Many corporations tout the benefits of collegial, efficient boards with a unified vision for the company and worry that shareholder-nominated directors will disrupt this environment by bringing in conflicting agendas.
But is an efficient board with a unified vision always in the best interests of shareholders? Not necessarily.
Shareholders, keep out
A few years ago, when the SEC considered introducing a new regulation requiring public companies to include some shareholder-nominated candidates for the board of directors on their proxy statements, Chevron (NYSE:CVX) objected.
In a letter to the SEC, Chevron claimed the proposed regulation would "create an adversarial aspect in director interactions," and argued that it's better to have a governance structure that promotes "consensus-driven leadership and oversight resulting from the free and open exchange of knowledge and perspective by a board of directors working in a collegial manner for the good of the stockholders."
That's all well and good ... if we can count on the board of directors to work in a collegial manner for the good of stockholders. But we can't always count on them to do this. Sometimes directors make self-serving decisions that put their own interests, and the interests of company management, before those of shareholders. In such cases, shareholders have reason to bring in board members that disrupt consensus and collegiality when it doesn't promote shareholder interests.
Score one for disruption
We don't need to look far to see why board disruption can be a good thing. Just look at two other energy companies: Chesapeake Energy (NYSE:CHK) and Nabors Industries (NYSE:NBR).
Chesapeake gained infamy for its poor corporate governance when founder and ex-CEO Aubrey McClendon was exposed for taking out $1.1 billion in loans against his personal stake in company-owned wells. And the company looked even worse after its board claimed that this action posed no conflicts of interest. Other scandals included McClendon's operation of a private hedge fund with significant positions in natural gas futures, and the company's decision to purchase McClendon's personal map collection for $12 million, which was significantly above its assessed value.
When Chesapeake shareholders fought back by submitting a proposal in the company's 2012 proxy pushing the company to list some shareholder-nominated directors on future proxies, Chesapeake's objection resembled Chevron's. It wrote, "Our Board is characterized by frank and open dialogue with management, the primary goal of which is to advance the long-term interests of our shareholders. Proxy access threatens to create a politicized environment, straining relationships among directors and between management and the Board."
Nabors Industries, meanwhile, has been embroiled in scandals of its own. It earned the ire of shareholders when it granted its former CEO, Eugene Isenberg, a $100 million severance package for relinquishing his CEO role, even as Isenberg remained as the company's chairman. Before that, a majority of Nabors' shareholders voted against the board's say-on-pay proposal. While Isenberg later agreed to forgo this severance, the board's questionable compensation decisions undermined shareholders' trust.
When shareholders fought back by submitting a proposal in the company's 2012 proxy pushing the company to list some shareholder-nominated directors on future proxies, the Nabors board responded with worries about "disruption" similar to the arguments from Chevron and Chesapeake: "Ultimately, the proposal could lead to a divided board of directors with competing factions that make it difficult for the Company to pursue a successful and consistent business strategy. The best results for shareholders are obtained when directors, elected to make significant strategic decisions, act together constructively to create shareholder value."
The Foolish takeaway
The conduct of the boards at Chesapeake and Nabors inspired shareholders at both companies to vote in favor of the shareholder proposals pushing for greater proxy access. While Nabors has resisted pressure to take further action on the non-binding resolution, Chesapeake is responding to the non-binding proposal by sponsoring its own proposal.
This is a positive step, as it gives shareholders more power to hold the corrupt and inept board members accountable at companies that have proved themselves untrustworthy. It also allows investors to introduce directors who offer different perspectives on what's best for the company.
But investors should ask themselves: Should it take a headline-grabbing scandal to push for more power over board elections? In an environment where egregious executive pay packages and conflicts of interest have become commonplace, I'd like to see more "disruption" introduced into boards before these scandals arise.