A Clubby World Turns Aggressive and Combative

On Corporate Boards, a New Push for Change

The once-clubby atmosphere of the public company boardroom has undergone a makeover during the past several years, as board members become more willing to flex their muscle and aggressively press management for changes.

Since early 2005, directors of some of corporate America's biggest names have pushed out their chief executives. At American International Group Inc. and Bristol-Myers Squibb Co., the board members acted in response to concerns raised by prosecutors. The head of Pfizer Inc. lost his job amid criticism over his $83 million retirement package as the company's share price slumped and the rollout of new drugs lagged.

The unfolding scandal at Hewlett-Packard Co. -- where the company's chairman, who was concerned about leaks, ordered an investigation of directors' phone records that may have been conducted illegally -- offers an extreme example of the new tensions inside some boardrooms.

Legal analysts, governance experts and directors agree that the nature of boardroom politics has changed in the years since Enron Corp. and WorldCom Inc. collapsed and directors of both companies were held personally liable for investor losses. New stock exchange listing standards that require a majority of directors to be independent of company management, the 2002 Sarbanes-Oxley law that lays more responsibility on boards and pressure from shareholder activists have combined to change how directors view their jobs.

"It's been a dramatic change in the last five years. It's the era of the empowered independent director," said Richard H. Koppes, former general counsel of Calpers, the California state employees pension plan, who now sits on the boards of two public companies.

Governance experts were quick to note that the situation at Hewlett-Packard is unusual and that its woes seem to stem from a board that was feuding and dysfunctional. They also noted that while the board voted to remove Patricia C. Dunn as chairman, they allowed her to stay in place until January and keep her seat as a director. But the governance experts said the mess should serve as a cautionary tale for newly assertive directors on how not to handle disagreements.

Independent directors now hold 81 percent of board slots at companies on the Standard & Poor's 500-stock index, up from 77 percent in 2001, said Julie H. Daum, who heads the board services practice at the search firm Spencer Stuart.

Many of the new outsiders are former regulators and retired executives who have been welcomed by longtime directors and management for their expertise. But board deliberations at some public companies have been complicated by pressure from large activist shareholders -- such as hedge funds and private equity funds -- to add directors who have a specific mandate to push for change.

General Motors Corp., for example, recently added Jerry York to its board under pressure from investor Kirk Kerkorian, who has acquired a nearly 10 percent stake in the automaker. Similarly, Acxiom Corp., an Arkansas data integration firm, headed off a proxy fight with the investment firm ValueAct Capital Partners in August by adding ValueAct managing partner Jeffrey W. Ubben to its board.

In 2001, Ubben's firm took a large stake in Martha Stewart Living Omnimedia Inc., and he joined its board. When the firm's founder and namesake ran into legal trouble, Ubben assumed the chairman's role and helped the company survive Stewart's conviction and imprisonment.

"They're bringing the boardroom back to where it was originally in the 1920s when large shareholders were managing the company," said Charles M. Elson, director of the University of Delaware's Center for Corporate Governance. Management-appointed boards are a more recent phenomenon that sprang up when companies grew too large for single individuals to hold a significant stake, he said.

But the result has been a bit of a culture shock for directors and management accustomed to a less contentious era.