Corporate Governance: Private Time
As more boards meet without management present, it makes for
franker talk -- and anxious CEOs
By George Anders
Thw Wall Street Journal
Monday, October 9, 2006
When a chief executive officer leaves a board meeting, is it
time for everyone else to go home? Or is the real corporate
drama about to begin?
Increasingly, the answer is the latter.
While it has always been possible for independent directors to
meet without top management present, such "executive sessions"
have roared into prominence in the past two years, ever since
the New York Stock Exchange and Nasdaq -- in an effort to
improve governance in the post-Enron era -- told outside
directors of listed companies to meet regularly in private.
Directors use these private sessions to test ideas, big and
small, with one another until they are ready to present a
unified face to top management. In extreme cases, they huddle
alone for some frank talk about whether the CEO deserves to
This year, 75% of big companies expect their directors to meet
regularly in executive session, in addition to their regular
board work, according to a survey by the Business Roundtable, a
Washington-based alliance of large corporations' CEOs. That's
up from 55% in 2003, the first year the group conducted the
The change is altering the boardroom balance of power in
unexpected ways. "It's been difficult for some CEOs to adapt to
being excluded from the boardroom," says Stuart Cable, a partner
in the Boston law firm of Goodwin Procter. "Even if there isn't
a specific agenda to the executive-session meeting, CEOs can
feel threatened by not being in the room."
In some cases, corporate bosses are right to be alarmed. The
average time in office for CEOs has been shrinking steadily in
recent years. Directors aren't tolerating flabby excuses for
underperformance or vague assurances that things will get better
in due time. Instead, independent directors who fear a company
is heading off course can use executive-session meetings to
reinforce each others' concerns and settle on a plan of action.
A prime case in point is Hewlett-Packard Co., the Palo Alto,
Calif., computing and printing company. There, independent
directors in early 2005 eased aside high-profile CEO Carly
Fiorina, amid concern that H-P wasn't getting the expected
benefits out of its giant acquisition of Compaq Computer Inc. a
few years earlier.
Just weeks before her ouster, Ms. Fiorina publicly stated that
her relations with the board were "excellent." Directors saw
things differently. Operating margins in key computer markets
were disappointingly low. Earnings weren't meeting
expectations. And Ms. Fiorina was resisting the board's call
for handing over more operating authority to other people.
On their own, outside directors decided their best hope would be
a new CEO. Patricia Dunn, who was H-P's non-executive chairman
until last month, revisited that decision in a phone interview
this past summer. As Ms. Dunn observed: "It would be hard to
make a decision whether or not to make a change at the top if
you couldn't meet without the person in question."
In H-P's case, switching CEOs was just the start of a massive
wave of board turbulence. The company's board in the past two
years has conducted aggressive probes of how journalists came to
know boardroom details. Those probes have become a major
embarrassment for the company, with California and federal
authorities investigating the methods used. Ms. Dunn and two
other directors eventually left the board, and she was among
several people indicted last week on state charges in connection
with the probes. (Through her lawyer, she vowed to fight the
But directors at various companies say there's a gentler side of
executive-session meetings that deserves attention, too. These
conversations can be a good way to brainstorm about ways to help
an admired CEO be even more effective. And if jockeying seems
too intense within a company's leadership team, candid chats
among independent directors can help everyone think of soothing
remedies before spats become unfixable.
Executive-session meetings also can be a good place for
individual directors to bring up topics that puzzle or intrigue
them -- without worrying that their remarks might seem ignorant
or rude. Ideas that resonate with other directors can be
brought up at the next board meeting. Suggestions that fall
flat can die a quiet death without causing embarrassment or
"It's a good place for directors to do reality checks," says
Holly Gregory, a corporate-governance specialist at the New York
law firm of Weil, Gotshal & Manges. "In the full boardroom,
there's a concern about speaking up, when you aren't sure how
your idea will be received."
Topics can be as simple as the way briefing books are prepared
for directors, Ms. Gregory says. Private discussions can
establish whether most directors are satisfied with what they're
getting -- or whether there's widespread concern that the board
might be overwhelmed with minutiae in some areas or inadequately
informed in others.
Directors might also want to kick around new approaches to
acquisitions. And frequently, board members want to share notes
about how top managers interact -- and whether some chemistry
issues need attention.
In some cases, outside directors meeting alone can gather up the
gumption to press for changes, even if management is resisting.
Olivia Kirtley, a Louisville, Ky., business consultant who sits
on several boards, says she got involved in one situation where
a company's profitability was disappointingly low and executives
believed they had taken all the cost-cutting steps they could.
"Management needed more firepower," she says. "They needed to
bring in an experienced consultant who could show them what else
they could do."
By meeting in executive session, she says, outside directors
"could speak with more passion about what was needed. It
changes the dynamics of the board. Directors can agree on
something, and then go back to management and ask for something
to be done."
Most executive-session meetings tend to be quick, running 15 to
45 minutes after the main board meeting. There usually isn't a
formal agenda; instead directors encourage a freewheeling
atmosphere in which unexpected topics can be aired.
Directors generally take minutes, documenting that discussions
were held in case that ever becomes an issue in a lawsuit. But
they seldom write down detailed accounts of who said what.
Lawyers explain that if the minutes start to resemble a
word-for-word transcript of the meeting, it can inhibit
directors who might want to explore some ideas without
necessarily committing to them as discussion continues.
Participants agree that it's crucial immediately afterward to
brief the CEO on what was discussed. That way, tensions don't
linger. And if directors want something added or modified to
the next general board meeting's agenda, the work to make that
happen can begin right away.
At Noble Energy Inc., Houston, CEO Charles Davidson says his
briefings come from Michael Cawley, the company's lead
independent director. They've worked together for six years and
have established a brisk, friendly rapport, Mr. Davidson says.
"I get a good sense from Mike of where things stand," Mr.
Davidson says. "He'll tell me either 'a few directors are
wondering' or 'the board believes'. That helps me understand
how to respond. If it's the entire board, then clearly it
becomes a major priority for me."
--Mr. Anders is a Wall
Street Journal news editor based in Palo Alto, Calif.
Write to George Anders at