APPENDIX TO CHAPTER 8

APPENDIX TO CHAPTER 8

Can an Old Guard of Directors Effectively Govern a 21st-Century Corporation?

Joann S. Lublin

This report questions how vigorously a counsel of elders can serve corporations in a fast-changing world.

No, they can't, assert increasing numbers of investors at underperforming businesses overloaded with older directors. Blaming the old guard for being entrenched or stale, these shareholders are doing what they can to rejuvenate boards.

Most major companies require directors to retire at a certain age, typically 70, surveys show. Directors usually lack protection under the federal age-bias law, which exempts outside board members because they aren’t employees and inside members if they are top-level executives. Still, people past the age of 70 hold at least 10% of the board seats at 296 of the nation’s 860 biggest public companies, concludes a proxy analysis by Directorship, a research firm in Greenwich, Connecticut. Board members over 70 hold between 33% and 56% of the seats for 39 of those concerns.

At the top of that list is Digital Equipment Corp. Five of Digital’s nine board members are over 70 years old, including two who joined during the 1950s. In 1993, the computer maker adopted a policy that new board members must retire at age 72. Those appointed before 1993 may stay until they turn 75.

Until last week, investor activist Herbert A. Denton, unhappy with Digital’s sagging performance, had been pushing for the replacement of some of the older board members with younger people. However, Mr. Denton, who is president of Provident Capital Inc., a small New York brokerage house, gave up his campaign this week because Digital now says it is looking for new directors. (Digital denies that news reports about a candidate search are related to Mr. Denton’s prodding, however.)

Shareholder dissatisfaction over too many older directors recently spurred shakeups at W.R. Grace & Co., Occidental Petroleum Corp., and Stone & Webster Inc. Twelve of Grace’s 25 directors were aged 72 or older in 1993. A cadre of big institutional shareholders led by the College Retirement Equities Fund persuaded directors of the Boca Raton, Florida, packaging and specialty-chemicals company to alter the by-laws weeks after the investors approached them in spring 1995. The change triggered the immediate departure of eight board members over 70 years old.

Occidental Petroleum acted less swiftly. Directors of the Los Angeles oil and gas concern embraced a mandatory retirement age of 72 in 1995—following eight years of failed shareholder resolutions seeking such a policy. And its shift to a more youthful board won’t be completed for three more years. The oldest of Oxy Pete’s four octogenarian directors: Retired Tennessee Sen. Albert Gore Sr., the 88-year-old father of the nation’s vice president.

At Stone & Webster, older directors became a bone of contention soon after dissident investors began to attack the Boston engineering and construction company three years ago. Those critics claimed the company’s share price had suffered because it was slow to move beyond the nuclear-power business.

“Why are the companies doing poorly the ones with the old, old board members?” one large Stone & Webster shareholder asks, and then answers: “Because they never upset the apple cart.”

In such situations, “all the board members should be looking for their replacements—and the way should be led by those over 70,” says Robert A.G. Monks, a principal of LENS, a Washington activist investment fund that owned about 3% of Stone & Webster’s shares in 1995.

Under intense pressure from such holders in the spring of 1995, Stone & Webster directors decided that they would begin to require retirement at age 70 the following year. They also agreed to exempt three older members until 1999.

Nevertheless, that trio quit in May 1996 when they were 71, 73, and 74 years old, respectively. The men felt “it would create difficulties for the company if they stayed another term,” explains Kent F. Hansen, the board's lead outside director. The departing board members were “all very sharp individuals” even though dissident investors saw them as “too much part of the old school of thought,” adds H. Kerner Smith, named president and CEO of Stone & Webster in February 1996.

H.J. Heinz Co., whose board has been criticized for having too many insiders, raised its retirement-age guidelines for outside board members to 72 years old from 70 in June 1996. Five nonemployee directors were over 70 as of last August, according to Heinz’s latest proxy statement. “Ageism is not something we want to engage in,” says a spokeswoman for the Pittsburgh food giant. Directors "felt that people remain very active and vital" beyond age 70, she says.

Activist investors may be misdirecting their dissatisfaction by focusing on directors’ ages rather than their tenure or performance, some observers suggest. “The longer you stay [on a board], the more the you become part of the problem,” says Charles Elson, a Stetson University law professor in St. Petersburg, Florida. He favors ten-year term limits for directors.

Mandatory retirement at age 70 means “you don't have to judge whether a director is asleep or alive,” says Donald Frey, retired CEO of Bell & Howell Co. But he wasn’t happy that he had to give up seats at three major corporations—Springs Industries Inc., Cincinnati Milacron Inc., and Clark Equipment Co.—when he turned 70 four years ago.

“I would have liked to have stayed on—I felt like I was contributing and I could have contributed more,” says Mr. Frey, now a Northwestern University professor of industrial engineering and management science.

“I've known board members useless at 60—or sharp as hell at age 80,” Mr. Frey observes. It makes more sense, he adds, “to apply judgment whether this guy still has his marbles.”