A fateful visit, a new destiny: it was a deal that got done during the darkest days of the financial markets meltdown. How the CEO and board of Rohm & Haas Co. turned what could have been a transition crisis into a rewarding return for shareholders.

• Author: Gupta, Raj L.
• Position: ORGANIZATIONAL LEADERSHIP - Interview - Company overview

A VISIT BY A HAAS FAMILY TRUSTS representative with Raj L. Gupta in November 2007 totally changed the trajectory of the company that he had worked at for 38 years and was then heading as chairman and chief executive. The message delivered was that the trust wanted diversification from its concentrated holding (30%-plus) in Rohm & Haas Co., the large, Philadelphia-based chemicals company. That was not a message to take lightly. As has been seen in many high-profile cases, an announced sale of some, or all, of the family holdings meant the future of the company could veer off in several directions, not all of them benign.

Gupta, then in his 10th year as CEO, sprung into action--as did the board. Over the next 18 months he, the directors, and the management team marshaled their talents to take control of the situation to try to achieve a result that would meet the approval not only of the family trust but of all the shareholders. And this is indeed what happened. Despite some hair-raising twists and turns along the way--this action period coincided with the darkest days of the recessionary crisis--on April 1, 2009, Dow Chemical Co. completed its acquisition of Rohm & Haas for $79.38. This represented a premium of 75% over what the company's shares were trading for ($45) on the day the deal was unveiled in July 2008. Objective accomplished: Great value delivered to the family interests and to all shareholders. And it surely ranks as a deal of the year to have gotten done amidst the meltdown in the financial system and business markets worldwide.

Gupta, who was only the fifth CEO in the company's 100-year history (it celebrated its centennial in 2009), retired after the deal closed. He is now serving on the boards of Hewlett-Packard Co., Tyco International, and Vanguard Group. Other initiatives he has taken on include being a trustee of the Conference Board and co-chairing its Task Force on Executive Compensation. After six months of study and debate, the task force issued a report in September 2009 that offers guiding principles for restoring credibility and trust in executive pay processes and oversight (see page 21 for some key passages from this new report).

In the following interview with DIRECTORS & BOARDS Chairman Robert Rock and Editor James Kristie, Gupta reflects on the intricacies of the Rohm & Haas sale, the board's role in guiding that process, and other important dimensions in governance, including the Conference Board's intent with its report on executive compensation.

--James Kristie

Directors & Boards: Raj, let's start at the beginning--what was the situation like at Rohm & Haas at the time of the visit from the trust representative?

Raj Gupta: First of all, not many companies have survived for 100 years. Rohm & Haas has been a company with excellent performance, excellent people, an excellent reputation, and a great set of values. Over the past 60 years, from the time it went public in 1948, the average annual return to the shareholder has been 12%. The average annual increase in dividends has been 7%. So in terms of performance that probably placed us in the top 5%, and maybe even better, of any public company over that period. Not only was this not a company in a distressed situation, but it was a company we always felt had a brilliant future.

Since it is such a key element in what happened, what was the nature of the family ownership structure?

We'll just go back to the Second World War for this. The two founders were Otto Rohm of Germany, who owned 40% of the company, and Otto Haas here in the U.S., who owned 60%. During the war the German ownership of Rohm & Haas was taken over by the U.S. government. When the war was over, Dr. Rohm's ownership was allowed to be sold, and that is how the company went public. That was in 1948. Mr. Haas passed away in 1960, at which time the family sold some stock to settle the estate. But still for a long period of time the company was majority-owned by the family. By the late 1980s the family ownership had been trimmed to the 30-32% range, and that's where it fluctuated up until the date of the sale.

A situation like this must require management staying in close touch with the family?

We always had a close dialogue with the family. My CFO and I used to meet with the family every three months to keep them in the loop on what the company was doing. We also set up a dialogue between the family and the board, which allowed family members to have independent access to the board. And we encouraged the family to have its own outside financial and legal advisers.

What was the situation regarding family members on the board?

For a period of time between the mid-'80s and 1999 there was no family representation on the board, nor were any family members working in the company. All the dialogue basically was between the CEO and the family. In 1999 we added two family members to the board. The close, cordial relationship with the family continued.

Then came the visit about diversifying the family's interests.

I remember the date precisely--Nov. 9, 2007. The message was that the family trust had reached a consensus to diversify a substantial portion, or all, of its ownership, that it wanted to do this over a 12-18 month period, and that it wanted fair value for its shares.

And that came as a bit of a surprise?

When you have a 30%-plus shareholder expressing such an interest, that does come as a bit of a surprise. On the one hand we understood the request because it makes sense to diversify and not have too concentrated an ownership in one stock. But the family had been served well. The performance of the company had been so outstanding that they really had no reason to sell, so we were never that concerned that they needed to diversify. During the past five years we had been buying back about 10-12% of our outstanding shares, and we encouraged the family to participate on a prorated basis in the buyback. But they indicated to us that they were happy with their level of ownership and were not ready to make any transition. In fact, we had just conducted a buyback program from July-October of 2007 that the family chose not to participate in. So their decision in November, only weeks later, to reduce their holdings was indeed a big surprise and, frankly, a shock, considering the implicit endorsement of the company shown by their decision not to participate in this most recent buyback. Another reason it came as a surprise to me is that we had my succession in place. I was planning to retire sometime during the following year. And, of course, the call came as a big surprise for the board.

After the visit, what was your next step?

Once we got over our surprise, the board made it very clear that they were going to look after the interests of all the shareholders, and that the board would control this process. That meant excluding the two family members from any deliberations on what path we would pursue, which the two members understood because clearly they were conflicted.

We hired a banker, a lawyer, and a public relations firm. And then we began a long process, from November through May-June of 2008, of assessing what the intrinsic value of this company was and what our options were.

What options did you consider?

We looked at a whole range of options of what might make sense. That included buying back some of the trust's stock, having the trust sell some stock through a secondary offering, or finding a strategic buyer who would be completely independent to take over part of the trust's ownership. We looked at splitting the company and giving the trust some assets. And we looked at combinations with other companies. We also considered a leveraged buyout as well as sale to a strategic buyer or private equity firm. But most important was to make sure...