How to Handle a Rogue Director
from
September/October 2007
by Lisa Holton
In one of the odder boardroom tales of the year, Dow Chemical’s board voted not to renominate director J. Pedro Reinhard, 61, a 37-year veteran of the company and its onetime CFO, after learning that he had secretly discussed a buyout of Dow with an unidentified corporate suitor. The shareholders went along with the board’s recommendation, and Reinhard, who’d already been fired by the company, stepped down. Dow had also fired Romeo Kreinberg, a divisional executive vice president and alleged conspirator. Reinhard, who served five full terms on the board, is suing the company for libel and breach of contract.
Go-it-alone actions by a director are extreme but emblematic of other behavior that creates problems with fellow board members. Leaking boardroom discussions to the press (as happened at Hewlett-Packard), snuggling up with shareholder activists, maybe even being seen having dinner someplace quiet with Henry Kravis, can disrupt a board and expose a company to unwelcome publicity.
While various reforms obligate outside directors to be independent, there are clear differences between that and rogue behavior. Where’s the tipping point? “The No. 1 issue is ego,” says Theodore L. Dysart, managing partner in charge of the board practice in North and South America at Heidrick & Struggles, an executive search firm. “They can’t get their own ego out of the way.”
To prevent this, boards need a system that can let a director know when his personality starts to interfere with his responsibilities—preferably one that doesn’t make him lose face. Dysart says, “When there’s a board crisis, it comes down to coaching and mentorship to solve the problem. There has to be a system for one board member pulling another one aside when there’s friction. Sometimes it corrects the problem immediately. ‘Hey, you’re trying too hard, tone it down, doing it is in your best interest’ is all it takes to fix a lot of the problems that are out there.”
Adds James D. Westphal, a professor of business administration and strategy at the University of Michigan, “I’ve heard about cases where directors who insert themselves into management decision-making, for instance, are taken aside and spoken to. Very seldom are people thrown off boards. They might get a talking-to by a mentor director or not be invited to informal meetings or find it tougher to get in touch with other directors. The message is passed that way.”
At least that’s how rogues are usually handled at Fortune 500 companies, says Westphal. At smaller outfits, “the norms of director conduct are less defined,” he says. “There’s more dissonance” due to a number of possible factors—less average experience per board member, or a heavier hand at the top from the chairman or CEO who may have founded the company.
Another factor affecting the way a director behaves just might be the company’s financial behavior. In any case, that’s the theory put forward by Alfred E. Osborne Jr., a senior associate dean at UCLA Anderson School of Management and a director of Kaiser Aluminum, brand-identification company Equity Marketing, and sporting-equipment manufacturer K2 Inc., all based in Southern California. “Some directors might have a personal liquidity event this month that pushes for a sale of stock,” says Osborne—and that’s bad news if the stock is in the pits. “Directors’ owning stock always creates both benefits and problems. You will see problems and difficulties surface when the company isn’t meeting goals, and you’ll see more input from people trying to provide solutions. Each boardroom will have a particular kind of tolerance for behavior, and it very much depends on the health of the company.”
The best time to keep big-ego directors off your board is during the recruitment process, of course. And here reforms have helped, according to Walter D. Scott, a management professor at Northwestern University’s Kellogg School of Management. “You have boards looking internationally for more professionalism, and that means skills as well as compatibility issues,” says Scott, who has served on the boards of JWT Group, Pillsbury, Playskool, and Quaker Oats. “I don’t see boards being any less civil, but I do see them as more focused, with a greater sense of mission and responsibility. There’s a heightened tension with management to both challenge and support it.”
Adds recruiter Lou Kacyn, managing partner in Egon Zehnder International’s Chicago office: “For us, it comes down to references. Because you may have a very high-profile individual in their industry, and you see some of these folks through the media and you initially say, ‘Oh, gee, if I could get him, that would be great,’ but it turns out when you check the references that he’s a holy terror.”
