How to Handle a CEO
by Judith H. Dobrzynski
February 21, 1994
Every two weeks, Zenith Electronics Corp. Chief Executive Jerry K. Pearlman sits down to talk with the company's directors--either at a full board meeting or a conference with the executive committee. The meetings go on for hours--usually 2 1/2, sometimes as many as four. Pearlman isn't plotting a megamerger, a restructuring, or any other extraordinary venture. He's just discussing ordinary business. But at perennial money-loser Zenith, directors have stripped Pearlman of the free rein that once was a corner-office prerogative. "We've been working in the trenches," says outside director Peter S. Willmott.
Shareholders of poorly performing companies have been pushing directors to get more active for years--ever since the 1980s merger wave petered out, killing the discipline that the threat of takeover exerted on CEO performance. Trouble is, most directors have no idea how to go about it. Many get their posts by knowing the CEO and are loath to challenge him. The CEO, also usually chairman, controls meeting agendas, the data directors get, and the time they have to ask questions and size him up. Now Zenith's directors, who since '92 have put Pearlman through a detailed accountability program, are providing one answer to the key corporate governance issue of the 1990s: how to monitor a CEO.
"LOST FOCUS." Zenith needed the scrutiny. "Jerry had lost focus," one director concedes. The Glenview (Ill.) company has wallowed in red ink since 1989, always promising that salvation lay just ahead in advances such as high-definition TV. Meantime, it weathered two proxy fights. Finally, after watching boards at IBM, GM, American Express, Westinghouse, Digital Equipment, and elsewhere fire the top guys, directors chose to act.
Led by T. Kimball Brooker, directors created an oversight system (table), including a program that tracks 20 performance measures. In 1993, they stepped up the attention. The full board met monthly last year, vs. five times in 1992, and the executive committee met 11 additional times. "This board is not taking an off-with-their-head approach," says Sidley & Austin attorney Thomas A. Cole, the board's adviser. "It is working with management, a roll-up-your-sleeves approach." Pearlman claims he qelcomes the board's help.
Zenith's directors haven't pleased every governance expert. "It's a good model in that they're doing something," says John Pound, a professor at Harvard University's John F. Kennedy School of Government, "but this guy ought to be sacked." Attorney Ira M. Millstein of Weil, Gotshal & Manges chides directors for being late: "It's another example of why boards ought to be taking more interest when a company is doing well as much as when it is not doing well." And Lilli A. Gordon, an adviser to Nycor Inc., which challenged Pearlman in a 1991 proxy fight, predicts fireworks ahead and likens the Zenith CEO and board to a couple in marriage counseling: "The purpose is not reconciliation, but it's a prerequisite to divorce." Yet Zenith's model is worth a look not only for its merits but also because the company's willingness to talk may prevent others from having to reinvent the wheel.
Brooker, a former Morgan Stanley & Co. partner who joined Zenith's board in 1989, says outside directors started meeting privately in '92 and decided to reestablish the board's old finance committee. That became the executive committee of Brooker, Willmott, CEO of Willmott Services, and Rand McNally CEO Andrew McNally IV. All three live in the Chicago area, near Zenith. Pearlman was asked to leave the executive panel.
CLOSE WATCH. With management, directors chose 20 important figures to track so that, Brooker says, "if we get off plan, we'll be able to address it quickly." They include production and market share by product line, sales in dollars and by unit, pretax profits, employment, such liquidity measures as cash balances and bank borrowings vs. available credit, and productivity relative to past performance. Says Brooker: "They are measures anticipatory to any problem of overproduction or underselling."
Then, in August, 1993, the board elevated Albin F. Moschner to president. "We took operations off Pearlman's back," says Brooker, allowing him to focus on strategy. Directors also changed Zenith's pay system, tying bonuses exclusively to its financial performance.
That means everyone is watching results. Executive committee meetings, which often start at 7 a.m., begin with a review of the tracked numbers, as do board meetings. Unless there's a problem, the discussion quickly moves to other issues. The executive panel--with Pearlman, Moschner, Chief Financial Officer Kell Benson, and sometimes marketing chief Gerald McCarthy in attendance--has taken up pricing, real estate sales, and joint ventures, among other items. Pearlman says the group aided Zenith's decision to join in the "grand alliance" of companies developing HDTV. Critically, Brooker, Willmott, and McNally later meet alone, "judging the performance of the CEO and all management," Brooker notes.
Brooker also has worked with Pearlman in many one-on-one discussions. That's possible largely because his day job, as president of family company Barbara Oil Co., takes just two days a week--leaving time both for Zenith and his pursuit of a doctorate in art history.
TOO FAR? If Zenith were profitable, he wouldn't have to be so attentive. Two dozen meetings a year between CEO and directors is too many, certainly for healthy companies. Indeed, drawing the line between board and management activities is a big debate in governance circles--and some experts think Zenith's board is too involved. Pearlman seems eager for breathing room. "I don't think the structure will change, but we're already discussing meeting less frequently," he says. "We may evolve to half as many meetings--having the board meet every other month and the executive committee meeting in between."
Zenith does seem to be better off, though. Pearlman hasn't committed to a turnaround time frame at the $1.2 billion company, but its stock has turned up, to 9 1/8, vs. a 52-week low of 6 1/4. Some credit goes to the board. "This is exactly what a board should do," says Nell Minow of Lens Inc., an activist investment fund. "In 99% of cases, the CEO is a capable person. If he's not doing a good job, it's because the board is not doing a good job of outlining his goals and holding him to them." Gordon agrees: "If this system had been in place five years ago, you'd have gotten better performance or you'd have gotten a new CEO." Pearlman must see the same picture.
THE ZENITH BOARD
ROLLS UP ITS SLEEVES
EXECUTIVE COMMITTEE Three outside directors meet with CEO Jerry Pearlman and top managers every month, between regular board meetings
TRACKING SYSTEM To monitor management, the executive panel watches data on 20 variables, including production, sales, pretax profits, market share, liquidity, and productivity
REMEDIAL MEASURES Deviation from the corporate plan in any of the 20 variables gets fast attention--a corrective measure or a plan change to accommodate new information
COMPENSATION Top management bonuses are now linked exclusively to Zenith's financial performance
DATA: BUSINESS WEEK
Related Topics: Business
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