Case Offers a Basket of Lessons in Corporate Governance

Usually when a board does a poor job of planning the succession of the company’s CEO, the consequences are some backlash from shareholders and maybe an increase in negative votes at the next annual meeting. On rare occasions, the stakes are much higher.

Such is the case that has unfolded at privately held grocery chain Demoulas Super Markets. The owner of the Market Basket chain of grocery stores, which operates 71 stores in New England, has a mess on its hands after it fired CEO Arthur T. Demoulas. The removal in June of the CEO, who was generally very well liked by employees, resulted in protests at company headquarters and stores by thousands of its employees and customers. Several senior-level managers resigned, store shelves were left empty, and the company began losing millions of dollars as the dispute drags on.

When it comes to corporate governance gone haywire, the Market Basket case is an extreme example. “It’s a private company. To some extent, management and owners can do what they want,” Matt Orsagh, director of capital markets policy at the CFA Institute, says. “That discipline of the public markets having to answer to shareowners isn’t there.”

Nonetheless, part of the conflict faced by the Demoulas board of directors is one faced by any corporate board that finds itself in the midst of controversy, “whether it’s a takeover contest or an activist attack,” says Gary Lutin, chairman of the Shareholder Forum. “You have a coalition that has come together to take a dissenting position. In this case, instead of [investor activist] Carl Icahn jumping on CNN, you have employees picketing the company.”

The same rules that apply to winning the support of investors apply to all stakeholders:  “You need to maintain control,” Lutin says. “That’s what the board is supposed to do, and they’re not here.”

Others agree the board did a poor job of anticipating the consequences of its actions. “This is a disaster that, for sure, should have been averted,” Wharton professor Michael Useem says. “The buck does stop with the board.”

Those who have been following the saga closely describe transcripts of Demoulas’ board meetings as reading like a comic book series—a fight between good and evil. Harvard Business School professor John Davis, who has been studying and advising family owned companies for more than three decades, explains that “the two sides have different points of view about the management of the company.”

On one side is the Arthur T. family, who remains “focused on growing the company and investing in it,” Davis explains. On the other side is the Arthur S. family, the rival cousin of Arthur T., who, “having not been involved in the business since the death of their father in 1971, has more of an investor mentality and more interest in the financial awards that were due to them as owners of the company.”

“Even though the family is at war, the show of loyalty by the employees and the ability of this business over time to achieve great customer loyal, those really indicate some strengths of family companies.”
John Davis, Professor, Harvard Business School

The family feud reached its boiling point in June, however, when one board member, Rafaela Evans, for reasons unknown, switched allegiance from one side to the other, effectively swinging majority control over to the Arthur S. side. After eight years as CEO, Arthur T. was fired. “That’s when everything erupted,” Davis says.

Boardroom Wars

Boardroom conflicts are not uncommon at family run companies, says Davis. And can resolve with the sale of the company or the firing of the chairman, he says.

According to a recent report by the International Finance Corp. and the Center for Effective Dispute resolution, 30 percent of 191 directors polled said they had experienced a boardroom dispute affecting the survival of a company. The most common disputes have to do with the “financial, structural, or procedural workings of the organization,” closely followed by the “personal behavior and attitudes of directors,” the report stated.

The report also found that the most difficult factors in resolving board disputes relate to competing parties on the board. Thirty percent cited “handling the emotions of those involved and separating personal from business interest,” while another 27 percent cited “conflict of personal or family interests versus interests of the company.”

Davis says that Demoulas’ conflict, and others like it, shouldn’t undermine the success that most family-owned companies realize. “Even though the family is at war, the show of loyalty by the employees and the ability of this business over time to achieve great customer loyalty, those really indicate some strengths of family companies,” he says.

“In spite of the weaknesses in the governance system and the family itself, [Market Basket] is a family business that has performed very well,” Davis adds. The company reportedly posted $4.6 billion in revenues in 2013.

Message Control

As a general lesson in corporate governance, boards of public and private companies alike can better maintain control by communicating “clearly and far in advance” to both internal and external stakeholders the rationale behind any big decision the company makes, Orsagh says. “It is the prerogative of companies to make the decisions they make, but it behooves them to make sure they communicate adequately those decisions,” he says.

“The board has a responsibility to assure an accurate understanding of issues by the decision-making constituencies,” Lutin agrees. “That’s just as important a responsibility as assuring accurate financial reporting.”

Each stakeholder group—shareholders, employees, customers, for example—is “unique and calls for different forms of communication and outreach,” Orsagh says. If the process through which the company makes its decisions “seems to be done fairly and justly, it’s less likely to run into problems,” he says.

Succession Planning

In most companies, the nomination and governance committee has direct responsibility to ensure the company is well-governed, Useem says. That entails not only ensuring the company effectively communicates to stakeholders the rationale behind its decision making, but also picking the right board candidates, or overseeing the CEO succession planning process.  

Demoulas Board of Directors

Demoulas Super Markets has seven members on its board of directors. The two sides of the family each appoint two members to the board, while its shareholders appoint three independent directors.
Arthur S. Demoulas. The only Demoulas family member on the board, Arthur S. and his relatives assumed control of the board last year and ousted Arthur T. from the chief executive officer role in June 2014. 
Keith Cowan. Cowan, who serves as both chairman and an independent director on the Demoulas board, previously was president of strategic planning and corporate initiatives at Sprint Nextel. Prior to that, he was chief field operations officer at BellSouth, a company he joined in 2004.
Gerard Levins. Appointed by the Aruther S. side, Levins is a tax law attorney with Levins Tax Law, a firm that he founded.
J. Terence Carleton. Appointed by Arthur T. side, Carleton is a financial advisor at UBS Financial Services, where he has been since 2009. Prior to that, he spent 20 years as executive vice president at advertising firm Hill Holliday.
William Shea. Appointed by the Arthur T. side, Shea brings to the Demoulas board 35 years experience in the financial services industry. Most recently, he spent 19 years with accounting firm Coopers & Lybrand. Previously, he was CFO at BankBoston.
Eric Gebaide. Gebaide is managing director of Innovation Advisors, an investment banking firm for technology companies. He has served on the Demoulas board of directors as an independent director since November 2013.
Ronald Weiner. Weiner is president and chairman of accounting and consulting firm Perelson Weiner. He serves as an as an independent director on the Demoulas board of directors.
Source: Jaclyn Jaeger.

That brings about another lesson in corporate governance: the importance of having in place a strong succession plan. “If you have a well-functioning board in which people really take their fiduciary responsibilities as seriously as they must, they generally will come up with a workable succession plan,” Nabil El-Hage, founder of the Academy of Executive Education, and a former independent director who resigned from the Demoulas board last year.

El-Hage’s resignation, itself, indicates just how venomous a boardroom dispute can become, if not resolved quickly. In publically announcing his resignation, for example, El-Hage had explained that serving on the board “evolved into a very difficult and time-consuming assignment.” He cited 28 board and committee meetings that had taken place over a period of just two months.

Aside from having a strong succession plan in place, an equally important consideration for boards is appointing members whose business acumen complements the overall culture of the company. Ignore that factor and you risk an acrimonious dispute like the one Demoulas’ board faces right now that undermines a company’s operation and performance.

The new group of independent directors on the Demoulas board “didn’t know anything about the company or people involved,” David Klebanoff, a partner at law firm Gilman McLaughlin & Hanrahan, says. “They came in and immediately started with their five-year plan for this and that in a company that’s been run as a family business for many years.”

“They expected that this is how a big business is supposed to run,” Klebanoff adds. “Right off the bat, you knew things weren’t going to go well, and it hasn’t.”

The board knew it wouldn’t win any favoritism among employees by firing Arthur T. What they didn’t expect was the amount of wrath they actually got.

“The board never conceived that employee loyalty was such as it has proven to be,” Klebanoff says. “The fact of the matter is they utterly misunderstood the company, its culture, and its people, and they look like idiots, so they’re looking for somebody to blame.”

The overall lesson for all boards is that “fiduciary responsibilities go well beyond contract law,” El-Hage says. “That principle extends to everything we do as officers and directors. It’s when fiduciaries lose sight of these obligations that troubles tend to begin.”