The Challenge in Parting Ways With Top Executives
Policy Shifts, More Oversight Have Some Heading for the Door

By Dina ElBoghdady
Washington Post Staff Writer
Monday, April 24, 2006

No one can say for sure if Steven R. Chamberlain resigned as chairman and chief executive of Integral Systems Inc. last week under pressure or at will -- except for Chamberlain and a few others.

And so far, they're not talking.

A company filing at the Securities and Exchange Commission offers no reason for his abrupt resignation. And an e-mail from Chamberlain to company employees says only that he does not want his "publicity/legal problems" to affect the Lanham-based company now that a grand jury has indicted him on felony sexual offense charges involving a minor. Chamberlain denies the charges and faces trial on July 24 in Howard County Circuit Court.

"Please don't be sad for me," Chamberlain said in the e-mail, posted on an Internet message board and verified by a company employee. "As many of you know, I've been meaning to retire for years and it took years to find someone crazy enough to take the job!"

And with that, the man who helped create the satellite software company 24 years ago and kept it profitable every year gave up his titles. But he promised to stick around "for quite some time" while former chief operating officer Peter J. Gaffney settles in as chief executive.

The last several months have been tumultuous ones for Chamberlain and some of his fellow Washington area chief executives. In a year when chief executive departures nationally have reached record levels, a number of prominent local executives have parted ways with their companies as boards of directors have asked increasingly tough questions.

David R. Huber stepped down as chief executive of the company once known was Corvis Corp. after the company altered its core business, though he remains chairman. Dendy Young, a fixture in local technology and government contracting circles, did the same at Chantilly-based GTSI Corp. after 11 years at its helm. And William H. "Nick" Timbers Jr., the ousted founder of Bethesda-based USEC, finally settled a long-running dispute related to his dismissal.

Most separations have not been as publicly dramatic as Chamberlain's, whose professional troubles began in January after a director wrote a series of scathing letters, filed with the SEC, criticizing him for failing to promptly notify the board about the charges against him when they were first filed in June. Back then, the allegations were less serious misdemeanor charges.

But deciding it's time for the person at the top to move on comes with a set of challenges, including who initiates the change, who makes the decision, when it happens and what persuades the boss to leave.

Most companies don't want to talk about it in detail. Often, departing chief executives limit themselves to vague comments in company-issued statements. Huber, for example, said that his reduced role came at a good time for the company and would allow him to "spend more time with my family and on my other ventures," an oft-stated formulation for such departures. Young said in an interview that the board made the "right decisions" given the weakened finances of the firm and its transition to a new line of business. And Timbers said he's not allowed to talk about his departure except to say that he needed to defend his reputation.

Even a scandal like Fannie Mae's $10.8 billion in accounting errors can produce a mild outcome publicly. The mortgage giant's chief executive, Franklin D. Raines "retired" in 2004 with benefits including a full pension that a compensation consultant estimated at $1.4 million annually for life.

Whatever the reasons, experts who track executive transitions say that jobs of chief executives -- and directors -- grew much riskier since the Sarbanes-Oxley legislation became law in 2002 and held top company officials more accountable for their actions. Some directors say they are spending much more time in board meetings than they used to, and chief executives say they're trying to cope with what many describe as "shadow management" boards.

"A CEO's job is much less stable than it was 10 or 20 years ago," said Steven N. Kaplan, a finance professor who studies corporate governance at the University of Chicago's Graduate School of Business. "One explanation is that boards are doing their jobs or they're doing their jobs more than they used to."

GTSI's board, plagued by a streak of money-losing quarters, began reevaluating its plans to improve the company's margins last year after its field of competitors got too crowded. The company replaced Young with Jim J. Leto in February. Young said at the time that "given the pressures on the board after a tough year, I think the board made the right decision."

The pressure at GTSI came in part from its struggle to scale back its core business of reselling technology to the government and become more of a service-oriented firm.

"Dendy's experience for the last 15 years that I've known him has been as a reseller," Leto, a GTSI director since 1996, said in February. "My experience base is almost in the exact sweet spot of where GTSI is headed."

Similar reasoning went into the decision on Huber, the Oregon-bred electrical engineer who founded Corvis, a maker of fiber optics equipment gear. Corvis, once based in Columbia, became one of the Washington area's most highly valued technology firms after it went public in 2000. But its customers dried up when the bottom dropped out of the telecommunications market.

The firm had acquired one of its customers, a telecommunications services company called Broadwing Corp., and later adopted its name, its business and more recently its Texas headquarters.

Huber "was a brilliant engineer, brilliant developer of new products and a very seasoned executive in the manufacturing world, but not so much in the services world," Broadwing board member Joseph R. Hardiman said. "We knew we needed someone with significant experience in that industry."

So at a regularly scheduled January board meeting at the Columbia office, the board reached its decision, with Huber's concurrence, to replace him, Hardiman said. Broadwing is now searching inside and out for a new leader.

"It was emotional for him and the board," Hardiman said. "When you've got that much of your life invested in a company, of course it's a hard decision to make."

Boards typically resist going public about a firing because of a "built-in bias" in the system, said Henry Hu, a law professor at the University of Texas at Austin.

"Because CEOs often have a lot of say-so on who gets to be on the board, there's often this kind of reluctance in effect to turn on the person that put you there," Hu said. "It's painful because you get to be part of a corporate family and you're asking board members to kind of ignore all that in terms of deciding what's best for shareholders."

One face-saving alternative is to push the chief executive to resign, hand over a severance package and extract a signed contract that requires the departing executive to keep quiet about the details of the exit. The strategy has become so routine that the public rarely gets an inside look at the mechanics of what happened. The goal is to downplay it all publicly so that investors stay calm, employees stay focused and customers stay loyal.

Surprises or changes can throw people off guard, said Leslie Gaines-Ross, chief knowledge and research officer at Burson-Marsteller, a New York-based public relations firm. "It's just a very difficult time for CEOs."

Their departures reached record levels last year at the Fortune 1000 companies, she said. A survey by her group found that turnover increased 126 percent in the chief executive ranks from 2000, when 57 chief executives left, to 129 in 2005.

It's tough to pinpoint how many were forced out because many leave without explanation. But once in a while, a firm boots its chief executive in a very public way for practical reasons, said Constance E. Helfat, a corporate strategy pRofessor at Dartmouth College's Tuck School of Business.

"If a company is doing poorly, then disruption may be good because you need a clear signal that 'we're going to change,' " Helfat said.

And sometimes the board doesn't have a choice, which can lead to costly battles such as the one involving Timbers, who led the uranium enrichment company called USEC for a decade and disputed the reasons for his dismissal in 2004.

Those reasons were never made public and both sides decided to arbitrate. In February, USEC agreed to pay Timbers $14.5 million in cash to settle the dispute and to cancel an outstanding $300,000 loan to him.

"The only thing that you have is your reputation, and any time someone disparages your reputation you have a responsibility and interest to go out and defend it," Timbers said in an interview last week.

Some board members say their reputation is also at stake if they fail to rein in a rogue chief executive or address perceived corporate governance lapses.

That's why a longtime director at Integral, Bonnie K. Wachtel, said she went public with her take on the politics and corporate governance issues at the company in a series of letters that questioned the chief executive's judgment. From there, the saga that ultimately led to Chamberlain's resignation last week unfolded. In the letters, Wachtel declined to stand for re-election and advocated for the company's sale, an option Integral is now exploring.

But as the Integral drama demonstrates, it's difficult to control all aspects of the outcome when a director challenges a chief executive.

"I want the company sold," said Wachtel, a shareholder who joined Integral's board in 1988, when her District-based securities brokerage firm managed Integral's initial public offering. "I never wanted to see (Chamberlain) step down from the board."

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