Resistible Force, Meet Immovable Object: Lucent Board Has CEO Issue

Whether Rich McGinn can pilot a turnaround at struggling Lucent (LU) is a good question. But Wall Street has a better one: Does he deserve the chance?

After four successive quarters of earnings shortfalls, Lucent's chairman and CEO has lost control of his company and his credibility with the Street, say analysts and former Lucent employees. Meanwhile, the telecom-equipment giant's board, at whose pleasure the CEO serves, appears unwilling to take control of the situation, these people say.

All this makes charting the future course of Lucent shares even trickier in the wake of Tuesday's earnings warning. With the stock trading at barely a quarter of its January high following Wednesday's 32% selloff, the whisper for McGinn's removal that began last quarter has become a deafening roar. Until the noise dies down, don't expect Lucent shares to win back any friends.

Sounding Board

The responsibility for making a decision on McGinn's fate falls to Lucent's board of directors. But some analysts and observers see the board as too far removed from day-to-day business to act effectively. The board also has been criticized as being too Old Economy -- and even too old -- to grasp the challenges facing a competitively challenged high-tech company.

For Old Times' Sake? Lucent's board leans toward older, nontech-oriented execs
Director/Age	Job Experience
Richard A. McGinn, 52	Lucent's CEO, chairman
Carla A. Hills, 64	CEO of international consultant Hills & Co.
Franklin A. Thomas, 64	President of the Ford Foundation, 1979-1996
Paul H. O'Neill, 63	Chairman, CEO, Alcoa (AA:NYSE)
Henry B. Schacht, 64	Ex-Lucent chairman; ex-CEO at Cummins Engine (CUM:NYSE)
Paul A. Allaire, 60	Chairman, CEO, Xerox (XRX:NYSE)
John A. Young, 66	CEO of Hewlett-Packard (HWP:NYSE), 1978-1992
Betsy Atkins, 45	venture capitalist
Source: Lucent

But grasp the challenges is what it will have to do. On a conference call with 400 Lucent managers Wednesday morning, McGinn adamantly denied he was leaving the company, according to a Lucent spokesman.

"I'm waiting for the announcement," says one prominent Wall Street analyst who asked not to be identified. "McGinn will never step down -- he will be asked to step down."

Graybeards can bring a crucial been-there-done-that sense to a corporate board. But in Lucent's case, experience might make for too much of a good thing. The average age of Lucent directors, excluding Chairman McGinn, is 61. Only two of eight directors have had any executive officer experience with technology firms. Several directors declined to comment.

"The board is too slow to act," says another Wall Street analyst who also asked for anonymity. "They are -- how should I say this? Let's call it very old school," says the analyst, who thinks McGinn should go.

Ruddy Bad Health

Lucent's fall from grace has perplexed investors and analysts alike for nearly a year. The astonishingly good health of the networking industry, which Lucent now struggles to compete in, makes the collapse only harder to comprehend. And the company's continued stumbles speak to problems at the very core of the organization.

"You can excuse one preannounced warning, but to have to preannounce three times takes away all your credibility and gives the appearance that you are losing control," says yet another analyst who asked to remain unnamed.

Former insiders describe the company as a shambles.

"The parking lot fills at 9 o'clock and empties out at 4:30. Engineers play chess all day," says one former optical networking manager who has since taken a job with a rival optical start-up. "There's no sense of urgency, no sense of accountability. They are all looking for new jobs."

Meanwhile, it has become obvious to some who worked with McGinn that his priorities lie more with currying Wall Street's approval than in running the company, says the former Lucent manager who had close ties to colleagues who worked with McGinn.

"All McGinn cared about was wining and dining analysts," says the former manager. "He lost track of the business, and he didn't realize that if he took care of the business, that would automatically take care of the analysts. He was too focused on the short term."

Missile Command

After the first round of shortfalls, McGinn turned his attention to restructuring Lucent and heads rolled. Optical chief Harry Bosco took a surprise early retirement, and shortly afterward the widely respected Patricia Russo left. Observers say the moves gave the appearance that McGinn was taking command, but the price was Russo's sacrifice. Now, one former insider said, "He doesn't have anyone else to point to anymore."

Things have gone so poorly for the venerable Lucent that smaller competitors that once feared Lucent's presence in the networking market now fear its presence in the mergers-and-acquisition market.

"Our fear here," said the former Lucent employee, "is that we have to keep our stock price up. Otherwise, we are scared Lucent will make a drastic move and try to buy us out for $30 billion. That would be the worst nightmare."

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