Too many cooks in the kitchen?

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Journal of Business Strategy

ISSN: 0275-6668

Article publication date: 1 December 2004

Citation

Dalton, C.M. and Dalton, D.R. (2004), "Too many cooks in the kitchen?", Journal of Business Strategy, Vol. 25 No. 6. https://doi.org/10.1108/jbs.2004.28825faf.002

Publisher

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Emerald Group Publishing Limited

Copyright © 2004, Emerald Group Publishing Limited


Too many cooks in the kitchen?

As any chef knows, the timeworn adage "too many cooks in the kitchen" may be old, but it is hardly passé. As with so many endeavors, when multiple parties insist on adding their "special ingredient" (i.e. their input) to the dish, the outcome is usually something less than palatable. Recent regulations regarding shareholder communications with boards of directors, and, more specifically, the director nomination process for US-based public corporations have this character. In an effort to give voice to multiple constituencies, the Securities and Exchange Commission (SEC) may have created legislation that results in an over-seasoned dish.

The SEC's new shareholder/director communication guidelines make it easier than at any time in US history for shareholders to access corporate boardrooms and to promote their own director nominees (companion guidelines have been adopted by the New York Stock Exchange (NYSE) and NASDAQ as well). These changes are the accumulated result of too many boards essentially hiding from shareholders by refusing to meet with them, failing to respond to their concerns, or being absent without leave (AWOL) at annual shareholder meetings. As a remedy, the newly adopted SEC rules require listed companies to disclose the following with regard to shareholder communications with the board:

  • Does the corporation have a process for managing shareholder communications with directors? If not, why not?

  • What procedures must shareholders follow in order to communicate with board members?

  • Are shareholder communications with board members screened? If so, by whom and following what guidelines?

  • Does the corporation have a policy for director attendance at annual shareholder meetings? What percentage of directors attended the most recent annual shareholder meeting?

Additionally, companies must address the following with regard to the director nomination process:

  • Does the corporation have an independent nominating committee that screens and recommends director nominees? If not, who handles this process? Does the definition of director independence conform to NYSE and/or NASDAQ guidelines?

  • If there is a nominating committee, the charter must be made publicly available (e.g. via the company's Web site or through SEC filings other than the proxy statement).

  • What is the corporation's process for identifying and evaluating director nominees? Do third parties assist with this process on a fee basis?

  • What are the minimum qualifications required of director nominees?

  • Does the corporation consider shareholder proposed director nominees? If so, what is the process for proposing a candidate?

According to SEC chairperson William Donaldson, the intent behind these rule changes is to enhance the transparency of the director nomination process for shareholders. By making the boardroom more accessible to shareholders, the SEC hopes to stave off another series of corporate failures such as that precipitated by Enron Corporation and Tyco International. The implicit assumption is that shareholders, through direct influence on the director nomination process and consequently the composition of the board, will provide greater assurance that directors attend to shareholder interests thereby averting future corporate crises.

While we strongly support shareholders gaining clearer insight into the processes by which boards conduct themselves, we advocate caution in allowing shareholders direct access to the boardroom via the director nomination process. To revisit our cooking metaphor, being able to read a recipe does not make a cook! Not all shareholder nominees will necessarily have either the requisite skill set or the broad-based company perspective that many boards seek in director nominees. We concede that it is important to establish clear lines of communication between the board of directors and shareholders, as well as procedures for follow through on issues of consequence to shareholders. The benefits of opening the director nomination process to the influence of special interest groups, albeit shareholder groups, is somewhat more opaque.

Part of our reticence with regard to the SEC's rules governing shareholder initiated director nominations is the potential for having a director (or directors) essentially foisted on the board. Anyone having served on a board of directors – or any group with substantial decision-making responsibility – knows that the power and performance of the group is largely contingent on effective group dynamics. Directors who serve with an implicit – if not explicit – agenda may sufficiently distract and disrupt boardroom conversations so as to render the board as a whole somewhat less effective. The end result is the risk that no shareholder or special interest group is effectively served.

An additional concern bears mention. While rules, regulations, and guidelines for corporate governance practices such as those for the director nomination and shareholder communication processes may be well-intentioned, no set of rules will ultimately solve what appears to be a lack of trust between directors and shareholders. Moreover, to institute wide scale rule changes in reaction to failures of a relatively few corporations (though notable in their size and scope) seems rather like punishing an entire team for the misbehavior of a small subset of players. We certainly do not mean to dismiss the severity of corporate failures such as that at Enron. The human and economic costs of such failures are genuinely tragic. The enormity of costs aside, there is an important principle at stake regarding the intersection of responsibility and accountability. Can any of you who have ever run suicide drills during a basketball or tennis team practice, for example, recall an instance when having to run a dozen or so extra drills because a teammate failed to touch the line on a drill benefited the entire team? We are not advocates of punishing the whole for the behavior of a few.

There is little doubt that mechanisms for enhancing the effectiveness of communications between shareholders and boards of directors will continue to garner attention in the coming months and years. Clearly shareholders need avenues at their disposal for communicating their concerns and wishes to board members. At the same time, board members need to be mindful of their responsibility to effectively represent shareholders and operate in their best interests. While hindsight will provide us acuity of vision, we are concerned that inviting more "cooks" into the director nomination "kitchen" risks distracting directors from effectively discharging their duties at a time when board members' responsibilities are both substantial and more visible than at any time we can recall. For us, the litmus test of any systematic change is whether the problem being addressed is concomitantly systematic.

Catherine M. DaltonCatherine M. Dalton is the David H. Jacobs Chair of Strategic Management, Kelley School of Business, Indiana University, Bloomington, IN (cdalton@indiana.edu).

Dan R. DaltonDan R. Dalton is the Harold A. Poling Chair of Strategic Management, Kelley School of Business, Indiana University, Bloomington, IN (dalton@indiana.edu).