Drama in the
Deferential No More, Directors Are Speaking Out More Often;
When Is Dissent Dysfunctional?
By Joann S. Lublin and Erin White
The Wall Street Journal
Monday, October 2, 2006
Corporate directors, pressed to become more vocal following the
scandals of the Enron era, are throwing their weight around
more, rubber-stamping management less -- and roiling many
At General Motors Corp., Jerome York, a representative of
investor Kirk Kerkorian, joined the board in February and is
pushing GM to weigh an alliance with Japan's Nissan Motor Co.
and France's Renault SA. Unhappy representatives of the
Chandler family on the Tribune Co. board have forced the media
company to consider big strategic moves, including a breakup of
the company. At H.J. Heinz Co., investor Nelson Peltz captured
two board seats after urging Heinz to cut costs and boost
marketing of its core ketchup brand. Heinz accelerated cuts and
announced a restructuring that wasn't too different from Mr.
Peltz's plan. He attends his first board meeting next month.
Few boards, though, have matched the degree of all-out war
achieved at Hewlett-Packard Co., where investigations into
boardroom leaks mushroomed to include spying on directors,
executives and journalists. The divisions were rooted partly in
disputes among three independent directors, including Patricia
Dunn, until recently H-P's chairman. Extreme though that
situation may be, it does highlight the pitfalls that may await
a board whose directors are fiercely independent of management
and, at times, antagonistic toward one another.
Propelled by changes in stock-exchange rules and the
Sarbanes-Oxley corporate-reform law, more independent directors
have more leadership positions on boards and meet more often
without management. Adding to the mix are several other forces,
including mergers that have left a legacy of distrust, forceful
investors who have won board seats through persuasion or proxy
fights and directors' fears of personal liability for corporate
Friction is inevitable in such circumstances, directors and
board watchers say. "With the emphasis on board governance, you
certainly are seeing directors unwilling to go along with the
CEO and the consensus" of other directors, observes Stephen
Hardis, outside chairman of insurance giant Marsh & McLennan
Cos. and a member of six other boards. "They say, 'I can't just
go along to get along.' "
Adds William George, former chief executive of Medtronic Inc.
and a director at three public companies: "I think we're
correcting the imbalance that existed five years ago....It's
unhealthy when boards become more of a rubber stamp to
The roster of potentially fractious corporate boards seems to
grow by the week. There have been 80 proxy contests for board
seats in 2006, more than double the 29 such fights in all of
2004, according to estimates by FactSet Research Systems Inc.,
of Norwalk, Conn. About 62% of this year's challengers have
succeeded, up from 41% two years ago.
At ImClone Systems Inc., investor Carl Icahn and three allies
won board seats last month after threatening a proxy fight. His
first day on the board, Mr. Icahn demanded that Chairman David
Kies resign. Mr. Kies was re-elected at a board meeting that
lasted five hours. Last week, Mr. Icahn, who owns almost 14% of
ImClone, proposed ousting six of the company's 12 directors.
Mr. Kies says Mr. Icahn is trying to seize control of the
company without paying a premium to shareholders.
At Blockbuster Inc., meanwhile, Mr. Icahn and two allies last
year won board seats after a bitter proxy fight. Mr. Icahn
pushed through a 70%, one-year cut in the annual retainer paid
to directors, to $15,000 from $50,000, over some board members'
objections. Mr. Icahn initially had only two allies on the
seven-member board. But with careful lobbying, he says, a
dissident minority can persuade other directors to "eventually
see it your way....It's human nature. You talk to people.
Board members start seeing the other side."
Historically, split votes have been rare in U.S. boardrooms; at
many companies, open disagreement during discussions borders on
heresy. That is changing. At Valeant Pharmaceuticals
International, a Costa Mesa, Calif., drug company with a
turbulent past, directors value their independence so highly
that they encourage members to cast dissenting votes.
"We've developed a culture where we're comfortable" with
nonunanimous decisions, because "we respect each other," says
Richard Koppes, a director and an attorney for Jones Day in San
Francisco. Board meetings last longer than they used to, he
adds. "There have been times when people change their minds.
And at times, we agree to disagree."
Last year, Valeant directors amended an approved executive-pay
plan after some directors voiced concerns by casting dissenting
votes, according to a person close to the situation.
Formerly known as ICN Pharmaceuticals Inc., Valeant in 2002
ousted its chief executive, Milan Panic, after he lost a fight
for control of the nine-member board. Mr. Panic, a Serbian-born
immigrant who served briefly as prime minister of Yugoslavia,
refused to relinquish his directorship before his term expired.
During the first board meeting of the revamped ICN board, "you
could cut the tensions with a knife," recalls Mr. Koppes, one of
the newly elected directors.
Before leaving the board in 2003, Mr. Panic repeatedly cast
dissenting votes. That made for a difficult period, Mr. Koppes
says, but he adds that Mr. Panic's opposition "caused people to
think" about the importance of dissenting votes. Now, when a
dissent is cast, Mr. Koppes says, "that means there has been a
Through a spokesman, Mr. Panic says Valeant "has been terribly
managed" since his departure. "All they have done is cost jobs
and hundreds of millions of dollars in shareholder value and
operating losses," the spokesman says.
Fears of boardroom divisions have proved groundless, in some
cases. At Marsh, former U.S. Attorney Zachary W. Carter joined
the board in 2004 with the backing of four big public-employee
pension funds. Mr. Hardis says he initially worried that
boardroom collegiality might suffer. But Mr. Carter says he
"made it clear that I saw my responsibilities as representing
all investors and not just one group."
A few months later, Mr. Carter turned out to be a big asset for
Marsh, after New York Attorney General Eliot Spitzer filed a
lawsuit accusing Marsh's insurance-brokerage unit of bid
rigging. Mr. Carter, a friend of Mr. Spitzer, helped arrange a
critical meeting between Mr. Spitzer and four independent
directors. Jeffrey W. Greenberg, Marsh's chairman and CEO, soon
quit, and Marsh reached an $850 million settlement in January
Worried about increased boardroom discord, more directors are
seeking help with handling disagreements, reports David A.
Nadler, chairman of Mercer Delta Consulting, a New York firm
that advises boards and CEOs. During the past few years, he
says, he has seen greater interest from board members keen to
examine "the critical issue of how do we work together with each
other and with management."
Experts say that some argument can be healthy but warn that
boards must learn to manage disagreement constructively or risk
becoming dysfunctional, as H-P's board did. An increasingly
popular tactic is the use of board peer evaluations, Mr. Nadler
says. "Four or five years ago, [such evaluations were] almost
unheard of," but now some 10% to 15% of major boards use them,
he says. Some problems directors encounter with peers include
inadequate preparation for meetings, asking too few questions,
asking too many unhelpful questions -- or leaking information to
employees or the news media.
Charles Elson, director of the John L. Weinberg Center for
Corporate Governance at the University of Delaware and a
director at three public companies, says discussions need to be
frank, but disagreements "shouldn't devolve into the personal."
Lead directors, chairmen and committee chairman are important in
helping reach a consensus. One tactic is to adjourn for a few
days. "Give people a day or two to rethink things," Mr. Elson
says. "Don't have a hasty vote."
Boardroom veterans say diplomacy can overcome many disputes.
Raymond Troubh, who serves on six public company boards, recalls
how the lead independent director at one company resolved a
disagreement a couple of years ago regarding the renomination of
another director. He declines to identify the company. The
lead director spoke with directors individually and summarized
each camp's position without the heated rhetoric. In the end,
the director was renominated unanimously.
Mr. Troubh says a lead director can be "a referee or a diplomat
or a mediator and calm down what might otherwise be a
Write to Joann S. Lublin at
email@example.com and Erin White at