A rare public peek into board dynamics: the battle for Anheuser-Busch cast a glaring spotlight on this iconic company's board.

• Author: MacIntosh, Julie
• Position: BOARD DYNAMICS - Reprint

WHEN FOREIGN BREWING GIANT InBev faxed in its offer for Anheuser-Busch in the summer of 2008, everything dropped right into the directors' laps, and their collective nightmare began. Many people who serve as corporate directors would relish the chance to bid for a rival company, but few are eager to be placed under a microscope on the receiving end. Suddenly, a raft of investors and news anchors turned their focus toward Anheuser's 14 board members to gauge how they might react. And their judgments weren't pretty.

Anheuser's board during the fight against InBev constituted a significant improvement on its governing bodies of old. Past directors of the company had included a deputy U.S. defense secretary who resigned in an insider trading scandal and a wealth of cronies and St. Louis-based supporters of the Busch family. Facing a barrage of criticism from shareholders, August Busch III (The Third) had taken some halfhearted steps late in his tenure to flesh out the group with a few people who seemed more independent. But August Busch IV (The Fourth) said he wanted to push those efforts further to "bring new board members on that have a diverse point of view."

The Fourth, however, had not appointed a single new board member since becoming CEO. All of the directors he answered to were installed by his father with the exception of James Forese, a former chairman of IKON Office Solutions and IBM executive, who was elected in 2003 while Patrick Stokes was in charge [serving in an interim CEO capacity between the tenures of August Busch III and his son]. "They were trying to change the board, and I was the last member to go on as sort of the 'next generation,'" said Forese.

Nine of the board members had served for at least a decade, which led to complaints that they were too heavily entrenched in August Ill's camp. Several served together on the boards of other companies. The Third, for one, sat on the boards of AT&T and Emerson Electric with three other Anheuser directors, and he and fellow director Edward E. Whitacre Jr. had known each other for decades. The Third had been one of the AT&T directors who approved a controversial $161.6 million pay package for Whitacre in 2007, the year he retired.

The heaviest criticism tended to center around the financial relationships between certain directors. Anheuser-Busch paid for tens of millions of dollars in auto rentals and other services each year from Enterprise Rent-A-Car, which was run by board member Andrew Taylor, although Anheuser argued that the amount it paid wasn't big enough to represent a conflict of interest. The company used the services of some firms that employed its board members and made donations to others.

Longstanding ties

Four directors were considered insiders: Stokes, the two Augusts, and Carlos Fernandez, CEO of Mexican brewer Modelo. Everyone else was considered "independent," despite some of their longstanding business and personal ties to each other. Close relationships can yield certain benefits in the boardroom. But they can also lead directors to strike allegiances that pollute their decision-making abilities with insider politics. "There was a lot of cross-stocking of the board," said beer industry scribe Harry Schuhmacher. "They were all friends, and they were all on each others' boards. They all kind of looked after each other. That helped to insulate the company from the real world."

Accordingly, Anheuser-Busch was awarded a grade of "F" in corporate governance from The Corporate Library--the worst score possible--in April 2008. It was taken to task for potential conflicts of interest between its board members and the advanced age and tenure of certain directors, among other things.

Most of Anheuser's advisors say its directors got too much flak for their apparent conflicts. There were lots of connections between members of the group, they admit, but that didn't detract from their professionalism...