Off with His Head?

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Harriet Poole was surprised by just how smoothly the shareholders meeting was going, given that Bretplex had announced only two days before that final earnings were coming in a full five cents under (already downwardly revised) expectations. It was, she reflected, a tribute to CEO Lloyd Byrne’s presentation skills.

The meeting was better attended than usual, with about 75 people in the room—more than twice the turnout last year. Predictably, the toughest questions so far had come from John Price of Bourne Investments, the Boston-based mutual fund company that was Bretplex’s largest individual shareholder, with about 12% of the company’s stock. To the relief of Harriet and her colleagues on the board, he had seemed quite receptive to the restructuring plan that Lloyd had outlined as the company’s strategy for reversing its yearlong earnings slide.

“Let’s take one last question, and then we can all go eat,” Lloyd suggested. “I think we’re all pretty hungry now. I see there’s someone at the back with a question.”

A woman stood up at the back of the hotel conference room. “Thank you,” she began. “My name is Laura Barrington, and I manage Shareholders United for Value. We have just bought stock in your company. Of course, we’re delighted that the company intends to address the performance issues, although we’ll need to think through the details before we can say if we like your plan. There’s one big question, though, that you don’t seem to have addressed. Forgive me if I sound blunt, but does Bretplex have the right team for this turnaround? And specifically, since you yourself have brought the company to where it is today, Mr. Byrne, why should we rely on you to also lead it to recovery?”

Everyone froze. No one had expected this kind of challenge. Judging by most people’s faces, the question was completely unexpected. Laura Barrington’s appearance at the meeting was a worrying development; SUFV was one of a growing number of activist shareholder funds, and Barrington had built up a formidable reputation as a CEO slayer. Harriet wondered how Lloyd would handle the question.

“It’s a fair question,” he conceded. “I’d like to make three observations in response. First, as I’ve been saying, the consolidation program is an integral part of Bretplex’s long-term strategy, not merely a reaction to the current market climate. Our plan was always to build up a collection of assets and then clean house. It’s certainly in the long-term interest of shareholders to back that plan and the team that devised it. Second, changing the team in midstream is only going to make the company vulnerable to competitors; a new management team will take time to settle in. Finally, few people know our industry as well as this company’s current management. So my answer is that the board has no plans to expose the company to the risks of a leadership change at this time. And now, I suggest that we all adjourn for lunch.”

That was, reflected Harriet, a very considered response. Maybe the CEO wasn’t quite so surprised by the question after all.

The Best Laid Plans

Harriet had been on the board of Bretplex for a year now. At the time she had joined the company, it was riding high in the charts. Under Lloyd’s charismatic leadership, sales doubled and market value tripled in just three years. Through a series of aggressive acquisitions, he transformed Bretplex into a midsize industrial conglomerate with four main areas of business: precision machine tools, weighing and measuring equipment, specialty glass manufacturing, and machinery servicing.

When Lloyd took the helm at Bretplex, the company was a small, family-controlled regional player in the machine tool business with a steady, if uninspired, order flow from corporations in the midwestern United States. His long-standing predecessor, Paul Bretzel—a member of Bretplex’s founding family, which collectively still owned 15% of the company—had been a domineering personality unwilling to consider anyone’s opinion other than his own. As a result, the company had found it hard to attract top-flight senior management talent. Upon Bretzel’s retirement, the company’s board decided to break with tradition and looked outside for a new chairman and CEO.

Lloyd, then a divisional president at engineering giant American Engines, was attracted by a generous option package and Bretplex’s steady cash flow. American Engines was not short of talented senior executives, and it would be years before he could progress further. Bretplex offered a chance for him to become a player. The markets had welcomed Lloyd’s appointment as a signal that the Bretzel family had relinquished its control over the company.

Lloyd revitalized the company’s management, reaching down into the organization to bring forward ambitious and talented managers. As the company grew, he buttressed them with experienced large-company managers from the likes of American Engines, AT&T, Lucent, and Tyco who were attracted, like him, by the promise of growth and promotion.

He also vamped up the board with glamorous nonexecutive directors such as strategy guru Jefferson Souza, a professor at Northwestern and former teacher of Lloyd’s. Jefferson was a paid-up five-star guru whose best-selling book Growth Logic had topped the business book charts for five straight weeks. Harriet had joined the board about the same time as the professor. A college acquaintance of Lloyd’s, she was CEO of TechGlass Industries, a leader in optics and one of the most highly regarded new high-tech firms. For her part, Harriet thought the appointment offered a first-class opportunity to see just what it took to turn a solid midsize business into an industry heavyweight.

Shortly after Harriet’s appointment, though, Bretplex’s previously unstoppable growth ground to halt. The turning point was Lloyd’s acquisition of Hazlemere Measures, a large British measuring and testing equipment manufacturer. The deal had been aimed at giving Bretplex a strong distribution presence in Europe, thus providing a platform for international growth, which would take up the slack as domestic growth possibilities began to dry up.

The logic of the deal had been reasonable enough. Unfortunately, the acquisition was hotly contested by a major German competitor, which dramatically forced up the price Bretplex eventually paid. The market believed that Bretplex had paid too much for Hazlemere, and analysts decided to look more closely at the company’s previous acquisitions. Sell recommendations proliferated after a damning report in a widely read investor newsletter called into question market growth assumptions underlying several of Bretplex’s larger domestic deals.

In the last nine months, the company’s situation had taken a further turn for the worse. The U.S. economy, which had produced tremendous growth for over a decade, was showing signs of heading into a recession, with technology sectors leading the way. In this environment, Bretplex’s prospects started to look less and less promising. Worse, in missing the revenue estimates, the company’s managers seemed as though they had lost their footing. During these months, Bretplex stood by its early forecasts for quarterly revenue for too long, only issuing downward revisions close to the final reporting dates. By the time of the latest shareholders meeting, shares were trading about 65% below the previous year.

The turnaround plan presented by Lloyd at the meeting called for a halt to the M&A program, which had already placed the company almost $10 billion in debt. With the Hazlemere deal, he claimed, Bretplex now had all the capabilities needed to lead the industry globally for at least ten years. The next four years would be dedicated to eliminating duplication within its operations and focusing on the sale of a number of noncore business units. The first to go would be Hazlemere’s personal weighing machines subsidiary, admittedly one of the larger units, but one that did not fit with Bretplex’s largely industrial customer base.

Stand By Your Man?

At home after the meeting, Harriet went over the day’s events. As a CEO herself, she sympathized with Lloyd’s predicament, and the phrase “There but for the grace of God go I” had gone through her mind a couple of times during the day. She thought Lloyd had fielded Laura Barrington’s question well, and his turnaround plan had sounded reasonable, although it was, she felt, stretching the point to suggest it had been intended all along. Consolidation had not been on the board’s agenda when she had joined a year ago.

But she doubted that his would be the last word. The gospel of shareholder activism had been finding a responsive audience among the larger investment community. With CEOs pulling in such huge pay packages, people were looking hard at executives’ performance.

Even the most celebrated CEOs weren’t immune. Barrington, for example, had engineered the dismissal of Bill Tweed, the former CEO of Knowledge Machines Incorporated, a PC clone manufacturer now owned by Compaq. Under Tweed’s leadership, KMI had been one of the great success stories of the late 1980s, and its PC sales had briefly topped those of IBM. Tweed himself was the object of case studies at Harvard and Insead.

In the early 1990s, however, a number of aggressive start-ups had begun to sell computers directly to customers at prices far lower than KMI, which sold through dealer networks. SUFV had bought shares in the company in 1995 and, after a year’s campaigning, persuaded other shareholders to support a resolution for Tweed’s dismissal, culminating in a vicious proxy fight. The debate about the rights and wrongs of that battle still reverberated in the investment community, as Tweed soon took a new job at Associated Microchip and was now leading a remarkable turnaround.

Harriet sighed. Her Bretplex directorship looked as if it were going to offer her very different lessons from the ones she had been looking for when she’d signed up. She got up and went into the kitchen to pour herself a glass of white wine. As she came back into her study, the telephone rang. It was Jefferson Souza. He got straight to the point.

“Harriet, I’m worried about this SUFV business. I think it spells a lot of trouble for the company. Today was just an opening shot. Barrington will make a public issue out of this, and she’s going to make things ugly around here. Look what she did to Tweed. I’ll cut to the chase. We’d do a lot better by the company if we did the deed ourselves. The market will take it as a positive signal that the company is serious about getting its house in order, and SUFV will probably back off.”

“We’d do a lot better by the company if we did the deed ourselves. The market will take it as a positive signal that the company is serious about getting its house in order, and SUFV will probably back off.”

“Hold on, Jefferson,” countered Harriet. “SUFV isn’t exactly a major investor. I’d be worried if John Price had asked that question, but he seemed comfortable with Lloyd’s turnaround plan. Lloyd says the one-on-one they had last week went quite well.”

“I wouldn’t put too much faith in that,” replied Jefferson. “Bourne Investments is also one of SUFV’s backers. And the Bretzels can’t be that happy with the share price, either.”

“But what about the restructuring plan we all agreed to? It should take care of most of the company’s performance problems. As Lloyd pointed out, there’s plenty of scope for cutting out duplication across the business units to make margins a lot more competitive.”

“The plan’s fine as far as it goes,” said Jefferson. “But that’s not really what Barrington’s arguing. Belt-tightening isn’t the kind of management challenge Lloyd likes to take on. He’s much happier managing for growth, and whichever way you cut it, the company will have to shrink, not grow, for the next few years. Besides, Lloyd’s performance this morning did nothing for the share price this afternoon—if investors were really confident in Bretplex, they’d be buying again right now.”

“All right, but what about the management team?” Harriet countered. “Lloyd brought in or promoted most of the senior managers. They won’t be happy to see him go in some kind of palace coup. If he goes, we might lose some key people just when the company needs its best managers.”

“I don’t see that as a problem,” said Jefferson. “Loyalty to the chief is a nice sentiment, but if the share price recovers, their options will all be much less underwater. I think they’ll come around very quickly. Look, I know you like Lloyd—I do, too. I taught him. But as nonexecs, we’ve got to put the shareholders first. So why don’t you give it some thought, and let’s talk again in a couple of weeks? And I think we should keep this between us for now.”

Et Tu, Brute?

Harriet was too busy for the following week to give much thought to the Bretplex situation. Her own company, TechGlass, was about to declare its final earnings for the year. Fortunately, the news was going to be good, and the company EPS was, for the fourth quarter in a row, coming in two cents above the forecast. The PR folks were scurrying around setting up interviews. In particular, they were planning a big splash on CNN in the next week as part of a Larry King series on successful women in business. The buzz was, Harriet found, a sharp contrast to the gloom that pervaded the fifth floor at Bretplex.

Two days after the Bretplex meeting, Harriet and the TechGlass PR folks got together to watch CNN’s interview with Carly Fiorina to get a feel for what Larry might ask in Harriet’s interview. The TV caught the very end of a business news program, and coincidentally—or not?—Laura Barrington was on, talking about managerial accountability. Harriet listened with interest. Most of that interview, to her relief, focused on general issues. But in his last question, the reporter asked Laura to comment on her interest in Bretplex. Her response was a scathing and tightly argued indictment of Lloyd’s performance since becoming CEO, focusing on the fallout from the Hazlemere acquisition. “Lloyd Byrne,” Laura was saying, “cannot be trusted to put the interests of shareholders ahead of his desire to salvage a deal he was determined to complete at all costs.”

When Harriet got back to her office, she found a message from Lloyd, asking her to call him at home that evening. It could only be about the SUFV business, and Lloyd was almost certainly going to play the CEO solidarity card. How was she going to handle it? Well, she’d just have to deal with it later. She had her own news for the business community to think about.

When she called him, Lloyd quickly moved to his own concerns. “You probably haven’t seen anything yet,” he said, “but I’m afraid that SUFV seems to be getting to work. Laura Barrington was on CNN this afternoon raking us over the coals. I think it’s important that we get our message across as well. We’ve got to make clear that the board is behind the new strategy.”

Harriet hedged, “Well, Lloyd, we’ve already agreed to the restructuring plan. I can’t see that there’s anything else for the board to do at this stage.”

“Harriet, you know as well as I do that SUFV has forced boards into firing management teams before. And they’ve sometimes been right to do so. But they’ve been wrong as well. KMI would probably still be an independent company today if Bill Tweed hadn’t been fired. Look at the turnaround he’s doing at Associated Microchip. And a lot of KMI people went with him, remember.”

Harriet picked her words carefully: “Lloyd, I take your point. But what is it that you think the board should do? I’m prepared to talk to the other board members if you think it’s appropriate, but unless you have something specific in mind, I’m not sure what I’d say to them.”

Lloyd decided to come out with it. “I won’t beat about the bush,” he said. “I’d like you to convince the other members that the board should make a public statement expressing confidence in the current management. And I’d like you to be the one to make that statement on behalf of the board. It would be appropriate coming from you, since you’re the chair of the nominating committee. You’re a successful CEO, and your backing would carry a lot of weight. So what do you say? Could you make a few calls over the weekend?”

Harriet played for time. “Lloyd, I’d hate to be in your shoes, and I’d like to be able to say yes right away. But this is not something I can decide right now. If I’m going to put my own reputation on the line like this, I’ve got to be sure I’m right. Tell you what. I’ll call you back in a week with a decision one way or the other. I can’t promise I’ll do it, but I will think seriously about it.”

For the next five days, Harriet had scarcely a moment to pay attention to Bretplex. She had her own company to run, after all, and preparing for her Larry King interview was enough of a distraction. She did notice, though, that Bretplex was given a decided thumbs-down by commentators in the Sunday Times, and on the morning of her interview, she read a less than flattering Lex comment in the Financial Times.

Her interview, however, was a great success. Better yet, TechGlass’s share price bounced nicely the day after. With the company’s results released and the interview completed, she felt that she could at last focus on the business with Bretplex. Driving home from the office, she was acutely aware that she couldn’t put off much longer the decision on whether to back Lloyd.

Lloyd had turned Bretplex into a major player, and he did have a sound strategy for bringing it out of the current crisis. But there was no getting around the fact that the company’s problems had started with the Hazlemere deal.

Her first instinct was to side with him. After all, Lloyd had turned the company into a major player, and he did have a sound strategy for bringing it out of the current crisis. What’s more, it would be highly disruptive for Bretplex to lose its much-admired leader, and maybe part of his team, too. But Jefferson had made some compelling points as well, and there was no getting around the fact that Bretplex’s problems had started with the Hazlemere deal. Lloyd’s unwillingness to back out of the fight with the German competitor worried her; sometimes it seemed as though Lloyd cared more about empire building than profitability.

“Oh, God,” thought Harriet, “This is not an easy call.”

Should the CEO be fired for one year of poor performance?

Norm Augustine is the retired chairman and CEO of Lockheed Martin. He serves on the boards of Procter & Gamble, Black & Decker, Phillips Petroleum, and Lockheed Martin.

My first thought is that Harriet Poole has a troubling inability to multitask. People in her position must be able to keep a lot of balls in the air at once. If all Harriet can handle is her own job and Larry King, she shouldn’t have accepted a position on Bretplex’s board.

Bretplex’s nonexecutive directors have three problems to oversee: fixing the operation of the business, getting company debt under control ($10 billion sounds like a lot to owe for a company of Bretplex’s apparent size), and (arguably the most important) deciding whether to direct Lloyd Byrne into a new career.

In addressing these questions, Jefferson Souza (who, like Harriet, serves on the board in part because of a prior association with Lloyd, which places them both in difficult positions) seems to be reacting to pressure from a single shareholder known to be a serial CEO killer. Harriet, Jefferson, and their associates need to remember that they were elected by the shareholders as a whole to do what is right. Jefferson is therefore wrong to rely on the argument that “we’d do better by the company if we did the deed ourselves.”

So what is in the company’s best interest? Harriet can be sure that firing Lloyd will be expensive: In today’s corporate America, CEOs earn far more for getting fired than for completing their jobs and retiring. The board also needs to remember the first law of wing walking: Don’t let go of something until you have hold of something else. It’s not clear that the board has done any work on succession planning—and the odds of success in bringing outsiders into senior line-management positions usually vary between poor and abysmal.

Neither of these considerations, though, justifies Harriet’s going along with Lloyd’s request that she orchestrate a vote of confidence in Lloyd and his team. Good executives restore confidence through sustained performance, not by winning votes of confidence. Do Jack Welch and Warren Buffett need votes of confidence?

Lloyd obviously doesn’t compare with Welch and Buffett. True, he did grow the business, and he has built a new and apparently strong management team. But he clearly became too caught up in the spirit of the chase in bidding for Hazlemere and ended up taking on enormous debt risk. Worse, he has repeatedly had to come out with downward adjustments of earnings, thereby violating the first law of bad news: Get it all out at once. The most charitable interpretation of this is that Lloyd doesn’t have a good handle on his own business; if he actually does, then he is guilty of something much worse than ignorance.

Jefferson’s argument that Lloyd is not the right man for the challenges Bretplex now faces adds weight to the case against him. Most people are good at some things and not so good at others. In business, many (perhaps most) people can be categorized as bear catchers or bear skinners.

“Jefferson’s argument that Lloyd is not the right man for the challenges Bretplex now faces adds weight to the case against him.”

The board shouldn’t worry about losing some or all of Bretplex’s management team. If company managers have more loyalty to Lloyd than to the organization, their departures will be no great loss. That said, the board needs to give the team some new stock options. Their current holdings are further underwater than the Titanic.

All things considered, then, my conclusion is that Jefferson is right (if for the wrong reasons): Lloyd Byrne has to go. Harriet should simply say: “Lloyd, you are…the weakest link. Goodbye.”

Charles Elson is the Edgar S. Woolard, Jr., Professor of Corporate Governance and the director of the Center for Corporate Governance at the University of Delaware in Newark, Delaware. He also serves on the boards of Sunbeam, Nuevo Energy, and AutoZone.

Unfortunately, our friend Harriet has a rocky road ahead. I believe, like Jefferson, that the CEO must go. This will be unpleasant for Harriet, unpleasant for Jefferson, and unpleasant for everyone because a CEO change is always very difficult. But in this instance, it is not only necessary but urgent.

It’s only when something is terribly wrong with a CEO’s leadership and strategy that an activist investor like Laura Barrington appears. Clearly, the steep fall in the stock price during the preceding year demonstrates that many investors already felt that Bretplex had problems. John Price, the largest institutional investor, will probably end up siding with SUFV even though he indicated support for Lloyd at the meeting. John, like any other investor, is primarily concerned about getting a good financial return, and in this respect, his long-term interests are exactly aligned with Laura’s.

“It’s only when something is terribly wrong with a CEO’s leadership and strategy that an activist investor like Laura Barrington appears.”

So what is wrong with Bretplex’s leadership? No particular overwhelming factor seems to compel Lloyd’s discharge, but a series of individual ones collectively form a strong case for his immediate dismissal. First, the management team has missed the numbers for almost a year. This indication of a lack of internal discipline and control within the organization would not give me, if I were in Harriet’s shoes, great confidence in Lloyd’s ability to take the company down the path of rationalization.

Second, the company’s long-term strategy of growth has failed. Whether due to poor execution or a misguided strategy from the start, it has obviously failed. My sense from the case study is that the CEO didn’t see any problems coming. The question to ask, then, is, If he couldn’t foresee these problems, can he be relied on to anticipate future problems? What’s more, his proposed cure is a retrenchment. That’s not a solution; it’s a reaction.

Third, as Laura points out, Lloyd is a growth person. Typically, executives who are good at leading growth are poor at carrying out retrenchment. What’s more, the abrupt change in the company’s direction will compound Lloyd’s problems; inevitably, confidence in his leadership will erode among the company’s managers. The rapid switch from growth to consolidation will also frustrate Lloyd on a personal level, which will only exacerbate the company’s leadership problem.

Fourth, Lloyd’s lack of candor indicates a major credibility problem going forward. He is making excuses to the board about the failure of the growth strategy, and it looks as if he has been bending the truth a little. An eventual retrenchment was not part of the original growth plan. Lloyd’s claim that it was would significantly diminish his credibility in my eyes if I were an independent director at Bretplex—especially on top of regularly missed forecasts. It will be difficult for the independent directors to believe in management’s representations in the future.

Finally, it’s clear from Jefferson’s initiative that the board has lost its unanimity. In and of itself, this would cause problems for any CEO trying to change a poorly performing company like Bretplex because it’s essential that the leader of a turnaround have a clear and unchallenged mandate from his or her board. To make matters worse, the dissident board member, Jefferson, is a highly respected authority on management and was Lloyd’s own teacher.

Given this charge sheet, Harriet has little choice but to side with Jefferson. Lloyd’s eventual departure, in my view, is inevitable—the only issue is when. Giving him more time will only compound Bretplex’s problems. The board will save the company a lot of agony if it moves to replace Lloyd right now.

A former deputy CEO and general counsel of the California Public Employees’ Retirement System (CalPERS), Richard H. Koppes is of counsel to the international law firm of Jones, Day, Reavis & Pogue in Sacramento, California, and a consulting professor of law at Stanford Law School.

Bretplex urgently needs to improve its corporate governance system. Firing a CEO is a very serious undertaking, and such a decision should not be taken as a result of a round of telephone calls. What’s more, it seems that Harriet is being placed in the position of having to decide Lloyd’s future more or less on her own. A properly run board would have a formal process whereby a director who, like Jefferson, had concerns about performance could convene an executive session of all the independent directors, who would then discuss the issue without the CEO.

Here, however, it does not look as though the board has evolved much since the days of family control. True, Lloyd has appointed some strong outsiders, and a nominating committee appears to exist, but there’s not much other evidence that Bretplex has developed a process for discussing strategic issues such as CEO performance. In fact, the board has had relatively little involvement in the development of Bretplex’s strategy—it seems to have been largely a rubber stamp. In agreeing to acquire Hazlemere, for instance, the board did not appear to have given any thought about what the company would do with Hazlemere after the acquisition. It seems to have been equally hands-off in the development of the restructuring plan. That’s just not good corporate governance or good business strategy. The independent members of a properly functioning board need to be deeply involved in debate, discussion, and decisions about major strategic issues.

The need for a careful, structured discussion is all the greater in a delicate and ambiguous situation such as this. It is not clear that Lloyd should go. He has, after all, led the company very successfully for most of his tenure and has built up a highly regarded management team. It’s also unreasonable to hold Lloyd accountable for a downturn in the economy. On the other hand, Lloyd is certainly not indispensable. Laura Barrington is right when she says that a CEO who is good at growing a company may not be good at trimming it. And as Jefferson observes, any qualms that Bretplex managers have about Lloyd’s departure would probably be laid to rest if performance improved. My point is that the issues are too finely balanced for Jefferson, Harriet, or anyone else to be making snap judgments. The board should be acting as an organized unit.

The independent directors might also want to take their own soundings of investors. When I was at CalPERS, I often had private meetings with independent directors of the companies we invested in and whose performance we had concerns about. CEOs did not attend these meetings, although company lawyers always did. I know that some directors hesitate to meet directly with investors because of issues related to insider information, but the objective of these meetings is not for them to communicate information about the company; it’s to listen to the investors.

Jefferson has been doing some research on Bretplex’s investors, but his findings are far from conclusive. It’s premature to speculate that John Price is using SUFV as a front—his investment in Bretplex is undoubtedly larger than his investment in SUFV. And no professional investor would mince words about a large company in which he has a 12% stake. But is John really as comfortable as Lloyd makes out? And what about the Bretzels? Harriet should not be relying on what Jefferson is saying about the attitudes of the company’s largest group of shareholders (unless he holds the Bretzels’ proxies).

“Fire Lloyd? Probably not—at least not yet. But the board should certainly be holding his feet much closer to the fire.”

Fire Lloyd? Probably not—at least not yet. But the board should certainly be holding his feet much closer to the fire. To do that effectively, it needs to put itself on a much more professional footing. For Harriet, that will be just as valuable a lesson as the one she was hoping for when she joined the board.

Nell Minow is the Washington, DC–based editor of the Corporate Library, a Web site that includes CEO employment contracts, shareholder proposals, academic studies, and special reports on corporate governance and performance.

Harriet should have kicked the tires a little harder before joining Bretplex. If she had reflected more on current issues and best practices in corporate governance, she would have seen a number of warning signs long before the bad news on the company’s earnings.

First, she should have been concerned that two of Lloyd’s additions to the board were people he knew. I am not fanatical about applying a strict standard of independence to boards—there is no way to certify independence of mind and spirit, and external indicia of “independence” can as often result in indifference as in effective oversight. But the fact that the CEO recruited her sent Harriet the message that he held the power over the board. If an outside director, ideally the chair of the nominating committee at the time, had approached her, it would have demonstrated that the board oversaw the CEO and not the other way around. In addition, Harriet should have gotten a thorough grounding in corporate governance and perhaps attended a conference conducted by the National Association of Corporate Directors. Besides learning about the role of a board, she might have discovered that it is not the amount of stock held by a group like SUFV that makes the difference; it is the group’s ability to communicate effectively with larger shareholders. Not hard when the stock is down 65%.

A more important warning sign was the company’s previous success. Companies make their worst mistakes when they’re successful. What’s more, Lloyd grew the company through acquisitions, not operating efficiencies or increases in market share, and it was inevitable that Bretplex would eventually want to pay too much for an acquisition. Such a moment is precisely when directors are needed. The board should have insisted on compelling data to support the higher price for Hazlemere and a comprehensive analysis of other, less costly ways of growing internationally. They should also have contrasted the disastrous acquisition decisions of Mattel and Quaker with the good example set by Coca-Cola, whose board rejected an acquisition that it deemed too expensive.

Harriet is too passive. Rather than wait to see how the annual meeting would play out, she should have insisted on a premeeting briefing for the board, so the directors could ask Lloyd tough questions. If she really believes Lloyd is the best person for the job, she should have said so at the meeting; it was inappropriate for Lloyd to speak regarding his own tenure. Harriet should also have made herself available to meet Laura Barrington and other shareholders to demonstrate the board’s responsiveness. She should already have known whether other directors thought Lloyd was on track. As chair of the nominating committee, Harriet should also be working with a search firm to bring in experienced new directors.

Instead, Harriet has drifted, forgetting about Bretplex for weeks and focusing instead on the PR push for her own earnings report. She should resign from the board if she cannot give it the attention it requires and should think more about her obligations to shareholders than about the business lessons she might learn. Indeed, her naïveté about her duties as a director makes me wonder what kind of board she herself has. Perhaps Harriet will be Laura’s next target.

“Harriet should resign from the board if she cannot give it the attention it requires. Her naïveté about her duties as a director makes me wonder what kind of board she herself has.”

I cannot resist giving advice to Laura, having been in her position. She should never surprise a company at an annual meeting. She should begin with a letter to the CEO, requesting a private meeting to express her shareholders’ concerns. In that way, she will get a much better idea of the CEO’s abilities and intentions, and, if things go well (as they did for me about a third of the time), the two will develop a relationship that will enable them to work together effectively.

A version of this article appeared in the October 2001 issue of Harvard Business Review.

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