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Corporate Governance:  Private Time
As more boards meet without management present, it makes for franker talk -- and anxious CEOs
By George Anders
Thw Wall Street Journal
Monday, October 9, 2006

When a chief executive officer leaves a board meeting, is it time for everyone else to go home?  Or is the real corporate drama about to begin?

Increasingly, the answer is the latter.

While it has always been possible for independent directors to meet without top management present, such "executive sessions" have roared into prominence in the past two years, ever since the New York Stock Exchange and Nasdaq -- in an effort to improve governance in the post-Enron era -- told outside directors of listed companies to meet regularly in private.  Directors use these private sessions to test ideas, big and small, with one another until they are ready to present a unified face to top management.  In extreme cases, they huddle alone for some frank talk about whether the CEO deserves to stay.

This year, 75% of big companies expect their directors to meet regularly in executive session, in addition to their regular board work, according to a survey by the Business Roundtable, a Washington-based alliance of large corporations' CEOs.  That's up from 55% in 2003, the first year the group conducted the survey.

The change is altering the boardroom balance of power in unexpected ways.  "It's been difficult for some CEOs to adapt to being excluded from the boardroom," says Stuart Cable, a partner in the Boston law firm of Goodwin Procter.  "Even if there isn't a specific agenda to the executive-session meeting, CEOs can feel threatened by not being in the room."

Justified Concern

In some cases, corporate bosses are right to be alarmed.  The average time in office for CEOs has been shrinking steadily in recent years.  Directors aren't tolerating flabby excuses for underperformance or vague assurances that things will get better in due time.  Instead, independent directors who fear a company is heading off course can use executive-session meetings to reinforce each others' concerns and settle on a plan of action.

A prime case in point is Hewlett-Packard Co., the Palo Alto, Calif., computing and printing company.  There, independent directors in early 2005 eased aside high-profile CEO Carly Fiorina, amid concern that H-P wasn't getting the expected benefits out of its giant acquisition of Compaq Computer Inc. a few years earlier.

Just weeks before her ouster, Ms. Fiorina publicly stated that her relations with the board were "excellent."  Directors saw things differently.  Operating margins in key computer markets were disappointingly low.  Earnings weren't meeting expectations.  And Ms. Fiorina was resisting the board's call for handing over more operating authority to other people.

On their own, outside directors decided their best hope would be a new CEO.  Patricia Dunn, who was H-P's non-executive chairman until last month, revisited that decision in a phone interview this past summer.  As Ms. Dunn observed:  "It would be hard to make a decision whether or not to make a change at the top if you couldn't meet without the person in question."

In H-P's case, switching CEOs was just the start of a massive wave of board turbulence.  The company's board in the past two years has conducted aggressive probes of how journalists came to know boardroom details.  Those probes have become a major embarrassment for the company, with California and federal authorities investigating the methods used.  Ms. Dunn and two other directors eventually left the board, and she was among several people indicted last week on state charges in connection with the probes.  (Through her lawyer, she vowed to fight the charges.)

Gentler Side

But directors at various companies say there's a gentler side of executive-session meetings that deserves attention, too.  These conversations can be a good way to brainstorm about ways to help an admired CEO be even more effective.  And if jockeying seems too intense within a company's leadership team, candid chats among independent directors can help everyone think of soothing remedies before spats become unfixable.

Executive-session meetings also can be a good place for individual directors to bring up topics that puzzle or intrigue them -- without worrying that their remarks might seem ignorant or rude.  Ideas that resonate with other directors can be brought up at the next board meeting.  Suggestions that fall flat can die a quiet death without causing embarrassment or dissension.

"It's a good place for directors to do reality checks," says Holly Gregory, a corporate-governance specialist at the New York law firm of Weil, Gotshal & Manges.  "In the full boardroom, there's a concern about speaking up, when you aren't sure how your idea will be received."

Topics can be as simple as the way briefing books are prepared for directors, Ms. Gregory says.  Private discussions can establish whether most directors are satisfied with what they're getting -- or whether there's widespread concern that the board might be overwhelmed with minutiae in some areas or inadequately informed in others.

Directors might also want to kick around new approaches to acquisitions.  And frequently, board members want to share notes about how top managers interact -- and whether some chemistry issues need attention.

In some cases, outside directors meeting alone can gather up the gumption to press for changes, even if management is resisting.  Olivia Kirtley, a Louisville, Ky., business consultant who sits on several boards, says she got involved in one situation where a company's profitability was disappointingly low and executives believed they had taken all the cost-cutting steps they could.

"Management needed more firepower," she says.  "They needed to bring in an experienced consultant who could show them what else they could do."

By meeting in executive session, she says, outside directors "could speak with more passion about what was needed.  It changes the dynamics of the board.  Directors can agree on something, and then go back to management and ask for something to be done."

Most executive-session meetings tend to be quick, running 15 to 45 minutes after the main board meeting.  There usually isn't a formal agenda;  instead directors encourage a freewheeling atmosphere in which unexpected topics can be aired.

Directors generally take minutes, documenting that discussions were held in case that ever becomes an issue in a lawsuit.  But they seldom write down detailed accounts of who said what.  Lawyers explain that if the minutes start to resemble a word-for-word transcript of the meeting, it can inhibit directors who might want to explore some ideas without necessarily committing to them as discussion continues.

Participants agree that it's crucial immediately afterward to brief the CEO on what was discussed.  That way, tensions don't linger.  And if directors want something added or modified to the next general board meeting's agenda, the work to make that happen can begin right away.

At Noble Energy Inc., Houston, CEO Charles Davidson says his briefings come from Michael Cawley, the company's lead independent director.  They've worked together for six years and have established a brisk, friendly rapport, Mr. Davidson says.

"I get a good sense from Mike of where things stand," Mr. Davidson says.  "He'll tell me either 'a few directors are wondering' or 'the board believes'.  That helps me understand how to respond.  If it's the entire board, then clearly it becomes a major priority for me."

--Mr. Anders is a Wall Street Journal news editor based in Palo Alto, Calif.

Write to George Anders at