Shareholder Activism: Collegiality is Overrated

June 15th, 2010
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Contributed by: Michael R. Levin, The Activist Investor
Oh the endless words that extol the virtues of a Board of Directors that gets along well. But, at what cost, to the business and its investors?

So, I give you Marty Lipton, as staunch an advocate, among many others, for such cordial relations:

The second most important yet often underemphasized consideration is collegiality. A balkanized board is a dysfunctional board; a board works best when it works as a unified whole, without camps or factions and without internal divisions. Strong, independent directors are essential to proper board functioning, but so too are elusive qualities such as collegiality, sense of common purpose, energy, industry knowledge, business sense and trust. Diversity of views and backgrounds can also enhance boardroom discussions.*

Of course investors probably don’t routinely need open battle among numerous warring factions in a boardroom. Civility counts for something. But, for what?

Not to pick on him, since one could cite many other similar observers (but why not given how he staunchly and blithely defends management at every turn), let’s unpack Lipton’s assertions just a little, with its loaded words and one-sided concepts.

• For example, does a board really work best as a unified whole, without camps, factions, or divisions? If the board only seeks to support management unquestioningly, well then of course directors should agree with each other.

• Why can’t a board have strong, independent directors and common purpose, energy, industry knowledge, and trust?

• “Diversity of views and backgrounds can also enhance boardroom discussions”, but how does diversity differ from “camps or factions”? Do we want variety, or not?

A previous article discussed how directors might comply with internal policies concerning confidential board deliberations. A duly-elected director that confronts policies restricting his or her communication (with investors, media, etc.) has no legal obligation to follow such policies, outside of specific laws pertaining to trade secrets, employment matters, and insider trading.

This director might comply only to get along better with directors, say to promote “collegiality”. We know of one director that did just this, at the specific expense of investors. The director feared a good shunning, and exclusion from the informal, collegial discussions that characterize this and many other boards.

No right-thinking investor wants a board that works this way - punishing a director that favors independent thinking over getting along, and valuing collegiality over debate over how best to represent investor interests. Given the choice between collegiality and spirited discussion, smart investors will take the latter every time.

Related Article Tags: Shareholder Activists, Corporate Raiders and Proxy Battles; Hedge Fund Resources and Featured Partner News

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