Activist Chairmen, Independent Directors Challenge CEOs, ‘Country Club’ Boards

In the summer of 2011, Yahoo Inc.’s board decided enough was enough. Directors had seen the Internet giant’s stock languish, and the answers they got from Carol Bartz, chief executive at the time, fell short of their expectations.

So, the board held a final meeting in Los Angeles, away from Yahoo’s Silicon Valley headquarters, to review the company’s progress, a source familiar with the matter said.

One of their conclusions? Fire Bartz, the source said.

Such scenes are relatively rare, but could be played out more frequently across corporate America as companies increasingly split the roles of chairman and CEO, and heed regulatory pressure to police their companies, U.S. public company directors said in interviews.

Last week, Citigroup Inc. Chief Executive Vikram Pandit resigned abruptly after a clash with the board and the bank’s chairman, Michael O’Neill, a day after it reported better-than-expected results. Citi declined to comment.

Other marquee names, such as insurer American International Group Inc. and technology giant Hewlett-Packard Co., have in the past few years also seen discord between management and independent directors spill into the open, resulting in either the CEO or chairman leaving the company.

Former Yahoo Chairman Roy Bostock himself left the company’s board earlier this year after pressure from shareholder Dan Loeb, of hedge fund Third Point LLC, and other investors.


Directors say these battles, and an increasing number of boards asserting themselves, may signal the ultimate end of the corporate board as a virtual country club for the chief executive’s friends.

“There is a growing sense of responsibility by the board that they are indeed in charge of the company. They are not just there as friends of the CEO giving advice. They are, in fact, responsible for making sure that the company is on the right track,” said Steve Miller, chairman of AIG and director of software maker Symantec Corp.

Miller became chairman of AIG after a clash between his predecessor, Harvey Golub, and the company’s CEO Bob Benmosche led Golub to quit.

Miller, who is also the CEO of aircraft maker Hawker Beechcraft Inc., declined to talk specifically about AIG, but has since smoothed over the relationship between the AIG board and management.

Indeed, there’s a plethora of reasons for boards to take their jobs more seriously, directors say. These include the lessons from the financial crisis of 2008, increased regulatory scrutiny, investor demands to split the roles of chairman and CEO, and fear of investor lawsuits.

“Clashes with management are more likely to occur when there are real difficulties and public scrutiny,” said Hal Scott, a director of investment bank Lazard Ltd.

“It’s a natural thing as a board member, when there’s a lot of attention being focused on your company and people are sort of saying, ‘Hey board what are you doing about this?'” he said.

The resulting change, governance experts say, is good for investors.


GMI Ratings, a corporate governance ratings agency, reported in June that companies that split the chairman and CEO roles post five-year returns that are 28 percent higher than companies where the same person holds both jobs. GMI also found that companies with a combined chairman and CEO role pay that person nearly double the average for someone who is only CEO.

In its most recent annual report on corporate governance among the S&P 500 companies, executive search firm Spencer Stuart found that 21 percent of the companies’ boards had an independent chairman in 2011, up from 10 percent in 2006. An independent chairman is someone who has not worked for the company and does not have business ties with it.

Over the same period, the percentage of companies whose CEO was also chairman fell to 59 percent in 2011, from 67 percent.

“They (boards) are becoming more assertive because you have non-executive chairmen who are taking leadership roles,” a long-time director at a major financial services company said. “There is an accountability factor that to the shareholders and to other stakeholders is very important.”

The new scrutiny that a more questioning board brings can make CEOs uncomfortable, directors say, and force them to look over their shoulders while setting corporate strategy.

That may mean fewer bold decisions, which, for a business, can sometimes be damaging.

And if a chief executive leaves abruptly, as Pandit did at Citigroup, it can also lead to uncertainty and hurt employee morale.

“What will be the impact of that in all sorts of businesses at Citi, and people’s uncertainty about what’s going on there, and whether they can have confidence in management? This kind of open fight at this level, I think, is very bad for the company,” Lazard’s Scott said.

“The board and the management won’t agree on everything, but you would hope they would be able to work it out and reach some consensus,” he said.


To be sure, there are plenty of companies that have a CEO who’s also chairman, and whose board plays a passive adviser that defers to the chief. These omnipotent heads may justify the status quo at their companies by pointing to examples of open warfare in other companies where the roles are split.

But, more and more prominent examples of independent directors asserting themselves could strengthen the hands of investors and corporate governance advocates looking for change.

“They (CEOs) are fighting, but I think it is futile. The trend here is definitely to divide the position,” the financial services company director said. “I don’t think there is anything wrong in second-guessing the CEO.”

AIG’s Miller, who has served on more than a dozen boards and is one of the country’s top restructuring experts, said the watershed moment that spurred change in boards’ attitudes came when energy group Enron collapsed in 2001.

That prompted directors across corporate America to learn from the mistakes made by the board of the one-time energy trading giant.

“I look at those board members, and they were some of the best and the brightest people I have ever run into in my business life. And somehow they let that situation get away from them,” Miller said.

“Enron was a big spur to improvement in the behavior of boards, and it wasn’t because some regulator wrote it down; it was the ‘oh my god’ factor.”

Directors also cited increased regulatory scrutiny after the financial crisis of 2008 and the presence of private equity and investor nominees on boards, who bring more of an activist perspective.

“If you think about who populated boards in the 1990s, it wasn’t people who had gone through PE. People now on boards are those who think they can drive value with activism,” said Devon Archer, a director at potash company Prospect Global Resources Inc.

The financial services director said regulatory pressures were foremost in directors’ minds these days.

“It’s the embarrassment factor,” the director said. “It’s the regulatory considerations. You don’t want government coming down on you feeling that you are not discharging your duties. It’s the press exposure. There is a sunlight to all of this that’s very fascinating.”

(Additional reporting by Ross Kerber in Boston; Writing by Ben Berkowitz; Editing by Paritosh Bansal and Bernadette Baum)