The workings of a model board.

• Author: Kristie, James
• Position: Compaq Computer's board of directors - Includes related articles on typical Compaq board meeting and on book 'How to Advertise' - Interview

From dark days in 1991 to today's award-winning recognition, Compaq Computer's board has been hardwired for action.

Kenneth Roman says he learned corporate governance from being at the wrong end of a hostile takeover. It was the late 1980s and he was only six months into the CEO's job at The Ogilvy Group, one of the country s top advertising agencies where he had spent 26 years of his career, when an acquirer carne calling. The aggressor was WPP Group PLC, which just two years earlier had waged and won a bruising takeover battle for J. Walter Thompson, another venerable advertising firm. Ogilvy came under WPP's wing in 1989, and, as Roman reflected in an interview earlier this year with DIRECTORS & BOARDS, the governance lessons were sobering. "I couldn't do anything to defend my job or the management's jobs or the clients," he says. "I had to solely represent the shareholders." Which he did well, to the tune of "25 times earnings, all cash" in negotiating the sale of the firm.

Another sobering governance lesson lay ahead. In 1991, having left the ad agency after the takeover and now in the role of a consultant, he joined the board of Compaq Computer Corp. He knew the company well, since Ogilvy & Mather had been Compaq's advertising agency from the computer maker's very beginning in the early 1980s. Roman remembers that the ad agency's Houston office at that time had one client, Shell Oil, and his people "wanted to do something else besides write gasoline ads." So the firm took on a little computer start-up called Compaq which, he says, "I kind of watched over from New York to make sure that things went well." That they did. The company had spectacular growth during the 1980s. However, by the early '90s, Compaq came to a crucial strategic crossroad. Roman's timing in joining the board was impeccable in that he got a tutorial on one of the most difficult of all governance duties: At his second board meeting, he participated in the removal of the CEO, Compaq's co-founder Rod Canion. More on that in the discussion below.

Compaq soon again righted itself. Fast-forwarding to the present, 1997 was a standout year. Compaq's revenues were up by 36%, to $25 billion, profits were up by 41%, to $1.8 billion, and its stock price increased by almost 90%. It completed the acquisition of Tandem Computers Inc. (and in June 1998 closed on the acquisition of Digital Equipment Corp.). Forbes magazine selected Compaq as "company of the year." Eckhard Pfeiffer, the replacement CEO tapped by the board in the dark days of 1991, was one of Business Week's "top managers" of the year. And, not to be left unrecognized, the Compaq board was given its due by the Wharton/Spencer Stuart Directors' Institute which named it the 1997 "board of the year" for being a model of board standards and shareholder-oriented governance. (Compaq publishes its heralded governance principles in its proxy statement; see also the Winter 1998 issue of DIRECTORS & BOARDS for an excerpt of the Compaq board principles.)

The latter award is one that Ken Roman can take particular pride in as chairman of the corporate governance committee of the board - although he is quick to credit Compaq Chairman Benjamin Rosen with being the inspiring force behind the company's progressive and proactive approach to governance. Quite fitting for a former adman, Roman still keeps his office on Madison Avenue as his base in between the meetings of a brimming portfolio of corporate and public-service boards. It was there that he fielded a few questions from DIRECTORS & BOARDS Editor James Kristie on the workings of this model board in particular and of good governance in general - subjects on which he has become a bit of an expert since the learning process began 10 years ago with a hostile acquirer showing up at his door.

D&B: As we speak [in late February], Compaq has been the most actively traded issue for 20 out of the last 21 trading days. How do you explain that? Obviously there is something other than good governance at work here.

Roman: Well, I'll give you one of two answers and then you can decide which one you want. One is that I can explain a lot of things about governance and nothing about Wall Street!

I don't think you're alone.

I don't think that I am, either. I think that it is a combination of several things. We have demonstrated results over a long period of time. We have had very few surprises. Wall Street likes the continuity of results. So far we have been pretty good at delivering what we said we were going to deliver.

The second thing that I think has happened is that people are beginning to understand that we have made two very interesting mergers, Tandem last year and Digital Equipment this year. They are beginning to understand that these were both superior strategic acquisitions that promise for the long term even faster growth. And I think that people are also beginning to recognize the governance issue. We have been something of an untold story because we weren't forced to take action. We weren't held up as a company that was, in the old expression, twisting slowly in the wind. You know as a reporter that bad news is news but virtue is not news.

It is not.

So, I think it is a combination of those three things. I think people feel pretty good about our ability to represent the shareholders effectively and our record in doing so on their behalf, and that if we were to get in trouble again we have a mechanism for dealing with it as opposed to just suffering any consequences. We are very focused on shareholders and we have means for delivering for shareholders which I think is a superior model.

Certainly there has been enormous shareholder value created at Compaq. People might look at that value creation and ask: Is it the board? Is it management? Is it both? It is neither? Is it the right company in the right industry at the right time?

It is all of the above. Clearly, the management built the company initially. The board made an important decision on behalf of the shareholders [to replace the CEO] and saved the company. Absolutely saved the company. We would have not been around or we would have been a minor factor if we hadn't taken that action. We picked the right new person. We were lucky. He was on the inside at the time. That new team delivered beyond anyone's expectations. It is Eckhard Pfeiffer and his team who did that. The board didn't do that. We supported him and encouraged him to think more broadly, and by doing so he was able to achieve even beyond what he had suggested. We were lucky to do it in the technology industry but we were also in an industry where the leverage of a right or wrong decision is very large, up and down.

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