Aol's Board Is Digging In

The decision haunts them. Forty-nine floors above midtown Manhattan, Time Warner's directors met in secrecy on a Sunday 31 months ago. One by one, all 13--including Stephen F. Bollenbach, CEO of Hilton; Reuben Mark, CEO of Colgate-Palmolive, and Michael Miles, CEO of Philip Morris--voted to sell Time Warner to the Internet giant America Online, despite pointed questions. Some directors asked whether Time Warner might prosper more without AOL. Was the $165 billion price tag, payable in AOL shares, enough, others asked, especially if a sagging stock could deflate the price before the deal closed? "This deal was a big leap of faith," says a person who was at the meeting. Yet the board jumped, assured by Time Warner CEO Jerry Levin that "convergence" of new and old media and the growth it would produce were real. "Jerry had a firm grip on the board," says a senior AOL Time Warner official. But so far, what became the biggest deal in the history of the media business has produced only misery.

Now directors of the combined company--seven from the old Time Warner, seven from AOL--are facing increasing pressure to make the merger work. Levin, who abruptly retired last December, is gone, as are many of the once powerful chief executives in a troubled corporate world. In the wake of Enron and WorldCom, once laissez-faire boards of directors now are facing shareholder suits and trying to steer wayward companies through government inquiries. To restore their reputations, many are grabbing the steering wheel. Gone are the days of genteel board membership, when directors could collect fat checks by squeezing in a few board meetings between tee times and lounging in corporate villas and flying on the corporate jet--all courtesy of the companies they were charged with scrutinizing. In the emerging 21st-century business landscape, corporate directors face real work.

Nowhere is the new activism more apparent than at AOL Time Warner. Since the company's birth in January 2001, the stock has plunged, vaporizing $200 billion in shareholder wealth. The supposed growth engine, AOL's Internet service, has stalled. In response, the board has overseen a dramatic shake-up in the executive suite, including Levin's sudden exit, and his once presumed successor Bob Pittman's resignation in July. In their place, directors installed CEO Richard Parsons and two Time Warner hands as his co-chief operating officers. As the directors become increasingly attuned to details once left to the CEO, several are emerging as influential leaders (chart). Among them: Bollenbach, who has vast industry experience as Disney's former chief financial officer; Mark, who's focusing on compensation and corporate values; Fannie Mae CEO Frank Raines, a frequent conservative sounding board for Parsons, and AOL Time Warner vice chairman Ted Turner, the volatile personality and largest individual shareholder. The board is tightening the reins on the new executive lineup. Among the top concerns: compensation, accounting issues and, most important, the company's overall strategy.

In May the board created a new strategy committee to alter the disastrous path set out by Levin and his coarchitect of AOL Time Warner, chairman Steve Case. The committee meets monthly to help chart the new strategy, which de-emphasizes "convergence" and AOL as the company's centerpieces; directors also scrutinize how Parsons and his team are fine-tuning the plan. Already, the committee has helped identify several broad areas, including cross-divisional advertising and online music offerings, that it wants AOL Time Warner to focus on. In the coming weeks, the members expect a comprehensive plan. This new aggressiveness is a "recognition that [the company] hasn't capitalized on the promise of the merger," Case told NEWSWEEK. "As we move forward, given the disappointment, a group of directors should play a more active role in driving the strategy."

The board will have a decisive role in another strategic move. It soon must approve a deal Parsons is said to be close to striking with cable giants AT&T and Comcast to reacquire their 25 percent of HBO, Warner Bros. studios and Time Warner Cable. The $8 billion to $9 billion deal may add stress to the company's finances, but it could also boost the sagging stock.

For now, the most ominous items on the board's agenda are two federal investigations into aggressive accounting practices before and possibly after the companies combined. The Feds are looking at how AOL booked revenues before it merged with Time Warner. While executives publicly downplay the problem, privately some of them admit that they're worried. "I think there's no chance they'll come back with nothing," one top company official told NEWSWEEK. Another says there's particular anxiety that federal investigators will comb the bookkeeping used in accounting for costs of the merger.

If the accounting scandal mushrooms, it will only stoke speculation that Case could be the next to go. Already some insiders are betting he'll be out by year-end. "Ridiculous," Case told NEWSWEEK. "I'm chairman and intend to be for many years." Case's job security rests partly on the continued strength of his most ardent partisans on the board. They include onetime Boston lawyer turned AOL executive Kenneth J. Novack and entrepreneur Miles R. Gilburne. If he is shoved aside, say close observers, some supporters may follow. "Can you move Steve without moving the rest?" asks one executive, implying the answer is no.

It remains to be seen whether the makeup of this high-profile board will change that dramatically. What is clear is that other media-company boards seem to be following AOL Time Warner's activist lead: directors recently ousted chief executives at Vivendi Universal and Bertelsmann, and there's growing speculation that Michael Eisner at Disney could go next. As the industry's tumult continues, CEOs aren't the only ones at risk: shareholders could toss out AOL Time Warner directors if things don't improve. And it's a long way down from the 49th floor.