You could have cut the tension with a putty knife. As one shareholder group was squeezing Home Depot Inc.’s board to divest a major unit last winter, other investors tried to chip away at CEO Bob Nardelli’s $38 million pay package. Earlier this year, the shareholder turmoil cost Nardelli his job. But the troubles didn’t end. The audit committee’s discovery of two decades of backdated stock options led to a $200 million noncash charge and Securities and Exchange Commission and Department of Justice probes; employee morale sank; customers were unhappy; and the economy got in a few kicks as a bleak housing-market outlook curtailed America’s obsession with home renovation.
Behind the scenes, CFO Carol Tome was scrambling to tune out the distractions and focus on the core business. She held two to three times her standard number of investor meetings last year and devoted untold hours to gathering information for the backdating investigation. In what she understatedly calls “a year of drama for Home Depot,” she watched the general counsel and the human-resources head follow Nardelli out the door. An obvious question loomed: Would Tome be next?
Boards are getting hammered from all sides these days, thanks to a potent combination of Sarbanes-Oxley rules and shareholder activism. More often than not, management receives some of those blows as well. Wealthy, reform-minded investors like Carl Icahn, former SEC chairman Richard Breeden, Nelson Peltz, Ralph Whitworth, and longtime corporate shaker Kirk Kerkorian are at the corporate gates, if not inside them, through board representation.
The companies they have sought to change include some of America’s best-known names: Motorola, H.J. Heinz, Blockbuster, Home Depot, Cadbury-Schweppes, Sharper Image, and Applebee’s International. In other cases, board warfare has brought new visibility to companies such as Ceridian Corp. and Take-Two Interactive Software Inc. As investors demand to be heard, boards are responding — and CEOs are leaving.
More Vulnerable than the CEO
Caught in the crossfire is the CFO, whose relationship with the board is becoming ever more complex. Sometimes this new reality works to the CFO’s benefit: he or she may emerge as a dependable source of analysis and a capable manager who can provide stability in troubled times. In other cases, the CFO may be sacrificed along with the CEO, or even identified as the primary source of the problem(s). In any event, it’s clear that CFOs must now develop deeper ties with their company’s board — even though it does not guarantee them immunity.
“Certainly, when things go wrong at a company the CFO is pretty vulnerable, and in fact may be even more vulnerable than the CEO,” says Jerome B. York, a longtime associate of Kerkorian’s and last year a member of the General Motors board when Kerkorian held 9.9 percent of GM stock. “We all know that in these meltdown situations, like GM in 1992, the CEO and CFO were fired simultaneously. The same thing [was true] at IBM” in 1993. York, who was CFO of IBM from 1993 to 1995, acknowledges that today outside pressures on both boards and managers are stronger than ever before. York is also working with Kerkorian in his current bid to take Chrysler private.