America's Worst Boards These six aren't just bad, they're horrible. So why don't shareholders throw the bums out? It isn't easy.
By Geoffrey Colvin

(FORTUNE Magazine) – The greatest bull market in history is not a good time to be on a bad board: You stick out more starkly than ever. This year's assembly of America's worst boards includes plenty of world-class governance badness--and for contrast we've added a look at America's best boards (see box). As in years past, we canvassed institutional investors, corporate-governance experts, investor advisory firms, and shareholder-rights activists for nominations. FORTUNE made the final selections. With proxy season approaching, you'll soon be asked to vote on director nominees. Remember, you can withhold your vote. Think about the past year and ask, What would happen to me if I'd done my job the way these directors have done theirs?

Advanced Micro Devices

AMD is the only company to appear on FORTUNE's list of America's worst boards for each of the past three years. The California Public Employees' Retirement System (Calpers) recently named AMD to its "focus list" of governance targets for the third time. Our competitors at Business Week this year deemed AMD's board America's worst. Here's what's going on.

AMD makes microprocessors in direct competition with Intel, which has ten times AMD's revenues and 62 times its market cap. For years this one-sided battle has followed a pattern: AMD announces a new chip design. As its introduction approaches, hopes rise, as does AMD's stock. The chip arrives, customers order it, the stock rises higher. Then Intel retaliates by cutting prices, and AMD announces it's having trouble manufacturing the chips in quantity. The stock tanks, and the cycle repeats. The stock chart looks like a photo of the Himalayas, but whether you measure from peak to peak or valley to valley, performance over any substantial period has been awful.

AMD's board appears to work not for the shareholders but for CEO and founder Walter Jeremiah Sanders III. Many in Silicon Valley think he should have been replaced long ago; instead the board has given him a remarkable 33-page employment contract. Among many other provisions, it obligates AMD to repay up to $3.5 million Sanders might borrow from anyone for any reason and guarantees him a performance bonus after he's dead. The board also seems to be having trouble with its No. 1 duty, choosing a successor to Sanders, who is 63. Last summer President Atiq Raza resigned abruptly, shocking Wall Street, which had believed he was heir apparent. The company recently hired a new president, Hector Ruiz (ex-Motorola). He was able to get a promise of two years' extra salary if he isn't made CEO within a couple of years.

AMD's stock is high now because it has introduced its latest chip, the Athlon. History says that this is where the cycle turns down. Over the years AMD executives have sold large numbers of shares just before the price begins to fall--and in this year's first several weeks, they sold or registered to sell more shares than ever.

Archer Daniels Midland

Think of ADM's board as the Albania of corporate America: It goes its own bizarre way, the results are terrible, and it doesn't really care what you think. We named this board to our list of America's worst last year, noting among other features its liberal attitude toward executive criminality. When senior vice president Michael Andreas (son of former CEO Dwayne Andreas) was indicted on federal price-fixing charges, the company put him on leave of absence, meaning he was paid for doing no work. After he was convicted, he went on unpaid leave, which is continuing while he serves a two-year prison sentence.

The board persists in its Albanian attitude toward executive pay, stating explicitly that compensation does not depend on the stock's performance or the company's profits. Why not? Because, the board explains in its proxy, the stock can be affected by such things as analysts' recommendations or buying and selling by mutual funds, and you can't hold the CEO responsible for that, now can you? When a board doesn't make executives accountable for performance, you get just what you'd expect. Last year we reported that ADM stock had fallen about 30% in the previous 12 months. It's down another 25% since then, underperforming even the peer group of companies selected for comparison by ADM itself.


California environmentalists have long despised this Houston conglomerate for logging redwoods. Maxxam mostly ignored the tree-huggers, until they were joined last spring by two institutional shareholders packing serious clout: Calpers and the New York State Common Retirement Fund. All three groups supported shareholder resolutions to change the way Maxxam elects its board, and they wanted to make themselves heard at the annual meeting. As the meeting approached, Maxxam moved the venue from Houston to Point Blank, Texas, at the edge of the Sam Houston National Forest, 85 miles away and 20 miles from the nearest hotel. The remote meeting was uneventful, and the shareholder resolutions failed.

Like this incident, most of what passes for corporate governance at Maxxam would be a comic parody if it weren't for the company's depressing performance: The stock is down 50% in the past 12 months. Don't expect the directors to get tough with CEO Charles Hurwitz. Maxxam is a textbook of governance worst practices. The board has just five members: Hurwitz, Maxxam's COO, its outside lawyer, another lawyer, and a former accountant. They meet only six times a year. In between, the executive committee "has authority to act on most matters." These must be cozy affairs, since the "committee" consists of Hurwitz and the company's lawyer. The staggered board makes it tough for any outsider to gain control through a proxy fight.

All this would seem sufficient protection for an underperforming CEO. But there's more. One of the board seats is voted on not by common stockholders alone, as is the usual case, but by the common holders plus holders of a special preferred stock with ten votes per share--just enough votes to outnumber all the common stock. Hurwitz controls 99.2% of the preferred stock. And at the annual meeting the company's nominee for this particular board seat was...Charles Hurwitz.


For years Ogden was one of America's wackiest conglomerates, with an ever-churning mix of businesses that included garbage disposal, child care, financial services, jet refueling, food service, water parks, and much more. The only constant was poor performance, which is why two years ago FORTUNE named Ogden's one of America's worst boards. Shortly after our report, the company seemed to get religion. It imposed an age limit on directors (which meant the 85-year-old had to go), destaggered the board, and announced that it was exploring ways to split the company in two. It sounded encouraging, so last year we took Ogden off our list.

Now Ogden has demonstrated that there's more to good governance than observing best practices, important as they are. There's also the little matter of having strong directors. Ogden's ten outside directors are mostly a low-wattage bunch; they include six academics but not a single CEO of a for-profit business. Last September the directors replaced Ogden's CEO, eliminated the dividend, and announced that the company would not spin off its aviation and entertainment-related businesses, as previously planned, but would sell them instead. Wall Street was not happy; Ogden's stock has lost more than half its value in the past 12 months.

Rite Aid

This board's failure was one of oversight, and in many ways it's easy to understand. Still, the company lost 80% of its value last year, which is harder to forgive. Rite Aid's trouble began five years ago, when Martin Grass, son of founder Alex Grass, became CEO. Intent on growing the Pennsylvania-based regional drugstore chain into a national colossus, he launched a program of frenzied buying, building, and expanding. The results dazzled investors, and the stock roared.

The board had no way of knowing that Martin Grass and other family members were investing in real estate that Rite Aid had bought or leased, and in suppliers with which Rite Aid did business; the family did not disclose that information. But the directors should have known Rite Aid's hypergrowth was bankrupting the company--and that shaky accounting was papering over the damage.

It all started to unravel about a year ago, when Rite Aid said it would badly miss its quarterly profit target because of expansion problems. The stock fell apart, and the board dithered, letting more bad news trickle out for months. The company eventually announced that it would have to restate three years of earnings; it turns out that $500 million of profits never existed. Even when the directors finally fired Martin Grass last October, they did it only because Rite Aid's banks threatened to walk if Grass didn't. Rite Aid's directors had gotten used to life under Alex Grass, a conservative manager who met his commitments. When his son proved a very different kind of chief executive, they weren't up to the job.


This is an old story always playing out somewhere: awesome pay for awful performance. A close look at Warnaco's board shows why it's happening there. The stock of Warnaco, an apparel maker (its brands include Calvin Klein, Speedo, Chaps, Olga, and many others), has lost about three-quarters of its value over the past two years. Yet in 1998, the last year for which full-year financial and compensation data are available, CEO Linda Wachner received a stunning pay package.

Her base salary of $2.7 million was the second-highest we could find anywhere, behind only Jack Welch's $2.8 million at GE. Her bonus, $6 million, was bigger than Jacques Nasser's at Ford, where the stock rose 70% that year, or Lee Raymond's at Exxon, where the stock went up and where Raymond negotiated what was then the largest merger ever. Wachner also received $6.5 million in restricted stock, plus millions of reload options--which are automatically replaced every time one is exercised. Bottom line: She was paid as if she'd had a knockout year running a huge company, when in fact Warnaco, too small for the FORTUNE 500, lost money, and its stock lost value.

The board's composition is the kind that makes corporate-governance experts cringe. Of the seven members, two are insiders; of the five outsiders, two are consultants to the company, and one is an attorney to the company. Warnaco stock remains in the tank, suggesting a powerful need to shake up the firm.

You have to wonder how things ever got so bad at these companies. The answer is that throwing out a bad board requires considerable effort and coordination by shareholders--usually mutual funds and pension funds--who, for business or political reasons, may not want to get tough with the directors of large companies. Still, shareholders will take only so much. Many companies on FORTUNE's past lists have made big changes in the following 12 months. These six are worth watching.