A visit by a Haas family trusts representative with Raj L. Gupta in November 2007 totally changed the trajectory of the company that he had worked at for 38 years and was then heading as chairman and chief executive.
The message delivered was that the trust wanted diversification from its concentrated holding (30%-plus) in Rohm & Haas Co., the large, Philadelphia-based chemicals company. That was not a message to take lightly. As has been seen in many high-profile cases, an announced sale of some, or all, of the family holdings meant the future of the company could veer off in several directions, not all of them benign.
Gupta, then in his 10th year as CEO, sprung into action — as did the board. Over the next 18 months he, the directors, and the management team marshaled their talents to take control of the situation to try to achieve a result that would meet the approval not only of the family trust but of all the shareholders. And this is indeed what happened. Despite some hair-raising twists and turns along the way — this action period coincided with the darkest days of the recessionary crisis — on April 1, 2009, Dow Chemical Co. completed its acquisition of Rohm & Haas for $79.38. This represented a premium of 75% over what the company's shares were trading for ($45) on the day the deal was unveiled in July 2008. Objective accomplished: Great value delivered to the family interests and to all shareholders. And it surely ranks as a deal of the year to have gotten done amidst the meltdown in the financial system and business markets worldwide.
Gupta, who was only the fifth CEO in the company's 100-year history (it celebrated its centennial in 2009), retired after the deal closed. He is now serving on the boards of Hewlett-Packard Co., Tyco International, and Vanguard Group. Other initiatives he has taken on include being a trustee of the Conference Board and co-chairing its Task Force on Executive Compensation. After six months of study and debate, the task force issued a report in September 2009 that offers guiding principles for restoring credibility and trust in executive pay processes and oversight (see page 21 for some key passages from this new report).
In the following interview with Directors & Boards Chairman Robert Rock and Editor James Kristie, Gupta reflects on the intricacies of the Rohm & Haas sale, the board's role in guiding that process, and other important dimensions in governance, including the Conference Board's intent with its report on executive compensation.
— James Kristie
Directors & Boards: Raj, let's start at the beginning — what was the situation like at Rohm & Haas at the time of the visit from the trust representative?
Raj Gupta: First of all, not many companies have survived for 100 years. Rohm & Haas has been a company with excellent performance, excellent people, an excellent reputation, and a great set of values. Over the past 60 years, from the time it went public in 1948, the average annual return to the shareholder has been 12%. The average annual increase in dividends has been 7%. So in terms of performance that probably placed us in the top 5%, and maybe even better, of any public company over that period. Not only was this not a company in a distressed situation, but it was a company we always felt had a brilliant future.
Since it is such a key element in what happened, what was the nature of the family ownership structure?
We'll just go back to the Second World War for this. The two founders were Otto Rohm of Germany, who owned 40% of the company, and Otto Haas here in the U.S., who owned 60%. During the war the German ownership of Rohm & Haas was taken over by the U.S. government. When the war was over, Dr. Rohm's ownership was allowed to be sold, and that is how the company went public. That was in 1948. Mr. Haas passed away in 1960, at which time the family sold some stock to settle the estate. But still for a long period of time the company was majority-owned by the family. By the late 1980s the family ownership had been trimmed to the 30-32% range, and that's where it fluctuated up until the date of the sale.
A situation like this must require management staying in close touch with the family?
We always had a close dialogue with the family. My CFO and I used to meet with the family every three months to keep them in the loop on what the company was doing. We also set up a dialogue between the family and the board, which allowed family members to have independent access to the board. And we encouraged the family to have its own outside financial and legal advisers.
What was the situation regarding family members on the board?
For a period of time between the mid-'80s and 1999 there was no family representation on the board, nor were any family members working in the company. All the dialogue basically was between the CEO and the family. In 1999 we added two family members to the board. The close, cordial relationship with the family continued.
Then came the visit about diversifying the family's interests.
I remember the date precisely — Nov. 9, 2007. The message was that the family trust had reached a consensus to diversify a substantial portion, or all, of its ownership, that it wanted to do this over a 12-18 month period, and that it wanted fair value for its shares.
And that came as a bit of a surprise?
When you have a 30%-plus shareholder expressing such an interest, that does come as a bit of a surprise. On the one hand we understood the request because it makes sense to diversify and not have too concentrated an ownership in one stock. But the family had been served well. The performance of the company had been so outstanding that they really had no reason to sell, so we were never that concerned that they needed to diversify. During the past five years we had been buying back about 10-12% of our outstanding shares, and we encouraged the family to participate on a prorated basis in the buyback. But they indicated to us that they were happy with their level of ownership and were not ready to make any transition. In fact, we had just conducted a buyback program from July-October of 2007 that the family chose not to participate in. So their decision in November, only weeks later, to reduce their holdings was indeed a big surprise and, frankly, a shock, considering the implicit endorsement of the company shown by their decision not to participate in this most recent buyback.
Another reason it came as a surprise to me is that we had my succession in place. I was planning to retire sometime during the following year. And, of course, the call came as a big surprise for the board.
After the visit, what was your next step?
Once we got over our surprise, the board made it very clear that they were going to look after the interests of all the shareholders, and that the board would control this process. That meant excluding the two family members from any deliberations on what path we would pursue, which the two members understood because clearly they were conflicted.
We hired a banker, a lawyer, and a public relations firm. And then we began a long process, from November through May-June of 2008, of assessing what the intrinsic value of this company was and what our options were.
What options did you consider?
We looked at a whole range of options of what might make sense. That included buying back some of the trust's stock, having the trust sell some stock through a secondary offering, or finding a strategic buyer who would be completely independent to take over part of the trust's ownership. We looked at splitting the company and giving the trust some assets. And we looked at combinations with other companies. We also considered a leveraged buyout as well as sale to a strategic buyer or private equity firm. But most important was to make sure that we understood what the value of the company was and what the board's role and responsibility would be throughout this process.
What was your initial decision after this review?
After this six-month review, during which we kept the family informed as to what we were doing, we went back to them and advised them that the best outcome for the company to maintain its independence and to serve the family well was to do what the family had done 20 years previously when it took its ownership from just under 50% down to the 30% range — that is, we would buy back some of their stock and help them with a secondary offering. We suggested we would go public with an announcement that the family trusts have made a decision to diversify and that they would exit in a systematic manner over a period of three years, and that our expectation was that over this period of time the value of the company would appreciate as it had historically.
We recognized that this was a signal for everyone to see — that the family was exiting and, should there be a strategic buyer who was interested, the board had done its homework and would give any expression of interest due consideration.
Were there buyers lurking during this period?
There were very few companies that could afford to make an acquisition of this size and pay a substantial premium. Private equity firms did not have enough synergies to do a transaction of this size. And remember that the economy was starting to slip in mid-2008 when we reached this point. Oil, which is a big part of our raw materials base, was hitting $140-150 a barrel. We looked at the landscape and knew that things were going to get tougher.
There were only three companies in this industry that
really could afford to acquire Rohm & Haas — BASF, Dow, and DuPont. All three companies had told us over the past 10 years that they were doing their homework on us and would be ready if ever there was an
opportunity.
And now the opportunity presented itself. What happened next?
I met with all three CEOs in June 2008 at an industry conference in California, indicating to them that the board might be interested in looking at options. BASF and Dow were the most prepared. DuPont had begun moving in a different direction with its strategy.
An informal offer came from Dow at $74 per share. We were then trading at $55 a share, and our all-time high was $62. This was a starting offer that the board needed to pay serious attention to.
How did the board react?
The board had made some important preconditions that all parties must agree to if they proceeded with a formal offer. One is that we would not accept any paper. Given the economic climate and the trust's need for diversification, cash would be the only instrument that we would accept. We also wanted certainty in concluding any deal. We knew that for each of the three potential bidders antitrust clearance would take time. So we drafted a contract that there would be no financing conditions and no material adverse conditions. The only condition would be regulatory approval. It was a fairly airtight contract.
A brilliantly drafted contract, no?
Well, it looked like genius after the fact. Our lawyers added one more condition — a ticking fee that would be added into the final price if the deal did not close in six months. We then advised the parties that these were our contract terms and asked for their best offer.
And Dow came through with the best offer?
Yes. The deal with Dow was announced on July 10, at a price of $78 a share. The day the deal was announced we were trading at $45 a share. The expected completion date was to be six months later, on Jan. 9, 2009.
And then came the fourth quarter of 2008.
The fourth quarter was a disaster. Between business conditions deteriorating and the financial meltdown, the world clearly changed from the time of the announcement. And Dow's particular situation changed as well. When their deal to sell assets to the Kuwaitis imploded, what they were counting on for equity financing disappeared.
The financing issues eventually got so great that Dow wanted to call the deal off?
Let me say that I was very empathetic to what Dow's situation was. This was a friendly, constructive deal, not a hostile takeover or unwanted transaction. This was a strategic deal — 95% of the integration planning was already done by the time conditions started to
deteriorate.
What we did not want to do is renegotiate any part of this deal and have to go back to the shareholders. We had gotten our shareholder approval in October. Dow did not need shareholder approval. To change the terms of the contract would have delayed this transaction forever, and who knows how the world might have changed yet again.
But things finally broke down. How did that break happen?
I should mention that the contract called for the deal to close in 48 hours once regulatory approval was received. This was an element in the certainty of closing. We had kept the dialogue going all through these difficult months. I kept asking them, “Tell me what I can take back to my board?” The dialogue broke down when we received FTC approval on Friday, Jan. 23. I got an email that Sunday evening — this is all part of the public record — which essentially said that Dow was in a difficult situation, that it doesn't have the resources, that going through with the deal would jeopardize the future of the combined entity, and that it will study the situation and will let us know in due course if it can complete the transaction. Our board was ready for this possibility. We met at 8:30 on Monday morning and filed suit by 10 a.m. in Delaware Chancery Court.
To give credit to Dow, they never argued with the contractual obligations. Their argument was survival. Our argument was that Dow had plenty of assets and resources to
finance the transaction, which turned out to be correct.
To jump ahead from this day in January when the suit was filed to when it was to be heard in March, the transaction seemed to come together right on the proverbial courthouse steps.
On March 9 I was in Delaware with our team of lawyers. The settlement negotiations literally started three days before the case was to be heard. To address the serious financial issues that Dow had to deal with, what we ended up doing was having the Haas trust reinvest 40% of its proceeds in a perpetual preferred equity instrument, and investor John Paulson, who had bought a big stake in Rohm & Haas when the deal was first announced, did the same. With $2 billion from the trust and $1 billion from Paulson, this provided enough equity to meet the bank covenants. The rest of the shareholders got all cash which, with the ticking fees added in, came to a final settlement price of $79.38. The deal closed on April 1.
Now let's focus in a bit on the board's role throughout this process.
Let me say the teamwork among our legal firm, the investment bank, the board, and the management was outstanding. The key was the board's engagement. We had 33 board meetings during this 18-month period from that first notice to the closing — 24 of which were teleconferences and nine face-to-face meetings. The board was informed all the way. We had very important debates, but every decision was unanimous. Nobody could look back and say, “I wish we had known this,” or “I wish we had done that.”
Did you set up a special board committee to oversee the process?
No. We did discuss that very early on. We knew that this would take a lot of time. We polled the board members on this, and their unanimous decision was that this was such an important development for the future of the company that they all wanted to be part of the process and they would make the time commitment that was needed.
Did you have a lead director with whom you worked especially closely on this?
Absolutely. The lead director was Sandra Moose who, fortunately, had retired from her position as Senior VP at Boston Consulting Group and was able to devote the kind of time that was required. It felt like I talked to her almost every day once we got into the serious phase of the process. Sandy had been on the board since 1981. And that's another important dimension of our board. It was a blend of executives who had been on the board for a long time as well as people who had been added during my time as CEO. As I said, it was a board that was always well informed and always engaged, and had made a conscious decision to be part of this process from the start to the finish.
Was having the two family members on the board helpful, or not, once this process got underway?
It was very helpful, actually. In their roles as family members, as trustees, and as board members, they made an invaluable contribution in sharing their perspective on how they thought about their investment in the company and what issues were important to them.
What we had done for them even before they first joined the board was to get them involved in an 18-month orientation program, where they would come in for half a day once a month and meet with our management and board members. Several of the directors even took them under their wing. So, yes, they had a different perspective than the typical board member, but we had gotten them very engaged in the company and that made the process much smoother to have had that relationship between the trust and the family with the board and management.
Were you invited to join the Dow board after the transaction closed?
I had decided it was not a sensible thing to do to have the CEO of the company being acquired go on the board. I have invested 38 years of my time in this company. I advised Dow that I am always available and they can always count on me to be helpful. In an early stage of the negotiations we had agreed that two members of the Rohm & Haas board would go on the Dow board. If everything had followed the normal course that likely would have happened. But once the transaction was completed the world had changed.
How are you feeling now about the transaction?
Clearly it was a home run for the shareholders. From the point of view of the employees it's obviously been painful. There are huge synergies that have to be realized when you pay a premium like this. But given the economic environment we were facing, we would have had to go through a major downsizing and restructuring on our own at Rohm & Haas. During the fourth quarter of last year and the first quarter of this year volumes were down 25-30%, depending on the business segment you were in. This was real decline in volume, not just inventory correction.
And it wasn't just the U.S. It was global.
It was horrific everywhere. Business just seemed to have stopped. It was probably the worst time that any of us has faced in this business. The decline now seems to have stopped, but recovery is going to be a slow process. Everyone is making tough calls. You have no choice. I would do exactly what Dow is doing to take out costs to downsize, or rightsize, to lower the breakeven point.
To turn back again to the company's governance, it seems clear the board was well equipped to handle this sudden turn of events. To what do you attribute that?
We had at Rohm & Haas some great board practices. My predecessor's predecessor put in place a majority outside board some 30 years ago. My predecessor, Larry Wilson, had three insiders along with 9-10 outsiders during his time in office. When I became CEO it was just me and my No. 2, and by the time I left I was the only insider.
The management never used the board as a rubber stamp. We involved the board quite a bit in strategy and in the succession process. And we engaged the board deeply in compliance issues. Rohm & Haas always had a strong culture of compliance. We always had global policies in place on those issues. We were one of the earliest companies to establish a safety, health & environmental committee of the board — which over the last several years was transformed into what we called a sustainability committee. And one last practice I'll note that we instituted very early on is having the board meet without the CEO present.
Are there things you did to put your stamp on the board?
One of the things I did right before I became CEO — the announcement was made about one year before I got the job — was to visit with each of the board members, one on one. I would meet them for breakfasts, lunches, or dinners to get their sense of things. I wanted to find out from them what they liked and what they might like to see changed. The clear message I got was that they would like to see less time spent in reviewing the financial results — “give us a monthly report that is very comprehensive and we will do our homework,” they told me — and let them spend most of their time on people and business strategy issues.
I also put in a more formal performance review of the CEO by the board, and also a formal board self-assessment that is done annually. We'll survey the board with some questions that are common from year to year for benchmarking along with some questions that are topical so that we can gauge how responsive we are to new priorities.
How have you seen boards, including your own, change over time?
Boards are more engaged in all aspects. They are spending more time, asking more questions, are more willing to challenge, and are acting more quickly than they ever have before. My view is that boards must do three things well. One is to focus on succession, and not just CEO succession but succession more widely at the top. The second is to understand the business and, because the world is changing all the time, to be involved in the strategic planning. And third, to spend time on compliance. If they do these three things and do them well, then board governance works.
This is especially true when the organization is in transitional crisis. That's when the board really needs to come together. That's what I saw happen with the board at Rohm & Haas in the last 18 months as we went through this process. You cannot just train the board when crisis happens. The board has to be knowledgeable and engaged all along.
Tell us about your work on the Conference Board's executive compensation study.
I became a trustee of the Conference Board earlier this year. In March we convened a task force on executive compensation, a timely initiative considering what has been happening in the financial sector and what might be coming down the pike in new government regulations. Bob Denham and I were nominated to be the co-chairs, and we had a good cross-section of members — institutional investors, rating agencies, CEOs, academics, board members. We had about a half-dozen face-to-face meetings plus a lot of work that went on behind the scenes.
There were several issues that we chose to hone in on. One is the rapid escalation in executive compensation over the last decade. A second issue is the perception that not only is compensation too high but in many cases these big pay packages are not tied to performance. Even worse is the perception that there is no penalty for failure or for underperformance. A third issue we looked at is unintended consequences of the regulatory changes that have been put in place. Finally, we studied what the best practices are in self-governance of executive comp. What you'll see that we addressed are whether the wrong metrics — sole focus on TSR or EPS, for example — may have led to the wrong strategies, the wrong behaviors, and perhaps an inordinate amount of risk — and, if that's the case, then what should be the right metrics for performance. (Ed Note: See excerpt from the report on pages 21.)
As you continue on now in your board service and perhaps take on other opportunities, what do you look for in accepting a board invitation?
The most important consideration of all is having the right leader in place. With Ed Breen at Tyco, Jack Brennan and now Bill McNabb as CEO of Vanguard, and Mark Hurd at Hewlett-Packard, these are all outstanding leaders. The reputation, ethics, culture of the organization must be beyond reproach — absolutely top-notch in terms of integrity. And I look for diverse industries to be part of — as in the services and security, financial, and information technology sectors I'm participating
in now on my three boards.
And what do you look to contribute as a board member?
What I feel I bring strongly to the board is helping guide the strategic thought process and evaluating the organization's people issues. Is the leadership being mindful of the changes that are happening in the globalization of business? How is the strategy being reflective of those changes? Does the organization have the people processes in place — are they able to recruit and retain a diverse scope of talented managers around the world? Another strength I bring is a sense of financial discipline. I spent 10 of my 38 years at Rohm & Haas in finance in different parts of the world. How is money really being made in your competitive space? Are you benchmarking yourself against the best? Are you setting targets that are stretch targets, or aiming to be just an average performer? All these are issues where I can make a contribution.
Are you at all fearful about the overall environment right now for serving on a corporate board?
Well, I go back to the basics. Having a strong leader, one who is totally transparent in communicating with the board. Having an engaged, informed board. And having a culture of compliance. If those basics are in place, I would like to think that there is no reason to be fearful. â–