In 1989, the proxy statement of the Occidental Petroleum Company informed shareholders that the company intended to spend tens of millions of corporate dollars to build a museum to house the art collection of Occidental’s founder, CEO and chairman, Dr. Armand Hammer. Furthermore, a much smaller sum would be spent on a book detailing two years in the life of Armand Hammer. The story provides an excellent study of boardroom neglect in the face of a powerful and domineering chief executive.

Occidental’s proxy revealed that the company had undertaken to finance the cost of a biography of Hammer, detailing his life from 1987–89. The proxy stated that costs had run to $255,000 already, with another $120,000 committed for further expenses. Occidental would have its costs reimbursed from the proceeds of the book. The publication was expected to be successful since Hammer’s first volume of biography, published two years before, had been a bestseller. Any remaining profits from the book would be donated to the Armand Hammer United World College of the American West, in Montezuma, New Mexico.

The volume of Hammer-ography was a small endeavor compared to the second project described in the proxy. Occidental pledged to finance the Armand Hammer Museum of Art and Cultural Center, to be located in a building next to Occidental’s Los Angeles headquarters. The proxy stated that, “Occidental’s board of directors believes that the financial support of the Museum will promote the continuation of goodwill which has inured to Occidental from its long-standing past association with and support of the [Armand Hammer’s] collections.”

Occidental would bear the cost of constructing the new museum, and ren-ovating four floors of the Occidental HQ building for use by the museum under a 30-year rent-free lease. These construction costs were estimated at $50 million.

Occidental was the subject of several shareholder suits charging that the museum represented improper use of corporate assets. During discovery, more facts emerged that further illustrated the careless use of shareholder money that the board had allowed. For instance, in 1980, Hammer had purchased a Leonardo Da Vinci notebook called the Leicester Codex, for $5.3 million. Hammer renamed it the Codex Hammer. It later transpired that the notebook had been bought with Occidental’s funds. In other words, Hammer had spent the Occidental shareholders’ money on a work of art that he named after himself. More outrageously, the board let him do it.

Further, Occidental would contribute funds to the museum for 30 years at a cost of $24 million. At the end of the 30-year lease, the Museum would have the option to buy the Museum building and the Occidental HQ building from Occidental for $55 million, its “currently estimated fair market value at that time.” Occidental would then lease its HQ building back from the Museum at a fair market rent.

The issue here is not whether corporate charitable giving is of benefit to shareholders. Some level of charity by corporations is not only acceptable, it should be encouraged. Companies should recognize their obligations to the community through charitable contributions. And these contributions provide important benefits to long-term shareholders, both directly and indirectly. Directly, shareholders benefit from the favorable tax treatment of charitable contributions. Indirectly, they benefit from the goodwill, support, and name recognition they inspire. But did the museum and book projects constitute corporate charity, or were they gifts to Armand Hammer?

Consider the book. Unarguably, Hammer has lead a fascinating life, and his first volume of biography had sold superbly, appearing for 18 weeks on the New York Times bestseller list. However, the very success of the first book should have made it possible for Dr. Hammer to negotiate a contract for a sequel with a commercial publisher. Instead, Hammer borrowed the money from Occidental’s till and gave it to someone to follow him round the world for two years. If the book made money, Occidental would be reimbursed, but why should the share-holders bear that risk? Why should a publicly held company be in the business of making interest-free loans to the CEO? Especially given the fact that the CEO was a billionaire and could easily afford to bear the risk of publication himself.

Of course, the book’s cost represented a fraction of the costs of the museum, which soon crept way above the $86 million mentioned in the proxy. One shareholder court filing in October 1990 alleged the total cost to be closer to $157 million. What was Occidental paying for?

The company argued that it “expects to receive appropriate public acknowledgment of its role in forming the Museum.” This was a highly tendentious claim. Hammer had originally promised his collection to the Los Angeles County Museum of Art (LACMA), but reneged on his promise when the Museum refused certain of Hammer’s demands. Among these demands was that his collection must be housed only in rooms bearing his name (and his name only), and should be housed together, separate from other works. Further he insisted that the entry way to his collection contain a life-size portrait of not just Hammer, but also his wife. Lastly, he demanded that the collection have its own curator, answerable to the Armand Hammer Foundation rather than LACMA. Hammer was insulted by LACMA’s failure to accede promptly to his demands and promised that he would house his collection in his own museum. Los Angelenos felt betrayed by this abrupt U-turn.

Occidental’s claim that it would gain recognition via its association with the museum failed on a second count. Art critics and historians believed that Hammer’s collection was not sufficiently good to merit its own museum. As the New York Times put it, for each of the good works, “there are a dozen Victorian pot-boilers, saccharine nudes and other losers.”[i] Time magazine was harsher: “Most of it [the collection] is junk: a mishmash of second- or third-rate work by famous names.”[ii] In other words, Occidental’s shareholders weren’t merely stumping up $95 million for a private museum, they were doing so for a second-rate museum.

Should shareholders bear the cost of a museum memorializing the company’s founder? Especially when various works of art in the museum don’t belong to him anyway? Should shareholders pay for Hammer to acquire a reputation as an art-lover, charitable donor, and philanthropist? Should Occidental’s shareholders pay tens of millions of dollars to divert the collection from a superior facility at LACMA in order to assuage Hammer’s bruised ego?

It was also dubious whether the museum counted as legitimate charitable giving. Under Delaware law (Occidental was incorporated in Delaware) charitable contributions in excess of the amount deductible for Internal Revenue Code purposes may be considered unreasonable. Occidental’s taxable revenue in 1988 was $111 million; and charitable giving was deductible only up to 10 percent of that sum. However, Occidental was planning to spend $86 million on the Museum, rather more than the $11 million that could be deemed “reasonable.”

Where was the board in all of this? Let’s begin with the chairman of the board, the legendary Dr. Armand Hammer himself. His career is the subject of hundreds of articles and several books. His career as an industrialist, philanthropist, and unofficial diplomat spanned the twentieth centry. He was one of the first Westerners to do business with the Soviet Union and with many Third World countries. He was the friend of world leaders. He was also a convicted felon, due to his violation of federal campaign contributions in 1976. (He was later pardoned by President George Bush.) At the sentencing proceeding, held in Los Angeles because Hammer was too weak to travel to Washington, he appeared in a wheelchair, his heart hooked up to monitoring machines checked by a team of cardiologists in the next room. His lawyer told the court that Hammer was “a sick old man [who] lives four blocks from the office, goes in late, goes home for lunch and takes a nap in the afternoon.”

Despite being too old and sick to work, Hammer was paid over $6 million in compensation from 1985–88. Furthermore, his employment contract, which provided for nearly $2 million in annual pay (including a “guaranteed minimum bonus” of $420,000), was written to remunerate him for his services until February 1998, when Hammer (had he lived) would have been 99 years old. One feature of the contract was that it would be paid in full whether Hammer lived or not. Thus, following Hammer’s death, Occidental’s shareholders coughed up a further $18.3 million to the Armand Hammer Foundation. The Los Angeles Times labeled this compensation gimmick a “Golden Coffin.”

However old and sick Hammer was alleged to be, there was no doubt that he was an energetic and highly “hands-on” CEO who ran the company in many ways as though it was his own kingdom. Wall Street recognized his deep (and sometimes eccentric) involvement in every aspect of the company with sharp increases in the stock price every time he got sick. (Indeed, on the day Hammer died, Occidental’s stock appreciated by over $500 million.)

Hammer picked his board members carefully. More than half the directors were insiders, or outsiders with ties to the company. Louis Nizer was a partner, and Arthur B. Krim was a counsel to a law firm that received $5 million from Occidental the year the board approved the Museum. Another “outsider” was Rosemary Tomich, who was also a director of an Occidental subsidiary. Arthur Groman, also an Oxy director, was a partner in a law firm that received fees of $1.8 million from Occidental in 1987, and Groman performed legal fees for Hammer and was a paid consultant to Occidental. George O. Nolley was the founder of the Permian Corporation, which had been bought by Occidental.

There was a widespread rumor that Hammer had signed, undated letters of resignation from each of his directors. True or not, Occidental’s board was ready to respond to every whim of the company’s domineering chairman.

Occidental had a staggered board, divided into three classes. The stated reason for the staggering was to ensure the “continuity” of board service. Such “continuity” seemed unlikely given the average age of Occidental’s directors. Hammer himself was 91 years of age; Nizer was 87; Gore was 82; and Krim 79. More than half of the board was over the age of 72. The “continuity” of this board was not something over which the company had much control.

It seems that Hammer went ahead with the museum plan even without full board approval. He had presented his proposal to the Executive Committee of the board, but the plan was not approved by the Special Committee (made up of outside directors) until long after construction had actually begun on the site.

One shareholder suit charged that the Special Committee had lacked sufficient information to appraise the museum proposal thoroughly. For instance, the Committee received its legal advice from the firm of Dilworth Paxson – Hammer had chosen the firm to advise the Committee, despite the fact that Dilworth Paxson was at that time representing Hammer in a personal legal matter. The Committee was never advised of this conflict of interest. The Committee also accepted, without investigation, the $55 million option price – the price the museum would pay if it wished to buy the complex after 30 years – on the basis of a report by an appraiser selected by Hammer. They accepted this report despite its startling conclusion that a building that cost $50 million to build would be worth only $55 million 30 years later. (Rockefeller Plaza, for instance, is 60 years old and is still the most valuable commercial property in New York.)

When the Committee approved the museum proposal they did not know:

? that Hammer had promised the collection to LACMA, and the public disapproval that resulted when Hammer reneged on this promise;

whether the museum building would be owned by Occidental or the museum itself;

the value of the art to be contributed by Hammer and the Hammer Foundation;

what portion of the art had been purchased with Occidental money;

whether Hammer would provide any financial support for the museum;

the cost to Occidental of the museum’s rent-free use of space in the com-pany’s headquarters building;

the tax aspects of the proposal – they didn’t even know if Occidental’s payment for construction of the Museum complex would be tax deductible;

not even where Occidental would get the funds to pay for the museum.

Senator Albert Gore Sr., at his deposition, showed that he understood few aspects of the museum proposal he had approved. The defendants suggested that Senator Gore, at 82 years of age, should not be expected to recollect corporate matters between board meetings. The obvious question is: what was he doing on the board at all? But that question can equally be asked of every board member.

A shareholder lawsuit challenging the museum was settled – over the objections of the large institutional investors – because the court found it likely that the contribution would be protected by the business judgment rule. Who then is in the best position to establish accountability here? How?

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[i] Michael Kimmelman, “Unintended Legacy of Armand Hammer is a Museum Dispute,” New York Times, Jan. 9, 1991. p. B1.

[ii] Robert Hughes, “America’s Vainest Museum,” Time, Jan. 28, 1991, p. 98.