STRATEGY

Governing: Boardroom Makeover

Like many company owners, Richard Domaleski set up a board of directors only to realize he had done it all wrong.
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Governing

Playmakers. people who lead and live the team. That's what Richard Domaleski wanted from his board. Instead, he had caretakers. People along for the ride. And who you have helping guide your business can be the difference, Domaleski soon learned, between a faltering company or one headed in the right direction.

When the founder of World Energy Solutions Inc. assembled his first board in 2000, it consisted of nine investors and friends. The group met quarterly, generally affirming Domaleski's every action. But the Worcester, Mass., company, which auctions electricity and gas credits, lacked customers and financing. It needed more from its board to survive. After eight frustrating months, Domaleski says, "I walked into a meeting and told them, bottom line, we haven't been effective." One director agreed to join the company as chief operations officer. The rest resigned. Recalls former board member Tom Sacco: "No one, that I really know about, opposed the idea. Rich hadn't taken a salary since the company started and things weren't looking too good. Change was needed."

Though he didn't know it then, in fomenting a boardroom shakeup more than a year before the Enron scandal, Domaleski was at the leading edge of a trend. In companies large and small, a rethinking in business governance is taking place. Not long ago, the stereotype of mahogany row as a club for Old Boys seeking frequent flier mileage approximated the reality of a director's portfolio. Now, business owners and investors demand more, and the consequences of this are profound. For one thing, people are opting not to join boards. And for another, companies like World Energy are starting over.

The environment has created, in the words of Ralph D. Ward, publisher of the online newsletter Boardroom Insider, a "talent gap" between the demand for directors and the supply of willing, qualified prospects. "Higher governance workloads, limits on the number of boards on which a director can serve, and new liability dangers make it much harder to recruit top board talent," he says. And different kinds of skills are in demand today. The gold standard used to be sitting CEOs, but with financial expertise at a premium, CFOs are becoming a much hotter ticket.


"The new board rolled up its sleeves and achieved goals even we didn't think were possbile," says Richard Domaleski, who reduced his board's size from nine directors to five.

As they remake their boards, business owners no longer take sole responsibility for landing top-notch directors. Big companies are turning to professional recruiters, whose searches start at $60,000, while smaller firms are using committees of employees and others to vet candidates. Companies are also doing better background checks -- hardly surprising given the recent slew of criminal allegations at the director level. Specialists like International Business Research of Princeton, N.J., which has seen an uptick in business in the last year, handle board of director screenings for between $4,000 and $6,000 per person.

Another tactic, used by Domaleski when he revamped World Energy's board, is to try before you buy. CEOs are requiring probation periods before inviting candidates to become full-fledged directors. In Domaleski's case, "We invited the best people to see our business, get excited, and over time, they committed," he says.

The second time around, Domaleski decided a five-person board would be better than nine members, and he looked for people who could add value in three areas: raising capital, startup operations, and new customer acquisition. Within a few months, he signed up an ex-energy executive, a start-up veteran, and a Wall Street financier. The board agreed to meet monthly, and 100% attendance was mandatory. World Energy also instituted an unorthodox compensation package to reward directors for leading special projects like new software implementation; it converted what consultants might earn for their time into stock options.

The new board clicked. The Wall Street financier helped to secure $1 million in funding in September 2001, just eight weeks after joining the board. And at presstime, the company projected $3 million in revenue in 2002 -- nearly 10 times what it grossed in 2001. "We survived a market of 60 competitors, and now we're one of only three or four companies left," says Domaleski. "The new board rolled up its sleeves and achieved goals even we didn't think were possible."


Three Notorious Shakeups


The Carter Administration
The shakeup: The role of president, as George W. Bush commented in 2000, requires vision, management, and an eye for talent -- not so different from that of CEO. But during the first years of Carter's presidency, his Cabinet was anything but businesslike, beset by infighting and meetings that ambled. So Carter replaced one-third of his unsuccessful Cabinet in 1979, bringing in the no-nonsense Hamilton Jordan as chief of staff.
The outcome: Many pundits continued to criticize the president for making the changes too slowly, and Carter lost to Reagan in the next election.

Apple Computer
The shakeup: One of the first acts during the second coming of Steve Jobs as CEO in 1997 was a major board overhaul. Larry Ellison, chairman and CEO of Oracle, Jerry York, former chief financial officer of IBM and Chrysler, and Bill Campbell, CEO of Intuit were all brought on as Jobs replaced the former CEO, Gil Amelio.
The outcome: Jobs took over when Apple stock was lower than it had been in five years. Thus began the reemergence of Apple. Still, the directors -- insiders who sit on each other's boards -- have been criticized for Jobs' compensation package. In the last two years, he received stock options worth $27.5 million, in addition to $90 million for a corporate jet.

Tyco
The shakeup: Maligned for being slack during the disgraced tenure of former chairman Dennis Kozlowski, all nine of the Kozlowski-era directors have departed or plan to soon. The mass exodus will give new Tyco chief executive Edward Breen a clean slate.
The outcome: Costly, at least for former board member Frank Walsh Jr., who plead guilty to securities fraud in December and agreed to pay $22.75 million in fines and restitution as part of the deal with federal prosecutors.


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Last updated: Mar 1, 2003




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