Martian's Daughter: A Memoir (29 page)

Meetings of the outside directors, without management present, which used to occur only at times of crisis, became regularly scheduled events, and we developed processes for annually evaluating the performance of the CEO, as well as the effectiveness of the board's own functioning. A growing minority of US firms has instituted the separation of the roles of chairman and CEO, which is usual in many European countries; in those that haven't, the role of lead director has developed as a partial substitute. This nonmanagement director works with the chairman to set the agenda for board meetings and presides over meetings of the outside directors without management.

At P&G, towering, deep-voiced Norman Augustine was chosen for this role by the universal acclaim of his board colleagues. Augustine, the CEO of Lockheed Martin, had held several important positions in our government's defense establishment and gained fame as the author of
Augustine's Laws
, a book about government and business bureaucracies as wise as it is hilarious. He applied this wisdom by putting his stamp on both the structure and the content of P&G board meetings.

In the wake of the Enron and other corporate scandals, most of these changes were codified into requirements by means of legislation and regulation. I was closest to these developments at P&G, where I chaired the
Governance and Nominating Committee for several years. In that role, I worked closely with CEO John Pepper to make sure the board's membership and procedures met the highest standards of corporate governance, a steadily moving target. The result was that, when the Sarbanes-Oxley legislation and its implementing regulations were passed in 2002, I was proud to discover that P&G already met almost all its requirements relating to boards of directors.

The one exception was that certain committee assignments had to be changed for two directors the board had categorized as independent but who did not meet the tightened criteria for director independence mandated by the new legislation. Ironically, one of the two was Lynn Martin, far and away the most candidly critical and outspoken of all the directors. The issue arose because she was associated with the consulting arm of Deloitte and Touche, P&G's main accounting firm; her role was to advise companies on how to eliminate practices that could be regarded as sexual harassment. “Legal requirements have trumped common sense, Lynn,” I grumbled when P&G's lawyers told us that she could no longer be a member of the Governance and Nominating Committee that I chaired.

One change in governance that the P&G Board made on its own initiative was to establish term limits for directors. As successful younger people, some in their early forties, were elected to the board, the possibility that tenures of thirty years or more would make it harder to bring new faces and ideas onboard led to the decision to limit directors to four three-year terms. As the chair of the committee that proposed this change and the longest-serving director, with twenty-seven years on the board, I immediately told my colleagues that I wouldn't stand for reelection at the next shareholders' meeting.

I had no doubt that this was the right move for the board and P&G, but it gave me a sharp pang of loss. I still miss the P&G board meetings, the thrill of being involved with a superbly managed and successful company, and the interactions with my outstanding colleagues there. Despite its reputation for conformity and its commitment to promotion from within, P&G has risen to the competitive challenges of a globalizing world through a process of continuous change, without the wrenching distortions that have made most of the other companies I've been associated
with either disappear as independent entities or alter so drastically as to be virtually unrecognizable.

Years later, with the experience of thirteen years as a senior executive at one of the country's largest multinational companies, General Motors, under my belt, I had a much better understanding of what makes big companies tick when I joined the boards of Browning Ferris Industries (BFI), a Texas-based waste management company, and Unocal, the old Union Oil Company of California, in the 1990s. I had worked with and come to admire BFI's chief executive, Bill Ruckelshaus, during the Nixon administration. As deputy attorney general in 1973, Bill had resigned rather than follow Nixon's orders to fire the Watergate special prosecutor, Archibald Cox, in what came to be known as the Saturday Night Massacre.

It's hard to imagine what could make a garbage company exciting. But there was plenty of excitement when Bill told the astounded board that he and the company's general counsel had been working secretly for months with the Manhattan district attorney to end the Mafia's stranglehold on commercial waste disposal in New York City. The Mafia had fought back with tactics we had all watched goggle-eyed in
The Godfather:
the wife of BFI's New York district manager, greeting some women guests, had found a severed dog's head on her doorstep. But BFI had the last laugh when the Mafia refuse collectors were rounded up, tried, and convicted. In his Texas drawl, with an unlit cigar clamped in the corner of his mouth, our lead lawyer explained: “I took the papers that would complete BFI's purchase of his company to the jail where one of the Mafia owners was locked up and watched while he signed them, cussing all the way. I had to bob and weave to duck his spit.”

Despite its success in this bit of heroic derring-do, BFI was struggling in an industry where the accounting practices of at least one of its largest competitors skirted the edge of legality. In 1997 the board decided that selling the firm to another company (not the one with the dubious accounting) was in the best interest of the shareholders. We didn't come to the decision easily; when BFI's young president first broached the idea, several of the directors said to Ruckelshaus, “You should fire him for disloyalty.” The evidence was ultimately persuasive, though, and we voted the company, along with ourselves as a board, out of existence.

Given the roughneck nature of the petroleum industry, it's not surprising that, when I joined the board of Unocal, I was nonplussed by the “cowboy culture” I found there. At one of my first meetings, the chairman reported on a leak that had allowed a toxic substance capable of causing skin irritation and flulike symptoms to escape from the firm's San Francisco refinery. The refinery's managers, he told us, had known about the leak but decided to do nothing about it until the time came for a scheduled overhaul of the plant. “And how,” we asked, “had those managers been punished for their irresponsible decision,” a misjudgment that ultimately cost the company some hundred million dollars in fines and penalties? “Oh, they were reprimanded and temporarily suspended,” came the bland reply. “You mean they weren't fired or at least transferred?” I sputtered.

Speechless with indignation, I couldn't manage even a sputter when Unocal's president, John Imle, reported that he had entertained several members of the Taliban at his home for dinner to discuss the possibility of Unocal getting involved in business in Taliban-ruled Afghanistan. It wasn't long before Unocal recognized the impossibility of working with the Taliban, and Imle was pushed out of the presidency not long afterward, but other elements of the company's traditional culture took longer to uproot.

Soon after I joined the board, the outside directors, acting through the various committees of the board, started putting steady, persistent pressure on Unocal's top management to change the firm's behavior from top to bottom, which in some cases involved ousting or reassigning some of its senior managers. Many of these initiatives originated with the Corporate Responsibility Committee, which I chaired during much of my time on the board. The directors themselves wrote a charter for each Board committee, and conducted an audit every year to check whether its commitments had been met and whether any revision or updating was required.

Beginning in 1994, Unocal started to issue an annual report to stockholders, separate from the required one focused on financial performance, in which it discussed candidly its problems in the areas of corporate social responsibility—health, safety, and the environment—and what it was doing to correct them. And it adopted as its motto “To improve the
lives of people wherever we work.” The process was a gradual one, but, over time and with the directors pushing and prodding every inch of the way, Unocal took steps to match its actions to its words. It became more forthcoming in admitting to and aggressive in cleaning up underground leaks that had persisted for many decades, and in compensating the communities that had suffered as a result. It strengthened the language in its code of conduct for both employees and directors, which was then cited by several activists as one of the most progressive in the industry. And it's Operations Management System, introduced in 1999 to identify, evaluate, and mitigate the various safety risks in its operations, was so cutting edge that Unocal received requests from other companies for help in implementing such a system in their own operations.

The most inflammatory issue Unocal's directors had to confront was the company's participation in building a gas pipeline through Myanmar (Burma), a country then ruled by one of the most thuggish regimes on the planet. The company was under constant, highly emotional pressure to get out of the country by selling its share in operations there. How, our angry critics demanded, could we partner with the state oil and gas company of such a reprehensible regime? My fellow directors in corporate jobs could shield themselves from hostile calls, but, as a member of a university faculty whose telephone and office door were open to anyone who called or knocked, I was confronted face-to-face by groups of students who told me bluntly that doing business in such a country was immoral.

We argued intensely over the relative merits of selling our interest in the project, what I dubbed the Pontius Pilate choice—washing our hands of responsibility for a situation by placing it in the hands of others—versus “constructive engagement.” Neither side persuaded the other, of course; some of the students prayed for my soul, while others burned me in effigy on the Diag, the center of the University of Michigan campus, where I had become a professor.

The Unocal directors chewed over the Myanmar issue frequently and at length. We quizzed the top management intensively on the nature of operations in that country, sending the CEO there in person to see the situation for himself. When he returned, we demanded and got from him personal assurances that, contrary to widespread allegations, the actual operator of the facilities in which Unocal held part ownership
(a French firm called Total) had never cooperated with the Myanmar government, either in using forced labor or in relocating villages to make room for the petroleum pipeline. On the contrary, he described to us in detail Unocal's active program of providing schools, clinics, and training (as, for example, in fish farming) to the people in villages along the pipeline route.

Our CEO's replies to our probing were corroborated by four field reports, covering the period 2002–5, based on extensive interviews with a broad range of stakeholders inside Myanmar, including villagers in most of the communities along the pipeline. These interviews were conducted by a small American nonprofit focused on working with companies to help them ensure that they have positive rather than negative impacts on the communities where they operate. The final report concluded, “[T]he overwhelming majority of [those interviewed] argue that Total [and its partners] should neither leave the country nor limit its interaction with the military regime in Myanmar/Burma.”
⁴

We recognized that when revenues began to accrue from the pipeline, some would go into the coffers of the despised and cruel autocracy that held—and continues to hold—the country in an iron grip. Weighing all these considerations, we concluded that the benefits we could bring to at least a small part of Myanmar's population by staying in the consortium there was preferable to a forced sale to another company, probably Chinese, that would almost certainly not continue investing in socioeconomic projects that benefited the local population.

Because of this decision to stay, Unocal was sued in 1996 by activist groups under a centuries-old law originally directed at curbing the operations of pirates on the high seas. The case dragged on inconclusively for nearly a decade. Meanwhile, the directors had gradually come to the conclusion that Unocal was too small to reap full economies of scale, implying that it would be in the shareholders' best interest to sell the company to a larger firm. This decision meant disposing of the lawsuit that was hanging over its head, and the case was settled out of court in 2005. Chevron, the company that ultimately bought Unocal, has continued to support economic and social initiatives in Myanmar and has continued to come under pressure for disinvestment.

Most of my years on the Unocal board were characterized by slow,
steady progress in the effectiveness of board oversight; the final year, in contrast, was one of high drama. After the company had been in play, or up for sale, for several months, it entered into negotiations with the only bidder that had met the announced deadline, Chevron, America's second-largest oil company. Terms had been agreed to and the transaction appeared well on its way to a shareholder vote when the Chinese National Overseas Oil Corporation (CNOOC), a firm 70 percent owned by the Chinese government, tendered an all-cash bid with a significantly higher value than Chevron's combined stock and cash offer.

With two contenders now in the game, the Unocal board, whose fiduciary duty was to get the highest possible price for Unocal's shareholders, successfully elicited a higher offer from Chevron. But in the meantime, all hell was breaking loose in Washington. Several legislators, egged on by Chevron's lobbyists, were raising objections to a sale to a state-owned Chinese firm on grounds of national security. They were threatening, at the very least, to complicate and stretch out the required approval process, to the point that CNOOC withdrew its bid. Chevron's was accepted, and Unocal was merged into Chevron.