularly and as publicly as underperforming CEOs. That’s the prediction of Scott Paper CEO Albert J. Dunlap, who is sharply critical of what he regards as do-nothing directors. The pink slips, he says, are coming like a freight train into Corporate America’s boardrooms.

FROM AAA TO JUNK

One investor envisions a database that ranks directors the way you rate bonds. These are the 10 directors found most often on the boards of companies targeted by shareholder groups

1 LILYAN AFFINITO: Kmart*, Chrysler*, Caterpillar, Jostens*

2 FRANK CARLUCCI: Westinghouse*, General Dynamics, Northern Telecom*, Upjohn

(RIGHT) WALTER P. CALAHAN

3 JOHN WEINBERG: Champion*, B.F. Goodrich*, DuPont, Knight-Ridder

4 RICHARD MUNRO: Kmart*, IBM*, Time Warner

5 VERNON JORDAN: American Express, RJR Nabisco, Dow Jones, Union Carbide, Ryder

LITTLE AT STAKE?

CEOs who dislike supervision may pick directors with many posts. So if you sit on many boards, it’s probably a sign that you’re not a very good director

6 LOU GERSTNER: IBM*, RJR Nabisco, Caterpillar, New York Times

7 WARREN BUFFETT: Salomon*, USAir*, Coca-Cola

8 RENE MCPHERSON: Westinghouse*, Dow Jones, Mercantile Stores

9 EDGAR WOOLARD: IBM*, DuPont, Citicorp

10 WILLIAM GRAY: Westinghouse*, Lotus, Scott Paper

*DENOTES A COMPANY CITED IN TWO OR MORE YEARS

DATA: DIRECTORSHIP DATABASE, CALPERS, COUNCIL OF INSTITUTIONAL INVESTORS, COMPANY REPORTS, BWBy Elizabeth Lesly in New York