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Target and Delta: A tale of two boards

Corporations should at least be well run and operated efficiently regardless of their purpose(s).

The nation lost one of its great leaders of the past 50 years with the passing of Howard Baker last month. Howard Baker refined bipartisanship into a high art form. (Remember bipartisanship? I admit I am dating myself.) During the Watergate investigation he used a question that became a household phrase: “What did the president know, and when did he know it?” I suggest that the same question be asked of the members of the board of directors of Target Corporation. As I discuss below, I would then ask an additional question: Why did it take them so long to find out?

As executive compensation has soared and wealth disparities widen, corporate governance is on everyone’s mind these days. What is the purpose of the modern corporation? Is it to maximize profits and let Adam Smith’s “invisible hand” guide us to the promised land? Or, as Thomas Piketty recently has written, must governments intervene actively lest unbridled capitalism destroy society’s social fabric?

Or should the modern corporation recognize a duty to various constituents, beyond its shareholders, such as its employees and the communities in which it operates? These are all important questions to be addressed by corporate boards of directors and executives. But my concern is more basic: Corporations should at least be well run and operated efficiently regardless of their purpose(s).

A great gig

As recently has been demonstrated in this community, a critical but often overlooked component of a well-run corporation is a highly skilled and active board of directors. Directorships of Fortune 500 companies are a great gig: significant six-figure annual compensation, stock options, attractive travel and board retreats, and no day-to-day managerial responsibility. Get on three or four boards and retire on your seven-figure income. Where do I sign up?

So far so good, as long as you are a director. And so far so good if you are a shareholder, if the directors have in place in a strong and successful management team. But when the board fails in its most important task, which is the selection of a first-rate chief executive officer, and fails in its second most important and related task of stewardship of the management of the company, the result is disaster. The importance of selecting the right directors and the right mix of directors is no better illustrated than the recent scenarios that have just played out in Minneapolis at Target and Delta Air Lines.

Target is in many ways the poster-child gem of the Minnesota business community. Its predecessor, Dayton Hudson Corporation, and before that the Dayton’s Department Stores have deep historic roots in the community. Service and integrity were an integral part of the Dayton family and the company. The Dayton brothers were farsighted businessmen who created the first enclosed shopping mall with the development of Southdale; the first discount store, Target; and the first national bookstore chain, B. Dalton Books.

They were also deeply committed to the community with the formation of the 5% club, which encouraged each major business in town to contribute at least 5% of its pre-tax profits to the community. They also had the foresight to exit the bookstore and the department store businesses  in a timely fashion. It is one of the great stories in corporate America, and the Dayton family has been the gold standard that proves good business and good corporate citizenship can go hand in hand.

Great runs — until the wheels fell off the bus

Since the early 1970s, Target has been managed by a series of able non-Dayton family members, and the family long ago exited the boardroom. Prior to Gregg Steinhafel, the company had great runs under the leadership of executives from Ken Macke through Bob Ulrich. Then the wheels feel off of the bus. What happened? I do not know anything more than I read in the newspapers, but it is clear that the Steinhafel regime fell far short of the mark in many areas. The Wall Street Journal — in a front page article [subscription required] on June 24 — details what essentially amounted to a Captain Queeg-type Caine Mutiny, corporate style. What went wrong?

I believe that one of the major things that went wrong at Target is that the board of directors was asleep at the switch. Moreover, I maintain that a review of the Target board members’ experience and qualifications reveals a board that in the main fell short of the standards of excellence required for a large company in an extremely competitive industry and environment. I do not personally know any of the directors, but I was struck as a shareholder when I read the company’s last annual report, which was issued before the Steinhafel implosion occurred, at the limited experience and gravitas of the board.

Certainly several highly respected CEOs are on the board, such as John Stumpf from Wells Fargo and Doug Baker from Ecolab (as a shareholder of both companies I am grateful for their stellar performance). James Johnson, of Fannie Mae and UnitedHealthcare fame, certainly has held major positions and made a ton of money. No one, however, would nominate him for any corporate governance awards based on his tenure at Fannie Mae and as the chairman of the United Healthcare compensation committee during the McGuire uber options and backdating era. Sol Trujillo, a former director with a 20-year tenure, did not run for re-election because he had served the board for the maximum 20-year period. He arguably destroyed significant shareholder value with his tenure at U.S. West, and later was voted by one survey the “least admired” chief executive in Australia when he was at Telstra. Without discussing each additional board member by name, suffice it to say the remaining board members seem to be without the type of background and distinction required by a company of Target’s size, complexity and stature.

The security breach was the most visible, but the least significant of the Target problems. Let’s look at the bigger issues. What did the board know and when did the board know about the wheels coming off the train in Canada? The same Howard Baker questions can be asked of Target’s broader computer and logistics failings in a business where these issues are critical to performance. And what did they know and when did they know that CEO Steinhafel converted a company known for its creative culture and panache to a management bureaucracy based on the twin M’s: meetings and metrics.

Employees will always find a way to manage to the metrics upon which they are evaluated. You can six sigma your way to oblivion if you are in a business that demands constant reinvention and creativity.

Delta board is highly skilled

On the other hand, when I read the Delta annual report, the quality of the board of directors knocked my socks off. Although the Delta headquarters is now in Atlanta, I still view them as a Minnesota company given Northwest Airlines’ strong Minnesota roots and continued presence. I have not met Richard Anderson, the Delta CEO, but his performance has been awesome.

As in the case of Target, I am a Delta shareholder (I admit I broke Warren Buffett’s rule of “never invest in an airline,” which I did with some trepidation). Richard Anderson has assembled a highly skilled board of directors who have the precise skills one would need to manage a major airline. Several directors are former CEOs or directors of pubic railroads and trucking companies. In other words, they have transportation expertise. Several directors were CEOs of international advertising and Internet firms, including one with significant digital and Internet marketing experience. There are several directors with significant energy and significant Wall Street and financial experience.

In other words, Anderson has assembled a team of directors with extraordinary experience in the areas in which an airline CEO needs guidance: competing transportation businesses, sales and marketing, energy costs and finance. I also would add that I am very impressed that Anderson went to work as a senior executive at UnitedHealthcare between being the CEO of Northwest Airlines and Delta. Clearly his ego is sufficiently under control that he was willing to be a senior executive, and not the CEO, at another public company. And hands-on health care experience, given the cost significance it has for U.S. companies, is not a bad expertise for a CEO to have. And one more feather in CEO Anderson’s hat: In a business in which the cost of fuel is the largest variable cost, Delta bought a refinery and became the first and only airline to do so.

A vivid contrast

One city and two boards: It would be hard to draw a more vivid contrast. As a shareholder, I have given up the ghost on controlling CEO, or for that matter, board of director’s compensation. So, institutional investors and board members,  let’s try to keep our eye on the ball. It is critical for the long-term success of any significant company to have a strong board that has the expertise to help the CEO with the difficult task of managing a large, complicated company in a world that is changing faster and becoming more competitive with each passing day. So, CEOs, build and attract a strong board with the right mix of experience and strengths for your particular industry. It will make your job easier and your tenure longer.

And shareholders, do read the annual reports and the proxy materials. And as they say in Chicago, “vote early and often.”

Alan J. Wilensky is a lawyer and financial advisor in Minneapolis. In 1992-93, he served as Acting and Deputy Assistant Secretary of the United States Treasury for Tax Policy. He serves and has served on a number of boards of directors of private and public companies.


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Comments (3)

  1. Submitted by Bill Schletzer on 07/18/2014 - 09:29 am.

    crummy links

    If you are going to provide a link to a web site that has supporting documentation for your article make it one that can be accessed without subscription.

    I have spent fifteen minutes trying to access the WSJ article without success. Big waste of time but then I’m not a rich investor like our writer. Thanks for nothing.

  2. Submitted by Greg Kapphahn on 07/18/2014 - 09:39 am.

    Based on Target’s VERY Public Missed Steps

    under his leadership,…

    it’s clear that Gregg Steinhafel was an ideologue:

    a “things are the way I believe them to be,…

    people operate according to MY principles (rather than their actual human nature),…

    and woe be unto anyone who seeks to tell me that what I believe about how things must be going and how people are is not reality,”

    type of leader.

    If the cost for underlings who seek to bring you accurate-but- bad news is too high,…

    and if you treat them as if they are seeking to violate the tenets of your one true faith,…

    if you “kill the messenger,” as it were,…

    NO ONE will deliver bad news to you (about the theft of all of your customer’s credit card information, for instance) in a timely manner.

    Everyone will seek to hide everything.

    Under such a leader, corporations move farther and farther away from reality,…

    and those who know better,…

    who know what’s really going on,…

    just keep their heads down and hope the collapse they see coming passes them by,…

    because they know there will be severe consequences if they seek to make management aware that the CEOs “true beliefs” are demonstrably wrong.

    I only hope that Target can recover from what’s happened to it since Ulrich left.

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