Stone & Webster: the company that built America

The work of Stone & Webster can be found in the very fabric of the United States of America. As an engineering and construction business, the company helped build the superstructure for the Manhattan project which developed the atom bomb in World War II, the New Jersey Turnpike, the Statue of Liberty restoration, and the Washington, D.C., subway system.

In the 1970s the company continued its success, constructing nuclear power plants to US utilities. The company has built more such plants in the US than any other company, except for one.

In its 1994 annual report, the company made much of its place in American corporate history: "Stone & Webster is a century old group of integrated and interdependent engineering, construction and consulting businesses. We have, for more than 105 years, been providing technological vision and innovative solutions to the changing world of energy, petroleum, petrochemicals, environmental responsibility, and infrastructure."

But, as we saw in the Sears and General Motors case studies, a glorious past is no indicator of future success. Indeed, a company accustomed to success may find its entrepreneurial spirit replaced by a sclerotic institutional culture. Past glory may even be an inhibitor of future performance.

Stone & Webster was known for being old and prestigious. It was also renowned for being secret and defensive.

The Boston Globe, writing in November 1994, tried to talk to some Wall Street engineering and construction analysts to give them insight into Stone & Webster. They found that no analyst tracked the company. The company's policy, it seemed, was not to brief the market on the company's prospects. Stone & Webster was also the only company in its industry which did not release backlog data, an indicator of future performance.

The Globe continued: "Its [the company's] critics say Stone & Webster clung to the past, refusing to acknowledge that its once highly profitable nuclear business was dead," and added: "It's a culture, say those who have worked there, where the boss is always right."

The newspaper identified the cause of this corporate culture. One former executive told the Globe: "They had been very successful in the past, so there was no reason to change. The more money they made, the more conservative they got."

Certainly in the case of Stone & Webster, the proud words of the 1994 annual report bore little relation to the facts. The company's core engineering business had been losing money for several years, a fact reflected in several key areas. By the mid 1990s, for example, the company's permanent staff had fallen to 6,000 from the 15,000 of less than a decade previously. Profits flattened and the stock price fell from the mid-40s to the high 20s at a time of consistently rising markets.

From 1989-1993, the stock of Stone & Webster fell 11.4 percent per annum, compared to a 7.1 percent per annum increase in the S&P 500 index, and an annual advance of 7.5 percent in the S&P Engineering and Construction index.

These poor figures were caused by continued poor performance of the company's central business. Stone & Webster had, in the early to mid 1980s, done considerable business building nuclear power plants. The business was conducted on a lucrative 'cost plus' basis, and the company's profits boomed.

The 'cost plus' system, under which the company is paid the cost of the project plus a percentage, may indeed have damaged the company's ability to compete. This system doesn't require a company to keep costs down. It doesn't create an incentive to find quicker, cheaper, or innovative ways of completing a project. Indeed, since the company's fee is based on a percentage of the cost, there is an incentive to drive up costs as high as possible. The system positively promoted ill-discipline.

The nuclear power market collapsed however. Following the incident at Three Mile Island in 1979, followed by the Chernobyl disaster seven years later, US utilities lost interest in nuclear power. The last two nuclear power plants in the US were ordered in 1978 but later cancelled.

The fact that Stone & Webster was slow to react to the decline of its central business is perhaps part explained by the diverse nature of the company's operations. In addition to central heavy engineering, the company also had significant, but unrelated, interests in cold storage warehousing, oil and gas exploration and production; oil and natural gas gathering and transportation, office building management and real estate development.

The assets were as diverse as the operations. The company owned four office buildings in Boston, New Jersey and Houston (the last was under construction); three cold storage facilities in Georgia; thirteen facilities for natural gas gathering and transporting in Texas, Louisiana and Oklahoma; a portion of the land and buildings in a 1,000-acre used office park in Tampa; mineral interests in the US and Canada; several inactive drilling rigs; and a portfolio of government securities and common stock.

The center of this sprawl? A holding company in New York City. Despite the fact that the engineering headquarters were in Boston, the company still maintained expensive office space in midtown Manhattan.

Stone and Webster, then, was a diverse misconglomeration, in which the central business had underperformed for several years.

Whose job is it to identify and rectify this problem?

In a public company, there are three obvious layers of accountability: · the disclosure of accounts. This forces a company to disclose answers on the most basic question - how's the company doing? · the board of directors. It's their job to replace management if they fail. · and the shareholders. They can replace the directors if they don't do their job.

We will see that Stone & Webster was able to subvert each of these three mechanisms for promoting accountability. As a result, the company continued to live in denial.

The balance sheet

In business, numbers aren't meant to lie. Performance is reflected in the fabled 'bottom line.' But because accountancy can sometimes be more art than science, this is not always the case.

A casual glance at Stone's balance sheet would have shown a company reporting healthy, albeit diminishing profits. Stone & Webster diligently met all the rules of accounting disclosure. But the numbers hid the true story.

The failure of the core business was disguised by the contribution of income from other sources. The most significant non-core addition to the company's income came from its overvalued pension fund.

In the 1970s and early 1980s, thanks to the 'cost plus' contracts they secured, Stone & Webster contributed generously to the company's employee benefit plans, especially the pension fund. After all, pension contributions were part of the 'cost' which increased the ultimate fee to the company.

Participants in the plan did not become fully vested until they had been employees for ten years -- and few jobs lasted that long.

Thus, in the good years, the pension fund outgrew the company. But as the workforce dwindled in the 1980s, there was no commensurate shrinkage of the plan. Large sums deposited earlier for pensions of terminated employees remained in the plan and became available for the company's relatively few ongoing employees.

In the late 1980s, the excess assets in the plan passed the $100 million mark -- far more than was needed for existing employees. The company amortized a portion of this surplus, and each year this portion represented an addition to the company's income.

The adjustment, it should be noted, was an accounting device and did not represent the transfer of any cash from the pension plan. Rather, it represented a reduction in the company's operating expenses. Nonetheless, it increased the company's reported earnings by an average $14.4 million per year from 1988-1994.

For example, in 1993 the company recorded a $2 million profit. But what the accounts did not state was that it benefited from a $14 million credit from the pension fund surplus, or 5 percent of the company's gross earnings. Aside from core engineering, this was the biggest single contributor to the company's income. The credit was not itemized in the income statement, as permitted by accounting standards.

Since 1987, when Stone & Webster first began the practice, the pension fund credits were responsible for reducing operating expenses by a total of $101 million. Without the adjustment, the company would have lost money every year except 1991.

The pension fund credit was not the only item propping up the balance sheet. As discussed above, there were other considerable passive assets completely unrelated to the company's core business. For example, the company's real estate portfolio was worth $169 million. The company also owned $38.2 million in Tenneco shares (a shipbuilding and automotive parts manufacturer) and $55 million in US Government bonds.

Stone & Webster asserted that the risky nature of the engineering and construction business made it essential to maintain substantial reserve assets in order to win new business. The company had no plans to liquidate these investments and re-invest them in the core operations, or simply pass them back to shareholders. Rather, the profits from these non-core investments were deployed to support the drifting central business.

These profitable sidelines allowed management and the board to ignore the reality of the company's disastrous performance in its core business, and masked its failure to master a changing business environment.

In your opinion, did Stone & Webster have an acceptable business structure? Had Stone & Webster been a company made up solely of that core division, would the market have tolerated its failure for long?

Why would investors buy into a failing engineering business to enjoy the fruits of investing in government bonds and Tenneco?

Who is responsible for ensuring that a 'warts and all' analysis of the company's health is reported to shareholders? The directors? The auditors? The audit committee of the board?

The board

Clearly, in the first instance, it is the job of management to confront sustained underperformance. That Stone & Webster's management allowed the company to drift in this way is perhaps partly explained by the fact that they were largely career Stone & Webster employees. Bill Allen had been with the company since the end of World War II and Bruce Coles had started at Stone & Webster 26 years previously.

As we have seen in other case studies, it is often difficult for career insiders radically to alter a company's direction and strategy. It is often easier for an outsider, who lacks the historical and emotional connection to the company, to effect a fresh start.

In such circumstances it is particularly vital to have a strong board, one that can demand a tough response to poor performance from long-term insiders. As we have explained in chapter 3 in this book, it is the responsibility of the board to select management, ensure they have the right strategy for success and, if necessary, replace them if they don't.

But the Stone & Webster board was not capable of fulfilling this function.

In addition to the three inside directors, there were nine outside directors. With the exception of J. Angus McKee (chairman and CEO of Gulfstream Resources, Canada), none of the outside directors was a full time executive in either business or finance.

Moreover, the ability of some of the outsiders to bring an independent perspective was compromised by the length of their tenure. William Brown had served for 25 years, John A. Hooper for 20, and Peter Grace (who was 80 years old) for a whole half-century. One director who stood down at the 1994 annual meeting, Howard L. Clark, had served for 25 years.

Of the nine outsiders, four were affiliated to the company via consulting arrangements. Kent F. Hansen received $60,000 in consulting fees from the company in 1993. Fred Dalton Thompson, who resigned from the board in 1994 to make a successful run for the US Senate, was a partner at a law firm that had billed Stone $134,000 in legal fees in 1992. Also in 1992, the company received fees of $481,000 from Canadian Occidental Petroleum of which Mr. McKee was President and CEO; and the company received $88,000 from W.R. Grace and Co. of which Peter Grace was chairman..

These arrangements meant that there wasn't a majority of independent outside directors on the board.

Of the four non-affiliated outsiders, three were over 70 years of age (in addition to the octogenarian Peter Grace) and retired. One was a foundation executive and one was an academic.

But, most worrying, was the stock (or lack of it) owned by many of the directors. The 1994 proxy reveals the following:

Source: Stone & Webster proxy statement, 1994.

Aside from Peter Grace, none of the outside directors owned more than a token amount of stock. For example, William L. Brown served on the board for nearly 25 years but had amassed a holding of just 400 shares. Meredith L. Spangler, although she'd served on the board for just three years, had nevertheless purchased only 100 shares.

The annual director's retainer was $20,000. In 1994, four directors owned less than $10,000 worth of stock.

It is also noteworthy that, until late 1993, there was no nominating committee so there was no focus or energy to bring on fresh, independent non-executive directors.

Finally, the 1994 proxy revealed that Peter Grace didn't attend 75 percent of meetings

Outside directors have a responsibility to provide a fresh, independent perspective, one that challenges the status quo if necessary.

Were Stone's outsiders capable of performing such a role?

The Shareholder Role

Directors, of course, are elected by shareholders. A board that fails to serve shareholders' interests may find itself voted from office. But here again, another layer of protective insulation stood between the company and its owners.

Thirty-seven percent of the company's stock was held by the employee stock option plan (ESOP), an incentive arrangement designed to reward long-term employees at all levels in the company.

The trustee of the ESOP was Chase Manhattan Bank, which had a long standing commercial relationship with Stone management. Chase received significant compensation for its services as a commercial and investment banker, a relationship that was strengthened by interlocks at board level. John Hooper, an outside director of Stone & Webster, was also a member of Chase's board. A previous Stone & Webster CEO had been a member of Chase's board.

As trustees of the plan, Chase was responsible for voting the shares in the ESOP in the best interests of the beneficiaries.

How can an ESOP trustee selected by management protect themselves from conflicts of interest?

A shareholder invests

The two authors of this book are principals of the Lens Fund, an activist investment group that targets underperforming companies and seeks to use the rights available to shareholders to bring about change. In mid-1993, Lens began purchasing the company's stock. By year end, it owned about 172,000 shares of Stone & Webster, or about one percent of the outstanding common stock, a stake worth about $6.4 million.

Having researched and analyzed the company, they concluded that the company was insulated from the discipline of the marketplace by the unreality of GAAP, a somnolent board and a friendly block shareholder.

Do you agree with this conclusion?

A Shareholder's Strategy

Lens's first act was to seek a meeting with the company's management, asserting that constructive dialogue is a key element of the governance process.

The first meeting took place in September 1993 with the company's CEO, COO and CFO. Management insisted that they were unwilling to consider asset sales, insisting that they needed to keep the reserves on hand in order to compete effectively for sizable construction jobs.

The Lens principals asked how the company could justify holding on to the Tenneco stock. The company replied that it didn't cost them anything. Lens argued that there was an opportunity cost if the Tenneco stake was tying up capital that could be more productively used elsewhere. Furthermore, they noted that the benefit of the capital markets was that companies could seek finance as and when they needed it.

One of the authors of this book, Robert A.G. Monks, noted after the meeting: "It was a striking case of corporate stasis." Later, the Lens principals wrote to the company suggesting that perhaps the company should privatize, with the ESOP buying out all the other investors. Lens wrote: "If a company cannot offer shareholders a competitive rate of return, it seems to me the company can determine whether it can justify having public shareholders at all."

The company didn't respond to this letter for two months, by which time it was too late for Lens to file a shareholder resolution.

Instead, Robert A.G. Monks proposed himself and Joseph Blasi, an expert on ESOPs, as members of the board. The company replied that the nominations committee (formed some months previously according to the company, although no announcement had been made) felt there would not be time to review their candidacies.

Lens also wrote to the trustee of the ESOP, Chase Manhattan Bank, suggesting that it was the trustee's fiduciary duty to consider their candidacy for the board. They received the following reply: "The resources available to Chase enable us to fulfill our fiduciary responsibilities through internal means. Accordingly, we thank you for your interest in this matter but do not feel that it is necessary at this time to meet with your company."

Do you consider that the above consists of constructive dialogue?

The Law

Lens filed a lawsuit against the company, its directors and Chase, claiming that the company had committed fraud by failing to disclose that its engineering division had been operating at a loss and to identify it source of reported surplus from the pension fund. In essence, the suit demanded that the company disclose its financial position according to accounting principles that weren't merely generally accepted, but offered a true view of the company's performance.

In a statement Lens said: "We've spent the last eight months asking Stone & Webster to conduct its affairs like a publicly owned company. It prefers to enjoy the benefits of the public market, but without the responsibility of full or accurate disclosure With management and its agent Chase controlling 37 percent, we've turned to the court to help before its too late."

The suit asked for two things - accurate financial disclosure, and that the company postpone its annual meeting to permit a proxy contest or solicitation of 'no' votes for election to the board. Finally, the suit asked the court to remove Chase as trustee of the ESOP because it had failed to vote the shares for the exclusive benefit of the employee members.

The court declined to postpone the annual meeting and Lens eventually lost the suit. However, in 1995, Stone & Webster restated its figures in precisely the way Lens had requested, and in a second court case, Lens was successful in an effort to secure access to internal company documents.

1994 annual meeting

At the annual meeting in 1994, the company announced that William Allen was retiring as chief executive (to be replaced by Bruce Coles) but that he would continue to serve as chairman for another year.

Lens withheld its votes from the director candidates, and explained why. Nell Minow said that Bruce Coles, as President of the company and CEO-elect was part of the management team that had let the company drift.

A second executive, William Egan, was also a candidate. As the company's executive vice president and CFO, he had been responsible for the decision to combine the pension surplus with the operating earnings.

Of the non-executives, Lens withheld their votes from Kent Hansen, who owned only 200 shares, despite having served since 1988. His consulting fees from the company have been disclosed in past proxies but not in that of 1994. Further, Mr Hansen was chairman of the nomination committee, which the company claimed was made up of outside directors, although Mr Hansen received twice as much in consulting fees as he did in director's fees.

Finally, Ms Minow pointed out that Donna Fitzpatrick, joining the board to replace Howard Clark, had purchased only 100 shares.

In a press release, Lens defended its decision to withhold its votes: "This board needs a message that shareholders will not support a board that hides negative earnings in the pension surplus, a board that fails to respond to five years of unacceptable performance."

Uniting the shareholders

Lens was not alone in finding the performance of Stone & Webster unacceptable. Frank Cilluffo, a private investor, owned or represented nearly 6 percent of Stone & Webster's stock, a holding worth over $23 million.

At the 1994 annual meeting, Mr Cilluffo said: "As a shareholder for the past three years I have continually had to wrestle with the question of defining our identity. Are we an engineering firm, an investment company, an oil and gas company, an REIT, or a cold storage enterprise? It appears from our past performance that it has been very difficult to optimally manage the performance of all these industry segments. Any concerned shareholder must wonder whether it would behoove the company to focus on a single industry segment."

He offered a seven point recovery plan: · the sale of the non-engineering businesses · the sale of under utilized real estate assets · possible consolidation of various engineering and management offices · the sale/lease back of owned real estate offices where appropriate · maintain tighter employment levels, reflective of current levels of business · appointment of additional knowledgeable outside directors · mandatory retirement age of 67 for management and directors

Following a similar agenda, and owning between them nearly eight percent of the stock, Lens and Mr Cilluffo represented a strong voice for change. How did the company respond?

A Year of Little Progress

Between the 1994 and 1995 the company's performance went from bad to worse - in 1994, it lost money in net terms for the first time in 60 years. It laid off one-sixth of its employees.

Over the course of the year, there was incremental change. But not the thorough, immediate action that Lens pressed for.

The company agreed to sell the Tennecco stock, and proposed to buyback up to 1 million shares. Some of the company's excess real estate was put on the market, and the company's structure streamlined. The company asserted that the changes would account for $55 million in annual cost savings. William Allen, the chairman, also announced that he would step down following the annual meeting. The company announced that Kent Hansen would replace him. Lens expressed concern that Mr. Hansen only owned 200 shares.

William Egan, the CFO, also announced his departure as both executive and director. Peter Grace also chose not to stand after a half-century of service.

The company proposed two new directors. First, Frank Cilluffo, a candidate warmly welcomed by Lens. As the owner of a stake now worth over ten percent of the company, he had a vital interest in the performance of the company - an interest that had been lacking in the boardroom for too long.

Another new director was Elvin R. Heiberg, the president of his own consulting firm. In contrast to Mr Cilluffo, he owned just 100 shares.

At the 1995 meeting, the CEO Bruce Coles said: "We have new incentive compensation, a new CFO, and our Cherry Hill facility is on the market. We have brought our cost structure into line with revenues. The first quarter we have recorded a profit of 32 cents a share. In the first quarter of 1994 we had a loss of 86 cents a share. Some would say we've been averse to change. I say we've embraced change."

The moves weren't enough for Lens who pressed for revolutionary, rather than evolutionary change. While they welcomed the sale of the Tenneco stock, they felt the asset divestment was proceeding at too slow a pace. When they pressed the company to take more urgent action, they were advised that Goldman Sachs were keeping the company's capital structure under review and advising on divestments.

Lens replied that unless they knew the scope of Goldman's inquiry, they couldn't know how effective the bank's advice would be. They continually pressed for details of Goldman's remit. No answers were forthcoming.

The issue was later raised by Lens in a letter to the board: "We have no idea what it is you asked Goldman Sachs and Co. If you had asked them for a plan of maximization of shareholder value, with full license to consider disposition of corporate assets, that would be one thing. If on the other hand, they were asked to approve a management plan (the elements of which we are in ignorance) that would be another."

Do you feel that shareholders of a company in a turnaround situation should be privy to the company's strategic plan?

To whom was Goldman Sachs accountable? Who were they were working for? What kinds of conflicts might the bank have faced?

In advance of the 1995 season, Lens again sought to use the proxy process as a device for airing their concerns. Lens and Lens contacts filed no fewer than ten shareholder proposals calling for such items as annual election of the board of directors, a requirement that there be a minimum share ownership by the directors, and asking that the company retain an independent investment bank to study asset divestment.

In a filing the size of a Manhattan phone-book, the company appealed to the SEC to have the resolutions excluded. Some of their arguments were petty at best. For example, they argued that Lens's statement that Peter Grace had served on the board for half a century was factually inaccurate. In fact, Mr. Grace had served 49 years and several months at the time Lens filed their resolution, and by the time of the annual meeting, he would indeed have served for 50 years.

To Lens, the company's response to the resolutions was excessive, an unproductive use of company resources, and yet further evidence that the board wished to remain insulated from external discipline.

But Stone & Webster won the day. The SEC proxy rules allow for only one resolution per shareholder. The company argued that in essence all ten resolutions were effectively from the same source -- Robert A.G. Monks, principal of Lens.

What do you think is the purpose of the shareholder resolution process? Is it to allow concerned shareholders a cheap and effective way of communicating with their fellow investors?

Is it a level playing field?

The company made it difficult in other ways for Lens to advance their concerns. Monks asked to address the annual meeting from the podium; the request was declined. He tried to respond directly to the CEO's summing up for the year, but was told he had to route all his remarks through the chairman. He sought to ask questions directly of the nominees for the board; the chairman said he would first ask the nominees if they wished to respond. Monks' aim, of course, was to expose the director candidates to some tough questions - the kind of questions that the non-executive directors should have been asking for some time.

And when Monks asked one director for an example of the way the board carried out self-evaluation, the chairman intervened saying that Monks had asked a question he hadn't submitted in advance. Another shareholder interrupted to demand an answer, saying "are you allowed to answer a question that hasn't been pre-screened?"

To Lens, this all represented further evidence that the management was unwilling to engage in meaningful debate about the company's future. But what does a company have to fear from its shareholders? Presumably a company's managers and its shareholders want the same thing -- the long term prosperity of the firm. So what does a company gain by attempting to silence its critics?

The 1995 Stone & Webster annual meeting speaks volumes about corporate democracy, or rather the lack of it. In this instance, management controlled the timing and procedure of the annual meeting, and could afford the vast resources of the company's legal department and outside counsel to ensure that an outsider couldn't compete on level terms.

Does the Stone & Webster story tell you that the current system favors one group over another? How might the system be improved?

Luckily, Lens had prepared a back-up in case (as happened) all its resolutions were dismissed. An investor called Alan Kahn had filed, with Lens' assistance, a resolution calling for the company to hire an independent investment bank to study divestment. This was the critical question in Lens' view, since it required management rigorously to justify the sprawling conglomeration of unrelated assets to a credible external agency with no conflict of interest. Mr. Kahn asked Robert Monks to propose the resolution on his behalf. Mr. Monks said the company cried out for a thorough examination from an independent, outside source -- a description not met by the company's use of Goldman Sachs. Monks agreed that Goldman was the ideal institution to carry out the inquiry but only if the company asked them the right questions.

But the resolution went beyond the immediate issue. Rather, it was a device for framing shareholders' wider concerns about the company's performance. It was a peg on which to hang concerns over the company's asset dispositions, the quality of the board, the defensiveness of management, and ultimately the long-term underperformance. Given the repeated failed overtures between Lens and the company, both in their meetings and in the courts, Monks said: "voting for this resolution is the only way we can articulate our concern for the company." The resolution, in a wider sense, became a vote of confidence in the board.

The company's CFO replied that the company was doing a lot of things Lens wanted. He said the charge that the company was hiding the pension credit was "an out and out lie." He said that hiring another investment bank, given Goldman's assignment, was unnecessary.

The resolution won 35.6 percent of the vote. If the votes of the employee plan, voted by Chase, are stripped out, the resolution won over 55 percent of the vote ? a demonstrable vote of no confidence.

The resolution's success was based, in part, on the fact that it was supported by Frank Cilluffo, from inside the boardroom. His position as a director, backed by his sizable stake, meant his support had substantial credibility.

First progress

Within three months, Bruce Coles quit the company, expressing a move to live in the South. Given that Allen, after a fifty year career at Stone & Webster had also departed at the annual meeting, the company had an opportunity to bring in new, outside blood. Lens pressed for further independent outside directors to join Mr Cilluffo and asked the company to search for a CEO from outside the company with Lens's help. The company agreed to these requests.

But Lens continued its aggressive pursuit of the company, even seeking purchasers for the company. Fluor Corp and Raytheon both investigated the possibility of a merger.

In September 1995, Lens issued a press release entitled: "Lens tells Stone & Webster to sell the company." In a letter to the board, Lens wrote: "We must conclude that the only way to realize full value of assets and the jobs of skilled professionals is to sell or merge the company. We are now past the point of studying the divestiture of assets. This company needs to put itself on the market as the best chance to realize full value for shareholders."

Stone & Webster understood that it might soon find itself in play. According to one account, Goldman informed the company that its assets were indeed more than its market value ? hence it was ripe for takeover.

Does there come a point where a company is unable to change organically and internally, and requires an external agent to effect change? Is a takeover an effective means or accomplishing this, or is it a symptom of a governance system that has failed?

Under greater pressure than ever to perform, the board continued to make changes ? they agreed to pay directors in stock, and consulted Lens on the criteria for new board candidates and a new CEO.

New management

In February 1996, the board appointed a new CEO, H. Kerner Smith. His first job was to call all the major investors and engineering analysts, not knowing that this reversed the company's traditional policy not to talk to anyone. Analysts began to follow the company once again.

The Bloomberg business news wire reported in June 1997 that the new CEO was bullish on the company's prospects and viewed analysts' estimates as conservative. Bloomberg noted: "The Boston based company is starting to court securities analysts and investors as never before. In May 1996, about three months after Smith joined the company, Stone & Webster provided analysts with its first earnings guidance in its 108 year history."

Smith's other extraordinary discovery was the lack of an overarching strategic plan. Instead, he found separate business plans for the four core engineering businesses. He initiated what Lens had been requesting for so long ? a review of the company's capitalization and outline for the most effective deployment of assets. He put in place an ad hoc board committee to study the issue. Within a year, the company estimated that Smith's strategy was worth about $55 a share. The company continued to sell off non-core assets and replaced a third of top management as a means of trying to deinstitutionalize the company's culture.

The 1996 proxy statement demonstrates that this new broom reached the boardroom. Three directors retired at the annual meeting - William L. Brown (after 26 years), John a. Hooper (22 years) and Kenneth G. Ryder (nine years). Joining the board in their place were John P. Merrill (chairman of Merrill International, international project development), Peter M. Wood (former managing director of JP Morgan), and Bernard W. Reznicek (former chairman and CEO of Boston Edison) - experienced businessmen all. Later in the year, an additional non-executive director was added, David N. McCammon, a retired finance executive from Ford.

By the time of the 1996 annual shareholders' meeting, the only directors remaining from 1994 were Angus McKee and Kent Hansen

It was not all good news, however. Merrill and Wood only bought 200 shares.

The 1996 proxy reveals further reforms. The board adopted confidential voting, allowing the ESOP votes to be cast in secret. And the company announced that, effective January 1997, directors would be remunerated in stock. Each non-executive would receive an annual retainer of 400 shares and $8,000 in cash. The directors could also elect to receive all meeting fees in stock.

The final pieces fall into place

In October 1996, Stone & Webster announced a " major operational and financial restructuring."

The key components were: · Headquarters consolidation: Stone & Webster's corporate headquarters in New York City were consolidated with the Boston offices of the company's principal operating subsidiary, Stone & Webster Engineering. The Manhattan office space was offered for sublease. The company finally admitted that its commitment to clients "does not require us to continue to own substantial real estate holdings or to maintain extensive space in a high-cost midtown New York location."

· Streamlined organization: the company reshaped its line management , saying that the company's "structure has been flattened and broadened to improve accountability and encourage a more entrepreneurial environment."

· Real estate sale: Stone & Webster announced the sale of its Boston headquarters building for sale, and the planned sale and restructuring of other real estate in Boston.

The good news continued. In February 1997, the company announced: · a revised compensation plan, based on the company's objective of achieving shareholder returns in the top quartile of the engineering and construction industry; · a reformed nominating committee, with an expanded remit, renamed the governance committee; · formal procedures for an annual review of CEO performance.

In May 1997, the board appointed Kerner Smith chairman as well as CEO. Kent Hansen, the caretaker chairman was appointed Lead Director. At this point, the board consisted of eleven members, including nine outsiders. Of that eleven, all but two had been appointed since 1992.

Kerner Smith celebrated his appointment by projecting a 15 percent increase in earnings per share over the previous year. The stock hit a high in the mid fifties in response.

Lens's took considerable credit for the changes that had taken place in over four year involvement with the company. In its 1997 annual report, the fund stated: "Lens has played a role in changing virtually every aspect of the governance of Stone & Webster, ranging from the replacement of eight directors and two CEOs to the divestment of non-core businesses, the fundamental recasting of the financial reporting, the creation of a nominating committee, and the adoption of confidential voting, especially important in a company with its ESOP as the largest owner. The company's focus on its engineering business has been strengthened. The Tampa land development, oil and gas holdings, the cold storage business and the Boston office buildings have been sold or are scheduled to be sold. The company has moved out of its expensive and redundant New York headquarters office, and Stone & Webster is on its way to becoming a world competitor in its field. The stock price has appreciated 52 percent over the past 12 months."

And Kerner Smith's view of the fund's involvement? "Lens keeps us on our toes."

Could these changes have taken place without the involvement of an energetic outside shareholders motivated to improve performance?