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Bausch & Lomb's Board Puts On Its Glasses

News: Analysis & Commentary: EXECUTIVE SUITE


Life just got more complicated for Bausch & Lomb Inc. Chief Executive Officer Daniel E. Gill. Under pressure sparked by a BUSINESS WEEK Cover Story (Oct. 23) detailing a pattern of accounting and ethical abuses at B&L, the company's somnolent board is waking up.

At a 6 1/2-hour meeting on Oct. 24, the board grilled Gill and other top executives, then decided to form a committee of four outside directors to investigate. "Although we have no reason to believe there was a systemic problem," says retired banker William Balderston III, who will chair the committee, "we are very seriously concerned about the assertions made in the article about our practices."

EYE-OPENERS. While corporate governance experts applaud the board's move, many contend it should have come sooner. Most of the concerns relate to 1993, when B&L managers engaged in a raft of questionable practices, including faking invoices and secretly assuring distributors they didn't have to pay for goods that were shipped. The tactics backfired in 1994, when B&L reported its first decline in profits after 12 straight years of double-digit growth, and the Securities & Exchange Commission launched an investigation into the company's accounting practices.

Convinced at the time that the problems were caused by a few divisional executives who since have left, directors kept Gill in place. They did press for and obtain tougher financial controls and new ethics guidelines. And early this year, the board's audit committee carefully reviewed B&L's 1994 financials.

But several directors concede that some revelations in the BUSINESS WEEK article, such as allegations that a Miami unit may have indirectly aided money laundering, were news to them. "That's why we formed the committee, to look into these things more thoroughly," says Balderston. The committee will examine whether executives were candid with directors about the reasons behind the accounting problems, and the extent to which they were caused by a culture in which results were demanded at virtually any cost.

There may be another reason for the probe: the CEO's reputation has been severely damaged. If the board decides to keep him, it must establish that he wasn't culpable in the accounting brouhaha. "There's a cloud over the management and the board," says John M. Nash, president of the National Association of Corporate Directors, a nonprofit body devoted to encouraging sound practices among corporate boards. "It's better to clear the air one way or another." In a statement to employees, Gill welcomed the probe: "We look forward to the conclusion of their work so we can put these issues behind us once and for all."

Gill also is feeling the heat from investors. B&L on Oct. 18 announced disappointing third-quarter earnings and told analysts fourth-quarter profits would likely be lower still. B&L's stock, which had dropped from a recent high of 44 in mid-September, sank to 36 after the news. "This company is inept," says one big institutional holder of B&L stock. "We have clearly conveyed our disappointment and discouragement to the company and to several directors. It's beyond me why they haven't already thrown Gill out of there."

Meanwhile, the SEC investigation continues. Sources familiar with the inquiry believe the agency is focusing on B&L's contact-lens division, a hotbed of questionable practices. One previously unreported practice being probed: Whether B&L inflated sales by offering some distributors hidden discounts, recording the full amount as revenue, and rolling over the shortfall as an unpaid bill for quarter after quarter. B&L says it has "adequately addressed" the unit's problem.

Sources say the SEC is aiming to determine whether Gill knew of these and other shenanigans. Given the layers of management insulating him, he may well be cleared. But the burden of proof for B&L's board is much lower: Did Gill create a climate in which such practices were widespread? If so, the inquiry may be a step toward his ouster.By Mark Maremont in Boston

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