There is no easy path to good corporate governance. But if anyone has been down it, it’s surely C Alan MacDonald. Over his 29-year career, he has run the management gamut from one end of the governance spectrum to the other. As a new managing director of Directorship, a Greenwich, Connecticut-based corporate governance consultant, MacDonald is a governance tour guide, spreading knowledge gleaned from his odyssey.
The road traveled by MacDonald is a snapshot of corporate America’s development in this half century. Even his first lucky break would be unlikely in today’s corporate climate: the young Cornell Hotel School graduate easily landed a job with his best friend’s father’s company, the Stouffer Corp. That was back in 1955.
‘Stouffer was still run like a family company even after it listed on the NYSE,’ comments MacDonald. ‘That’s true of a lot of family companies that have gone public – even today.’
This clubby culture was shattered, however, when Stouffer got scooped up by conglomerate Litton Industries in 1967. ‘We went from a small family company to a large, highly visible, very short-term thinking one, with weekly phone calls to track profit,’ recalls MacDonald. ‘Soon the paper castle came tumbling down.’
Indeed, Litton’s stock plummeted from $119 to a low of $3. ‘That’s what short-term thinking can do to a good business with lots of valuable companies,’ notes MacDonald, who by then had risen to the position of Stouffer Foods president and chief executive officer.
MacDonald got a taste of a very different kind of thinking when Stouffer was acquired by Nestlé, the Swiss food giant, in 1973. ‘We went from a very short-term culture to extremely long-term thinking among top management.’ He recalls being scolded by Nestlé brass for producing monthly P&L statements: once a quarter at the most, he was instructed by the Swiss, ideally he should produce them twice a year.
Even Nestlé’s preference for an over-the-counter ADR instead of a full NYSE listing is partly due to its long-term outlook, MacDonald avers. ‘The pressures of quarterly reporting and disclosure demanded of a Big Board company mean not only that competitors get information, but they contribute to the problem of short-term thinking in corporate America.’
Board Buffer
MacDonald retired from his post of president and CEO of Nestlé Foods in 1991, when the company consolidated its US operations and elevated management from its Carnation subsidiary. Around the same time, MacDonald embarked on his next governance adventure, joining the board of American Maize Products. This turned out to be his ‘MBA in how you shouldn’t do it, an education in how to change.’
Stamford, Connecticut-based American Maize was then headed by a third generation chairman & CEO whose sister also controlled a big chunk of the company’s voting shares. The sister took him to court for mismanagement, forcing the replacement of ‘old cronies’ on the board with independent directors. One of them was MacDonald, who was appointed chairman of the board’s executive committee while a new CEO designate eased into the job. ‘I had to be a buffer between the outgoing chairman, the new directors and the new CEO.’
MacDonald says implementing good business decisions at American Maize was like pulling teeth because the old CEO refused to treat it like a public company. The independent directors tried to explain that majority or minority, he had a responsibility to the shareholders to optimize the company’s value. ‘Here’s somebody who is a great sailor. So how could he not even be capable of making simple business decisions?’ MacDonald marvels. Eventually the new directors forced a variety of ‘good’ moves on American Maize, including spinning off pieces of the company.
In the meantime, MacDonald undertook a stint as chairman and CEO of Lincoln Snacks while adding other boards to his roster of duties. One of those was the antithesis of American Maize, situated at the opposite end of the governance spectrum. At Lord Abbett, a mutual fund firm, ‘the six independent directors clearly represent the shareholders, making sure management manages those mutual funds appropriately.’
They are shareholders in fact as well as in theory, MacDonald reports, and most of his retirement savings are in Lord Abbett funds: ‘This is a company with outstanding board governance standards. I can look over the whole ball park between American Maize and Lord Abbett and clearly see all the governance issues in between.’
Still Keen
Many directors with that perspective could well become jaded. But not MacDonald. At Directorship, he’s pushing those governance issues with the same zeal he once applied to Stouffer’s frozen food. And he foresees no shortage for his product: ‘Calpers and the like are trying to bring a cookie-cutter approach to governance problems,’ he says, citing the $108 bn California pension fund’s list of 28 governance suggestions. ‘But every company is different, just like people have different heartbeats, chemistry and things that make us tick. Companies are going to need Directorship to put in place appropriate solutions one by one.’
For example, MacDonald notes Calpers’ current high profile feud with Heinz over governance, and insists ‘there’s no way anyone is going to organize Tony O’Reilly at Heinz like some Caspar Milquetoastá. What is right for Heinz? You can’t knock O’Reilly’s record, so the way the board is doing it is probably the right way.’
Or take the limit of three or four boards per director suggested by Calpers and others like the National Association of Corporate Directors. MacDonald stomps on that recommendation, pointing to his friend Ray Troubh, who sits on twelve boards. ‘I was with Ray on the board of American Maize and he made a huge contribution at monthly meetings. He’s a lawyer who understands governance from beginning to end, and those twelve companies on whose boards he serves would be less well managed if he wasn’t there.’ MacDonald adds that Troubh is also older than Calpers’ maximum age cut-off.
Premium Proof
Proof of the benefits of good board governance is in new evidence from McKinsey & Co, says MacDonald. Institutional investors, chief executives and directors were asked to compare two well-performing companies and say whether they would pay a premium for the one with better governance. The results show that investors would pony up an 11 percent premium, with directors chalking up 11 percent for good governance and chief executives 16 percent. ‘How hard would you have to work on sales and profit to boost your market cap the same 11 to 16 percent?’ MacDonald demands. ‘Those results make for a potent selling point.’
So corporate America is moving rapidly up the spectrum of good board governance, MacDonald says, with around 18 percent penetration already achieved. He picks that number because of its significance to the household appliances market: ‘It takes a long time for a new product to reach 18 percent household penetration. Once it does, you can be very confident that it will go the whole way. One of these days we’re going to look up and find that corporate governance has gone the whole way…’
After a pause MacDonald adds, ‘… if they let us do it on a voluntary basis and don’t regulate it.’ That ominous ‘they’ is government, and MacDonald warily regards signs that regulators might step in with governance guidelines. He returns to the theme that companies must be allowed ‘to respond to the spirit of good governance principles, each in its own way. The differences in corporate cultures, the nature of the businesses, the personalities of executives and managers, the internal rhythms are so different that there is no one standard formula that is appropriate for all.’
For instance, on the subject of compensation, MacDonald points to the trend towards board diversity. It may make sense for investment bankers, outside CEOs and lawyers to get paid all in stock, but that certainly wouldn’t attract many professional communicators, human resources experts, marketers or academics.
Compensation Combination
‘Business today needs more entrepreneurial thinking on boards. It needs new and different talents to meet new and different needs. If you’re a university professor or a young entrepreneur, you need some cash as part of your compensation. Directors should be paid in a combination of cash, stock and stock options, and there is no single right answer. It depends on the company, and on the individual director.’
MacDonald looks forward to an issue of Directorship, the firm’s monthly newsletter, showing the chronic problem of directors with ownership positions that are tiny compared to their overall wealth.
Clearly good board governance has a long way to go just in the US. Yet MacDonald is already sounding out business opportunities overseas. In October he traveled to Madrid to address a group of European corporate directors. With a nod to investor relations, he announced that governance will not come down to facts but to the perception of those facts: ‘It is no longer enough simply to communicate your side of the issue. It is not what you say or write, it is what shareholders hear and see.’ And he confessed to feeling like Paul Revere. But instead of hollering ‘the British are coming,’ he warned that ‘the shareholder activists are coming!’
