IN AUGUST 1996, U.S. Surgical Corp. initiated a hostile takeover bid for Circon Corp., a smaller competitor in the medical devices market. What resulted next was a two-year siege for control of the company that finally ended in October 1998 with the board ousting the chief executive officer, taking over the reins of the company and, a month later, agreeing to sell Circon to Maxxim Medical Inc.
The epic struggle is the subject of a Harvard Business School case study, which termed it "the longest-running takeover battle in U.S. corporate history." The transaction also forms a core teaching component in Charles Elson's "Advanced Corporate Governance" class at the University of Delaware's Lerner College of Business and Economics. Elson, who is director of the school's John L. Weinberg Center for Corporate Governance, was a player in the case. Among the many twists and turns in the battle--as management fought hard to remain independent and shareholders voted decisively to sell the company--Elson was elected to the board by disgruntled holders as a dissident director. Along with Victor Krulak, a former general in the U.S. Marine Corps, the two joined the board a year into the siege. It was a proxy vote notable not only for adding these two dissident nominees but also for not returning to the board the CEO, who was in the class of directors up for election at this contentious moment. (Shortly after the vote, the CEO rejoined the board when one of his supporters resigned, opening up a seat.)
The topic of dissident directors takes on heightened focus in the context of the fierce debate over shareholder access. The Securities and Exchange Commission has floated and revised and floated again a series of proposals on how to give shareholders more influence over the election of directors. Opinions are running strong and vocal on the issue. The Business Roundtable, in its critique, has stated a fear that any SEC rule making on this governance matter exceeds the commission's authority and may result in a "hijacking" of the director election process by special interest groups, which "will likely lead to increased proxy contests resulting in divisive boards that have difficulty functioning as a team and jeopardizing effective board oversight."
Having digested the 50-page case study of the Circon transaction, and cognizant of the looming prospect of some form of enhanced shareholder access, nine experts gathered at the Weinberg Center in May 2004 to examine the nature of board dissidence. Their backgrounds and perspectives are diverse (see box on next page). With Elson moderating, the group included another key Circon player--outside board member George Cloutier, who began as a staunch loyalist of the CEO and ended the battle's emotional roller coaster by being the swing vote on the board and the one to tell the CEO it was time to resign. The following excerpts from the discussion address the pros and cons of having dissident directors, the prospect of more dissidents being elected to boards, and the evolving "etiquette" of dissidency.
An anathema in corporate America
Charles Elson: When I was asked to go on the Circon board, I remember being very concerned. Not only was it going to be a rather unpleasant experience, but also people said to me, "Are you nuts to be running as a dissident? You will never be asked on a real board again." The feeling was that once you are branded as a dissident, that's it--you've just shot your career. I decided that, under the circumstances, I would do it anyway.
Up until Circon it was rather rare that someone ended up on a board as a dissident director. The argument was that it would disrupt board process and disrupt the proper monitoring by the board of management. It was just an anathema in corporate America to have a dissenting director. We've been told by some very senior and experienced directors that to ask a question in a board meeting 20 years ago was considered uninformed and ill-behaved.
With the SEC now considering a process for shareholder-nominated directors, the question in Circon is raised again: Should you place someone on the board whom management does not recommend? Is this a good idea or not? Some say it will wake up boards and create a stronger, more effective monitoring board. Others suggest that destroying the collegiality of the board will make it less effective.
Let's start with you, Frank. You have been on both sides of this issue, having defended both boards and dissidents.
Frank Balotti: I was on a board of a New York Stock Exchange company for about five years. There is little doubt in my mind that having a dissident director in the room would have dampened conversation, would have dampened the decision-making process, and would have seriously affected the way the board operated--at least until, if ever, the board members got comfortable with the dissident.
As Charles mentioned, just recently I represented a dissident. That dissident was kept out of the decision-making process by the board, which formed a committee consisting of all directors other than the dissident. That committee was where most of the business of the board was done. Information was kept from the dissident, and, yes, it affected the decision-making process. But having a dissident ended up helping that company. The company's stock price increased rather dramatically, at least in part because of investors' anticipation of change due to the presence of this dissident director. So I think it is a mixed bag. Yes, there certainly is an effect in the boardroom, but the effect is not necessarily all bad.
George Cloutier: I have lived with two dissident directors--Charles Elson and General Krulak. Known as "Brute" Krulak, he had served in Vietnam as the Marine commander, and he did not take any prisoners from day one. He opened each Circon board meeting with a resolution to fire the CEO, which created a certain amount of emotional turmoil for the first half-hour.
Depending on the maturity level and the rationality of the dissident directors, I think they can play a very strong role. They remind the rest of us on the board that there is another view of life, which is very important for all of us to have. Secondly, it forces the non-dissidents and the management to sharpen their attitude, sharpen their mental responses and, most importantly, to sharpen their management performance on the job. Frank just said he's in the middle on this debate, but I'm on the side of "Let's bring them on"--as long as it is civilized. Shouting, yelling, and screaming do not serve a purpose. On balance, people who are elected dissident directors are mature, honest individuals with a strong point of view. To keep them out of the process would be a big mistake.
Changing the boardroom dynamic
Ralph Whitworth: We need a good working definition of "dissident." I haven't joined a board through a proxy contest, so I'm not a dissident from that perspective. But certainly I have been on a number of boards over the years in which I came into a situation uninvited and, usually through a compromise negotiation, became a director. In all of the cases I'm proud to say that any member of those boards would agree that my role was constructive and professional, and would readily admit that having someone on the board who came from a different perspective turned out to be positive for the company.
There are some perils, which Frank pointed out. It does come down to the individuals involved and the dynamics of the situation. But, by and large, what I call a shareholder director--someone who comes in from the shareholder perspective, maybe either nominated or somehow driven to the position as an investor--changes the dynamic in the boardroom for the good and for the long term. I can think of only one case where, from the outside, it appeared to me that a dissident director was not a constructive dynamic in the boardroom and that was Ross Perot's role at General Motors.
Stephen Lamb: Having dissidents is sometimes a part of the takeover market. It certainly was with Circon, and it was with General Motors and Ross Perot. Perot became a director of GM because GM bought his company, EDS. He was paid a huge amount, but it was in stock, so he became a dissident because it was a way to get cash out of GM by being...