In nine years on the board of Hollinger International Inc., former Illinois Gov. James R. Thompson never said no.
During that time, Hollinger Chief Executive Conrad Black and his top lieutenant, David Radler, sold off newspapers, often at bargain-basement prices to companies they owned. They extracted at least $100 million for promising not to compete–in some cases against themselves–after the sales. And they changed the minutes of board meetings in a way that enabled individual executives to benefit financially, sources said.
As chairman of the Hollinger board’s powerful audit committee, Thompson acknowledges that he always voted with Black, who added the Chicago Sun-Times to his media empire in 1994. He makes no apologies.
“You don’t serve on a board under the assumption that management is crooked,” Thompson said in an interview Friday. “That’s not an assumption you start with.”
Thompson hasn’t been afraid to draw a hard line in other boardrooms where he has served. He tossed out management at one company. He investigated and criticized self-dealing at another.
Now, a Securities and Exchange Commission investigation of Hollinger threatens to tarnish Thompson, whose reputation remained unblemished after a record 14 years as Illinois governor. A subsequent career as chairman of the Winston & Strawn law firm and the state’s most powerful lobbyist has expanded the clout of the man known as “Big Jim.”
The SEC probe of Hollinger includes an examination of the actions–or inaction–of board members. Civil lawsuits, such as one filed last month by Hollinger shareholder Cardinal Value Equity Partners, are mounting. Black and Radler have stepped down from their executive posts. And new revelations are embarrassing the company weekly.
Thompson, 67, says the SEC has not contacted him, and he plans to fight the lawsuits. He said he wasn’t intimidated by Black’s legendary bluster or his status as Hollinger’s controlling shareholder.
“I’ve been a U.S. attorney, a governor and chairman of Winston & Strawn,” Thompson said. “If I said, `No,’ to a CEO and he wanted me off the board, that wouldn’t bother me for a moment.”
Thompson’s entanglement with Black began blandly enough in 1994. He came to be a Hollinger director for the same reason he served on other corporate boards: He was asked.
Black’s Hollinger Inc. had just purchased the Sun-Times from the investment firm of Adler & Shaykin, and the Canadian press baron needed a local heavyweight to provide a presence in Chicago.
Thompson eagerly agreed to join when Black approached him.
“Being on a media board is attractive, isn’t it? It’s kind of exciting,” Thompson said. “Especially a worldwide media board.”
Indeed, the Hollinger board was a far step from the stolidly Midwestern, virtually anonymous cluster of companies where he also has served as a director–the Prime Group real estate company; construction equipment giant FMC Corp., and Navigant Consulting Inc., among them.
Black’s board was a glittery gathering by comparison.
Besides such Washington, D.C., insiders as Henry Kissinger and Richard Perle, it included Leslie Wexner of Limited Inc., Dwayne Andreas of Archer Daniels Midland, real estate magnate Alfred Taubman and former Democratic National Committee Chairman Robert Strauss.
Thompson recalls Strauss’ comment to him during one early board meeting. “Jim, we’re the only dumb SOB’s who don’t have their own planes.”
At the time he joined Hollinger, Thompson had no prior experience with Black. But he didn’t feel the need to research Black’s background or his finances.
“If you looked at the other members of the board, I think I had a right to assume that guys like Kissinger, Leslie Wexner, Dwayne Andreas or Bob Strauss were not going to be wrong,” Thompson said.
Still, Thompson bristled when asked if he found the glamor on the board attractive.
“I’ve known Henry Kissinger for 35 years or more,” he said. “I don’t go on boards to be impressed by other directors.”
Respect for past performances
In fact, Thompson’s track record as a corporate director over the years stands in stark contrast to the allegations of negligent indifference in Hollinger’s boardroom. Both as a director and outside troubleshooter, Thompson has shown he knows the law and the standards of corporate governance. He has acted with urgency and energy, impressing colleagues.
Fellow board members at Chicago-based Navigant point to Thompson’s cleanup job there as an example of the man at his best.
When Navigant’s outside auditor tipped off Thompson about secret loans to top executives days before Thanksgiving 1999, he jumped into action.
Thompson immediately launched an investigation conducted by outside directors, fired the chief executive and others, and recruited a Chicago banker, William Goodyear, as Navigant’s new chief executive.
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Mitchell Saranow, another independent director, recalls Thompson phoning him and demanding he cut short a vacation in Australia to deal with the trouble.
“He was an active, responsible director,” Saranow said.
Goodyear can’t imagine an inactive Thompson.
“The guy is on the case. I’ve never called him when I haven’t gotten a call back in five minutes,” Goodyear said.
In another governance matter, Thompson was brought in to conduct an investigation of alleged improprieties at Ullico Inc., a union-owned insurance company. Thompson spearheaded that 2002 investigation into $13.7 million in questionable stock deals for 20 Ullico executives and directors.
Thompson found Ullico officers and board members had enriched themselves at the expense of shareholders. In doing so, he explicitly rejected a defense that commonly arises in corporate governance matters: the business judgment rule.
Ironically, he is counting on that rule to protect him in the Hollinger mess.
“The business judgment rule will come into play,” Thompson predicted.
Traditionally, the rule has been used to get almost all corporate governance cases against directors and executives thrown out of court, so long as they acted in good faith, on an informed basis and with loyalty to shareholders. But two recent court rulings went against directors and have begun to chip away at the bulwark of the business judgment rule.
Last May, a court in Delaware agreed to hear a case against the Disney Co. board that allowed a $140 million severance payment to former executive Michael Ovitz without review. The business judgment defense also did not protect the board of Abbott Laboratories, when an Illinois court in March agreed to hear a case after ruling that the board took no meaningful action during a string of regulatory lapses that led to a $100 million fine from the Food and Drug Administration.
Rulings may reset standards
The new court rulings raise the standards for directors. The rulings suggest they can be held legally responsible if they fail to consult outside advisers, if they ignore major issues that should be apparent or if they fail to question conflicts of interest.
That could spell trouble for Thompson.
He acknowledged in his interview with the Tribune that he did not always read Hollinger’s public disclosures, and he does not recall noticing when a company filing falsely claimed in 2002 that the board had been advised about “non-compete” payments to Black and Radler.
“The problem for the directors … is the pervasiveness and the tenure of the nonsense,” said Bert Denton, president of Providence Capital Inc., which is advising disgruntled Hollinger shareholders. “Thompson knew better.”
Thompson was not alone in his lack of diligence.
In 2000, Kissinger, Perle and four directors were absent for more than 75 percent of meetings. Insider dealing was rampant, with Perle receiving an undisclosed $300,000 a year for serving as head of a Hollinger subsidiary, Hollinger Digital.
Thompson dutifully attended the meetings. He said he always read materials that were provided prior to them.
Black put the judgment of his directors to a test beginning in 1999, when he launched a series of assets sales to unload $2.7 billion in newspapers.
Non-compete deals under fire
Much of the Hollinger controversy surrounds the non-compete payments made to Black and Radler from buyers of the Hollinger properties.
The biggest and most controversial payment came in connection with the $2.1 billion sale of most of Hollinger’s Canadian papers to CanWest Global Communications in the summer of 2000.
That autumn, the audit committee headed by Thompson took less than an hour to approve $33.9 million in non-compete payments to Radler and Black, sources say.
Management contended the payments were justified because they were similar to those paid to Hollinger executives in a sale of newspapers to Community Newspaper Holdings Inc. in 1999, the Cardinal lawsuit states.
But the CNHI payments had not been disclosed to the board or to shareholders. The audit committee, without debate, nevertheless approved the CanWest payments, according to the lawsuit.
Eight months later, in a highly unusual move, Radler turned to Thompson’s committee for approval to change the corporate records of the CanWest deal.
On May 14, 2001, the committee worked from a Hollinger lawyer’s memo that described the changes as a correction of “inaccuracies.” But the three changes were substantive and geared toward protecting Black and the board against potential legal challenges on the payments, says a source close to the board.
The changes erased any reference to the CNHI deal. They also saved Black and Radler millions of dollars in taxes by reclassifying $8.1 million as non-compete payments instead of bonuses, which are taxed under Canadian law, the source said.
The records also were changed to claim that the payments to individuals were “a critical condition” of CanWest’s purchase. But CanWest has said it never insisted on non-competes with individual Hollinger executives.
In another transaction in 2001, the audit committee ratified, without question, the sale for $1 of two small newspapers, the Skagit Valley Argus and Journal of the San Juan Island, to Horizon, a company majority-owned by Radler and Black.
Radler told the board the newspapers had a “negative cash flow,” the lawsuit says. But the board sought no independent valuations on the properties, according to the Cardinal lawsuit.
Corporate governance standards call on boards to act independently of management, particularly when discussing compensation and transactions with managers. But Thompson allegedly asked Radler to excuse himself from an audit committee meeting only once, when KPMG accounting firm representatives were present.
On shareholder radar
The questionable dealings eventually caught the attention of shareholders.
In late 2001, New York investment firm Tweedy, Browne Co., which owns 18 percent of Hollinger, began raising questions about the board’s dealings with Black and Radler. Tweedy, Browne sent a letter to directors complaining about conflicts of interest. Thompson did not respond, according to the firm. In early 2003 a series of increasingly contentious e-mails zapped between the firm and Black.
Even with the corporate governance spotlight glaring, Thompson participated as the board cleaned up one extra piece of Black’s business: an $8 million purchase of Franklin D. Roosevelt’s personal papers that Black had made without board approval.
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Even though Black had used the FDR papers extensively in writing a recently published biography of the former president, the board approved a resolution declaring that the papers were of no personal benefit to Black.
Thompson’s apparent lack of vigor on the Hollinger board surprises people who have known him as a man of action since he made his name by jailing former Illinois Gov. Otto Kerner while serving as U.S. attorney in Chicago in the 1970s.
Dawn Clark Netsch, a Democratic Party stalwart who has known Thompson as a political rival and a friend, thinks she understands what happened.
“This is another manifestation of the old boy network,” Netsch said. “They’re all part of the power elite. They don’t worry about keeping a close eye. It doesn’t even occur to them.”
To Jeffrey Sonnenfeld, a corporate governance expert at the Yale School of Management, Thompson’s situation seems similar to that of the board at Enron Corp.: People with stature and expertise who did not do their jobs.
“You find that increasingly, big names on boards are running into problems,” Sonnenfeld said. “It’s not fair to call them corrupt, but they are people who should have known better. It’s looking like Thompson would fall into that group.”
Thompson, who remains on the Hollinger board, said he has no regrets. “I don’t live in a world of regrets,” Thompson said. “I don’t regret being on the Hollinger board. Do I regret all the controversy? Absolutely.”