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The Jack Wright Series # 4 – The Mystique of Board Meetings

Preparing for the First Meeting

Approximately two months after agreeing to join the Mega board, Jack Wright received a
package of material for his first board meeting in April, immediately after the annual meeting at

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which he was to be elected. The package arrived on a Friday afternoon, and the two-day meeting
was to begin on the following Tuesday, with committee meetings. A social dinner was
scheduled for Tuesday evening, and the full board meeting was scheduled for Wednesday after
the annual meeting in the morning. While he technically would not be elected until the annual
meeting, he was asked to attend the Audit Committee meeting, on which he had been asked to
serve. He could participate but would not have a vote.
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The principal agenda topics for the Audit Committee were to review the auditing firm’s
Management Letter for the prior year, review the impact of the Sarbanes-Oxley legislation, and
discuss the Internal Auditors’ plan for the coming year. Summary reports on all of the topics
were included in the pre-meeting material.
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He particularly noted that the auditors were very critical of internal controls, particularly
with regard to currency hedging transactions, perhaps sensitized by publicity about recent abuses
in other companies. Even though this was not a topic with which he had much familiarity, he
sensed that Management’s answers were not very forthright, and that there was a fundamental
disagreement between the auditors and management.

The regular Board meeting packet included a proposed agenda, minutes of the last
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meeting, and financial statements for the quarter and year to date, along with one capital
appropriation request (CAR). There was also to be a briefing on a new acquisition strategy.

Jack read through the material carefully. He noted that the minutes were very brief. He
made a note to ask the corporate counsel about Mega Corporation’s standard for including items
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This case was prepared by Wallace Stettinius, Visiting Lecturer, George W. Logan, Lecturer in Business
Adminstration, and John L. Colley, Jr., Almand R. Coleman Professor of Business Administration both at the
University of Virginia Darden School of Business. It was written as a basis for class discussion rather than to
illustrate effective or ineffective handling of an administrative situation. Copyright  2003 by the University of
Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to
sales@dardenpublishing.com. No part of this publication may be reproduced, stored in a retrieval system, used in a
spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or
otherwise—without the permission of the Darden School Foundation. Rev. 4/25/06.

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in the minutes. The financial statements did not reveal any surprises – operations were actually
proceeding more or less according to plan. The CAR seemed to have a marginal return on
capital, and he wanted to know more about why it was justifiable. But it was not a large amount
- $1.5 million – compared to size of the firm, so it wasn’t something about which he would make
a major issue.

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He thought a great deal about his goals for this first meeting and how to comport himself.

The First Meeting

Jack Wright arrived early Tuesday afternoon for the Audit Committee meeting.
On the trip from the airport, Jack shared a ride with Phil Agee, who was the Chairman of the

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Audit Committee. Phil was the CEO of a successful, family-owned manufacturing business. He
was semi-retired, having turned operating responsibility over to his son. He now spent his time
more or less as a professional director, currently serving on four boards of publicly held
companies. He seemed to be very conscientious, and thoughtful about his role and that of the
audit committee.
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They played “who do you know?” and found they had several good friends in common.
A notable coincidence was that Jack’s son was married to the daughter of one of Phil’s neighbors
and college fraternity brothers. They also shared a passion for travel, and found that they and
their wives both particularly liked traveling in Europe. Phil and his wife owned a flat in London,
the use of which he quickly offered to Jack. Sally and Bob Moses had often stayed there.
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As they got to know each other, and established something of a common bond, Phil took
Jack into his confidence with regard to the agenda for the audit committee. Phil said that while
he had great confidence in the operating ability of the CEO, John Rock, he (Rock) was not a
great numbers guy. The new CFO, Jim Bond, was young and ambitious. They were under great
pressure from “the Street” to improve earnings; hence the motive to try to increase net income
through hedging. While he thought that Bond was probably very competent at the treasury
function, he appeared weak in the controller’s function (operating financial management and
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controls).

At the audit committee meeting, Phil acted as Chairman, and the CFO, Jim Bond,
represented management. John Rock was not present. Jack was welcomed and introduced to the
other two members and the other attendees. Joseph Cummings was a retired former banker and
credit officer who had been on the board for about 20 years. He knew the company well since he
had been the primary source of credit in the early years of its growth, and was a long-time friend
of the Chairman. Herman Abrams was an independent investor with a large stake in the
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company. He had started his career as a CPA, and then moved into venture capital. Also present
at the meeting from the company were the Chief Accountant, Mary Moore, and the internal
auditor, Alison Thompson. The auditors had two representatives, the engagement partner and
the engagement manager.

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The meeting began with a discussion of the Management Letter. The engagement partner
introduced the topic, and turned the discussion over to the engagement manager to present the
details. She said that a number of issues had surfaced, as outlined in the letter, which had been
successfully resolved with management. Then she went rapidly to the currency issue. She
pointed out that since there were substantial global operations, there was a currency exchange

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risk that was material. The company had a practice of hedging these risks, with which the
auditors agreed. But, the auditors felt that the practice had expanded into currency speculation –
using hedges that exceeded the actual risks. These activities needed to be approved by the board
and disclosed in the financial statements, based on new disclosure requirements.

The CFO responded that the activities were sound business practices that did not
represent undue risk. The company’s policy was to only hedge exposed positions so that there

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was no risk. The CFO had decided that he would take advantage of what he thought were
favorable opportunities to make currency bets in advance of the need for hedging. He had done
this four times in amounts of $10 million each time. The annual volume of hedging transactions
was about $500 million; while the company’s net worth was $3.1 billion. If the price of currency
at the time of the purchase were compared to the price at the time of the transaction when he
would normally have bought the hedge, he had profited three times and lost once. The net gain
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was approximately $1 million. While the amount was moderate, the committee was more
concerned about the practice, which could expose the company to substantial risk outside of
normal business operations. It also did not like the fact that Bond had taken these actions without
informing the board or the CEO in advance and without getting their approval.

The Audit Committee decided that there was no culpable wrong doing requiring
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disciplinary action, but established a policy that currency transactions should be pure hedges
with no timing anticipation that exposed the company to additional risk, on the theory that the
technique was designed to reduce risk, not to make money. Jack was comfortable with this
decision.

The Committee then considered the other topics on the agenda – the impact of Sarbanes-
Oxley legislation and the Internal Auditors’ Plan. The Sarbanes-Oxley report stated that the
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rules had not all been released; it was rather a work in process. It appeared, however, that there
would be some requirements for changes in the functioning of the company’s board. The
Internal Auditor’s plan was presented, discussed and approved without modification. Jack
Wright was positively impressed with its thoroughness, and especially with Phil and Sally’s
grasp of the details.

That evening the Chairman of the Board, Sam Bigger, entertained the board at his
magnificent home. Sam was the son of the founder of the company, and still owned 15% of the
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company. Also, his sister owned 15%, plus she and her brother controlled the foundation which
owned 10%. He was somewhat of a legend as an entrepreneur and a philanthropist. His second
wife, after a 40 year marriage, had died almost ten years earlier, and he had married a very
attractive 35 year-old woman, and they had proceeded to have a child, much to the consternation

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of his five grown children, who were not involved in the business. His wife was a lovely hostess
who made a great effort at making everybody feel at home. The food and drink were excellent.
The evening was entirely social, and a pleasant affair, if somewhat formal for Jack’s tastes.

All of the other directors were present except Waldo Lydecker, who was out of the

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country and Ben Oldster, who was recovering from surgery. Jim Bond, the CFO, was also
present.

The next morning, the Annual meeting was held at 9 am in a large meeting room at a
local bank. A few employees and shareholders attended. The agenda was very straightforward.
Sam Bigger chaired the meeting, and went through the legal formalities of ascertaining that a
quorum of stockholders was present in person or by proxy. He then said the only business was

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the election of directors, and asked if there were any stockholders who wished to vote in person.
There was none, so he asked the corporate secretary to tally the proxy vote. The secretary did so,
and announced that there was a majority voting in favor of all directors nominated in the proxy.
Sam then gave a very brief report on the year, and asked if there were any questions. There was
none, so, the chairman declared the meeting adjourned. The whole process took twenty minutes.
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The Board meeting started at 10 am.

The Board Meeting

The Agenda:
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1. Quorum
2. Approval of Minutes
3. Consent Agenda
 Regular Dividend
 Approval of CAR
4. Committee reports
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5. President’s Report
 Review of Financial Statements
6. New acquisition strategy
7. Other Business
8. Executive Session
9. Adjournment

The Chairman opened the meeting, and since all but two directors were present, he
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announced a quorum. He asked if there were any comments on the minutes, and hearing none,
said they were approved.

The consent agenda was designed to be an efficient way of handling routine items that
did not require a lot of discussion. No change was recommended in the dividend – it had been

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the same amount for about four years, and the dividend policy was reviewed once a year at
another meeting.

Jack wondered why the CAR was on the consent agenda. It sent a signal to him that
capital appropriations were considered routine, and he didn’t agree with that approach. He

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thought capital appropriations were an opportunity to learn more about the business and to
understand management’s priorities. He also believed that investing the company’s capital was
an important responsibility that required the board’s active involvement.

The chairman asked for any discussion of the consent agenda, and Jack considered
whether this was the time to raise his concerns. He decided not to say anything at this time, but
to determine through informal discussions whether anyone else shared his concerns. Since no

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questions were raised, the consent agenda was approved.

The meeting to this point had been underway for five minutes.

The Committee chairmen then made their reports.

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The Executive Committee had not met.

The Nominating Committee had met, and reported that since Jack had joined the board,
no other near term additions were planned.

The Audit Committee reported on its meeting. The chairman described the issue of
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hedging raised by the auditors, the process used to investigate it, and the conclusion that
there had been no material wrongdoing. He described the policy that the committee was
initiating – that currency transactions should be pure hedges with no timing anticipation
that exposed the company to additional risk.

He also reported on the ongoing discussions of the impact of the Sarbanes-Oxley

legislation, and that the Committee had approved the Internal Audit plan.
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There were some rather probing questions from Betty Moneymaker. She supported the
policy, but made the point that management must understand that appearances are very
important, and that management should not aggressively pursue opportunities that are not
directly aligned with its business without full disclosure to and the agreement of the
board.

The President then delivered a report on the affairs of the business. He said the financials
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had been distributed, and simply asked for questions. There was none since they were very close
to expectations. He said that the outlook was promising although there were some risks that a
large account in the major business might move some of its business to an offshore, lower cost
supplier. He said that this might be the beginning of a trend that was being watched closely.

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Jack saw a major problem with the financials in that they did not describe in detail the
profitability and trends in each subsidiary. He thought that the board should see
disaggregated numbers that would help them understand the problems and opportunities in
the subsidiaries, and then have management discuss its plans to address them. He vividly
recalled his early experiences at Dryden, where he found a situation strikingly similar to

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Mega’s. Dryden had almost failed because its senior management and its board were not
able to track each operating division’s profitability nor its management performance. This
compounded the problem of knowing what capital expenditures should be made and where.
This absence of discrete unit reporting and accountability make any serious effort to create an
effective corporate strategy virtually impossible. Jack had worked hard in his early years at
Dryden to fix these problems, and he had been very successful. He knew his challenge at
Mega would be one of broad cultural change to permit the effective transference and

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application of his vast knowledge, to the benefit of all Mega shareholders, but especially to
Sam, ironically perhaps the biggest obstacle.

John Rock then made a 30 minute presentation on an acquisition strategy that he was
studying. He was not yet prepared to make a recommendation, but wanted a reaction to the
concept. He was suggesting that it was important to grow, and that they didn’t have a lot of
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opportunities for internal, organic growth, particularly in their largest business, which was
number two in its mature market with approximately a 20% market share. The largest
competitor had 35% of the market. Rock thought that by acquiring the number three company
with its 15% market share, he could substantially reduce competition and costs, and thus
transform Mega into a more formidable competitor.
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There was also a briefing on the company’s strategy for a new product.

From the discussions, the board seemed split into two equal camps – a group that was
risk adverse, and wanted to proceed very cautiously, and a group that thought the status quo was
not acceptable, and that bold action was necessary. Jack wondered how these different
viewpoints were going to be resolved. He also wondered about priorities. Was it best to be
thinking about acquisitions before solving current problems? And, was there really so little
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opportunity for organic growth?

After the report, there was no further business, and the board went into a brief executive
session of only the outside directors. Sam Bigger was considered an outside director, so he
stayed in the meeting, continuing as the chair. John Rock left the meeting. The discussion
centered on the need to get the current operations fine tuned, in order to deal more effectively
with the threat of offshore competition. The feeling was that another domestic acquisition would
not solve that problem – it would only make the company more vulnerable.
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The meeting which had lasted about two hours, then adjourned.

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Jack’s Reflections on the Meeting

It was very clear to Jack that the long term directors – Bill Monday, Joe Cummings and
Bob Workman, along with Howard Bigger – would be very reluctant to cross Sam Bigger. He
also put Harry Harmony in this camp. But, he also felt that a couple of them might be open to

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new ideas, and perhaps provide a way to reach Sam. Sally was the most interesting of these.
While she seemed loyal to Sam, she was clearly her own person. She was passionate about the
foundation, and therefore concerned about anything that affected it. Jack didn’t know whether
she would take Sam on, or whether she would succeed if she did. But, he suspected Sam listened
to her as much or more than anyone else. These six, plus John Rock and Sam Bigger, gave the
group a majority of 8 out of 14 votes.

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He saw himself, Phil Agee and Waldo Lydecker as being truly independent. The two
venture capitalists, Abrams and Oldster, also seemed independent, but he wasn’t sure about their
motives. Betty Moneymaker seemed to think independently, but had self-interest in protecting
her investment banking relationship.

It was also clear to him that Sam and Sally, through their control of 40% of the stock,
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would win any proxy fights, unless their position was so unreasonable as to open the possibility
of stockholder lawsuits. But, proxy fights weren’t Jack’s style or intent, anyway. The question
for him was how to get the board energized to deal with the issues with which it was confronted.

He was very puzzled by Sam’s apparent indifference. Sam clearly had been a very astute
CEO who had built an extremely successful business. What had changed? It seemed too
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simplistic to explain his behavior by his new marriage. What else might be going on?

On the way home, Jack reflected on what he had seen, and what he should do. Who were
the power players other than Sam? Was it all perfunctory? Was there any evidence that the
board ever seriously challenged Sam or the CEO? Why weren’t there more questions during the
meeting?
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Jack felt that the board wasn’t appropriately concerned with the large risks inherent in the
currency transactions. He wondered why a company as large as Mega would tolerate
questionable activities with such a low threshold of possible financial gain.

He also looked at himself. Why was he so reluctant to ask questions, particularly about
the CAR? This type of board meeting was a vivid contrast with his company’s board meetings
where issues were presented fully and actively discussed. What would be required to make this
board more open and collaborative? What was his responsibility to bring about change? After
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all, he was just one of many directors, and the newest one, at that.

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