Stryker CEO, Steve Macmillan, had asked Board for approval to date employee

CEO Sought Nod for Romance (Wall Street Journal)

At the recent annual meeting of medical-device maker Stryker Corp., Chairman William U. Parfet puzzled attendees when he began with a brief statement about former Chief Executive Stephen P. MacMillan, who was pushed out two months earlier.

“Just to clarify, on behalf of the board of directors, we’d like to clearly state that Steve never violated any company policy nor any code of conduct,” Mr. Parfet said at the meeting April 24.

It wasn’t clear why he made the comment—Stryker had said in February that the CEO was leaving for “family reasons”—and Mr. Parfet didn’t explain.

The circumstances, pieced together from interviews with people who had direct knowledge of the events, offer a cautionary tale about how an office romance and resulting concerns about credibility could bring down a well-regarded CEO.

Mr. MacMillan, 48 years old, was forced out partly because certain board members became bothered by his handling of a relationship with a former flight attendant for the company’s corporate jets while his wife pursued a divorce, according to people familiar with the matter.

What distinguishes his story from others in this well-worn genre is that, according to a person familiar with Mr. MacMillan’s version of events, the CEO approached Mr. Parfet and Louise Francesconi, head of the board’s governance and nominating committee, in late September seeking their approval to date the employee, Jennifer Koch.

The two directors said that same day that he could so long as she quit, two people familiar with the matter said. Stryker declined to comment.

The 41-year-old flight attendant, a divorced mother of two, left a few weeks later and began dating Mr. MacMillan. But the CEO’s unusual deal fell apart amid suspicions the relationship had begun before she left, people familiar with the matter said.

The board hired a lawyer to investigate, and while he turned up no evidence of wrongdoing, Mr. MacMillan had lost the confidence of some directors and was forced to resign, a person familiar with the matter said.

Mr. MacMillan now is vying for a senior management spot at Johnson & Johnson,JNJ +0.70% the health-care giant where he spent 11 years, people familiar with the matter said. J&J declined to comment.

Mr. Parfet’s statement at the annual meeting was prompted by other Stryker directors who believed Mr. MacMillan was treated unfairly, people familiar with the situation said. That the CEO lost his job shows how, in the rough and tumble world of boardroom politics, workplace romances can create vulnerabilities that prove hard to manage.

Directors are paying closer attention than ever to CEOs’ personal behavior, worried about their companies’ reputations. “A quick photo shot with a phone or a search through Twitter or Facebook can turn up embarrassment or liability,” said Freada Klein, a work-bias researcher.

In Mr. MacMillan’s case, anonymous comments about his life were posted on Cafepharma.com, an industry message board, for weeks before his resignation. On Jan. 17, one poster wrote, “Who knows what the board think [sic] of his new girlfriend.”

Mr. Parfet, Stryker’s independent lead director until he assumed the chairmanship from Mr. MacMillan, played a pivotal role in the former CEO’s success—and his departure, people familiar with the matter said. He recruited Mr. MacMillan to be Stryker’s president and chief operating officer in 2003 from Pharmacia Corp., where Mr. Parfet was a director. John Brown, Stryker’s CEO at the time, said Mr. Parfet told him, “This guy is really good.” Eighteen months later, Mr. MacMillan succeeded Mr. Brown as CEO.

Mr. MacMillan won accolades for keeping Stryker’s performance steady as the market for orthopedics stalled amid federal probes and the economic downturn. Stryker, a maker of equipment ranging from replacement hips and knees to operating tables and bone saws, earned $1.35 billion last year, up 5.7% from 2010. Directors gave Mr. MacMillan stock grants worth $6.7 million in 2011, along with unlimited personal use of the corporate plane.

Last summer, Mr. MacMillan separated from his wife, Amy, after 24 years of marriage.

He decided not to date Ms. Koch until his divorce proceedings were under way and he had obtained board approval, said people familiar with his version of events. He had seen too many CEOs brought down for inappropriate behavior, a person familiar with his thinking said.

Mr. MacMillan’s troubles began on Dec. 12, when someone called a Stryker hotline with an anonymous complaint that Stryker had terminated an employee for having an affair with Mr. MacMillan while the CEO enjoyed preferential treatment, people familiar with the matter said.

The board hired Mark P. Goodman, a partner at Debevoise & Plimpton LLP, to investigate the claim. Mr. Goodman analyzed more than a year of Mr. MacMillan’s expense reports and discovered just one mistake, the people said. A human-resources executive had been listed as his guest during a nearly $200 dinner at a hotel dining room in Dubai, when instead the CEO had dined with Ms. Koch, the people said.

The dinner took place in January 2011, before Mr. MacMillan separated from his wife and asked for permission to date Ms. Koch, the people said.

On Dec. 23, Mr. Parfet grilled each of Mr. MacMillan’s lieutenants about whether they thought the CEO’s romance had begun sooner than he had said, one person familiar with the matter said. Two vice presidents said they thought it had, the person said.

Three days later, Mr. Parfet confronted Mr. MacMillan in the CEO’s office, people familiar with the situation recall. Certain executives “find you divisive,” Mr. Parfet said, and questioned whether Mr. MacMillan had shown good judgment in dating a former employee, according to people familiar with the matter.

Mr. Goodman reported to the full board at a special meeting in Atlanta on Jan. 7. He said he had found no improper use of company assets nor any evidence of an affair before Ms. Koch quit, said a person familiar with the meeting. Mr. Goodman didn’t return calls for comment.

Still, Mr. MacMillan felt his support on the board slipping away.

Ronda E. Stryker, granddaughter of the company’s founder and its biggest individual shareholder, remained upset that the still-married CEO was having an affair with the ex-employee, a person familiar with the matter said. Some other directors criticized Mr. MacMillan at the meeting for causing dissension by questioning whether Mr. Parfet was trying to drive him out, another person familiar with the matter said. Ms. Stryker didn’t reply to requests for comment.

“I am prepared to still run this company,” Mr. MacMillan said during the board’s next meeting, in February, according to a person who was there. “But if you guys want to make a change, I will offer my resignation.”

Stryker announced the CEO’s resignation on Feb. 8. The company treated his departure as a “termination without cause.”

Write to Joann S. Lublin at joann.lublin@wsj.com and Christopher Weaver at christopher.weaver@wsj.com