WESTINGHOUSE'S DO-LITTLE BOARD
Westinghouse Electric Corp.'s board of directors provides yet another example of failed corporate governance. Even though the company was teetering on the brink of financial disaster, it was investor pressure -- not the board -- that moved CEO Paul E. Lego to act (page 32). The activist institutional investors that began agitating this summer can take heart that Lego finally moved. Getting action at other recent activist targets, such as GM and Sears Roebuck, took years.
Interestingly, Westinghouse's diversified nature made it more vulnerable to activist shareholders because its disparate businesses lend themselves to a fire sale. The activists demanded an easy remedy, and the market applauded, pushing up the company's stock by 24% on the day of the restructuring announcement -- despite a dividend cut.
But a more important point is involved. Westinghouse shows just how dysfunctional corporate boards can be -- particularly at diversified companies. No one believes, anymore, that a professional manager can manage any kind of business. If making a conglomerate work takes exceptional management, it takes exceptional directors, too. Yet despite the need for greater vigilance caused by problems in many of Westinghouse's diverse businesses, the company's board did little. The company's finances deteriorated, its market performance declined, and its investors grew angry, but its directors didn't rise to the challenge. What made Westinghouse directors think they could be effective monitors of management at a troubled, diversified company without an extra effort? Notes Stanford law professor Joseph A. Grundfest: "Where you find conglomerates, you often find a dysfunctional governance process." If the board wants to burnish its tarnished reputation, it should enact many of the reforms activists seek, notably creation of a nominating panel to replace departed directors.