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CORPORATE GOVERNANCE

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The Jack Wright Series # 1 – Jack Wright, Director

Introduction

Jack Wright, 55, the CEO of Dryden Corporation, which was located in the mid-west,
had led his company to strong growth and profitability levels during the previous ten years. He

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had led a group that bought controlling interest in Dryden when it was floundering from
mismanagement, product obsolescence, and foreign competition. Dryden had sales of $250
million when his group bought it. Wright and his management team had rejuvenated the
company so that it displayed a strong balance sheet and had grown rapidly through a dozen
acquisitions to reach annual revenues of more than $2 billion. This success had gained wealth
and recognition for him and had led to his being promoted to leadership positions in his
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community, and in the industry in which Dryden competed.

While Wright felt considerable pride in his accomplishments, he was nonetheless pleased
when John Rock, 63, the CEO of Mega Corporation (a well-known company that was much
larger than his) approached him in February of 2002 about joining Mega Corporation’s board of
directors. His friend explained that a formal invitation would be forthcoming from Mega
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Chairman Sam Bigger if he indicated positive interest in joining the board. Mega would need an
answer by the end of February in order to get Jack’s name into nomination in the company’s
proxy statement. Wright had known Rock quite well when they both served on the board of their
alma mater and liked him as well as respected him for being a solid thinker. John thought that
Jack had the personality and experience to be helpful in working Mega’s situation. He conveyed
these feelings to Jack when he issued the invitation to him in an effort to persuade him to join the
board. This conversation prompted Wright to remember having attended several social events,
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including dinners and a golf outing, where he met several members of Mega Corporation’s
Board of Directors. The social occasions had been orchestrated so smoothly that Wright had not
had any idea he was being considered as a candidate to join the board. The directors he had met
included two CEOs of other large companies, a well-known trial lawyer, and a nationally known
academic and author, along with his business friend.
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This case was prepared by Wallace Stettinius, Visiting Lecturer, 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.
11/2/05.

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The timing of the approach from John Rock was somewhat of a coincidence. Jack had
been giving a lot of thought to the future of his business. He was concerned about how he was
going to grow the business, and he realized that acquisitions was one path – one that Mega had
successfully followed.

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He also recognized that his primary allegiance must be to his business. The fact that his
business might be a logical acquisition for Mega crossed his mind. He was also aware that one
of Mega’s businesses ($500 million in sales) was in direct competition with his business. Was
this conflict of interest material enough to create problems for him and Mega?

He thought that he had the management team in place so that he had the time for the
Mega board position. In fact, he was looking for opportunities to expand some of his key

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people’s responsibilities.

Wright indicated to Rock that he would need to think about the opportunity and talk it
over with his wife, who would be expected to participate in some activities with the members of
the board of directors and their spouses. A few days later, he sat down in his study to organize
his thoughts and apprehensions about the possibility of joining the board of Mega.
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He knew that its Chairman and former CEO, Sam Bigger, still tightly controlled Mega
and that the company was going through a difficult time. Given his friendship with Rock, could
he, and did he want to be as independent as he thought directors needed to be, particularly since
there would probably be the need for some tough decisions. Wright was especially concerned
about how to conduct effective due diligence regarding the Mega Corporation. He was also
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concerned about why they wanted him and the role they expected him to play.

The Mega Corporation

From public records, and from conversations with John Rock, Wright pieced together the
following background on the company.
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The Mega Corporation, headquartered in a mid-sized Southeastern city was a large ($7.2
billion in sales) diversified holding company with eleven subsidiary companies operating in a
variety of industries.

Sid Bigger, Sam’s father, had founded Specialty Manufacturing Company during the
early years of the Great Depression. After struggling for some years to survive, the company
was bailed out by government contracts during the Second World War and the years after the
war were marked by substantial growth and profitability.
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Sam Bigger was born in 1925. His younger sister, Sally, was born in 1930. He entered
the Army Air Force in 1943 and became a fighter pilot. He was fortunate enough never to see
combat, but did spend an exciting couple of years in France. After the war, he went to college,

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where he majored in golf and women, graduating in 1951 with a solid C average. By then
Bigger had become good enough at golf to try the professional tour for four years. And he was
good enough with women to marry a Hollywood starlet while he was on the golf tour. By 1955,
aware that he wasn’t going to excel as a professional golfer and that he didn’t want to go to
Hollywood, Bigger decided to work in the family business, which had grown to about $50

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million in annual sales. His wife didn’t come with him, but she was happy for him to take their
two children.

Bigger settled into the family business and found that he was a pretty good salesman—in
fact, a darned good one. Over the next ten years, the father and son were able to grow the
business to about $200 million in sales, with Sam generating the revenues and his father running
the operations side. He married a local woman, and they raised his two children plus three of

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their own. He began to develop a taste for the “good life,” a nice home, good travel, and a lot of
golf. But, Bigger had grown up. He was totally committed to his wife and the company.

In 1965, his father and mother were killed in an airplane crash, and Bigger found himself
in charge of the business that he and his sister, Sally, inherited. Their father had also set up a
charitable foundation by his will, which Sally ran, although both of them were trustees. Sally was
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an impressive person in her own right. While she was on the board of Mega, she had an
independent career of her own. She had built a very successful real estate firm, and had a happy
marriage to Bob Moses, a successful physician.

Bigger was smart and understood his strengths and weaknesses. He knew that he had to
find someone who could replace his father in running the business. John Rock caught his eye.
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Rock was the first in his family to go to college. He had graduated with an Engineering/
Industrial Management degree in 1961 and had immediately gone to work for Specialty
Manufacturing as a production foreman. By 1965, he was a plant manager. By 1967, Rock had
become vice president for Manufacturing and was named COO in 1972, after taking an extended
Executive Management graduate course. Bigger and Rock constituted a strong team: Rock was
as steady and conservative as Bigger was flamboyant and entrepreneurial. An exceptional CFO
and administrator, who had started as an accountant with the company in 1950 and would retire
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in 1990, supported them.

By 1975, the company had reached $500 million in sales and Sam decided to acquire a
competitor that was a division of a larger corporation, at a bargain price. It was a turnaround
situation and was successfully accomplished. While Bigger saw a lot of opportunity for internal
growth of Specialty, he had been bitten by the “deal bug.” He came up with the idea that they
could find other troubled divisions of larger corporations that they could buy at bargain prices,
turn around, and then sell to strategic buyers who were trying to consolidate market-leading
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positions. He tried a couple of smaller deals and was very successful.

In 1985, the company crossed the magic $1 billion mark in sales and decided it was time
to go public so that Mega could make even larger deals, in part using company stock as its

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currency. The success of the business had also pleased Sally. She and her husband had become
very philanthropic over the years. They didn’t have children, and they viewed doing good works
in their community as their legacy. By 1985, the foundation was giving away about $2 million a
year, most of it coming directly from Mega dividends, or indirectly from Mega through Sam,
Sally and Bob.

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The stock offering and subsequent use of stock to make acquisitions changed the
ownership structure as follows:

Pre-offering Post-offering 2002

Sam 37.5% 22.5% 15%

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Sally 37.5% 22.5% 15%
Foundation 25.0% 15% 10%
Public 0% 40% 60%
Total 100% 100% 100%

The stock offering gave the foundation $75 million in cash with no tax liability, and each
of the two siblings $112.5 Million before taxes.
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The next ten years were marked by profitable growth, both in the Specialty
Manufacturing Company and in the portfolio of acquired businesses. Specialty Manufacturing
Company had acquired about twenty companies and had sold ten of them with holding periods of
5 to 10 years. Bigger was proud that he had not lost money on a single deal, and some
investments had been incredibly profitable. The company had been renamed Mega Corporation
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in 1990.

In 1995, Sam’s wife died. While very saddened, he quickly rebounded and, in 1997,
remarried—this time to a 35-year-old saleswoman at Specialty. They almost immediately had a
daughter, who was the apple of his eye. Bigger was 72 years old and in excellent health, but he
wanted to shed the burden of running the company, so he had appointed John Rock as CEO in
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1997. It was clear to all, however, that he had not given up control. He and his sister still
controlled 40 percent of the company. Bigger was an active non-employee chairman. But deal-
making stopped. By 2003, they hadn’t bought or sold a company since 1997. He spent about
half his time at the company and the rest with his new family and playing golf. He was 78 years
old in 2003.

None of his five older children worked in the company and none had aspirations to do so.
One son, however, was on the board. Sam had not given his children much of his holdings
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because he said he didn’t want to spoil them. They said it was because he wanted to use it to
support his lifestyle. He had, on occasion, helped them.

Jack Wright gave a lot of thought to the meaning of all of this in terms of whether he
should accept the invitation, and if so, how it would relate to his role as a director.

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The Current Situation

Wright read a draft of the 2001 Mega Annual Report thoroughly.

The financial picture was very straightforward—the company had a strong balance sheet

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with $4.8 billion in assets, long-term debt of $500 million, and equity of $3.1 billion. There was
about $1 billion of goodwill, after a write-off under the new accounting rules of $300 million
that was impaired. Cash and marketable securities offset the debt so that net debt was zero.
Overhanging the balance sheet, however, was a defined benefit pension plan that was under-
funded by $1.1 billion if continued to maturity. This liability was not stated on the balance sheet
but was described in the footnotes. Capital spending had been less than depreciation over the
last five years.

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The income statement trends were not as good. Sales were relatively flat. The Specialty
business was about half of sales, and had been flat for some years in a mature market. With the
recession starting in 2000, sales had declined 10 percent by 2002. Foreign competition was
squeezing margins. Specialty had been aggressive in moving production off shore, and this was
the only factor keeping it competitive. The international thrust had, of course, been very
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disruptive to work force morale in the United States. On the other hand, one of the portfolio
companies, Star Services, was growing at 20 percent a year and had reached $1 billion in sales.
Three of the other ten accounted for all of the rest of the growth in the portfolio. Four companies
were holding their positions during the recession, and two were experiencing small declines in
revenues. Profits and cash flow trends were off much more than sales. Net income in 2002 was
down to $252 million from a high three years earlier of about $436 million. EBITDA was $750
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million, down from about $900 million. Annual dividends had stayed flat at $100 million.

The stock price reflected this disappointing performance, compounded by the general
slide in the stock market since the economic bubble burst in 2000. The market capitalization of
the equity was now $3 billion, down from $5.5 billion five years earlier. The stock price had
gone from $55 at its peak to the current $30 a share.
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Wright was not yet familiar with the company’s strategy for moving forward. The sense
he obtained from the analysts’ reports and John Rock was that the near term outlook was going
to be no better than the economy, and that the longer-term strategy was not clear.

He learned that the directors’ retainer was $50,000 annually, plus $2,000 for each
meeting. There were six meetings a year, plus three or four committee meetings, so that the total
fee would be approximately $70,000. Since he already had an income of about $2 million a year,
this was not an important consideration. In addition, Mega Corporation’s directors were given
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stock options on 5,000 shares of stock annually, which was currently selling at $30 per share.
Within two years of being elected, each director was expected to purchase at least $100,000
worth of stock on the open market.

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Looking at the list of directors, he was impressed with the fact that eight had been on the
board for more than 14 years. He doubted that they were truly independent. If they were not,
then little change would come about that management and the majority ownership didn’t support.

Should Wright join the Mega board? He was interested because he readily embraced

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challenges and this would give him a much larger arena in which to play. He admired what Sam
Bigger and John Rock had done in building Mega, and thought there was much he could learn
from them, in spite of their current problems. He decided to make a list of the pros and cons
relative to Mega and to his personal situation, and to talk over the possibility with his wife and a
couple of friends in whom he had a great deal of confidence.

Of all the pros and cons that resulted from Jack’s private thoughts and actual discussions

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with family and friends, foremost among his reservations was that one person, Sam Bigger, had
absolute control of Mega. As a director of a publicly held entity, this was an inherently
dangerous situation if Sam drove actions that benefited his interests to the detriment of the
remaining unaffiliated shareholders. Jack did not have any hard evidence that this could occur,
but in principle he was troubled by the possibility. And, furthermore, even though Jack was
close friends with John Rock, he thought that a possibility existed that he was being cultivated
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for a board seat because he was viewed as manageable by Sam, a “yes man” of sorts, lacking in
the independence of thought and action essential to non-managerial directors. Yet, neither of
these reservations was of significant magnitude to derail Jack’s interest and the challenge he
sensed existed.

He thought he had two opposing options if he chose to join the board. The first was to
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not pursue due diligence much further, and simply listen and learn while he built relationships
and credibility. He thought that he could deal with problems as they emerged, and that if the
situation was not a good one for him, he could resign.

He concluded that he really did want to join the Mega board in spite of the obvious
difficulties it was having, and the fact that bringing about change might prove difficult.
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He thought that he could make a difference. And, he also believed that it presented
opportunities for him and for Dryden that could be attractive.

The other approach would be to find out whether they were sincerely interested in
meaningful change, and what role they wanted him to play in bringing about change. If he took
this approach he realized that he should talk further with his friend, John Rock, and with Sam
Bigger, and even other directors. He pondered which approach would be the better one.
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As Jack wrestled with this decision, he found his thoughts coming back to an
extremely complicated problem in which he was involved as chair of the Governance and
Nominations Committee of a large community bank in his hometown. Could such an
instance of apparent inside dealing occur within the Mega board, given Sam’s looming

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presence? Jack thought Sam was implicitly honest, but then so did the founders of the bank
view one another . . .

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