The Board Member That Forgot To Tell His CEO and Board That He Was Buying The Company

He is playing on too many teams in my opinion

The Compleat Angler Hotel is a classic 400 year old English country house style lodging situated in an idyllic setting on the banks of the River Thames - a short walk across the bridge to the town of Marlow.

It is also the key meeting place for one of the most blatant disregard for good corporate governance in modern business history.

This is the story of the two Dow Chemical Company senior executives that forgot to tell the CEO and the Board that they were plotting a leveraged buy out (LBO) of the company.

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The Dow Chemical Company is headquartered in Michigan.

As of 2007, it is the second largest chemical manufacturer in the world after BASF.

Dow is a provider of plastics, chemicals, and agricultural products with presence in more than 175 countries and employing 46,000 people worldwide with 2007 revenues of $USD53.513 Billion.

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On January 18, 2007, the Financial Times reported "talk in the market" that "a consortium of private equity groups are working on a breakup bid" for Dow.

Dow's share price was spiking; its shareholders, employees, and joint venture partners were demanding more information; yet its CEO, Andrew Liveris, was totally in the dark about what, if anything, lay behind the rumor.

The next morning he e-mailed Dow director and former chief financial officer J. Pedro Reinhard, whom he knew to be plugged in to the financial community.

"Can you sniff around your contacts?" he asked. "Let me know if this has any basis?"

About two hours later Reinhard replied dismissively, "This rumor was in the market for about over six months."

"Anything new?" pressed Liveris.

"Not that I am aware," Reinhard responded.

Reinhard was not being candid with his CEO.

A few hours before tapping out his responses, he had been meeting with two advisors working for an Omani sovereign wealth fund.

The fund was trying to form a consortium with U.S. private equity firms to launch a LBO of Dow.

According to later statements by the advisors, Reinhard and one of Dow's highest-ranking executives, Romeo Kreinberg - then responsible for about half of Dow's global operations - had been in a hotel room flipping through a 100-page booklet prepared by a London affiliate of J.P. Morgan Chase outlining how the Omani-led LBO would proceed.

They were also discussing the compensation Reinhard and Kreinberg might expect if the deal went through as planned - Reinhard would be chairman of the new entity and Kreinberg chief executive.

During the first half of 2006, Dow's share price was languishing, and the company was regularly being approached by investment banks with unsolicited presentations proposing deals to increase shareholder value, including breakup LBOs.

In July the company's senior management and board held a weeklong strategy retreat in Newport, R.I., where they debated six strategic "optionalities," including a breakup of the company.

Liveris argued that Dow's commodities and performance segments were so interdependent that it was best to maintain the company's integrated structure. Instead of a breakup, he favored an "asset light" strategy, in which Dow would "monetize" its commodities assets by, for instance, selling joint venture interests in them while keeping operational control. The proceeds would be used to expand the performance units.

The board backed Liveris's asset light strategy and rejected breakup strategies.

The only dissenter was Reinhard.

It was at the same time that these discussions were being held that Reinhard was working on the LBO of Dow.

In the maddening rush, he forgot to tell the Chief Executive Officer and the Board of his conflict of interest.

As a result of information gained during the discovery process, Dow's board later leveled an additional charge against Reinhard - that he had, without its board’s knowledge or permission, served as an observer at board meetings of another chemical company, Basell, which recently merged to become LyondellBasell. (Basell and, now, LyondellBasell are businesses privately owned by the holding company Access Industries, an investment vehicle privately owned by billionaire Len Blavatnik.)

The planned LBO came to light after three London newspapers reported rumors about the bid. Dow CEO Andrew Liveris then made inquiries of JP Morgan Chase CEO Jamie Dimon, who ultimately confirmed that, in fact, the bank’s London office had pursued such a plan, and that Kreinberg and Reinhard had been involved.

Dow’s board terminated the two executives two days later.

(Based on "Inside Job" by Roger Parloff - Fortune July 1st, 2008)