America’s Most Dysfunctional Boards

By Markets 24/7 Wall St.

Some boards of directors of America’s largest public companies have shown such poor judgment guiding their troubled corporations that they have long stopped being effective. Just recently, the misguided actions of the boards of Hewlett-Packard (HPQ), Bank of America (BAC), and Yahoo! (YHOO) caused the stocks of all three to plunge. The three boards have failed in their attempts to elect effective CEOs and stumbled in their efforts to set sensible strategic directions for their companies. 24/7 Wall St. has named eight other companies whose boards are the most dysfunctional among those that run America’s largest companies.

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Dysfunctional boards have helped create problems at large public companies that have lost billions of dollars in market value. Current SEC and other government agencies’ regulations make it almost impossible for shareholders to remove directors. Investors in these companies, therefore, have little choice. They can decide to live with these boards, or — if they think the governance of the companies will not get any better — sell their stock.

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To find the most dysfunctional boards, 24/7 Wall St. looked at the S&P 500 companies. We chose companies whose stock prices have fallen at least 33% over the last five years, but excluded those with revenues lower than $5 billion in 2010. Finally, the board troubles at Hewlett-Packard, Bank of America, and Yahoo! have been so well chronicled that we excluded them from the list as well.

Among the subjective guidelines 24/7 Wall St. editors used to further determine the effectiveness of a board was the length of service among board members. Boards with long-serving board members can be an impediment to change if companies run into troubles, such as in the case of GE. Another factor we looked at was whether a company’s board supported a poor performing CEO for several years, as in the case of Goldman Sachs. Ironically, the reverse — electing too many CEOs — may also indicate a dysfunctional board. This is a sign the board cannot effectively choose chief executives and strategies that will help its company return value to shareholders consistently, such as in the case of Hewlett-Packard. 24/7 Wall St. came up with eight “American Companies With The Most Dysfunctional Boards”.

1. Sprint-Nextel
> Current CEO: Dan Hesse
> 5 yr. share decline: 81%

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Sprint-Nextel (NYSE: S) has lost approximately 80% of its market value over the last five years. The company has been unable to set an effective strategy to compete with larger rivals AT&T (NYSE: T) and Verizon Wireless. Sprint’s board has supported CEO Dan Hesse since he became the telecommunication company’s top executive in late 2007. Among its ten directors, all but one have served since 2008 or earlier. Sprint-Nextel’s Chairman of the Board, James H. Hance, Jr, has been a director since 2005, just after Sprint had announced in late 2004 that it would buy Nextel for $35 billion.

Sprint has lost money each of the last four years. Revenue has fallen from $40.1 billion to $32.5 billion over that time. The board has supported Sprint’s decision to deploy WiMax 4G technology, which is not compatible with the 4G systems built by AT&T and Verizon Wireless. AT&T has attempted to buy T-Mobile to increase the size of its business. Sprint, however, has done nothing to expand the size of its business as the company continues to bleed subscribers.

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2. AMD
> Current CEO: Rory Read
> 5 yr. share decline: 75%

AMD (AMD) may be the single greatest failure among large tech companies based in America. AMD’s stock is down more than 75% in last five years. The chip company lost money from 2006 to 2008. It had tiny margins in 2009 and 2010 with net income of $376 million and $471 million, respectively. These include the effect of the $1.25 billion settlement payment from Intel (INTC) in 2009 to end patent disputes.

CEO Dirk Meyer left in January 2011 by “mutual agreement,” apparently because disputes over strategic direction. He had been chief executive since 2008. It took the board eight months to find a replacement, and not a terribly impressive one. Rory Read was hired last month. Before becoming CEO of AMD, Read was COO of PC company Lenovo, which has been late to get into the extremely important tablet PC business.

Bruce L. Claflin, AMD’s Chairman of the Board, has been a director since 2003. Several directors have been on the board since 2006 or earlier. Only one member has been elected recently, Henry W.K. Chow, who was appointed early this year. AMD has failed to move into the rapidly growing mobile market, which leaves it mired in the PC and server sectors. Mediocre chip designs put it further behind the results of R&D work by rival Intel in 2009 and 2010, in the opinions of many clients.

3. Moody’s
> Current CEO: Raymond W. McDaniel Jr.
> 5 yr. share decline: 52%

Moody’s (MCO) stock sank more than 50% in the last five years. Following the subprime crisis, many charged the ratings agency with contributing to the crisis. This raised serious questions about how the company failed in its fiduciary duty to put objectivity over profit. But ethical charges were only the beginning. As of June, it was not certain whether the SEC would file civil fraud charges against Moody’s and S&P for their roles in triggering the credit crisis.

The Senate Permanent Subcommittee on Investigations released findings from a two-year study completed earlier this year in which it said “inaccurate triple-A credit ratings” from Standard & Poor’s and Moody’s Investors Service introduced risk into the financial system and “constituted a key cause of the financial crisis.” The FCIC added that “failures of credit rating agencies were essential cogs in the wheel of financial destruction”, referring to the collapse of the financial markets. As BNET pointed out last year, “The ratings agencies business model is based on a flagrant conflict of interest — they’re paid by the firms whose credit they evaluate.“

It is truly a wonder how CEO Raymond W. McDaniel, Jr has kept the job he has had since 2005 in the wake of such pointed and supported accusations. Moody’s directors have impressive longevity. Robert R. Glauber has been a director since 1998. Henry A. McKinnell has be a director since 1997. Three have served as directors since 2004. One was elected in 2008, and another in 2011.

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4. Best Buy
> Current CEO: Brian J. Dunn
> 5 yr. share decline: 55%

Best Buy (NYSE: BBY) shares have fallen well over 50% during the last five years. The electronic retailer’s net income of $1.3 billion last year was below that of 1997. Sales have basically plateaued in the last two years. Quarterly earnings have missed Wall Street expectations in each of the last three periods. Investors now think Best Buy is so far behind Amazon.com (NASDAQ: AMZN), Walmart, (NASDAQ: WMT) and Target (NYSE: TGT) in the e-commerce business that it cannot catch up and will be relegated to the brick-and-mortar retail sector.

The single biggest problem with the Best Buy board is that it is dominated by Chairman Richard M. Schulze, one of the company’s founders. He has been director since the company was started in 1966 and owns almost 18% of the company. Four board members have been with the company since 2004 or earlier. Only one member has been appointed since CEO Brian J. Dunn was elected in June 2009. Under Dunn’s leadership, the company has lost whatever positive momentum it has had. That momentum was powerful for most of the three decades that preceded Dunn’s promotion.

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5. Cisco
> Current CEO: John T. Chambers
> 5 yr. share decline: 30%

Cisco ‘s (CSCO) CEO John T. Chambers has been a member of the company’s board since 1993. Eight other members have been on since 2003, if Arun Sarin, who rejoined the board in 2009 after serving from September 1998 to July 2003, is included. Excluding Sarin, only one new board member has been added since 2006.

Cisco was the envy of Silicon Valley until Chambers began an ill-advised diversification strategy. The company went on an acquisition spree, but the acquired businesses triggered a margin drop. Similarly, Cisco’s revenue growth from $34.9 billion in its fiscal 2007 to $42.3 billion in its most recent fiscal year, was mostly due to acquisitions. Cisco’s shares have lost a third of their value in five years as a result. And while net income rose sharply from $6.1 billion in 2009 to $7.8 billion in 2010, it fell to $6.5 billion in fiscal 2011. The stock has fallen from nearly $28 in April 2010 to just above $15 recently.

Cisco has not only lost revenue in its non-core business, but its core router business is under pressure from Juniper (JNPR) and Chinese router manufacturers. CNNMoney recently reported “Cisco still is facing many serious challenges, most notably the fact that its core businesses of selling routers and switches is slowing. The company also has needed to deal with tough competition from upstarts like Aruba Networks (ARUN) and F5 Networks (FFIV).” Wall Street thinks the board has given Chambers too much support and allowed the company to stay on the same track for too long.

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6. Goldman Sachs
> Current CEO: Lloyd Blankfein
> 5 yr. share decline: 40%

The board at Goldman Sachs (NYSE: GS) is incredibly long-lived given the ethical and legal charges the company is still facing, and the fact that directors have continued to support Chairman and CEO Lloyd Blankfein who has been on the board since 2003. Five directors have been on the board since 2004 or earlier. Board member Stephen Friedman, a former Senior Partner and Chairman of the Management Committee who retired in 2004 has been a director since 2005.

Perhaps most extraordinary of all, presiding director John H. Bryan has been a member of the Goldman Sachs board of directors since 1999. He would be the most logical director to leave Goldman along with Blankfein to partially atone for the firm’s actions during and after the credit crisis. The only member to leave the board since the end of that crisis is Rajat K. Gupta, who is under investigation by the SEC for insider trading.

Goldman agreed to pay $550 million last year to settle fraud charges brought by the federal government. Recent filings with the SEC show Goldman is still in legal trouble. According to MarketWatch, documents show that Goldman “faces a number of investigations and probes, from a variety of federal and state regulators and other entities. It has received “requests for information and subpoenas, for example, from federal, state and local regulators and law enforcement related to the mortgage-securitization process, subprime mortgages, collateralized debt obligations, servicing and foreclosure and related issues.”

Revenue at the firm has been badly hurt by a drop in institutional client services and investing and lending segments, much of which is the basis of the firm’s core trading business. Goldman’s stock is down over 40% in the last five years.

7. Sears
> Current CEO: Louis J. D’Ambrosio
> 5 yr. share decline: 65%

Sears Holdings (SHLD) shares are down almost two thirds over the last five years. Edward S. Lampert, the retailer’s Chairman of the Board, holds directly or indirectly 65,243,311 shares, or 59.9%. Sears and K-Mart merged in 2005, and several Sears Holdings directors served on the board of one or the other of those companies prior to that merger. They include Steven T. Mnuchin, Ann N. Reese, and Thomas J. Tisch. Sears Holdings’ interim Chief Executive Officer and President from February 2008 until February 24, 2011, W. Bruce Johnson, was elected to the board in 2010. Louis J. D’Ambrosio, Chief Executive Officer and President since February 2011, is also a board member.

The board has not only failed to find a permanent CEO for two years, but its strategy to hold onto customers and manage the Kmart and Sears brands has failed as well. This has become clearly evident in the company’s financial results of the past several quarters. In the recent second quarter, Sears posted a large $144 million net loss, exceeding both the mean analyst expectations and the net loss posted in the same quarter last year ($34 million). The company has not made any successful effort to outflank rivals Home Depot (HD), Lowe’s (TGT), Target, and Walmart. The lack of success is clearly seen in the 3.6% decline in same-store sales in the quarter ended April 30. The figures were down more modestly in the latest quarter. Sears sales have dropped every year since Lampert created the company in 2005.

8. GE
> Current CEO: Jeff Immelt
> 5 yr. share decline: -55%

GE’s (GE) shares have dropped 55% during the last five years. The company’s revenue in 2006 was $163.4 billion. Last year, that number was $150.2 billion. Net income was $20.8 billion in 2006, but approximately half that — $11.6 billion — last year. GE has recently restructured in a way that would affect the numbers between the two periods modestly. The largest of these changes is the sale of the majority interest in NBCU to Comcast. However, that does not change the overall picture of GE as a company that has stagnated during the last half decade, despite restructuring efforts and a hard push into the healthcare and environmental business sectors.

A large number of directors have been with GE for a decade or more. Former banker Douglas A. Warner III became a board member in 1992. Sam Nunn, a former Senator, has been a member since 1997. Race car entrepreneur Roger Penske has been a member since 1994. Andrea Jung of Avon has been a member since 1998. All joined prior to the appointment of current CEO Jeff Immelt. Only two new directors have joined the board since 2005. The trouble at GE is all the more vexing, since it was once viewed by many as the best run company in the world.

There have been a good many periods of management indecision since Immelt became CEO. For years, he said that NBCU was a core business. He reversed field less than two years ago. The board, arguably, should have pressed Immelt to alter what the market has come to believe is an outdated strategy. Fortune wrote of Immelt earlier this year that “judged rigorously on what he has delivered — the GE way — he has not made a strong case for 10 more years.” The fault for that is a board that has too many people who have been in place for too long.

This content was originally published on 24/7 Wall St. 

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