Tales From The Boardroom WarsJudith H. Dobrzynski
Dale M. Hanson sinks into a couch in Anaheim, Calif.'s Hyatt Regency Hotel. The normally upbeat chief executive of the $80 billion California Public Employees' Retirement System is subdued, even melancholy. Less than 24 hours before, on May 16, Hanson had informed the CalPERS board, meeting here, that he was quitting. After seven years of fighting for management accountability and boardroom reform--not to mention managing a fund with 1 million beneficiaries--America's most prominent activist shareholder was leaving to become CEO of a new investment company. Now, Hanson starts to relate what he saw at the revolution.
And revolution it was. At one company after another, the balance of power shifted as investors forced the ouster of CEOs or other changes. One tale shows how rebuff turned into respect. In January, 1990, when Hanson wrote General Motors Corp.'s directors to complain about its performance, then-Chief Executive Roger B. Smith--without consulting the board--told the fund to mind its own business. That August, when Hanson wrote Smith's successor, Robert C. Stempel, requesting a meeting, General Counsel Harry J. Pearce called back asking when. By November, 1992, when John F. Smith Jr. replaced the ousted Stempel, Pearce was inviting Hanson to visit Smith.
Hanson was in the thick of headline-making battles at Westinghouse, Sears, American Express, IBM, Advanced Micro Devices, and Time Warner, plus many more events behind the scenes. All told, he has met with 65 CEOs of 56 companies and held many talks with outside directors.
As Hanson tells it, CalPERS' campaign was studded with lucky accidents, mistakes, and embarrassing moments. He reveals how the seminal idea of writing to GM happened to come up during secret talks in 1989 with Business Roundtable members at Treetops, the Champion International Corp. mansion in Stamford, Conn., where Mike Todd proposed to Elizabeth Taylor. He recounts how once, as he escorted Paul E. Lego, then CEO of Westinghouse Electric Corp., from CalPERS' Sacramento headquarters, they ran into American Express CEO James D. Robinson III in the waiting room (both resigned under pressure within months); how Roger Smith, when ordered by GM's board to meet Hanson, pounded the table and blamed the carmaker's problems on the Japanese, lawyers, and unions; and how Texaco Inc. chief James W. Kinnear phoned him in Wisconsin one weekend and, mistaking the voice of Hanson's 81-year-old father for his, charged the retired dry cleaner with betrayal.
Hanson says, too, that his mission would never have been accomplished without help from CEOs such as TRW Inc.'s Joseph T. Gorman and, eventually, Kinnear. "We know he convinced others to talk to us."
At first, Hanson and CalPERS General Counsel Richard H. Koppes, his chief accomplice, needed that help. In the 1980s, "if you were not Forstmann Little or KKR or Carl Icahn, shareholders were a joke," Hanson recalls. "We would have never guessed where we are today."
Getting there brought out critics. Some say CalPERS won its mammoth reputation because of its size, not Hanson. Others have blasted Hanson as a publicity hound eager for a political career. Still others nicknamed him "two-dinner Dale," claiming that CEOs could buy him off with a little schmoozing.
WATCHDOGS. Hanson, however, has no illusions that a revolution is a dinner party. True, some CEOs do stonewall, such as Boise Cascade's John B. Fery. "I don't know if that company will ever be saved," Hanson says. While Boise maintains that it's on track to profitability, based on price increases in its key paper grades, CalPERS would call Boise a work in progress.
By Hanson's account, CalPERS has let enly one chief executive off the hook: Champion's Andrew C. Sigler. And that, Hanson says, was because Sigler has two big watchdogs in shareholders Lau-rence A. Tisch and Warren E. Buffett.
Hanson came to be a governance kingpin by accident. When he joined CalPERS in April, 1987, the fund had started, willy-nilly, to file resolutions against poison pills and for confidential proxy voting. Hanson didn't plan to pay much attention. Koppes, though, had just returned from McDonald's Corp.'s annual meeting, where he fruitlessly advocated an anti-poison-pill measure while management announced record profits and a stock split. "Rich took me aside, and said, 'It's not working; there's no focus,'" Hanson recalls.
The two decided to concentrate on poor performers, heeding advice from the corporate world--most notably from General Mills CEO Bruce Atwater and New York attorney Ira M. Millstein, an adviser to the Business Roundtable. CalPERS began devising a system to choose a dozen targets a year.
Meanwhile, more pressing matters surfaced. In spring, 1988, raider Carl C. Icahn made a run at Texaco. CEO Kinnear sought support from shareholders, and Hanson, doubting Icahn's financing, agreed to vote with management. Texaco won--and Hanson wanted something: shareholder input on directors. Nothing came of two meetings with Kinnear that summer and fall. "It was clear that they took us to the dance but they didn't want to take us home," Hanson says.
Over Thanksgiving weekend, he and Koppes decided to file a resolution seeking creation of a shareholders' advisory committee. Then, they put out a press release. "We don't believe in shareholder committees," Hanson confesses. "We needed to get their attention." They did. That's when Kinnear gave Hanson's father an earful. Kinnear says he talked a lot with Hanson but doesn't recall that incident. In the end, Texaco agreed to consult with shareholders on director qualifications.
GETTING LUCKY. CalPERS' next leap forward came the following year at TRW. Without yet knowing how to define poor performance, it filed a resolution calling for a shareholders' committee and wrote the company asking for a meeting. "It was a screwup," Hanson admits. "TRW had suffered just a one-year blip in its airbag business."
Even so, smiles Hanson, "we got lucky." Although neither Hanson nor Koppes expected to meet with the CEO, Gorman invited them to dinner at TRW's guest house, near its Cleveland headquarters. The discussion went so well that Hanson decided to ask to meet some TRW directors. Surprisingly, Gorman didn't hestitate. A few months later, when the duo went back to Ohio, their luck held. Because of a family emergency, Gorman couldn't attend. But he told them to see the directors without him. "That's commonplace today, but it wasn't in 1989," Hanson says. "Joe had real courage."
TRW proved key: "We learned the importance of meeting with directors. We wanted to see if there were any lights on--were they representing us and was there any accountability."
If its lesson on directors started with a break, CalPERS' most visible victory began with an offhand question. Late in 1988, eager to thwart the assault on CEO power, the Business Round- table's governance task force--headed by Sigler and including Atwater--invited a few pension-fund managers to dinner in New York. It went nowhere. "I left at least 10 times for a smoke because everyone was making speeches and no one was talking," Hanson recalls. Still, the same cast agreed to two sessions at Treetops.
These, too, produced little substance. At the talks in fall, 1989, Koppes asked if there was any company everyone could agree was poorly run, any company where the board was not doing a good job. "GM," one CEO piped up--touching off a discussion of what could be done. Millstein proposed that shareholders write a letter--though no one volunteered. On the plane back to California, Koppes told Hanson he wanted to do it. "Sure, go ahead," Hanson said.
MILESTONES. The dominos soon began falling: GM's aroused board ordered Roger Smith to meet with Hanson; it subsequently fired Stempel and named director John G. Smale chairman; Jack Smith became CEO; and this March, the board issued a 28-point governance credo. Cal-PERS promptly sent copies of GM's guidelines to the CEOs of 200 top companies, asking for a response by Aug. 1.
There were other milestones. In August, 1991, after CalPERS protested ITT CEO Rand V. Araskog's hefty pay package by seeking votes against directors, Araskog flew to Sacramento. "He said, `I'm here because my board told me to get out here...they don't want me to be your poster boy,'" Hanson says. "It was clear to us that the no vote had made an impression"--though CalPERS got just 1.5%, half of that its own stock.
There was also Avon Products, where CalPERS helped start regular meetings with big shareholders; Lockheed, which now consults big shareholders on directors and business issues; and USAir, where one director admitted that the board should have questioned the 1987 purchase of Piedmont. But according to Hanson, the director said that back then, speaking up "was equivalent to flatulence in church." Now, thanks to Hanson and other activists, more directors are asking questions. "Dale has won great respect in the corporate community," says Atwater. "There's pretty good agreement on these issues."
Hanson now wants to "institutionalize some of the gains we've gotten." Hence those 200 letters. "It's to get directors thinking about what they do and why they do it." Hanson's last day is June 30; he doesn't wants his successor to have to teach refresher courses in Corporate Governance 101.