Dec's Board Has Woken Up. Now Comes The Hard Part

Just over two years ago, directors of Digital Equipment Corp. did what many thought they never would do: fire their friend, the floundering company's founder and chief executive, Kenneth H. Olsen. But even under new management--and despite cost cuts, strategic shifts, and management changes--DEC is still mired in muck.

On July 26, the computer maker reported flat revenues of $3.9 billion for the quarter ended July 2 and an operating loss of $160.4 million--higher than expected. DEC's stock ended the day at 193/4--up 1, thanks to the stabilized sales--but still near its 52-week low, showing the market's skepticism about the restructuring plan CEO Robert B. Palmer announced in mid-July. DEC watchers, increasingly, are asking questions: Why are there no signs of progress? Is DEC's plan to return to profitability by yearend workable? How long will Palmer last?

Here's another question that needs asking: What is DEC's board doing now?

IRON FIST. By its account, a lot. Directors realize that their job didn't end when they chose Palmer, and they have begun delving deeper into DEC's business. But they have not mustered the gumption of activist boards at General Motors Corp., Zenith Electronics Corp., and other struggling companies, which put new CEOs on strict regimes. The problem stems from the Olsen era: DEC's board wasn't doing its job when the company was doing well and now, hidebound by convention and crippled by a lack of knowledge, it is struggling to catch up. As Palmer puts it: "Had the board been educated on the industry and on what our competitors were doing, we would have moved sooner. Directors didn't have the information."

Until his ouster, Olsen ran the board with an iron fist. "Ken felt it was his company even when 95% of the stock was owned by the public," says Director Thomas L. Phillips, former CEO of Raytheon Co. Adds Director Robert R. Everett, former CEO of MITRE Corp.: "When things were going well, we just listened."

Times have changed, directors say. They're getting more data, probing DEC's strategic plan, and working closely with Palmer. Talk flows freely at meetings. Dinner meetings are no longer mere social occasions. Some directors are seeking out top managers for talks and are visiting plants. Starting in August, directors will review results with managers of newly created divisions, not just with Palmer and the chief financial officer. And DEC's 10-member board got new blood--former Nynex Corp. Chairman Delbert C. Staley and Economics Studies Inc. President Kathleen F. Feldstein.

Still, DEC's board hasn't gone far enough. Take the new directors. Phillips says he proposed Feldstein and Staley, then "Bob Palmer interviewed them, and he made the decision to invite them." That's hardly a way to establish a new director's independence--part of the problem under Olsen.

DEC's directors are bucking current wisdom on another boardroom issue: They haven't met without Palmer. "We haven't felt it necessary, and I think such a meeting would undermine him," Phillips says. But notes John A. Pound, a governance expert at Harvard: "It's becoming established practice for directors to meet privately at least once a year to evaluate senior management." Pound adds that they should also meet with large shareholders.

SOFT TARGETS. Most important, directors are still following when they should be leading. After working with Palmer on a strategic plan and goals, they should set reasonable timetables for their execution. At DEC, the process was reversed. Palmer laid out his own aims for a return to profitability, rationalizing the business, and downsizing, then presented them to the board. Says Phillips: "He picked the fourth quarter as a goal. His job is not in the balance if he does not make it, but the goal is that quarter or the one immediately thereafter." Business conditions can always interrupt timetables, but why start out with a mushy goal? On July 27, Palmer already started hedging on the timetable.

Arguably, directors could be working so closely with Palmer that the origin of a goal doesn't matter. But Phillips says directors were "shocked" when DEC reported a $183 million loss in the quarter ended Apr. 2. "It was a disaster, and we said, `Bob, the situation is urgent, and we must deal with it."' Why weren't they prepared for the number? Either directors aren't working as intimately with Palmer as they think or Palmer himself doesn't have a good handle on the company's business.

Good boardroom practices don't necessarily mean good results. And DEC's board seems to be trying to do the right thing--especially lately. But DEC might have a far better chance of surviving in the fastest-paced business around if its directors took more steps to get themselves up to speed.

Before it's here, it's on the Bloomberg Terminal.