The Secret War Inside Grace & Co.

The roots of the current management crisis at W.R. Grace & Co. go back to late 1992. J. Peter Grace had fallen ill with cancer, and his longtime lieutenant J.P. Bolduc, former executives say, began pressing the board to name him chief executive. The board--loyal to Grace but knowing the octogenarian executive needed to be eased out--agreed. In 1993, Bolduc became the first person outside the Grace family to head the chemical and health-services company. Peter Grace, who had been CEO for 47 years, remained chairman.

And Peter Grace remained bitter. For the next 21/2 years, as former executives and other sources close to the company tell it, Grace simmered while Bolduc stripped him of the rich perquisites he and his family may have regarded as their birthright. Bolduc took away Grace's private Gulfstream IV jet, and he trimmed Grace's personal corporate staff from about 10 to 4. Last November, he insisted that the company disclose in the proxy millions of dollars of perks and loans made to the Grace family. But Bolduc pushed too hard, and the backlash was severe. On Mar. 2, he resigned, citing differences with the board.

What really lay behind Bolduc's fall from grace? First came reports that Bolduc had been forced out after insisting on disclosure of the Graces' perks. Outraged institutional shareholders applied such pressure that Peter Grace and nine other board members agreed not to stand for reelection at the annual meeting on May 10. But many insiders remained disturbed by the way events unfolded at Grace. In a Mar. 23 memo to other board members obtained by BUSINESS WEEK, director Robert C. Macauley complained that "we are living a lie." And, finally, on Mar. 30, the company said publicly that Bolduc had been asked to resign after several employees accused him of sexual harassment--charges Bolduc denies.

The real story, as pieced together by BUSINESS WEEK, however, may be far more complicated. Former executives and others close to the company contend that Bolduc's downfall came after a small group of Grace executives and outside board members became convinced that Bolduc had to go.

A key figure in Bolduc's departure is Constantine L. Hampers, a Grace executive who runs its National Medical Care Inc. unit. It has been dogged by the Food & Drug Administration, which has cited it for selling nonsterile medical equipment several times since 1993--but it is also Grace's biggest profit generator. The company says the problems have been resolved.

As Bolduc moved to centralize Grace's operations and lower overhead, Hampers grew increasingly angry. Hampers says that last December he told the board he would resign when his employment contract expired in 1996. Hampers acknowledges that he wanted Bolduc gone, though he says his threat to leave was not a ploy to oust Bolduc.

Hampers is a complex character. A physician who started NMC in 1968, he sold it to W.R. Grace for approximately $238 million in 1984. Hampers in 1988 was charged in a 14-count indictment with smuggling the skins of endangered Mexican jaguars and ocelots into the U.S. He pleaded guilty to a reduced charge in 1990, according to the company's proxy. He remained very much in charge of NMC, and he didn't think much of Bolduc. Says Hampers: Bolduc "was terrible to work for. He never understood operating. I just did not want to work for him."

Hampers became allied with other Bolduc critics inside the company. A former executive says they include Peter Grace, his son Patrick Grace, and three outside board members--former New Hampshire Senator Gordon J. Humphrey, consultant Virginia A. Kamsky, and Macauley, founder of a Catholic charity. Humphrey and Kamsky did not respond to requests for interviews. Some directors on the 22-member board "felt [Bolduc] was pushing Grace too far," says a former executive whose account was confirmed by several others. "Then Gus Hampers came out of the woodwork. They got together to support Gus Hampers as CEO and get rid of Bolduc."

At some point, a private investigator came into the picture. Hampers says he hired Kroll Associates Inc.--and is personally paying for its services. Hampers says he is convinced that there is a campaign afoot to prevent him from getting the top job at the company, and that is why he hired investigator Jules Kroll. "The purpose was to look into who was conducting a campaign of innuendo and rumors" against Hampers, Kroll says.

The former executive contends, however, that Hampers actually hired Kroll to investigate Bolduc. Hampers denies that. "I'm not looking for dirty laundry [on Bolduc]. I'm looking for a conspiracy against me," he says.

Meanwhile, Grace's board in February launched its own investigation of Bolduc, hiring retired federal Judge Harold Tyler. His original assignment was to give an opinion on the necessity of disclosing the Grace family perks in the proxy. Then, allegations that Bolduc had sexually harassed female employees came up, and Tyler was directed to investigate that issue as well, Macauley says.

LATE-NIGHT DEAL. Damaging information on Bolduc was easily found, according to several former executives who paint Bolduc as a rough-hewn taskmaster, though smart and effective. "J.P. went around and harassed all the people all the time," says the former executive. According to a company statement, Tyler told the board on Feb. 28 that "grounds existed to find that Mr. Bolduc had sexually harassed certain employees." Tyler did not respond to BUSINESS WEEK's request for an interview. Through an attorney, Bolduc denies ever acting inappropriately.

But the Tyler report sealed his fate, and Bolduc negotiated a $20 million severance package in a late-night meeting with director Roger Milliken. In his Mar. 23 letter to board members, Macauley questioned the propriety of the payment. "Neither I nor many of the other board members have the faintest idea as to the reasoning," it says.

After the upheaval, Hampers publicly offered himself as the best candidate to be the next CEO, and Macauley says the majority of Grace directors support him. But investors are violently opposed to the idea, since Hampers is regarded as too closely tied to the Grace family. The company "sanctioned a witch-hunt against their chief executive," says one institutional shareholder who has been agitating for corporate-governance reforms. "Our primary objective is that Gus Hampers not get the job." His hope: that the litigation-wary board will hire an outsider as CEO.

After all the Sturm und Drang at Grace, though, it may be tough to lure a good manager to take the job.

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