Good morning,
Carl Icahn, the 87-year-old billionaire activist investor, scored another victory in his legendary and controversial career this spring when he won a proxy fight at Illumina, the world’s largest maker of genomic sequencing machines.
The backstory to that battle is complicated. As I report in a new feature, it involves a company that makes a potentially revolutionary multi-cancer-screening tool and a board that voted to acquire it—at the former CEO’s urging—over objections from U.S. and EU regulators. Icahn later accused the board of failing to prevent the CEO from making terrible decisions.
But Shiva Rajgopal, a professor of accounting and auditing at Columbia Business School, believes there are dozens of large companies whose boards deserve the Icahn treatment for their failure to stop even plain vanilla transgressions that ultimately weigh on investor returns. Consider all the boards that have signed off on overly generous executive pay, for example, or allowed a CEO to stockpile cash.
“A lot of American boards aren’t doing their job,” Rajgopal tells Fortune. Many boards have a problem with groupthink, he adds, and “a cultural distaste for confronting the CEO in a constructive manner.”
Instead of demanding detailed market research before a big pivot, or forcefully urging company leaders to rethink plans for a hiring spree, for example, weak boards rubber-stamp their CEOs’ projects and strategy. Part of the problem is that they face few repercussions when the CEO turns out to be wrong.
“There is no discipline, but there's a lot of process and it looks like they're doing stuff,” he says of U.S. boards. “They have board evaluations, and they do their matrices. Blah, blah, blah. ‘Are they effective?’ is the question that needs to be asked a bit more.”
A recent survey supports Rajgopal’s observation: In June, the Conference Board reported that only 33% of C-suite leaders felt that their directors asked probing questions. Last year, PwC also found that 19% of board members felt their fellow directors weren’t standing up to management often enough.
How can boards introduce more productive confrontation?
Companies that want to build a less accommodating board should begin by looking at their board recruiting process, Rajgopal suggests. The platonic ideal of a board member shouldn’t be someone who is conflict-averse, he argues. But board recruiters often say that they use candidate interviews to suss out whether a would-be director might be the type to rub people the wrong way or be overly argumentative. Instead, the professor says, such traits should be valued.
Boards that sense they could be tougher on their CEO can also try designating a “rock thrower,” he says. That means officially sanctioning nonconformist behavior by choosing one director and saying to them: This year, it's your job to be the dissenting voice, to bring complaints, and to create a PowerPoint presentation that an activist might come up with.
Rajgopal says some board members take copies of negative analyst reports about their company to fellow directors as fodder for discussion and analysis. “They say, ‘These guys don't seem to like us. Let's try to understand why,’” he explains. That’s a constructive exercise that’s worth replicating, but he urges boards to go one step further: Find an activist like Icahn, or a short-seller, and ask them to present to the board as if they were weighing whether to launch a proxy battle.
“You’ll learn a lot from that interaction that you're not going to learn by looking in the mirror,” Rajgopal says. Board members tend to think alike, he adds, but a real activist can “pierce the bubble.”
The professor says he’s shared this particular tip with several board members and—perhaps unsurprisingly—the idea hasn’t landed. So far, he reports, no one has dared to follow his advice.
Lila MacLellan
lila.maclellan@fortune.com
@lilamaclellan
