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Quite the contrary

10 July 2015 By Breakingviews columnists

Public companies should appoint a “contrarian director,” whose role would be to challenge management recommendations, according to a paper authored by MBA student Siobhan Sweeney. Her idea was the winner in a competition sponsored by Cambridge University and McKinsey. The idea was inspired by the Catholic Church’s devil’s advocate of 1587 but modeled after the advocate general of the European Union. Breakingviews columnists found time in their own hellish schedules to consider whether it is a corporate governance idea whose time has come.

Kevin Allison: NO. Contrarianism for contrarianism’s sake is a waste of time, but institutionalizing healthy skepticism is a good idea. Putting responsibility in the hands of a single director arguably doesn’t go far enough. In Silicon Valley, SuccessFactors, a human resources software company acquired by SAP in 2012, had a dedicated team whose mission was to think up ways to disrupt its own business model. This “Red Team” approach of reporting to management so it can contribute more directly to the spread of ideas – perhaps with a direct pipeline to the board – might be a better option than appointing a single, contrarian director.

Rob Cox: NO. Bravo to the woman who came up with this idea (we are accepting résumés at Breakingviews) – and kudos to McKinsey and Cambridge for sparking a debate on this important matter. But I am in the no camp. The reason is simple. Anointing one director as contrarian runs the risk of exonerating the rest of the board from its fiduciary and other obligations. It’s a moral hazard-type problem. If one director is supposed to act as the devil’s advocate, the rest are given a pass. Not only can they defer to management, with its asymmetry of information, they can sit back and elect not to take a strong position one way or the other. Creating a contrarian director is another way to give boards, particularly in the governance wasteland of the United States, a way out of separating the roles of chairman and chief executive. It’s like a slightly more activist version of a lead independent director. Look no further than the recent decision by Barclays to sack its chief executive for validation of having a strong, independent chairman acting in the best interests of the company’s owners. Anything else is just a copout.

Rob Cyran: YES. The Romans had a similar idea, and they were right. When a general paraded through the capital after a great victory, the slave holding the laurel leaf crown above his head would whisper into his ear: “Remember, you are only a man.” Our society has glorified CEOs with Byzantine excess. Companies would benefit by appointing a contrarian director that reminds cozy boardrooms that success is not pre-ordained because leaders say so.

Neil Unmack: NO. Anyone who is paid to be contrarian will end up not being very contrarian. The Roman system was supposed to stop generals from becoming too powerful. It didn’t stop Julius Caesar marching on Rome, or the decades of anarchy and civil war that defined the late Republic era.

Antony Currie: Comedy value YES. Let’s do it. The person taking the role could be called the Nuncle Director. She or he would be the one to bring uncomfortable facts, discarded strategies and new ideas to the attention of the CEO and chairman – or lead independent director, for those companies still insisting that one person can combine both top jobs. He or she would be well advised to develop a good relationship with the boss, if only to get some kind of protection if the ideas whip up too much opposition from the more pedestrian thinkers on the board. Trouble is, it smacks too much of theater to be of much use – much like King Lear’s Fool.

Jeffrey Goldfarb: YES. It would be great if the corporate world could do without such an idea, and if all directors – especially independent ones – played devil’s advocate. Appointing one member of the board to the role could create all sorts of unintended consequences. For one thing, such individuals might easily be dismissed as gadflies. What’s more, are there enough people out there suitable for the job? However, given the state of corporate governance, consistently being exposed by more activist investors, it is an idea worthy of a controlled experiment by a select group of companies bold enough to give it a go.

Reynolds Holding: YES. It’s a good idea, and companies seeking better governance would probably be open to it, assuming there were enough people qualified for the job. The trick would be to devise a way to gain widespread acceptance. Contrarian directors could be required by law, but that seems extreme, and in America each state sets its own rules anyhow. One approach would be to say any decision by a board with a contrarian director is protected by the business judgment rule, which presumes decisions are valid and shielded from legal challenge absent a clear breach of duty. The extra legal protection would be justified because of the additional check on board behavior, and also could be a powerful incentive. Delaware might take the lead on this. If it worked, other states and nations could sign on, too. Laboratories of democracy and all that.

Robert Cole: NO. No self-respecting contrarian could say yes to this. It would be equally wrong for those of a conventional disposition not to disagree. True, it is good to play devil’s advocate from time to time. But full-time contrarians would be prone to pitching false arguments. Why would it be so bad? Directors of all companies, institutions and other non-profit bodies should consider all sides of any argument before arriving at any decision. If contrarians are always contrarian, the power of their unconventional approach will be undermined. Conventional thinkers, meanwhile, garner respect only if they occasionally take the counter-intuitive line. The big risk is that contrarian directors will imprison free thinking. No? Yes.

Richard Beales: YES. Robert Cole is right: All directors should play devil’s advocate themselves. But in the real world, they don’t. The idea of an official contrarian is therefore valuable. There could be ways to refine the idea. For example, regular audits of public company board performance, which is common practice in some markets, including the UK (take note, Washington), could recommend a contrarian director be appointed unless the audits determine that the devil’s advocate already gets a fair hearing. A contrarian director could become a grating presence in a boardroom, but that could be a good incentive for any supine directors to start asking harder questions.

Verdict: Half agree, the other half are contrarian.

 

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