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Dealing With Difficult Directors

Director seats are precious, and CEOs and lead directors must be able to move quickly to weed out problems to make room for what they most need.

directorWhen billionaire hedge fund manager Nelson Peltz fought for a seat on Procter & Gamble’s board this past October, CEOs watching the drama unfold could have been forgiven for cheering P&G on from the sidelines. In recent years, corporate boards, and CEOs themselves, have come increasingly under fire from shareholder activists waging public, and often combative, campaigns to influence everything from site selection to M&A decisions to product strategy. Peltz winning by such a slim margin that recounts were warranted was encouraging, suggesting the hope that not every proxy battle need end in management capitulation.

However, the battle came at a high cost. The consumer goods giant spent around $60 million attempting to fend off Peltz, whose firm, Trian Fund Management, owns a $3.5 billion stake of P&G. That price tag may be above average, but all proxy fights take money, time and focus away from the business of managing the company, which may explain why so many campaigns end in settlements, often including a board seat for the activist. The percentage of shareholder campaigns in which activists obtained at least one board seat rose to 46 percent, from 41 percent in 2016 and 29 percent in 2012, according to FactSet’s Sharkwatch.

It’s worth noting that shareholder campaigns aren’t aimed only at big companies anymore. In 2016, companies with market caps of less than $2 billion accounted for 78 percent of all targets, up from 72 percent in 2015 and 70 percent in 2014, according to Activist Insight. In 2017, two-thirds of all U.S. campaigns targeted companies with market caps below $500 million, FactSet reports.

With such heightened scrutiny, boards can’t afford even the whiff of complacency or dysfunction lest they become targets. Given that shareholder activists often complain about board skillsets and expertise, CEOs need to ensure there are no weak links around the table. And yet, according PwC’s 2017 Annual Corporate Directors Survey, there are plenty of weak links in America’s boardrooms. The study found that almost half of directors thought that at least one director on their board should be replaced; one-fifth said two or more should go.

“The pressures that directors are feeling from their institutional shareholders and activists as well as other stakeholders is causing board members to become more critical of the performance of their peers, and they’re coming to the conclusion that there is no room on the board for directors who aren’t adding value,” says Paul DeNicola, managing director in PwC’s Governance Insights Center. “The bar has certainly been raised around director expectations.”

“Problem directors run the gamut, from the unengaged absentee to the aggressive naysayer.”

At the same time, with velocity of change at a whiplash-inducing rate, boards have to be ready to react quickly to a new strategy— whether related to product diversification, expansion into new markets, acquiring new businesses and so on—and the board may then need a new set of skills to match the new strategy. Whatever the individual case, director seats are precious, and CEOs and lead directors must be able to move quickly to weed out problems to make room for what they most need. The following are three strategies for strengthening your board to help keep activists at bay.

ASSESS PERFORMANCE AND TAKE ACTION. While annual assessments are ubiquitous across public company boards, their effectiveness varies greatly depending on the objectives set ahead of time and whether the evaluation is a “check-the-box” governance exercise or a real commitment to better the board.

If you suspect you have a problem, but are not sure where the fault lies, individual director evaluations, rather than overall board assessments, can uncover weak links, says Dennis Carey, vice chairman and co-leader of Korn Ferry’s board services practice. “Sometimes, the key question of whether there are outlying directors who are not contributing in a way that’s meaningful to shareholder value gets lost in the rhetoric.”

If you already suspect you know who the problem is, assessment can provide the formal evidence you need to make a change, says Jerre Stead, CEO of IHS Markit, who has served on more than 30 public company boards. “To me, it’s a very helpful process because it sets the situation up.”

Stuart Levine, former global CEO of Dale Carnegie Associates and current board consultant, agrees, recalling his experience as a lead director for a large Nasdaq company. “We had one of those toxic directors and it was really distracting the CEO and the board. By commissioning an independent assessment, it affirmed all the side conversations and made it more systematized.”

In that case, the toxicity manifested as chronic negativity and a tendency to take the board down a rabbit hole of details better left to management. “Directors are helpful when they input on strategy, succession planning and they understand their lane,” says Levine. “This particular individual took a very myopic, tactical view when we really needed to be talking about strategy.”

Perhaps most importantly, boards need to be prepared to take action following an assessment. “If you learn you have an issue with a director’s performance, and then you put the results in a drawer and don’t touch it, it’s not really that effective,” says DeNicola. He does note some promising improvement in that area: PwC’s 2017 survey found that than two-thirds of directors (68 percent) said their boards had taken some action in response to their last assessment process, compared with less than half (49 percent) the previous year.

KNOW WHAT CAN BE COACHED—AND WHAT CAN’T. Problem directors run the gamut, from the unengaged absentee to the aggressive naysayer. In some cases, with a little helpful direction, the problem behavior can be corrected. Stead recalls his experience as a lead independent director on a board that brought in the CEO of a public company who was bright and successful. “But he wanted to shift everything to the way his board had done it. That’s an instant chemistry problem,” says Stead. “I sat him down and said, ‘I never want to hear that again.’” He let the director know how his style was coming across to the group and suggested a better approach. “He got it right away and helped us make some good changes later.”

In another case, Stead’s board brought on a former state governor, knowing the risk was his lack of public board experience. “When he started moving toward a bureaucratic approach to things, I had to sit him down and say, ‘We elected you because you’re very bright and have a lot of great experience, but this is a reminder that this is a private institution and you’re not running for election to make sure it’s a CYA,” says Stead. “That’s all it took.”

Other cases aren’t so simple. “If difficult constitutes not doing preparation or talking too much, you can coach that,” says Betsy Atkins, founder and CEO of Baja Ventures and board member at Cognizant, Home Depot Supply and Schneider Electric. “But if difficult means you are unable to let go of your strongly held view when the board moves on from a topic and makes a decision different from the one you are advocating—that is very hard to remediate.” The board cannot afford to waste time convincing one truculent board member who remains unmoved after vigorous, lengthy debate, adds Atkins, who is also a columnist for Chief Executive’s sister publication, Corporate Board Member. “At a certain point, it becomes very disruptive. You have to either support your colleagues or self-select that you’re no longer productive. Or you’ve forced the governance committee or lead director to look at a rotation. That’s hard because it often happens with very smart board members.”

When disruption rears its head, CEOs and their lead directors have to be willing to nip it in the bud, because with only four to six meetings per annum, “that’s not a lot of time to get a lot of important things done,” says Bonnie Gwin, vice chairman and co-managing partner of Heidrick & Struggles’ global CEO & Board Practice. “You’re building chemistry quickly, and you have a working group that has to come together quickly and be highly effective.”

Too often, boards will let the director stay and simply remove him or her from committee work, says Atkins. “They hold their noses and continue. A lot of people are uncomfortable with confrontation. And board renewal is not a concept that boards actively embrace as a whole.”

Yet, investors are looking more critically at director tenure, zeroing in on boards that they believe are not refreshing often enough, are not adequately diverse or have a disproportionate number of directors near retirement age. But the turnover numbers suggest that isn’t yet having a strong impact on action. “One of the striking things to me in our survey was that 46 percent of directors say at least one director should be replaced. And if you look at the turnover in board seats last year, it was less than 10 percent,” says DeNicola. “That makes me think there’s a disconnect between what directors may think on one hand and what they’re actually doing to refresh the board on the other.”

HIRE SMARTER. Naturally, catching problems in the recruitment stage saves the board a lot of time and trouble. But while board independence has improved dramatically over the years, CEOs and Nom-Gov committee chairs still fall prey to familiar habits. “I’ve seen too many add a friend of a friend of a board member or somebody who lost their fast ball years ago and is looking for something else to do,” says Carey. “The whole rigor around the board selection process needs to be much more enhanced than it has been historically.”

In addition to getting diverse, independent slates of candidates, one of the most crucial pieces, often underutilized, is rigorous reference checking. A candidate who looks perfect on paper from a skills and expertise perspective may prove to be oil to the board’s water—and that isn’t something you’ll see on a CV. “You have to speak to their former colleagues, people who have been on boards with them in the past who can tell you exactly what it was like working with them,” says Clare Hart, CEO of Sterling Talent Solutions.

When Stead chairs a board, he insists that every director interview a new candidate. “I’m not usually a consensus guy because I think it slows things down, but in this case, it’s really important,” says Stead. If even one director has a problem that can’t be assuaged with discussion, “we probably won’t add the person.”

Once the director is on board, give them the tools they need to be helpful, says Carey. “I see the most progressive boards putting new directors though an intensive process to get to know the company.” For example, at Sterling Talent, Hart organizes “board education days” where new directors can meet with executive committee members who don’t typically attend board meetings but have P&L responsibility, including the head of client services, head of sales, chief technology officer and chief product officer. “It’s kind of a deep dive to help them better understand and frame the business,” she says.

Even with the most diligent hiring practices, there are no guarantees—and hindsight is 20/20. Most important is the willingness, when necessary, to take action swiftly so that negative energy is not allowed to linger in the boardroom and become a vulnerability that activists can exploit. “Any time you have to tell someone, ‘This just isn’t going to work,’ it’s tough,” says Stead. “But when you’re the CEO, that’s part of the job.”


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