COMPAQ: Management Failure of Boardroom Success? By Ralph D. Ward There is no doubt in retrospect that the problems facing Compaq Computer were serious, though company results, compared to most American corporations, looked good. But the company had shown a loss in the last quarter, investor confidence was slipping, and it seemed as if Compaq was being left behind in the blur of PC industry change. The board of directors, led by Compaq's chairman and initial venture capitalist Ben Rosen, defined the word "proactive." They viewed short-term failure to make the numbers as a harbinger of ongoing strategic and pricing failure by management, failure that could ultimately wreck the company. Without second-guessing or hand wringing, Rosen and the board sacked Compaq's chief executive, even though he had delivered almost a decade of strong success before the present setbacks. That was 1991, and the CEO who took the long walk out of the boardroom was Compaq founder Rod Canion. But it also sums up the situation for Compaq on Sunday, April 18, when current CEO Eckhard Pfeiffer was bounced by the still-powerful (and still Compaq chairman and major stockholder) Ben Rosen. Eight years separate these two chief executive coups, and we shouldn't reach too far in saying that history repeated itself. Compaq's 1991 malaise came during a national recession, the decline in market share had gone on for all of six months, and the first that most business observers knew of trouble came when Canion was already packing his briefcase. In 1999, by contrast, the computer maker had delivered a major shock to the markets on April 9 when it announced that earnings for the first quarter would be only half of expectations, knocking the share price down by 22 percent in one day. Strike suit lawyers have already begun to pile on to the company for that very high-profile disappointment. Yet the boardroom parallels in both cases cannot be ignored. This has less to do with their echo effect than for what they teach us about effective corporate governance -- and how a board can make a difference. The board acted quickly. Not hastily, but not with drawn-out, interim dithering, either. Just over a week separated the April 9 Compaq earnings shock and Pfeiffer's ouster. Though the board had doubtlessly been observing the situation for some time, it was able to quickly read current management strategy, judge its negative impact on both earnings and market confidence, and quickly cut its losses. The board "leader" led the way. Tech companies are more likely than old-line industrials to split the positions of CEO and chairman. By keeping the role of chairman firmly in the hands of Ben Rosen, Compaq has shown the value of an independent power center in the boardroom. A separate chairman, particularly one who owns over five million shares in the company as Rosen does, has both the means and motive to counterweigh the powers of management. However, a separate chairman is not the only venue for such board power. Most of the high-profile boards that sacked underperforming CEOs in the early 1990s (General Motors, Kodak, IBM) were sparked by a "lead" director. Though not the board's chairman, this respected dean of the outside board members (often a retired chief executive himself) was not likely to be overawed by the CEO. The most noted example was John Smale at General Motors. No sentiment in the boardroom, please. In the earlier Compaq coup, the board booted the company's founder. In last weekend's case, directors pushed out a CEO who had brilliantly led Compaq over most of the 1990s. Just a year after taking command, Eckhard Pfeiffer had boosted Compaq sales by 50 percent, quadrupled earnings, and almost doubled market share. Yet, when the board confronted provable failures in management strategy, directors were willing to look both these executive heroes in the face and ask "so what have you done for me lately?" This attitude brings up the final, and most striking, aspect of the Compaq style of governance. Unlike most of corporate America, this board does not view firing the chief executive as any sort of a corporate disaster. On a daily basis, American businesses cut product lines, close facilities, and unfortunately, lay off workers. But they also launch new strategies, fund new ventures, and hire. Compaq shows that this stomach for "creative destruction" can extend to the very top of the management pyramid, and that it can bring highly positive results. Instead of shock over CEOs being dismissed by their boards, perhaps we should ask why it doesn't happen more often. Maybe management didn't fail at Compaq. Instead, maybe governance succeeded. Ralph D. Ward is editor of Boardroom INSIDER newsletter, and of The Corporate Board magazine.  He is author of the book 21st Century Corporate Board (1997).  Back to the top with the Corporate Governance NETwork! 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