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Fall From Grace

Cover Story


Feb. 11, 1994, marked the beginning of the coup. Late that night, J. Peter Grace Jr., the octogenarian chairman of W.R. Grace & Co., and his youngest son, Patrick, president of Grace Logistics Services Inc., telephoned Grace Director Robert C. Macauley to say they had something urgent to discuss. They immediately headed over to Macauley's West Palm Beach (Fla.) vacation home.

Macauley, ever indulgent of his old friend, remembers being mystified. The company, after all, was going great guns. J.P. Bolduc, who had been chief executive for just a year, had cut costs and sold $2.1 billion worth of Grace's extraneous businesses since becoming president in 1990. Wall Street was finally happy with the longtime laggard: The company's stock, at 457/8, had jumped 32% in less than five months.

"REALLY NEGATIVE WAY." But as soon as the Graces arrived, it was clear the problem was Bolduc. As the meeting wore on into the wee hours of the morning, Macauley says the Graces told him of troubling allegations they had unearthed against Bolduc, who had replaced the elder Grace as CEO of the Boca Raton (Fla.) company in January, 1993. The Graces told Macauley that Bolduc had allegedly committed financial improprieties that involved steering Grace company business to his friends and to a company on whose board he served. The Graces' "displeasure with Bolduc came out in a really negative way," says Macauley, who agreed that the allegations had to be pursued. "I wanted to investigate more thoroughly," he says.

With that secret meeting--which, along with the questions about Bolduc's financial dealings, has never been disclosed to the full board--the Graces began what appears to have been a concerted, 13-month campaign to push Bolduc from his post. Macauley says none of the allegations of sexual harassment that would eventually cost Bolduc his job were raised. Indeed, far from being the key issue behind Bolduc's resignation, as the company has maintained, a business week investigation reveals that by the time those allegations surfaced more than a year later, they were just the most convenient cover for a long-planned corporate execution.

In fact, extensive interviews with more than a dozen key players--including directors, former and current executives, and major institutional shareholders--reveal that Bolduc's ouster was the result of a vicious, behind-the-scenes power struggle. It was a battle that pitted Bolduc, a voluble, back-slapping executive who naively believed his salvation lay in managing the company well, against the patrician Grace family and a band of loyal, financially beholden directors who resisted efforts to tamper with their private kingdom.

SHAREHOLDERS' VICTORY. As befits a Greek tragedy, all of the key players have suffered. Bolduc's reputation has been destroyed. Just days before his Apr. 19 death from cancer, Grace was forced to relinquish his position as chairman of the company he had ruled since 1945. Son Patrick, 39, who labored, several sources say, to gather information damaging to Bolduc, seems unlikely to ever run the company his great-grandfather founded in 1854--even though his father had talked openly of installing him one day as CEO. And Constantine L. Hampers, head of Grace's largest and most profitable division, National Medical Care Inc., failed in his highly politicized campaign to persuade the board that he was Bolduc's rightful heir.

Even Grace's determination to keep the company whole--and independent--has been undermined. Hampers has launched an unsolicited $3.5 billion takeover of the nmc unit. With nmc likely to be sold--either to Hampers or a higher bidder--shareholders say Grace's remaining units could also become acquisition targets. Wall Street investors are speculating that some Grace businesses, especially water treatment and packaging, could soon draw bids from other companies. "I don't think the company will exist in its present form for much longer," says one major institutional shareholder.

Oddly enough, it is the shareholders who have emerged victorious. For all the power he wielded, Peter Grace owned just 0.005% of the company's common shares outstanding. And his directors--many of whom presided over Grace for two decades or more--shared a host of social and financial entanglements and refused to acknowledge modern-day standards of corporate governance.

Now, W.R. Grace has been dragged kicking and screaming into the late 20th century. A newly chastened board has beaten back attempts by a faction allied with the Grace camp to install Hampers as CEO. Instead, the directors chose former American Cyanamid Chairman Albert J. Costello. With a trimmed, more independent board and talk of a breakup in the air, Grace shares have jumped 38%, to 615/8 since Bolduc's resignation. Despite the high-level infighting, the folks in the trenches have stayed focused on cost-cutting and a restructuring devised by Bolduc. Sales rose 16% in 1994, to $5.1 billion, while operating income climbed 23%, to $515 million. Results for the first quarter were even better. Earnings from continuing operations shot up 56% to $60.2 million, and revenues climbed 25% to $1.4 billion.

A happy ending for shareholders seemed unlikely in early 1994, when Grace first began taking steps to remove Bolduc, 55. Current and former Grace executives say his relationship with the much younger man had been extremely close, bordering on the paternal, for more than a decade. Grace tapped the obscure management consultant as his chief aide in 1982, when Bolduc joined him at a federal cost-cutting group that became known as the Grace Commission. The next year, Bolduc joined W.R. Grace as a senior executive and became Grace's right-hand man.

Bolduc made himself indispensable to the prickly tycoon, who always wore a loaded pistol strapped to his leg. He oversaw the release of the Grace Commission report in 1984, then helped Grace form Citizens Against Government Waste with columnist Jack Anderson and former Treasury Secretary William E. Simon. Bolduc also became a member of the Knights of Malta, a secretive, selective Catholic lay order that counted Grace as its leader in the U.S. (BW--May 1). In addition, sources close to the company say Bolduc began managing Grace's personal outside investments, including a West Virginia timber company and Boca Raton-based Brothers Gourmet Coffees Inc., which is now publicly traded.

By 1992, Bolduc was Grace's president and chief operating officer. Grace, meanwhile, was diagnosed with cancer of the hip and began undergoing chemotherapy. After a decade of subservience, Bolduc began operating more independently, former executives say. That winter, he asked the board to name him CEO. Since Grace would remain chairman, the board acquiesced. Sources close to Grace say he was displeased but didn't argue against the move. In January, 1993, Bolduc became the first person outside the Grace family to run the company.

As his power grew at the company, executives and directors say, Bolduc became less and less deferential. In the past, whenever Grace was around, former associates say Bolduc's large frame almost seemed to shrink in size. As his role expanded, any reserve disappeared. Bolduc's demeanor around colleagues never changed, however. Several longtime associates describe Bolduc as a somewhat rough-hewn, bombastic man, who would swear and tell off-color jokes, and occasionally hug male and female colleagues.

At the annual budget and planning meeting in the fall of 1993, Grace was conspicuous by his absence. "Bolduc really pushed Peter totally out of the company" around that time, recalls a former Grace executive. "Bolduc was telling executives not to pay any attention to [Grace, and] you could tell a little bit of friction was going on between Peter and J.P." Much of that growing tension sprang from Bolduc's determination to dump what analysts regarded as Peter Grace's vanity holdings--a cocoa company, a stake in gourmet food retailer Dean & DeLuca, and bath-products retailer Caswell/Massey--which were unrelated to the company's core specialty-chemical and health-care businesses.

BYZANTINE NETWORK. As 1994 progressed, the conflict between Bolduc and the Graces grew more intense. Bolduc was preoccupied with a restructuring at the disparate conglomerate. With praise from Wall Street rolling in, sources close to Bolduc say he failed to realize he couldn't afford to antagonize Grace, who still had the board's solid support. He shrugged off a warning from board member Macauley, who knew Bolduc risked pushing Grace past the breaking point. "This is Peter's board," Macauley says he cautioned Bolduc. "These are friends of his. All 20 of them."

Indeed, many of Grace's directors were interconnected by a byzantine network of old family ties, lucrative consulting contracts, investment activities, and joint memberships on other boards. Grace commonly paid many of his directors consulting and other fees in addition to their director's compensation. Over the past decade, Grace's proxy statements show that directors, their companies, or their relatives were paid more than $60 million in additional funds. Despite repeated efforts by business week to contact them, most Grace directors declined to comment.

Among Grace's board members, five had become particularly supportive of Peter Grace's efforts to oust Bolduc. This faction included Macauley, Virginia A. Kamsky, Charles H. Erhart Jr., Hampers, and Gordon J. Humphrey, a former U.S. Senator from New Hampshire. Macauley's charitable group, AmeriCares Foundation, counted Peter Grace as a founding board member and a daughter and granddaughter of Peter Grace as staffers. Kamsky's father had long been a top executive at Grace. Her consulting firm, Kamsky Associates Inc., collected $420,000 in fees from W.R. Grace in 1994 alone. Erhart was Peter Grace's second cousin. Humphrey drew consulting fees from the company as well and had long been associated with Peter Grace's various political activities. Humphrey also sat on the AmeriCares advisory committee and was an old friend of New Hampshire resident Hampers. A number of the directors, including Bolduc, also invested jointly with Peter Grace in ventures unrelated to the company, such as Brothers Gourmet Coffees and a private investment partnership, Catterton Group.

As Bolduc grew bolder as CEO, he began taking aim at Grace and other directors' perquisites. First he stripped Grace of his private company jet and reduced his personal company staff from 10 to 4. Then, in late 1994, Bolduc began discussing the need to disclose some of Grace's perks to shareholders. There were also rumblings that Bolduc intended to cut back sharply on the directors' lucrative consulting agreements.

LOOKING FOR AMMUNITION. But what really brought the dispute to a head was an incident that occurred last November. Bolduc and other top executives learned that J. Peter Grace III, the elder Grace's son, had used company funds improperly as he arranged to buy a unit that Grace was divesting. The younger Grace was asked to resign on Nov. 8 and did so the following day. J. Peter Grace III did not return repeated requests for comment.

At a meeting on Nov. 29 of a select group of directors, a solution was proposed: If the $1.4 million was repaid immediately, and the elder Grace resigned by yearend, the matter would not need to be disclosed to shareholders, since his son would no longer be related to a board member. Although the money was repaid, Grace saw the move as a ploy to force his resignation and refused to quit. For the elder Grace, say Macauley and others close to him, these moves were an affront to his family's honor.

At this point, the Graces--Patrick in particular--intensified their efforts to gather ammunition, putting together information on what they claimed were Bolduc's own questionable dealings. The gist of the allegations: Bolduc had the company award lucrative contracts to his friends, including one who owned a large auto dealership in Boca Raton and was hired to provide Grace with a fleet of cars. Another involved the company's purchase of a large warehouse in Baltimore from a Bolduc friend. Still another allegation involved a bid for a $40 million construction contract for a new Grace plant in Malaysia. One of the losing bidders was affiliated with a company based in Charlotte, N.C., on whose board Bolduc sits. Through his lawyer, Gerald Walpin, Bolduc denies any impropriety and says his ties to these individuals and firms were disclosed to senior executives or the board beforehand. To this day, none of the allegations of impropriety has been publicly disclosed or discussed by the full board.

Sources close to the company also say that a consultant with close ties to Peter Grace traveled to several Grace offices in the U.S. in search of evidence about sexually inappropriate behavior by Bolduc.

Grace was apparently spurred to action by his feelings that Bolduc had betrayed him. He had, after all, made J.P. Bolduc what he was: an up-and-coming corporate chieftain who could now count heavyweights such as Blockbuster Entertainment Group CEO H. Wayne Huizenga as a friend.

That Bolduc even found himself in such surroundings was a triumph of will over circumstance. He came into the world in 1939 as Joseph Jean Paul Raoul Bolduc, son of a Lewiston (Me.) bobbin maker. By the time he made it to Minnesota's St. Cloud State University on a baseball scholarship, he called himself Paul Ralph Bolduc. After graduating with a ba in business administration in 1961, he joined the U.S. Agriculture Dept. as a $5,540-a-year accountant. His name then: J. Paul Bolduc.

Bolduc's inauspicious beginnings stand in stark contrast to those of Peter Grace. A grandson of W.R. Grace, New York's first Catholic mayor, Peter Grace sprang from some of the oldest money in New York. After graduating from Yale University, he played world-class polo before immersing himself in the company. He expanded W.R. Grace & Co. from revenues of $296 million, when he took the company public in 1953, to $4.3 billion, when he was pressured to stand down in as CEO 1992. But despite his patrician roots, Grace could be crude. He may be best known to the public for such idiosyncratic pronouncements as "this food stamp program is basically a Puerto Rican program" (1983) and New York's troubles spring from "Cuomo the homo" and "Dinkins the pinkins" (1992).

Over the years, Grace had bought and sold such disparate businesses as Herman's Sporting Goods; American Breeders Service, which sells frozen bull semen to cattlemen; and the Houlihan's and El Torito restaurant chains. But when it came to selling off major assets--a steady shareholder refrain--Grace resisted. So, when Bolduc indicated to institutional investors that he would break up Grace's diverse units if the stock price didn't improve further, it just created another source of tension.

Bolduc probably could have continued remaking Grace if he had not made one final--and fatal--miscalculation. Until this point, Hampers, the powerful and autonomous nmc chief, had not taken sides in the escalating war. But in late 1994, Bolduc's moves to assert authority over nmc so antagonized Hampers that he threw his considerable weight in with the Grace camp.

SWEETENED SEPARATION. With that shift, Bolduc found himself without allies on the board. What little power he had derived from his sway with shareholders. Until almost the end, he had no idea how precarious his position was. "J.P. saw [the internal fights] as a minor irritant," says one big institutional shareholder who knew Bolduc well. "He was very confident [the Grace/Hampers faction] wouldn't uncover any business or operational problems."

Hampers was the wild card. A physician who co-founded nmc as a portable kidney-dialysis provider, he sold out to Grace starting in 1984--pocketing an estimated $100 million in the process--and stayed to head the operation. Fiercely independent, Hampers was left to run his own show, since he consistently delivered earnings and sales growth.

In mid-1994, Hampers says Grace began negotiations with Baxter International Inc. to merge part of nmc with Baxter's kidney-dialysis unit. The Baxter/nmc deal, which has never before been revealed and which Baxter refused to confirm, would have resulted in a $3 billion freestanding company, says Hampers, who originally backed the plan. By late summer, however, the deal fell apart over who would run the new company. "It was a matter of control," Hampers says. "We could not work out the governance."

Then, in December, the Food & Drug Administration cited nmc for selling nonsterile medical products for a second time. Sources close to Bolduc say he was enraged and sharply criticized Hampers. As part of his effort to rein in the independent executive, Bolduc unveiled plans to centralize nmc's billing and accounting functions.

That was the last straw for Hampers, who threatened to resign over such meddling. Bolduc was "a terrible person as a boss," Hampers says. "Bolduc had no grasp of what the operating people needed." Hampers says his dissatisfaction with Bolduc led him to agree with the Graces that Bolduc should go.

By then, sources say, Bolduc's days were numbered. At a one-on-one meeting on Jan. 13, Bolduc tried to iron out his differences with Grace, says Walpin. But the angry chairman refused to mend fences. Not long thereafter, retired federal judge Harold R. Tyler Jr.--who had been retained by the board to give an opinion about the need to publicly disclose the company payments made to Grace and his family--was also asked to look into the allegations of sexual harassment by Bolduc that had been compiled. On Feb. 28, Tyler told the board that "grounds existed to find that Mr. Bolduc had sexually harassed" five Grace employees. Bolduc, through his lawyer, denies the allegations, which he first learned of on Feb. 21. The identities of the women have still not been disclosed to Bolduc or the full board.

Bolduc was finished. In a late-night meeting on Mar. 1 with directors George C. Dacey, John A. Puelicher, and Eben W. Pyne, Bolduc agreed to resign and received a sweetened $48 million separation package. Both sides agreed to keep mum about the sexual-harassment allegations, and his resignation, for "philosophical differences" with the board, was announced on Mar. 2. Less than a month later, the sexual harassment charges were leaked to the press.

Macauley and Humphrey immediately moved that Hampers be named Grace's new CEO. Instead, the board picked a reluctant Thomas A. Holmes, a retired CEO of Ingersoll-Rand Co., who was seen as more able to step in and run a large industrial company while the board conducted a less hasty search. Macauley believes that if Hampers had pushed harder and been elected CEO, he would likely still hold that position today.

Major shareholders were stunned by Bolduc's departure. Only three weeks earlier, institutions representing about 35% of Grace's shares, had met with Bolduc. Investors felt Bolduc had put Grace on the right track. So when they learned of Bolduc's ouster from news services, the shareholders felt they were the victims of an end run by Grace.

A few days later, in a meeting with Holmes, investors grew increasingly angry about his refusal to provide them with any more details on Bolduc's departure. Shareholders also feared that Hampers, who had quickly begun a public campaign for the CEO's job, would be chosen. The company's largest shareholders insisted that the new CEO be an outsider with no ties to the Graces. After that meeting, Holmes hired lawyer Martin Lipton to guide the board through the morass of selecting a new CEO and avoid what threatened to be a slew of shareholder suits. One major shareholder believes that although Holmes initially thought the charges against Bolduc were reasonable, he gradually realized that the board had not understood all the subterranean forces at play. Holmes, a relative newcomer to the board, promised a clean, professional selection process using an executive search firm.

EMERGENCY MEETING. Hampers, meanwhile, continued lobbying heavily for the job. Although he had the backing of the Graces, he hired investigative firm Kroll Associates because he was convinced there was a "conspiracy" afoot to discredit him and deny him the job. Hampers allegedly also used Kroll to investigate the backgrounds of other candidates for the CEO position. One candidate for the job says Hampers appeared to be trying to come up with information to discredit rivals. Hampers and Kroll both deny this allegation.

The intrigue didn't end there. Board members loyal to Grace--and supportive of Hampers--began campaigning on behalf of the nmc chief. On Apr. 10, Humphrey sent an unsolicited letter to Miller Anderson Sherrerd, an institutional shareholder opposed to Hampers because he was an insider and tied to the old regime. Humphrey offered a personal testimonial to Hampers' professional abilities and character. "Dr. Hampers is well qualified to serve as CEO of W.R. Grace," wrote the former Senator in documents obtained by business week. "...He is totally Company motivated and has never sacrificed Grace's interests to his own or that of nmc." Humphrey closed the letter saying that he and "several board members who share the[se] views" would like to visit shareholders personally.

Meanwhile, Kamsky applied her own pressure. John J.F. Sherrerd, one of the principals of the same firm Humphrey was courting, shared in common with Kamsky a trusteeship at Princeton University. Kamsky offered to pay Sherrerd a visit, according to Nicholas J. Kovich, the portfolio manager who oversees the firm's Grace investment. She proposed bringing along Hampers. But two board members say that Holmes did not appreciate these maneuvers and put a stop to the proposed meetings.

Holmes had to move fast. Grace's big shareholders were threatening to withhold their proxies if a CEO candidate wasn't identified before the May 10 annual meeting. And Hampers' alleged background checks on his potential rivals made it imperative to keep the candidates' names secret. On Friday, Apr. 28, the board was notified of an emergency meeting to be held Monday morning in New York. It was only Sunday night, over dinner with Holmes, that Hampers learned he wasn't the nominating committee's choice.

Monday morning, Albert Costello was presented as the pick of the nominating committee, and Holmes pressed for an immediate vote. Costello won, with 13 votes. Hampers got votes from five board members: Macauley, Kamsky, Humphrey, Erhart, and himself. Two directors abstained. Macauley says he and others who had supported Grace and Hampers were outraged: "I thought it was abnormally quick," Macauley says. "I disagreed with the process." That may be a little bit true, says one big institutional shareholder with a smile: "By the time Hampers summoned his supporters together, he didn't have enough time" to block Costello's election.

But if he couldn't be CEO of W.R. Grace & Co., Hampers had an alternative. On May 4, he went to Costello's office and announced his bid for nmc. Costello says he was happy to see Hampers' offer. He knew he faced a difficult and time-consuming decision over whether to break up the company, as shareholders wanted. Now, the decision had almost been made for him. At Grace's May 10 annual meeting, the new CEO said that at the very least, nmc would be sold to the highest bidder or spun off to shareholders. "The die is sort of cast," Costello said after the meeting. But in a written response to business week, he denied that more sales of major assets are on the way. "I'm not here to preside over the liquidation of W.R. Grace," says Costello.

Peter Grace was an active player in the struggle over the company virtually until the day he died. Macauley and others who knew him well believe that Grace clung to life longer to finish the fight as best he could, even rising from his hospital bed to deliver a final speech to the board on Apr. 6. Too weak to finish it himself, Grace's wife completed his thoughts. "I have spent my life serving this company," Grace told the board. The "sad, even tragic, and unnecessary events of the past several months [were caused by] an effort by my successor to mislead you and attempt to embarrass me and my family, and pressure me into retiring from the board." Bolduc, through his lawyer, denies ever misleading the board.

After receiving last rites from John Cardinal O'Connor three times in a week, Peter Grace died on Apr. 19, just days before the annual meeting that would have marked his last day as chairman of W.R. Grace. He died with his title intact and with the knowledge that he had, in the end, bested Bolduc. "I got him," a longtime Grace confidant says he can picture Grace saying. "I got the bastard."

The Grace Endgame

Jan., 1993

After months of gently prodding the board, Bolduc is named CEO. Peter Grace, ill with cancer, remains chairman.

May, 1993

Bolduc tells shareholders that he will divest extraneous Grace holdings, such as the wholesale cocoa business and a frozen bull semen unit.

Feb. 11, 1994

Peter Grace and son Patarick, a company executive, pay a late-night visit to director Robert Macauley, outlining allegations of financial improprieties by Bolduc.

Summer, 1994

Bolduc talks with Baxter International about a joint venture with National Medical Care. Disagreement over who will head the merged unit scuttles the talks.

Oct.-Nov., 1994

Son Peter Grace III misuses company funds. He resigns and the money is repaid but Bolduc's handling of the matter enrages the elder Grace.

Dec., 1994

Angered over Bolduc's move to centralize NMCs billing and accounting in Grace headquarters, Hampers threatens to resign.

Feb. 7, 1995

Boluc meets in Boca Raton with a small group of Grace's largest shareholders. He indicates to investors that if earnings improvements don't boost the stock price, he'll break up W.R. Grace.

Mar. 2, 1995

Bolduc unexpectedly resigns, with no explanation given other than philosophical differences with the board. Outraged shareholders want Boluc reinstated immediately.

Mid-Mar., 1995

Hampers retains Kroll Associates to investigate the "conspiracy" to deny him the CEO post. Others say that Hampers had Kroll unearth damaging information about rival candicates for the job. Hampers and Kroll deny this.

Mar. 30, 1995

Allegations that Bolduc sexually harassed five female employees are leaked to the press. The company now maintains that the allegations led to Bolduc's ouster.

Apr. 19, 1995

Peter Grace dies at 81.

May 1, 1995

At a hastily called meeting, a split Grace board taps former American Cyanamid chief Albert Costello at CEO. Hampers's supporters complain the process is rused.

May 4, 1995

Spurned CEO candiate Hampers unveils an unsolicited $3.5 billion bid for NMC.

May 10, 1995

At Grace's annual meeting, new CEO Albert Costello says NMC will be spun off or sold to the highest bidder.By Elizabeth Lesly in Boca Raton, Fla.

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