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
Noted
“He's, in a way, a mascot for these A.I. researchers working on this really big project. He's there to encourage. He's there to ask questions. He's there to help them get over roadblocks.”
—Wall Street Journal reporter Miles Kruppa on Sergey Brin’s return to Alphabet and the effect that the cofounder and board member’s presence is having inside the company. Kruppa also said that Alphabet CEO Sundar Pichai has welcomed Brin, who has no new formal title.
On the Agenda
👓 The Securities and Exchange Commission’s final version of new cybersecurity regulations does not require boards to disclose their cybersecurity expertise. The National Association of Corporate Directors applauded the decision to drop that mandate, which had previously been part of the proposed directive. “Risk management resides in management,” said NACD president Peter Gleason.
🎧 Jonathan Kanter, assistant attorney general for the Department of Justice’s antitrust division, joined Bloomberg’s Odd Lots podcast to discuss the Biden administration's approach to antitrust enforcement. M&A laws haven’t changed, Kanter says, but the working definition of “anticompetitive” has evolved.
📖 Why do investors vote against corporate directors? It’s not just a rhetorical question; it’s the name of a new study by researchers at Georgetown University. They collected proxy voting data from 2013 to 2021 to look for answers. The authors found that “investors today hold directors accountable for a much wider range of issues, such as climate change and board diversity, than in the past.”
In Brief
- Richard Dickson, operations chief and president at Mattel, is now set to take over as CEO of Gap Inc. Fortune’s Phil Wahba says the retailer’s board probably picked a strong candidate—Dickson played a key role in transforming the Barbie brand—but he has a tough road ahead at the struggling clothing giant.
- Women are more likely than men to be forced to find a new job as generative A.I. becomes ubiquitous in workplaces, according to a new report from McKinsey Global Institute, the research arm of the consulting company. Compared to men, women hold a larger share of office support and customer service roles, and both sectors are expected to see the mass deployment of A.I.-driven bots that can replace, not assist, human workers.
- Navigating antitrust regulations and disclosure requirements has become so challenging for U.S. companies that boards are looking for corporate lawyers versed in compliance to fill new director openings. “‘It’s a ‘golden age’ for lawyers seeking corporate board seats," writes Bloomberg Law.
- Some 50,000 companies in the EU are facing new rules about climate disclosures after the European Commission said it would adopt European Sustainability Reporting Standards yesterday. But some investors and shareholders say the requirements are not tough enough, and that companies have “too much latitude to decide what to disclose,” according to Bloomberg.
The Long Read
“The difference between my business and your business is I know the people who are suffering from substance-use disorder, and you don’t.”
That’s Dana Lariviere, founder and CEO of the New Hampshire–based telemarketing company Chameleon Group, quoted in an eye-opening new Fortune magazine feature about recovery-friendly workplaces by senior writer Erika Fry. Employees who deal with addiction exist within every company, but many corporate leaders choose not to see them. It can be an expensive mistake: Substance-use disorders at work increase absenteeism and drive up health care costs.
Fry also compiled a cheat sheet of best practices for companies that want to become more recovery-friendly. They include using ongoing education to debunk myths about substance-use disorders and offering employees multiple ways to access support resources, whether inside the firm or anonymously.
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