Handling Dissent in the Boardroom

What if more dissident directors are added to boards if shareholders gain more influence over director nominations?


Editor’s Note: The cover story in the Fourth Quarter edition of Directors & Boards is titled “Dissidents, and Dissent, in the Boardroom.” It is a nine-page exploration by a panel of experts of the implications for board process and interaction if more dissident directors are elected to boards. Here is an excerpt that captures five cautionary viewpoints.


Charles Elson (director of the John L. Weinberg Center for Corporate Governance at the University of Delaware): When I was asked to go on the Circon Corp. board [in 1997], I remember being very concerned. Not only was it going to be a rather unpleasant experience, but also people said to me, “Are you nuts to be running as a dissident? You will never be asked on a real board again.” The feeling was that once you are branded as a dissident, that’s it -- you’ve just shot your career. I decided that, under the circumstances, I would do it anyway.

Up until Circon it was rather rare that someone ended up on a board as a dissident director. The argument was that it would disrupt board process and disrupt the proper monitoring by the board of management. It was just an anathema in corporate America to have a dissenting director. We’ve been told by some very senior and experienced directors that to ask a question in a board meeting 20 years ago was considered uninformed and ill-behaved.

With the SEC now considering a process for shareholder-nominated directors, the question in Circon is raised again: Should you place someone on the board whom management does not recommend? Is this a good idea or not? Some say it will wake up boards and create a stronger, more effective monitoring board. Others suggest that destroying the collegiality of the board will make it less effective.

George Cloutier (chairman and CEO of American Management Services Inc. and a director of Circon Corp. when the dissidents were elected): I have lived with two dissident directors -- Charles Elson and General Victor Krulak. Known as “Brute” Krulak, he had served in Vietnam as the Marine commander, and he did not take any prisoners from day one. He opened each Circon board meeting with a resolution to fire the CEO, which created a certain amount of emotional turmoil for the first half-hour.

Depending on the maturity level and the rationality of the dissident directors, I think they can play a very strong role. They remind the rest of us on the board that there is another view of life, which is very important for all of us to have. Secondly, it forces the non-dissidents and the management to sharpen their attitude, sharpen their mental responses and, most importantly, to sharpen their management performance on the job. I’m on the side of “Let’s bring them on” -- as long as it is civilized. Shouting, yelling, and screaming do not serve a purpose. On balance, people who are elected dissident directors are mature, honest individuals with a strong point of view. To keep them out of the process would be a big mistake.

Steve Odland (chairman, president and CEO of AutoZone Inc. and chairman of the Business Roundtable’s Corporate Governance Task Force): Let me confess that at Autozone I sometimes feel that I have eight dissident directors. AutoZone has been recognized as one of the top governance companies in the U.S. We are consistently in the top 10 of the ISS rankings of 5,000 public companies, due not in small part to Charles’s influence on the board and our corporate governance principles. We clearly believe in corporate governance.

I don’t think there should be such a thing as a dissident director. The idea of a dissident is that he or she is there to disagree and to fight for something else. Well, all directors should be there to represent the shareholders and to work together to create shareholder value. If you have to have a so-called dissident on the board, it means that you have a dysfunctional situation -- some belief that you are not creating shareholder value. So you have a problem in the company. Most companies are not in that kind of a situation.

Ralph Whitworth (founder and principal of Relational Investors LLC and former chairman of Waste Management Inc.): I have proposed that maybe all boards -- even if they don’t have a dissident -- should designate a “dissident for the year.” When someone comes to the board and asks the board to waive its ethics policy, this director would be responsible to say, “Wait a minute. Let’s talk about this for a day instead of five minutes.” When the CEO is under investigation for tax fraud and the board needs to decide whether that should be disclosed to shareholders, there is someone who says, “Okay, the general counsel recommends that we don’t do that, but let’s talk about it for a day.” The idea is that a dissident is someone who is a bit of the devil’s advocate.

Let me give you one example. After some negotiation, I went on a board of a large technology company. Our fund owned 10 percent of the company. The company had a lot of governance issues that it was facing. Shortly before I went on the board, the company named the CFO as the new CEO. I think they wanted to get this appointment made and out of the way before I came on board.

Before my first board meeting, we had, as often happens, a board dinner the night before. I asked the question at the dinner about why they chose the CFO rather than the president, who was the other obvious candidate. Someone said, “Well, let’s have the chairman answer that.” The chairman said, “It was my recommendation.”

I told the board that I had gotten to know both of the executives and that both were good individuals, but that considering what the company’s mission is and where it is headed it seemed that the president was more suitable. One of the other directors said, “I felt that way, too.” And another director said, “That is how I saw it.” It went like that around the room. At that dinner we decided to change the succession configuration, even though it had been publicly announced, because we determined that a majority of the board members thought that the president was a better choice.

These board members were honest people. They were smart, they had integrity, there was no chicanery involved. Essentially, it was a case of the chairman giving them the reasons why the CFO should be the CEO, and everyone going along -- but they didn’t feel that way. That is just one example of how an outsider can change the dynamic. There was a catalytic effect of just my asking the question.

Frank Balotti (member of the Wilmington, Del., law firm of Richards, Layton & Finger): It really should be the function of the CEO to encourage board members at every meeting to analyze and to question. The CEO who stifles questions is making a big mistake. If you can instill that in the CEO mind, you won’t have to have a dissident of the year, because every board member would be performing that function.