Originally published in Fortune on October 13, 2015.
Investors, analysts, employees, and the business media were all equally startled by the exit of DuPont’s accomplished CEO Ellen Kullman this month, just one quarter after her triumphant proxy battle with activist Nelson Peltz.
Kullman’s departure may have more to do with flaws in the DuPont board’s decision making process than Peltz’s pressure or any failings in her leadership. Psychological pathologies among infamous past boards of General Motors, American Express, Gap, Jet Blue, Apple, Hewlett Packard, and Motorola may offer insight into Kullman’s resignation.
Yes, groups can become just as stress-crazed as individuals, which can cloud the judgment of otherwise savvy decision makers. Sigmund Freud was one of the first to diagnose a shared psychosis as a psychiatric syndrome of shared delusions, calling it “folie à deux.” In more recent decades, Yale’s Irving Janis famously branded the group pathology of excessive cohesion, attributing the fear of constructive conflict among teams to disasters such as the Pearl Harbor bombing, Kennedy’s Bay of Pigs fiasco, and the space shuttle explosions. DuPont’s abrupt announcement of CEO Ellen Kullman’s resignation suggests a deeply troubling, mercurial board temperament that is unfortunately similar to the self-destructiveness of the boards of other great U.S. enterprises.
Board failures: It has nothing to do with a lack of qualifications
A corporate board’s top responsibility is to hire—and fire—the chief executive. Some are too slow to act, some move just in time, and others, in haste, act without justification. United Technologies last year and United Airlines last month got it just right, responding quickly and quietly to remove their CEOs after obtaining evidence of failings in leadership performance and conduct. Of course, boards also get it right when they stand by a strong CEO who is leading admirably through a tough period. JPMorgan Chase defended Jamie Dimon’s command through the global financial crisis and the 2012 $6 billion trading fiasco known as “the London Whale.” Dimon was transparent about the bank’s internal failure, and its stock has doubled since then. Despite persistent attacks on Dimon’s titles and compensation, the board has consistently stood behind him.
Hiring the right CEO is incredibly difficult, especially given the murky performance data on outside hires, as references can be biased by collegial envy or fear of defamation. Picking a CEO becomes even more fraught when board pathologies enter the equation. Just look at HP’s disastrous appointment of Carly Fiorina and, later on, Leo Apotheker as CEO. Because of the company’s dysfunctional search process, HP’s board of sophisticated, experienced directors never met either of these CEO candidates before they were already on the job for a month. CEO removal is even more complicated because of the bonds many board members form with incumbent leaders. The bankruptcies of American Apparel this month, Lehman Brothers 7 years ago, and Enron 15 years ago remind us of the negligent boards that missed the signals that change at the top was overdue. Members of these boards all had industry and leadership experience, financial literacy, and independence in spades. They didn’t fail in their roles because they lacked qualifications. In fact, transcripts of the Enron board deliberations show that Mickey LeMaistre, a medical researcher and former head of the MD Anderson Cancer Center who received financial support from Enron, was, nonetheless, the most persistent critic of Enron’s corrupt business practices.
Trigger-happy board members: A recipe for disaster
When many sophisticated boards do act, it is often in response to board politics rather than objective performance concerns. James D. Robinson III brilliantly led American Express’ direct marketing revolution, marrying technology and customer segmentation, only to be undermined in 1993 by a faction of directors with their own unfulfilled late career agendas and activist investors. Five days after Robinson had been reappointed chairman, Rawleigh Warner Jr., the retired CEO of Mobil, and former American Express chief Howard L. Clark led a board revolt to remove Robinson. They expressed their frustration with briefly declining stock prices at AmEx. Ultimately, the week of governance turmoil cost the company an additional 9.3% of stock value and Harvey Golub, Robinson’s protégé, was put in charge.
In March 2009, Fritz Henderson succeeded his failed predecessor Rick Wagoner, masterfully leading GM out of bankruptcy, only to have his 25-year career at the auto giant end abruptly. He was replaced, in rapid sequence, by two “retired” telecom executives on the board who had none of the manufacturing, engineering, global marketing, or otherwise relevant industry experience to do the job. Many GM executives contacted me with their bewilderment and anxiety over these abrupt changes. Product safety oversight failures subsequently cascaded down from the top until Mary Barra took command in 2014. As a 25-year GM veteran who served in many key engineering, manufacturing, and administrative roles, Barra had a reputation for being a clean-up leader with genuine, relevant expertise.
In 2007, eight years after Jet Blue was founded, its founder David Neeleman was removed as CEO and replaced by chief operating officer after David Barger, who cultivated board support in blaming Neeleman for a high-profile operations failure. In short, nine airplanes filled with angry passengers sat stranded on the runway of JFK for six hour or longer. Ironically, this failure might have been laid at the feet of the official who seized the CEO position from Neeleman. But Neeleman humbly raced around with multimedia apologies, investigations to prevent the return of such problems, and compensation for the passengers while his operations chief worked the board. The board never even met as a group before they voted to fire Neeleman. I spoke with several top management team officials soon afterwards as they relayed the widespread demoralization in the ranks.
A similar power struggle between legendary retailer Mickey Drexler, who was CEO of Gap stores, and Gap chairman Don Fisher led to Drexler’s ouster. As CEO, Drexler led the company from $480 million to $14.5 billion in revenues and a 169-fold stock increase from 1983 to 2002. Fisher had pushed Drexler into a 70% growth in real estate despite the conflict of Fisher’s brother owning the construction company building these excess stores. Gap has never regained its footing in fashion or finance since Drexler’s departure. And Drexler told me he never had the chance to address his own board before he was terminated.
In Apple’s case, a board was able to correct its blunder. In 1985, former Apple CEO John Sculley forced Steve Jobs out of the company he founded. Biographer Walter Isaacson described Steve Jobs as the “creative entrepreneur whose passion for perfection and ferocious drive revolutionized six industries: personal computers, animated movies, music, phones, tablet computing, and digital publishing.” Yet, in 1985, soon after the successful launch of the pioneering Macintosh and the LaserWriter printer, Jobs was out. The firm suffered from multiple product flops, plunging stock prices, and crippling losses until Jobs was brought back in 2007 to build what became a $200 billion company and the most valuable brand in the world.
Eager to burnish her soiled reputation as CEO of Hewlett-Packard, Republican presidential hopeful Carly Fiorina was quick to disparage the leadership of her revered predecessor Lew Platt, who helped hire her, to justify her ill-conceived merger with Compaq, a deal that snuffed out more than half of the value of HP and three quarters of the value of both firms pre-merger. Platt told me he was sickened by this acquisition but did not want to campaign against his successor. Platt, himself, stepped down as CEO prematurely in response to board pressure despite achieving 20% annual sales and profits growth through the 1990s. During his seven-year tenure at HP, Platt had built HP’s revenues up from $16 billion to $47 billion.
Over the past 15 years, HP suffered from tumultuous leadership, with a whopping seven CEOs during that period. It had three CEOs over the first 45 years of its history. Only now under Meg Whitman does HP’s leadership and board have a compelling strategic vision and the management stability to act on it.
Motorola suffered from a board misfire, which led to a long, tragic saga. In 1997, Chris Galvin took the reins at the company his grandfather Paul Galvin founded in 1928, which originally manufactured a broad portfolio of electrical appliances. Under Chris’ father Robert Galvin, Motorola became the global gold standard of manufacturing quality, introducing the first “Six Sigma” processes and inventing the first cell phones, while also becoming a leader in semiconductors. Chris had a few setbacks, such as the technologically brilliant but commercially unsuccessful Iridium satellite phone, and the delayed production of a new generation of phones due to SARS epidemic shutdowns of some key Chinese suppliers. At a routine board meeting in the fall of 2003, Motorola shocked the industry and fired Galvin. Galvin told me he was completely blindsided by this board’s decision and had no chance to make his case. Two directors confided their regret to me, saying, “We just fell victim to the constant drumbeat of the media over presumed nepotism….”
By the time an outsider was hired three months later, Galvin’s planned turnaround came to fruition, with revenue up 41% over the prior year and a 454% increase in earnings. In fact, just two weeks after Galvin’s exit, new product orders were up 25% and cell phone revenues were up 44%. Nonetheless, key Motorola officials made their way for the exits, confused by Galvin’s ouster and the unclear direction of his successors. Three years later, activist Carl Icahn bought a stake in the company and began to dismember it. The subsequent implosion of Motorola is not to be blamed on activists, however. As Newsweek’s Kevin Maney explained, “Much of the blame falls on the company board of 2003. While believing it was doing its fiduciary duty, it caved to pressure from Wall Street and the media to try to produce positive and predicable quarterly numbers. It fired the wrong man at the wrong time….”
These situations, especially the HP and Motorola scenarios, seem dangerously familiar to the governance crisis at DuPont. Once again, a temporary cyclical setback, such as at HP or Motorola, was misread by an anxious board worn down by external saber-rattling in the media.
Ellen Kullman presided over a 266% rise the first six years of her tenure compared to a 165% return for all S&P 500 firms as well as the third highest shareholder returns of all world’s best chemical companies. DuPont’s temporary setback this year was due to China’s slowed economy. China dialed down its investments in Brazil which, in turn, depressed DuPont’s huge investment in the South American emerging economy.
This is, by all expert views, a cyclical problem, yet DuPont’s board seems to have acted as if there was a structural issue. Neither the board nor the activists anticipated this global twist of events, which is beyond the control of any one CEO. Kullman was repositioning DuPont around its historic research lab, which spends a mere $220 million a year (or 0.7% of sales) but is responsible for new products that account for a third of DuPont’s revenues. Nelson Peltz and Trian’s proposal to shutter that resource would have destroyed long-term value at the chemical giant.
To push out a 27-year company veteran and high-performing CEO on the basis of a single disappointing, but highly profitable, quarter is worrisome. To create internal chaos and external confusion so soon after reaffirming that leader’s command erodes confidence this board. Furthermore, not bringing Kullman into the executive sessions of the board to defend herself shows cowardice.
The disjointed thinking of DuPont’s sophisticated directors may have been a manifestation of groupthink in reaction to the wilting external criticism of a few activist investors and some very new directors, namely recently retired CEOs Ed Breen and James Gallogly. The battering in the media, confusion over cyclical versus structural issues, the ambitions of a few directors, and the inability to talk directly with the board to correct misconceptions makes for a toxic, dysfunctional environment.
The boards of some of the nation’s most venerable enterprises are especially susceptible to self-destructive behavior. Many directors at such storied firms are anxious to preserve a legacy they worry they could not have built on their own. At the same time, many are fearful of appearing as mere custodians of past grandeur if they don’t make big, bold changes. They often destroy the greatness of their cultures in the process. Management psychoanalysts like Manfred Kets de Vries and the late Abraham Zaleznik have described this dynamic as an Oedipal-like rivalry, where boards harbor resentment toward the inherited genius of the generation that preceded them, and are eager to leave their own generational imprint.
The clamoring for change at any cost by activist investors has been magnified by the media, global regulators, governance critics, financial analysts, ratings agencies, community groups, and platoons of other vocal critical constituencies with inconsistent short-term yardsticks of success and fears of disruptive technologies, ferocious competitors, and economic uncertainty. This loss of purpose is what sociologist Emil Durkheim termed “anomy,” where people distressed by the confusion of fluid standards turn self-destructive.
U.S. Navy Commodore Oliver Hazard Perry famously declared in his 1913 victory in Battle of Lake Erie, “We have met the enemy, and they are ours.” Renowned cartoonist Walt Kelly parodied that pronouncement with his character Pogo the Possum in his comic strip of the same name. Satirizing the self-destructive nature of contemporary bureaucracies, Pogo routinely declared, “We have met the enemy and he is us.” Such wisdom has been lost.
Corporate boards should see that they have met the enemy and it is themselves—not activist investors, regulators, or even lawyers. Hopefully, DuPont’s directors can save themselves from the governance disasters of HP and Motorola and instead correct their mistakes, as Apple did. Kullman stepped down taking no severance payment, just the normal retirement package, and she refused to disparage the board that failed her. Perhaps Kullman should keep her lab jacket handy in case the board comes back to its senses.