Real Debate in the Boardroom
By Michael J. Berthelot
Michael J. Berthelot is chief executive officer of Cito Capital Corporation, a director at Fresh Del Monte Produce, Inc. (NYSE: FDP) and the incoming vice chair for the Corporate Directors Forum.
Originally published in the Sept/Oct 2004 issue of Across the Board, the magazine of The Conference Board.
One of the commonly voiced criticisms of directors is their failure to challenge management’s plans, actions, or assumptions—to “ask hard questions” and “stand up for the shareholders.” It’s no surprise why: When such challenges or criticisms are made, management often receives them on a personal rather than an intellectual level—even from directors who are friends. Feeling rebuffed by management’s inevitable defensiveness, the questioning director may then inadvertently personalize the discussion even more through follow-up questions.
After only a couple of tense sessions, the director is marginalized, seen by both management and fellow board members as “having it in” for management and “never having anything positive to say.” The director’s questions will no longer carry the import and demand the attention that they might otherwise deserve. And this process will hardly go unnoticed: To avoid their colleague’s fate, the other directors will tone down their questions in terms of both tenor and content.
In the end, of course, the real victim is not the marginalized director but the company, which loses the inarguable benefit of legitimate criticism and questioning.
The question to ask, then: “Is there a workable model that provides directors the opportunity to ask penetrating questions that may make management uncomfortable yet avoids, or at least minimizes, the feeling of being personally attacked?” The answer is yes—if we look to modern debating societies.
In formal debates, one team is assigned to argue the affirmative of an issue, the other team the negative, regardless of their own personal beliefs. Each side researches its position and presents its arguments before a panel of neutral judges. The winner of the debate is solely determined upon the strength of its argument and evidence. All parties recognize that there is nothing personal meant or implied in the process of the argument—the worthiness of the issue alone is the focus.
Obviously, no one wants to see boardrooms evolve into debating societies for which the process is more important than the end result. There is, however, one debate fundamental that can be adapted for use in the boardroom, one that will improve the board’s ability to consider important issues from different perspectives and, at the same time, preserve a collegial atmosphere of cooperation and shared interest. That fundamental is the designation of one director to represent the negative, or alternative position, of an issue before the board.
Following usual protocol, management presents an issue to the board along with a recommendation for action to be taken. This procedure can be likened to representing the “affirmative” position of a debate setting. Management has most likely had substantial time to research its position and may have applied significant resources, including outside experts, analyses, and modeling to prepare its presentation.
By contrast, independent directors may have had just a few days to consider the information presented. In most boardrooms, unless an individual director is personally roused to take exception to management’s proposal, there will generally be little organized discussion or consideration of alternatives. As a general rule, until recently, directors had no time to hold “rump sessions” to discuss management’s proposals in depth or to determine whether there was a significant level of concern. The recent implementation of executive sessions of outside directors immediately prior to or after a meeting of the entire board is a positive step in allowing for more open discussions; still, when compared to management’s formidable resources, such sessions do not allow for adequate analysis of alternative plans.
By appointing a specific director to argue the opposing position on a major issue, the board provides itself with a structure that focuses the questioning of management in a non-threatening, non-personal, and organized manner. Appointing an “alternative position” director institutionalizes the concept of presenting more than one side to an issue and should draw out increased director involvement. The director appointed to represent the alternative position should sound out his colleagues on questions they might have about management’s proposal, and point out any aspects of it that appear to be weak or contrary to the board’s experience and knowledge. In this regard, the director representing the alternative position would be authorized to ask questions of management and its experts, to review any alternatives that management may have considered, to review models, and, if necessary, to retain independent advisers to assist in developing the negative argument.
At the board meeting, following management’s presentation of the “affirmative position,” the director representing the alternative position would present those issues identified in the course of his evaluation as well as those developed by other directors. In the ensuing discussion, directors’ concerns could be allayed (or not), and the board, fully informed, could make its decision. Because the director representing the alternative position was appointed and the process is institutionalized in the board’s procedures and policies, management should be far less likely to “take it personally.”
Great care should be taken that the director representing the alternate position does not usurp management’s authority and responsibility by overtly influencing the proposed actions or converting the process into a game of “gotcha” by finding things that management may have been missed in their review.
In implementing this program, the director representing the alternative position should be:
A caution: Individual board members should be reminded that the appointment of a director representing the alternative position does not absolve them from their responsibility to ask questions or present their opinions; rather, this model should serve to organize and facilitate their questions and opinions.• independent and appointed by the chairman or, in the case of a single chairman/CEO, by the lead director;
• appointed as far in advance of the meeting as possible so as to allow adequate time and resources to consider the alternative arguments;
• communicated to the other members of the board and management as quickly as possible so as to avoid a surprise and to allow for openness of communication and the gathering of information;
• rotated so that a single individual does not become thought of as “the negative director”;
• based upon the background, education, and experience of the director as it relates to the specific issue at hand;
• reserved for significant transactions and issues, so as not to overload directors or generate complexity where unwarranted. Consideration of such critical issues as overall strategy, acquisitions, changes in capital structure, succession planning, and long-term compensation plans would be well served by using this device; and
• provided resources commensurate with the issue under discussion, including clerical and, as necessary, professional support.