Martian's Daughter: A Memoir (28 page)

Of the four firms whose boards I joined in the 1970s, only P&G was still an independent company, with the same name, when I stepped down. There was continuity in management there as well; every CEO had been either president or its equivalent before he succeeded to the top job, consistent with the company's commitment to promotion from within. At first, coming from an academic environment where the most effective way to get a promotion was to brandish outside job offers, I had been appalled by such insularity. As I saw the results over time, though, I had to admit that the powerful culture and unwavering loyalty to the company and its principles that this process produced was a major strength. This emerged not only in the consistency—with one notable exception—of P&G's financial results and successful global expansion but in its impressively high level of social responsibility.

This last was attested to by the awards, prizes, and public recognition it garnered every year for its achievements as a “most admired company” that offered a welcoming workplace to women, working mothers, minorities, and people with disabilities. It also received accolades for its
environmental progress, its use of advanced technologies to improve consumers' quality of life worldwide, and its work on finding alternatives to animal testing—this last in the same year that its annual meeting was picketed by animal-rights activists for not having eliminated such testing entirely.

Cautiously and gradually, P&G's strong culture became less insular, opening up to the outside world. In its research and development, this process took off in the late 1990s. For decades, the company had a closed innovation process, centered around its own secretive research and development operations. Then, in less than a decade, P&G increased the proportion of new product ideas originating from outside the firm from less than a fifth to around half.
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Nor did their conservatism and insularity prevent P&G executives from taking forward-looking positions on local issues. When a group tried to close down an exhibit of Robert Mapplethorpe's controversial photographs by bringing obscenity charges, several of these executives said publicly that this misguided effort would only subject the city to national ridicule, a stance the board roundly applauded.

The chief executives at P&G may all have been “proctoids,” as they were sometimes derisively dubbed, but that's not to say that their personalities didn't vary widely, requiring the directors to adjust to a new style with each change of leadership. A particularly sharp style change occurred when quiet, courteous, consensus-building John Pepper succeeded autocratic, sharp-tongued CEO Edwin Artzt, whose nickname both inside the company and in the press was the “Prince of Darkness.”

The one time I saw Artzt act with ruthless decisiveness was when a senior executive failed to alert him to a potential crisis, a wrangle over the allegedly deceptive labeling of P&G's pasteurized orange juice as
Fresh Choice
, which led the Food and Drug Administration to order the product to be immediately pulled from supermarket shelves. Artzt, who had not been told about the situation, was blindsided and, as he told the board, “mad as hell.” The executive vice president responsible, who had been regarded as a possible heir apparent to the top job, suddenly resigned.

In another embarrassing situation, though, Artzt showed that he did not hold himself excused from accountability. He turned down a hundred thousand dollars of his annual bonus in 1994 in the wake of losses
on complicated derivative securities transactions the company's treasury department had entered into with Bankers Trust, without his knowledge and against guidelines authorized by the board of directors only a month or so before. Even though P&G eventually recouped almost its entire loss in the settlement of a lawsuit against Bankers Trust, heads rolled again, including that of the company's treasurer, because these executives had explicitly violated the board's guidelines on using derivatives. By turning down his bonus, Artzt signaled that, as the captain of the ship, he, too, had to bear some responsibility.

Artzt's biggest public relations stumble occurred when he discovered that somebody on the inside was leaking proprietary information—company secrets—to the
Wall Street Journal.
In his eagerness to locate the culprit, he asked the Cincinnati police department to comb through hundreds of thousands of phone calls to the
Journal
reporter who wrote the stories. When he told this to the board, my heart sank as I thought to myself, “Don't do it, Ed,” remembering the pithy advice Jack McNulty, the vice president of public relations at General Motors (GM) had given me: “Never get into a fight with someone who buys ink by the barrel.” I said as much, and others chimed in, but it was too late; the search of telephone records was already under way.

Whether the inside leaker was located and punished or not, it wasn't worth the widespread negative publicity; the furious journalist published a book about the company that was as negative as she could possible make it. Artzt had to admit publicly to “an error in judgment,” and the whole episode at least temporarily tarnished the company's image in the eyes of the public. But the board had spoken its displeasure out loud, and Artzt took the lesson to heart, behaving much more circumspectly after that.

One of the primary responsibilities of any board of directors of a publicly held company is to hire and, if necessary, fire the company's chief executive. All of us on the P&G board knew that, of course, but we never thought it would happen to us, or anticipated how painful it would be.

When John Pepper announced his intention to retire as P&G's chairman and CEO, there was no doubt as to who the top executives had agreed his successor should be: Dirk Jager, the second in command. In fact, Jager had been Artzt's choice as his own immediate successor, but the
board had persuaded him that Pepper should become CEO and Jager president. As Jager's mentor, we had argued, Pepper could smooth off some of his rough edges. Jager was a total product of the P&G system; he had joined the company straight from university and worked his way up through successively more responsible positions. He was a large, blond Dutchman with steel-rimmed glasses and a stern visage. This appearance, along with his clipped speech, made him seem cold and distant. But he was admired for his well-honed analytical mind and his hands-on approach to his job. Even as president, he never missed an opportunity to visit grocery stores to see for himself whether P&G products were properly displayed and how they were selling.

The directors were less certain than the top executives about Jager's suitability; we had a lively discussion chewing over the pros and cons. “He's absolutely brilliant, totally customer oriented, and has a fabulous track record,” argued his supporters. “But he's got lousy people skills and is quick to blame others for problems,” countered those who had their doubts. In the end, though, we agreed that he should succeed Pepper in the top job. The first signal that the doubters might have had the better argument came quickly. Jager's first board meeting as chairman and CEO had been preceded by a dinner the night before in honor of a recently retired P&G executive vice president who was also a member of the board. Jager, who made no secret of his dislike for this man, remarked loudly at the luncheon following the board meeting that he had skipped the dinner in favor of staying home to watch TV with his wife. With that pointed comment, he shattered the sense of team spirit so important among top executives and boards of directors alike. I knew right then that we had made a mistake in appointing Jager. So, from the looks on their faces, did my fellow directors. But it was too late for us to do anything about it.

Less than eighteen months later, after three successive negative earnings “surprises” and a 50 percent drop in the price of P&G stock, Jager was gone. Despite his obvious strengths, his inability to set appropriate goals or exercise effective leadership had proven too costly to the company and its shareholders, including nearly all of its employees, who had chosen to put their retirement nest eggs entirely into P&G's profit-sharing plan and now saw their value cut in half. The episode was most painful for Jager,
who, I believe, never did understand where he had gone wrong. But it was also painful for the board members, who had to admit to a serious error in judgment; we should have been more alert to the warning signs that had come up in our discussions of the CEO succession.

In light of the fact that Jager had spent his entire career at P&G and been responsible for many of its successes during his climb to the top, the board regarded three years' compensation as a reasonable severance payment. But when the amount he received, which totaled about nine million dollars, became public, we were heavily criticized for giving an outrageous “reward for failure.” The American public was beginning to be resentful of the sums that were bestowed as parting gifts on chief executives as they were being shown the door by disappointed boards of directors. In the first few years of the current century such severance payments, often made to CEOs with very brief tenures at their companies who had built guarantees of such compensation into their employment contracts, became truly outrageous, often amounting to more than ten or even twenty times what we had decided on as Jager's payment.

By then I had joined one or two outspoken directors of other large firms in insisting, both privately in meetings of board committees and in public speeches, that the total compensation of many top executives was exceeding the bounds of reason and decency, and that self-policing by companies' compensation committees was urgent. If we don't fix it, I warned, others will, and you executives won't like their fix one bit. My friend Ann McLaughlin, who was also a member of the board at several leading companies—including GM—put the warning even more tersely: adapt or Congress will adopt. I had no trouble getting other directors, many of whom were CEOs themselves, to agree with me in compensation committee meetings, but none of them was willing to step forward and say so publicly, each insisting that he would be verbally lynched by the community of fellow executives if he did that.

With the financial industry meltdown of 2008, the American public's building anger against executives who grew unimaginably rich while the activities that ballooned their paychecks created economic disaster for many ordinary Americans exploded in a demand for government action. Congress and the administration have responded by making Ann McLaughlin's and my warnings a reality. Firms that have received government
assistance are subject to a variety of restrictions on executive compensation, and, at one point, legislation was proposed to claw back bonuses, through retroactive taxation at confiscatory rates, from executives who have already received them. Board compensation committees are beginning to be held more strictly to account by both shareholders and the public, and at least some of them show signs of acting more independently of management.

Gradually but continuously over the more than three decades (1973–2005) I spent as an outside director on corporate boards, they were evolving from the rubber stamps of management I found when I first entered these august boardrooms to monitors who tried to look out for the interests of both the shareholders and the organization itself. In Manny Hanny's case, the initial impetus was primarily external, as when the president of the New York Fed put the board on notice that it was responsible for making sure that the bank's fragile condition improved with all deliberate speed. At P&G the embarrassing fallout from Dirk Jager's failures and subsequent removal played a role.

Above and beyond developments at individual companies, though, those years had been ones of upheaval and change in the governance of all public corporations that swept their directors along. We had been subject to increasing pressure from several landmark lawsuits and a dramatic shift in the ownership of corporate shares from individuals to activist institutional investors, mainly pension funds and mutual funds. This new class of owners was capable of turning the glare of unfavorable publicity on firms whose governance didn't meet its requirements. In response, the standards by which a board's performance was judged rose dramatically, affecting the makeup and processes of every board on which I sat.

Boards became better suited to fulfilling their monitoring role as they both shrank in size and became more diverse, and the number of directors who were also members of management fell, often to the CEO alone. Directors spent more time studying their homework in advance of meetings, and the training sessions for new directors that had been a novelty when I joined the board of Manufacturers Hanover have become routine at most large public firms, supported by a cottage industry of training programs for directors at law and business schools eagerly embracing a new cash cow. As someone who had often questioned just
how much I was contributing to a company's performance by sitting on its board, I welcomed this more intense engagement, even though it increased both the hours I spent preparing for meetings and the personal exposure, both financial and reputational, that I risked.

At P&G, these developments were accelerated by the recruitment of an increasingly diverse, sophisticated, cosmopolitan, and strong-minded group of outside directors. These included not only younger CEO's from companies in industries newly relevant to P&G's success, such as software and Web services, but also outstanding people from outside the business world, like Joshua Lederberg, who won the Nobel Prize for Medicine at the age of thirty-three, and Ernesto Zedillo, the former president of Mexico, who brought an international perspective. As a group, we exerted polite but constant pressure to cut down on the carefully scripted presentations by management, allowing the meetings to become more informal, better focused, and with more opportunity for spontaneous give-and-take.