Fighting board rubber-stamping

Public companies should appoint a ‘Contrarian Director’ who systematically challenges management recommendations to the board and suggests a range of alternative outcomes, argues a Cambridge graduate student in recently published research.

A Contrarian Director (CD) would help prevent rubber-stamping of management decisions by too-collegial boards whose supposedly “independent” directors are anything but, according to MBA student Siobhan Sweeney. Her paper cites last year’s comment by Warren Buffett that companies recruiting such directors often “do not look for Dobermans. They look for Cocker Spaniels and then they make sure their tails are wagging.”

According to Sweeney, there have been “significant failings of boards,” as shown by the recent financial crisis and other corporate failings.

Currently, “social and psychological incentives propel directors towards collegial consensus,” and acting as a devil’s advocate in the boardroom is “currently a dangerous career path.” So appointing a CD to every public company board is an “innovative solution that is simple yet has the ability to significantly increase the board’s ability to discharge their corporate governance and risk oversight.”

The CD concept was inspired by the Catholic Church’s ‘Devil’s Advocate,’ introduced in 1587 to argue against a candidate’s canonisation in order to uncover any character flaws, but modelled more on the Advocate General of the European Union, who delivers impartial recommendations to the full EU Court of Justice.

The CD’s role would be more impartial than that of the church’s Devil’s Advocate: while both present a negative hypothesis, the CD’s proposed role is then to “assess the strength of the negative hypothesis to assist the board to form a balanced opinion.”

The CD’s name derives from the literal Greek translation of ‘contrarian,’ who “habitually opposes or rejects prevailing opinion or established practice” – and in the context of the CD provides significant recommendations to the board.

Under the paper’s proposal, companies would adopt their charters to state that a CD appointed to their board “has a duty in respect of every recommendation to the board of substance to give careful consideration to the possible case, if any, against the recommendation. The CD must then prepare for the Board a written report, which outlines the case or possible case against the recommendation. The written opinion of the CD would be non-binding on the board and CEO.”

To help companies choose CDs, a new Institute of Contrarian Directors would be established in order to maintain a list of qualified CDs – people with analytical skills and experience, but who have not previously served as public company directors except as a CD. If a company asks the Institute to suggest a CD, and the company does not make the appointment, the Institute would not make a further CD suggestion to that company for five years to prevent the company “shopping for an amenable CD.”

“The introduction of the CD institutionalises the ability to stand outside the tide of Groupthink and effectively warn and caution the board,” said Sweeney, who was a corporate lawyer in Australia before beginning the Cambridge MBA programme last year.

Sweeney’s paper, ‘The creation of the Contrarian Director and their role in achieving workable board independence and better risk oversight’, was recently named the winner of the 2015 Cambridge-McKinsey Risk Prize at the Centre for Risk Studies at University of Cambridge Judge Business School.

The award, in conjunction with consulting firm McKinsey & Company, was announced at the recent 6th annual Risk Summit of the Cambridge Centre for Risk Studies at Cambridge Judge. The award is open to current students at Cambridge Judge.

“The judges were particularly impressed by the originality and spark of Siobhan Sweeney’s proposal on contrarian directors, which speaks directly and practically to corporate governance,” said Danny Ralph, Professor of Operations Research and Academic Director of the Centre for Risk Studies at Cambridge Judge. The judges, who consulted with other risk professionals and academics, were Professor Ralph and Dr Sven Heiligtag, a principal at McKinsey’s global risk practice based in Hamburg.

Adapted from an article originally published on the Cambridge Judge Business School website.