Board of Directors' Role Comes Into Focus

LAST month Kenneth Olsen, the founder and president of Digital Equipment Corporation, shocked both the computer industry and investors by announcing that he would leave his post as head of the nation's second-largest computermaker.

Not long before, Mr. Olsen had said he intended to stay on and see DEC through a difficult turnaround. In the late 1980s, the personal-computer revolution caught the maker of mid-range machines by surprise. Digital's stock fell from a peak near $200 a share to a low of $33 this year.

Why did Olsen change course so suddenly?

Although the details have not become fully public, Digital insiders have said that the board of directors - of which Olsen had been the dominant member - finally moved to replace him.

What happened at DEC also happened earlier this year at General Motors Corporation, and it is likely to happen again.

"Managements are finding out that they're hired guns, ... that it's not their company, it's the shareholders company," says John Nash, president of the National Association of Corporate Directors.

At the heart of this change is the corporate board, which is legally bound by state laws to maximize shareholder value.

GM's board did not replace Robert Stempel as the chief executive, but it did remove him as chairman of its board and reshuffle other top executives.

"The fact that a couple of boards are acting is good news," says Jay Lorsch, a Harvard Business School professor who studies corporate boards. But he notes that it took "years of malperformance" at GM before the board acted. "Boards need to be strengthened," he says.

That is the goal of a growing number of shareholders. Institutions such as pension funds own so much stock in so many companies that it is difficult to rely entirely on the investor's most potent weapon: the ability to sell shares when unsatisfied with company performance. The $62-billion California Public Employees Retirement System, for example, owns stock in hundreds of companies. CalPERS is focusing on trying to prod those firms to improve as well as figuring out which stocks to buy and sell.

"A good director is the best friend of the CEO and his best critic," says Donald Frey, former chief executive of Bell & Howell Co. He now sits on two boards and is a professor at Northwestern University in Evanston, Ill. Mr. Frey says boards should consist largely of outsiders, but ones who understand the industry well enough to be constructive critics of management.

Despite the long-term approach that CalPERS and other institutional investors say guides them, some observers worry that pressure from investors will only encourage companies to increase their focus on short-term results.

But management consultant Robert Schaffer says this criticism is off base. "The Japanese invest long-term," he acknowledges. "But the Japanese more than anybody have worked on how to make things happen today, this hour."

Activist investors say that their agenda is limited to specific issues of corporate governance, not intrusion into day-to-day operations. In other words, their goal is to keep a fire lit under boards and CEOs, but not to tell them what to do.

This year, the United Shareholder Association (USA), in its ongoing shareholder activism program, convinced 13 companies to change aspects of corporate governance without the matters coming to a shareholder vote. Ryder System Inc., in a joint agreement with USA and CalPERS, will require that a majority of its directors be selected from outside the company, and that only outside members sit on the board's compensation and nominating committees.

This tactic of negotiation rather than confrontation was one reason why the number of shareholder proposals voted at corporate annual meetings actually declined this year. But in some cases, this tactic "didn't appear to be working as well as hoped," says Mary Stakem of the Council of Institutional Investors, based in Washington.

To focus companies on shareholder value, investor Robert Monks recently formed Lens Inc. The group will seek money from large investors and use it to buy stakes in companies that are considered to have poor corporate governance policies. Lens will then press for changes.

Meanwhile, the Securities and Exchange Commission (SEC) recently proposed two key rule changes that promise to further help the cause of shareholder activism. One change would make it easier for shareholders to confer with each other about corporate matters without informing the SEC, a practice previously limited to 10 or fewer investors. The SEC also pro-posed that companies simplify their disclosure of executive pay and explain how the pay is tied to company performance.

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