MOTOROLA INC. MADE two major moves last week to put its house in order as it works to revive its flagging mobile device business.
First, the company and investor Carl Icahn agreed to seat one of Icahn’s allies on the 13-member board and place that person and another Icahn ally on the board’s recommended slate of candidates for shareholder approval at the annual shareholders’ meeting scheduled for May 5.
Motorola’s board agreed to consult with Icahn, who owns more than 145 million shares, or about 6%, of the company, in its selection of a new CEO for its handset business and to allow Icahn’s allies to brief him on the board’s deliberations. The two parties also agreed to drop ongoing litigation.
Icahn recently sued Motorola in a Delaware court for information on the board’s activities, apparently in the early stages of a public campaign to gain four seats on the board by undermining investor confidence in the board’s competency. In the past year, Motorola has plummeted to about 14% global market share from a previous high of 22% and shed tens of billions of dollars in market value.
Second, in a related move, Motorola named current board member and veteran telecom executive Dave Dorman to replace outgoing chairman Ed Zander. (Zander relinquished his CEO post Jan. 1 to current CEO Greg Brown.) Zander gives up his board chairmanship on May 5, when Dorman will assume that office. Dorman is a former chief executive of AT&T.
Balancing act
The two actions create a balance of interests on Motorola’s board between company loyalists and “outsiders,” represented by Icahn’s allies. And, by splitting the chairmanship and CEO positions between two different individuals, Motorola departs from its history in an apparent effort to more carefully reconcile long-term strategy and day-to-day operations.
The deal with Icahn gives the activist investor a significant role in the company’s direction that he has sought for the past year. By naming a seasoned telecom executive to lead the board, the company ensured that someone with industry experience will influence its strategy.
Both moves were less important than the company’s ongoing search for a new CEO to lead its handset business, according to analyst Mark McKechnie at American Technology Research.
“The new leader for the handset business is more important,” McKechnie said. “The current CEO, Greg Brown, has his hands full. So a seasoned telecom executive as chairman makes sense.”
Splitting responsibilities
According to Paul Hodgson, who tracks corporate governance at The Corporate Library, by splitting the roles of board chairman and CEO between two different people, Motorola ensured that long-term strategy and daily operations each have independent champions. Previously, both Zander and his predecessor, Christopher Galvin, held the two posts imultaneously. Zander voluntarily retired and Galvin was forced to resign during periods when the company’s financial picture deteriorated.
“This is a significant change in Motorola’s history,” Hodgson said.
In Hodgson’s native United Kingdom, Parliament in the 1990s mandated that the chairman of the oard and the chief executive officer positions be held by different individuals to create “a balance of power,” he said. In the United States such a balance is not required by law. That means that when a board’s sense of strategy conflicts with a chairman/CEO’s trategic or operational approach, he board often fires the chairman/CEO, according to Hodgson.
By splitting the two roles, otorola ensured that strategy and perations would be balanced and epresented by two authoritative figures, Hodgson said.
“Having an independent chairman eans that, when there’s conflict, the CEO has to listen,” odgson said. “This is not necessarily a reaction to the Zander era. It’s a decision by the Motorola board that they feel – particularly with two Icahn nominees on the board – that they need someone in place to represent their interests to the operational management. It’s a significant change to all of Motorola’s history.”
New faces
Dorman, 54, is a 28-year veteran of the telecom industry and currently serves as a managing director at Warburg Pincus and Co. He joined AT&T as president in December 2000 and served as chairman and CEO until November 2005.
Keith Meister, who is managing director of Icahn’s investment funds and principal executive officer of Icahn Enterprises, has been seated on the board. Meister will be on Motorola’s board-approved slate for election by shareholders on May 5. William Hambrecht, CEO and chairman of WR Hambrecht + Co., another Icahn ally, will also appear as a board-recommended candidate for election to the board.
Only weeks ago, Motorola’s board had rejected Icahn’s suggestion that Meister join the board on the grounds they were unfamiliar with him.
After Motorola and Icahn agreed on a deal, Icahn declared it “a positive step” that “shareholder representatives” would have “strong input” on the company’s future.
“We are pleased to avoid a costly and distracting proxy contest,” Brown said.
Now what?
With these matters settled, Motorola must still move ahead with its stated ambition to explore the company’s split into two publicly traded companies to foster a recovery by its handset business.
According to a consensus of analysts who track the company, Motorola placed inordinate emphasis on its hit Razr handset and failed to follow its success from 2004 to 2006 with further handset innovations, dropping the price to increase sales at the expense of profits. Most analysts agree that Motorola’s revival must be led by new products, though many fear that those innovations will be delayed until the company’s structure and leadership is finalized.
When the company announced its intent to explore splitting in two, it said that such a reorganization would not be completed until next year – several product cycles after it lost its footing, a situation certain to be exploited by rivals.
