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Drama in the Boardroom
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 once-clubby boardrooms.

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 misdeeds.

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 management."

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 full debate."

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 2005.

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 conflagration."

Write to Joann S. Lublin at joann.lublin@wsj.com and Erin White at erin.white@wsj.com

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