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United Airlines Photograph by Kara Gwyn Photography

United-Continental’s Leadership Problems Have Deep Roots

Mar 10, 2016

The skies just became a little less friendly for the United Continental board.

While most corporate boards get the sweet deal of picking their own members and running for re-election unopposed, Altimeter Capital Management and PAR Capital Management, which has a collective 7.1% stake in United Continental (ual), are saying not so fast this year. The group is planning to put up an alternate slate of board candidates at the airline's annual meeting this year.

One of the hedge funds’ six proposed nominees, former Continental CEO and chair Gordon Bethune, is no stranger to United Continental’s top ranks. Both United Continental Chair Henry Meyer and United Continental CEO Oscar Munoz served on the board of Continental Airlines when Bethune was the company's chair and CEO. When Continental and United merged in 2010, both Meyer and Munoz stayed on the merged company’s board.

Were the seeds of upheaval planted long ago? Disputes and hurt feelings often don't just appear overnight. Neither do major corporate challenges. When any are allowed to fester unaddressed, however, the company loses.

Board flare-ups are a part of United-Continental's history. Bethune was CEO of Continental Airlines from 1994 until his retirement at the end of 2004. The announcement of Bethune’s retirement in early 2004 was sooner than expected and came as part of a broader board shake-up. Reports at the time said the change had to do with Bethune’s disagreements with Texas Pacific Group founder and former Continental chair David Bonderman, who had appointed Bethune CEO of Continental. As part of Bethune’s planned exit, the board announced that Bonderman and three other board members, “two with ties to Bonderman,” would leave the board.

Meyer had joined Continental's board in 2003 and was in place when the decisions about Bethune’s retirement and the other board departures were made. In a strange twist, Altimeter and PAR are now recommending Bethune take Meyer’s spot as United Continental’s chair.

United Continental CEO Oscar Munoz joined the Continental board during Bethune’s final year at the helm. Despite the fact that Meyer has been serving on an airline board for approximately 13 years and Munoz for 12, the Wall Street Journal reported this week that “[i]n an interview, the 74-year-old Mr. Bethune bemoaned the lack of airline experience among United’s top executives, including its chairman and Mr. Munoz, which he said was a red flag.” In putting his hat in the ring to become chair, Bethune has said he just wants to be helpful to his colleagues.

The alternate slate certainly isn’t the board’s only headache. United Continental has seen its share of leadership troubles.

Munoz, who was on the board of United Continental, became CEO this fall after former United Continental chair and CEO Jeff Smisek left following internal and federal investigations into a pay-to-play scheme. Smisek had been a lieutenant of Bethune’s when Bethune ran Continental. He had orchestrated Continental’s merger with United and, some say, had subsequently run United into the ground, with mounting discontent from customers and employees. Meyer became chair of United Continental when Smisek left.

Bethune has said that he counseled Munoz when he first became CEO of United Continental. He was never asked by United Continental board members to join the board, however. And Bethune’s advisory role didn’t last long either. Munoz has been out of commission since October following a heart attack (and subsequent heart transplant) six weeks into the job. As a result, United Continental has been running with an interim CEO for nearly five months. The airline has also had an interim CFO for seven months. Munoz is slated to return next week. No permanent CFO has been named.

On Monday, one day prior to the shareholders' announcement of an alternate board slate, the board announced changes to its composition. Employee groups are now lining up to take sides.

In two separate press releases on Tuesday, the Association of Flight Attendants expressed support for Munoz saying, “Our union has worked with a lot of management teams over seven decades and we have rarely experienced a CEO as engaged or committed to the success of an airline” and announced that United Airlines and 13 flight attendants had resolved a disagreement that had involved the dismissal of the workers in 2014. The International Association of Machinists and Aerospace Workers also sent out a press release backing Munoz and his strategy.

Teamsters Mechanics, meanwhile, are not pleased with how things are going. “United's mechanics overwhelmingly authorized a strike because the company's executives are lining their own pockets, while failing to keep the promises they made to employees who took major concessions during United's bankruptcy," said Capt. David Bourne, Director of the Teamsters Airline Division, in a press release.

Now, shareholders proposing alternate slates of board candidates shouldn't be considered abnormal. Too many boards wait until pressed to change their composition. For example, rather than ask each year who in the whole wide world would be the best members of a board, boards more often ask, can we keep going with those we have? And too often it is deemed impolite to point out that board members don't always act like grown ups. “It’s like high school,” a Fortune 500 board member recently told me.

United Continental clearly has bigger fish to fry than board squabbles—from consumer dissatisfaction to employee unrest—and the company and its board will have to wrestle through these issues. In 1995, Bloomberg reported that, despite tough times and asking cuts of workers, the Continental board gave then CEO Bethune a “new Porsche and a $1.5 million bonus …when it feared he would go to United.” It’s doubtful United Continental’s board will find they can now offer Bethune such a measly reward to have him go away.

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (http://www.thevaluealliance.com), an independent board education and advisory firm she founded in 1999. She has been a regular contributor to Fortune since April 2010 and is the author of two books on corporate governance and valuation.

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