Those of us contemplating joining a board as part of the rush to find more independent members should bear in mind that responsibility now goes well beyond showing up with a PDA stuffed with contacts that might be useful to company marketing and finance executives. As directors, we are now accepting an unprecedented amount of personal liability; ergo anyone with an invitation for a board seat must perform as much due diligence on the board as the present members will do on the candidates, investigating not only the company’s fundamentals but also whether mechanisms are in place that allow for constructive disagreement. The exploration is a soul-

TOP VIEW In the wake of scandals that tarnished the directors of Enron, Tyco, WorldCom and others, corporate board members cannot afford to rubber stamp senior management’s decisions. Our economic survival and professional reputations dictate that boards not merely tolerate but encourage anyone with a contrarian’s view to explain his objections and cast a nay vote.

searching process in which we must ask ourselves whether we would be willing to follow the lead of directors like Roy Disney or Walter Hewlett of Hewlett Packard & Co., taking a public stand against a company strategy that the rest of the board supports.

Avoiding the Noose
 “Directors are aware, at least in theory, that keeping their mouths shut when management is proposing a course of action worth hundreds of millions of dollars to the company is very risky, to them personally as well as to the company,” says Jay Lorsch, a professor at Harvard Business School and co-author of Back to the Drawing Board (Harvard Business School Press), a recently published book on boardroom best practices. Lorsch himself currently serves on the boards of Blasland, Bouck & Lee, Computer Associates International and InteCap. “Any time a scandal hits the headlines, directors start asking themselves what they need to do to avoid putting their own heads through the same kind of noose,” he says.

When it comes to open and spontaneous debate, however, all too often a CEO might be the one who stifles all constructive dissent. While imperial CEOs who will tolerate no challenges are the exception to the rule, governance experts agree, their infamy is well recorded. Bernie Ebbers, former WorldCom CEO, was known to have little tolerance for anyone who questioned his professional judgment. And Hollinger’s Conrad Black, according to suits filed against the company’s directors, brought decisions to his board to ratify long after he had already acted on them. A CEO can acquire an undue amount of power simply by virtue of his or her long tenure, as has Michael Eisner at Disney. Nonetheless, in all these cases, governance gurus insist that board members could have asserted themselves. “The CEO serves at the pleasure of the board,” says Roger Raber, president of the National Association of Corporate Directors in Washington. D.C.

“Directors are aware, at least in theory, that keeping their mouths shut...is risky, to them personally as well as to the company.”

Those of us who have found no outlet for voicing dissent at a board meeting should not chastise ourselves for timidity, however; few boards have any kind of formal procedure to solicit or encourage dissent, leaving it up to the chairperson or lead director to set the direction for discussions. “There is clearly a problem of group dynamics here, one that has immense consequences for the way corporate boards function,” says Lorsch. “In any board discussion or group meeting I have attended, there are always people who may be antsy about where the discussion is going but who don’t have the courage to stand and contradict people who have more seniority on the board or a CEO who seems to have all the information.” Few would risk the social and professional ostracism that traditionally plague the lone dissenter.

In his book, Lorsch argues that board members need to create formal mechanisms to foster open discussion and constructive disagreements without producing boardroom rifts and resentment. That burden, governance experts agree, is likely to fall on the shoulders of the growing number of independent directors who serve on boards. “Independent” must mean not simply coming from outside the close-knit world of Fortune 500 executives, but actually being independent-minded. “The sad reality is that a lot of independent directors are passive directors who accommodate the CEO by rubber-stamping decisions or just going with the flow,” explains Raber. Going forward, he argues, this new generation of independent directors will need to be able to stand up to even the most strong-willed CEOs and ask tough questions. “Before you can even get to a point where you’re having a good debate, you have to deal with a lot of small, structural issues.”

QUESTIONS FOR THE DEVIL'S ADVOCATE 1. Does management present the company’s raw data in a form that I can scan and understand several days before the board meetings? 2. Does the board schedule regular executive sessions, among members only, to discuss regular issues in greater depth and explore big-picture developments? 3. Does the meeting agenda allow the time and structure for open-ended discussion?

Flawed Reasoning
Suzanne Hopgood, a former real estate financier who has become an expert on turnarounds and financial restructuring, has found that some managers believe that directors are not supposed to question even the small issues. When she joined the board of Furr’s Restaurant Group in 1996 she issued a simple housekeeping demand that flabbergasted senior management; she insisted management replace the foot-high stack of data the directors received ahead of each meeting with a much shorter analytical summary of where the company stood vis-à-vis its competitors. “They had never had anyone ask for less information before,” she says. “But data isn’t information.” The heftier board financials become, Hopgood contends, the less able directors are to scan, much less absorb and understand, the raw data they contain. If they are unable do that, how can they detect and challenge faulty numbers or flawed reasoning?

Furr’s gradually complied with her request, and the streamlined information flow did indeed lead to hints of mismanagement. Finally Hopgood withdrew her name from the management’s slate of directors up for reelection when the board was asked to approve what she considered to be an overly generous compensation package for management. Instead she ran in opposition on a slate of directors that pension fund giant TIAA-CREF put forward. “It was the first time a shareholder succeeded in replacing the entire board in a proxy fight,” Hopgood says of the battle. She became chairman of the company in 1998, after TIAA succeeded in ousting management amid growing concern over flagging sales and losses. The company eventually wound down its bankrupt business in the fall of 2003, liquidating its remaining assets.

Tweaking the board’s agenda can help foster constructive debate and dissent, directors agree. Traditionally, a board meeting begins with a perusal of budget plans, recent transactions and other routine matters, leaving longer-term strategic issues such as capital raising, mergers and acquisitions or new product development until the end. All too often, however, discussions of the incidentals drag on, leaving little time to explore the big picture. At Washington Mutual, Doug Beighle, the presiding director, who is in charge of executive sessions when management is absent, moved the routine matters to the end of the meeting.

One boardroom practice that new governance rules now mandate is executive sessions: board meetings that exclude boardroom observers such as consultants, external counsel and corporate management and even, on many occasions, the CEO. Beighle is also a director of Puget Energy, where each board meeting begins with an executive session that includes the CEO and ends with one for independent board members only. The independent directors also hold an annual two-day retreat in the San Juan Islands, and are considering adding a second such off-site meeting. “There is a big difference between a two-hour board meeting where you listen to a series of scripted presentations, and going to a two-day retreat where there is lots of time to dig in and really talk about issues,” says independent board member Craig Cole, who is president and CEO of Brown & Cole Stores, a family-owned food retailer based in Bellingham, Wash.

In his book, Lorsch suggests going even further, appointing an individual or group of board members to be responsible for serving as devil’s advocate. They should be charged with assembling arguments against whatever proposal management is making, particularly when these are “bet-the-company” decisions such as mergers or acquisitions. Governance specialists are divided, however, on whether the approach is useful; some call it cumbersome overkill. Cole recommends that a director with a question or a concern seek an ally before the board meeting, then focus dissent not on management’s proposals specifically but rather on the lack of an environment where debate can take place. “One person dissenting can be marginalized; it’s hard to dismiss two people as being troublemakers,” Cole explains. “And the current buzz about governance gives anyone in this position a great way to frame the discussion in a constructive way.”

If a CEO rejects repeated efforts to enhance the level of open discussion, Cole warns that we should muster ourselves for the ultimate step: either resigning or firing the CEO. He and other directors at a large privately held distribution company opted for the latter a few years ago. “The CEO would throw a hissy fit whenever someone challenged him,” Cole says. When he and his fellow independent directors hired consultants to look at the company’s finances, the CEO refused to show them the books. That was when the directors fired him. When they did finally examine the books, they perhaps were not too surprised to find  irregularities that nearly bankrupted the company. “Imagine what would have happened eventually if we hadn’t disagreed with his views, but just let things drift on as they were? Just the thought that could happen makes me shudder.”