Three of four Network Six Inc. directors resigned last month citing philosophical differences with the remaining director: Chairman, President and Chief Executive Officer Kenneth C. Kirsch. As the sole remaining director of the Warwick information technology company, Kirsch immediately named a pair of replacement directors to the board. One of the new directors also is a senior Network Six executive and, as such, works for Kirsch in his role as CEO.
Network Six’s board shuffle isn’t uncommon, but some observers said it casts doubts on the board’s fitness to supervise management.
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“The board of directors is supposed to exercise independent control over the CEO,” noted James Werbel, co-director of the Murry G. Bacon Center for Ethics in Business at Iowa State University. “Usually, the three would get rid of the one.”
Kirsch and other Network Six officers didn’t return numerous telephone calls to the company placed since late March.
George deLodzia, a professor of management at the University of Rhode Island who studies boardroom politics, also questioned the ethics of outside directors resigning amid differences with the CEO.
“It’s legally acceptable. You can do that,” deLodzia said. “But the main purpose of a board of directors is to advise, counsel, guide and set standards of performance for the chief executive officer.”
But what if the CEO is the chairman of the board?
About three-quarters of the country’s large public companies are set up that way, according to Bruce Beebe, editor of the Connecticut-based newsletter Directorship. But in countries such as England, Beebe said, chairmen traditionally come from outside the company.
“If you have a combined CEO and chairman, then there’s an obvious conflict,” he said. “However, in mainstream American companies this is the norm for whatever historical reasons–a cowboy mentality where one person runs everything or whatever it is. It’s done, and it works.”
Network Six’s chairman isn’t just a director and an executive, though. Kirsch’s vision for the company apparently trumped that of the other three directors when his vision began to diverge from theirs.
A Network Six statement issued on March 15 said the three directors–Ralph O. Cote, Nicholas R. Supron and Peter C. Wallace–stepped down for personal reasons and because of their “philosophical differences” with Kirsch. The statement also said, “None of them expressed any disagreement with any policy of the company or the board of directors or submitted any objection to any action of the company or the board.”
None of the three former Network Six directors could be reached for comment by press time.
The statement further announced that Kirsch had named Donna J. Guido and Henry N. Huta to the company’s board of directors. Guido is Network Six’s vice president of information systems, and Huta is president and CEO of BIW Tamaqua Cables in North Dighton, Mass.
On March 30, Network Six announced three additional board members for a total of six: Edward J. Braks, Owen S. Crihfield and Thomas J. Berardino. Shareholders will vote on all the new directors at the company’s annual meeting in May.
Braks is chief financial officer of Paul Arpin Van Lines Inc. in West Warwick, while Crihfield and Berardino are managing directors of Saugatuck Capital Co.
The Stamford, Conn., investment company owns 19 percent of Network Six’s voting stock, according to documents filed with the Securities and Exchange Commission in Washington, D.C. Kirsch owns about 11 percent of the voting stock, and Guido owns 3 percent.
Saugatuck ponied up $2.5 million in 1992 to buy the equivalent of 178,571 shares of Network Six stock. That investment was worth about $826,000 at press time with Network Six’s stock price hovering at $4.63 per share–down from more than $60 per share, adjusted for stock splits, in 1994. The terms of Saugatuck’s investment allow it to appoint two Network Six directors if the company fails to pay Saugatuck’s dividends for three quarters or more, according to a Network Six statement.
The new face of the board raises further questions about what happens if the fresh panel of directors doesn’t see eye-to-eye on the best course for the company. Crihfield and Berardino, who didn’t return calls, presumably would vote together, as Kirsch and his employee Guido might. In that hypothetical scenario, Huta and Braks could be the swing votes.
All corporate directors have a legal responsibility to protect the interests of shareholders, according to corporate lawyer Michael Sweeney, a partner in Duffy & Sweeney LLP in Providence and chairman of the Rhode Island Bar Association’s business organization committee.
But deLodzia, the URI professor, said that doesn’t always happen in practice. “Generally, they are pals of the CEO,” he said. “They get paid and all sorts of perks, and what you do is just rubber stamp what goes on.”
Sweeney declined to comment on the makeup of Network Six’s board specifically because of his personal relationships with employees of the company, but, speaking in general, he said the major stock exchanges all require companies to have nonemployee directors as a condition of being listed on the exchange. Network Six trades on the NASDAQ stock exchange.
Business ethicist Werbel said that conflicts of interest arising from the dual role of chairman and CEO are a red flag, but don’t necessarily harm shareholders. Beebe added that shareholders’ interests actually may be enhanced because there’s no chance for conflict between the chairman and CEO.
