More Corporations Turn to Lead Directors

Article excerpt

The merger of Portec Rail Products Inc. and L.B. Foster Co. was less than a week from closing when a judge temporarily derailed the deal April 21 because a sweeter offer was kept under wraps.

Portec Chairman Marshall Reynolds had passed on a bid that was 2.5 percent higher from a local hedge fund, but did not tell the board until the $112 million deal with Foster was announced in mid- February, according to court documents.

An Allegheny County Common Pleas judge ruled that Portec's board "did not have any process of making itself reasonably informed" of a better bid.

"Clearly, the fact is that lack of communication caused all of this," said James Bank, a securities analyst at Sidoti & Co., New York.

If Portec's board had a lead independent director, the local rail- industry suppliers might be running down the tracks together today. A lead director's central role is to be a bridge between directors and the chairman or CEO, experts say.

Their job involves "serving as the point person" between directors, management and "different constituency groups," said Patrick McGurn, special counsel at RiskMetrics Group, New York. "Lead directors are not a panacea but they are one of the last structural changes in corporate governance that's needed."

Portec's Reynolds could not be reached, and CEO Richard Jarosinski declined to comment, citing the pending litigation.

By contrast, a major fight for control at H.J. Heinz Co. in 2006 was relatively contained, partly due to the efforts of its lead director.

At the time, billionaire dissident shareholder Nelson Peltz waged a proxy fight to oust five Heinz directors and install his slate. Peltz's group wanted to slash expenses and boost advertising -- all plans opposed by Heinz directors and management. Instead, Heinz crafted a five-point plan "to benefit all shareholders," including regular meetings with key shareholders.

In the middle was Heinz's lead director Thomas Usher, former chairman and CEO of U.S. Steel Corp.

"My role was to try to convince the shareholder base that the plan we were on would get us to where the stock should be and that the board was independent from management and holding them accountable," said Usher in an interview last week.

"I also met with (Peltz) to see how we could all work collectively for the good of Heinz shareholders," Usher said.

When the Heinz proxy fight subsided by September 2006, two of Peltz's five nominees were elected to the board, and the stock price had increased to $42 from $36 a year earlier.

Nearly six in 10 of U.S. corporate boards (58 percent) featured a lead director in 2009, according to the National Association of Corporate Directors. Its survey of more than 600 companies showed that's up from 38 percent in 2005 and 44 percent in 2007.

Lead directors are in place at major corporations including Microsoft Corp. and Bank of America Corp. …