Leadership by Geoff Colvin

Lessons from the St. Joe board resignation debacle

February 23, 2011: 11:50 AM ET

As discussions between fund manager Bruce Berkowitz and St. Joe progress, shareholders will need to take a close look at any board election slate to ensure that sustainable, positive change takes place at the beleaguered company.

By Eleanor Bloxham, contributor

Boards often move at a glacial pace. The pace, that is, at which glaciers moved before global warming. And sometimes that slow pace can get them in trouble. But is six weeks really long enough for a new director to expect major change on a board?

Bruce Berkowitz resigned from the St. Joe (JOE) board on Valentine's Day after just six weeks, unhappy because of his inability to create change as a director.

Berkowitz told Bloomberg News, "It was clear to us we weren't going to be able to achieve anything further as directors. The only way we can be effective is as shareholders."

This isn't the first time Berkowitz has abruptly resigned from a corporate board. Last year, Berkowitz resigned from the White Mountains Insurance Group board with one day notice. The 2010 proxy that had already gone out to shareholders had to be amended by the company in a subsequent filing.

White Mountains' amended filing didn't mention the reasons for Berkowitz's departure and a White Mountains spokesperson would not provide comment. There are specific disclosure requirements for board resignations that stem from disagreements.  Still, the abruptness was startling.

How did Berkowitz get appointed to the St. Joe board in the first place? Based on his statements, it looks like Berkowitz (a nearly 30% shareholder) wanted to sit on the board. But of course, just because you are a substantial shareholder doesn't entitle you to a seat.

Although the company is not required to provide all the disclosures they would in an annual proxy, its press release announcing Berkowitz's appointment in December 2010 cited his "strong experience and valuable strategic insight," "a deep understanding of our business and its inherent long-term potential, and his "capital markets expertise."

The qualifications for selection to the board (according to the 2010 proxy) include the "ability and willingness to serve on the Board for an extended period of time".

Given Berkowitz's brief stay, St. Joe's seems to have failed miserably in the longevity department. It's doubtful that this is one of the issues Berkowitz is talking about when he says he has governance concerns with the company, though.

To date, Berkowitz has been vague about his concerns, but his February 9 statement suggests that he is concerned with the board's independence.

Berkowitz has specifically cited his concerns with St. Joe's incentive compensation. But he has not introduced any compensation initiatives as a St. Joe shareholder in the last three years.

And it's not that the warning signals were missing. The work of the compensation committee was clearly described as less active and independent in the company's 2010 proxy statement than the Business Roundtable recommends in its principles on governance.

What about other governance issues? They don't appear to be a high priority at St. Joe. The governance and nominating committees only met twice in 2009. This compares to nine meetings of the board, nine meetings of the audit and finance committee and seven of the compensation committee.

Of course, despite their nine meetings in 2009, the audit and finance committee may have needed to meet more often. A January 10, 2011 filing by the company stated the SEC is conducting "an informal inquiry into St. Joe's policies and practices concerning impairment of investment in real estate assets."

The committee is also responsible for risk oversight, but one wonders how seriously they considered the risks associated with their largest shareholder becoming so unhappy that he wants to propose all new board members.

The board has a set of governance principles which were originally adopted August 19, 2003. The company did not answer queries on when they were last updated or reviewed, although the proxy says they get reviewed at least annually. These principles describe a narrow, hands off role for the board which includes, at the core, selecting the CEO and then advising him and monitoring his performance.

Despite citing Berkowitz's strategic prowess, the board has no role in strategy defined in the principles or in the proxy. The principles don't allow a role for the board in external relations: "Management speaks for the Company. Communications about the Company with the press, media and other constituencies (e.g., shareholders, customers, communities, suppliers, creditors, regulators and corporate partners) should be made by management. Individual Board members may from time to time, at the request of the Chief Executive Officer, meet or otherwise communicate with various constituencies of the Company."

How can the board be truly independent if it does not engage in independent fact gathering? The board should be more engaged. Regulators are conducting an inquiry into St. Joe, the largest shareholder has a serious issue with the firm and its governance, and the board is facing a securities fraud lawsuit from investors.

At least for now, the drama of Berkowitz's resignation and subsequent threats to put up his own slate of directors has resulted in discussions between the St. Joe board and Berkowitz.

As discussions progress, shareholders will need to take a close look at any board election slate to make sure sustainable, positive change takes place.  They will need to determine whether the recommended board members are truly independent and competent -- and whether they are ready to do the hard work that overseeing the long term interests of all stakeholders entails.

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (http://thevaluealliance.com), a board advisory

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About This Author
Eleanor Bloxham
Eleanor Bloxham
Contributor, Fortune

Eleanor Bloxham, an authority on governance and valuation, is CEO of The Value Alliance and Corporate Governance Alliance, an independent board and executive educational and advisory firm she founded in 1999. She is author of the books Value Led Organizations and Economic Value Management: Applications and Techniques, and publisher of the Corporate Governance Alliance Digest and her blog The Bloxham Voice.

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