Q&A with Ralph Whitworth of Relational Investors

Proxy access legislation provides investors with one more arrow in their quiver to take aim at corporate boards where the make-up of the board seems less than optimal. Recruiting strong boardroom talent and pruning the dead wood from boards is still a challenge for many boards. Few people understand this issue from both the shareholder and the boardroom perspective better than Ralph Whitworth. A co-founder of Relational Investors, a $7 billion activist investment fund that targets underperforming companies and often takes seats on their boards, Whitworth has served as a director of nine public companies including Mattel (MAT), Sovereign Bancorp (SOV), Waste Management (WMI) and April Healthcare Group. He shared his views on this topic with BusinessWeek columnist Beverly Behan. Edited excerpts of their conversation follow: What do you see as the likely impact of the recent changes in legislation making it easier for investors to nominate directors? We'll certainly see some increase in shareholder activity around director nominations, but this is still a complex and expensive process that requires a long-term commitment by an investor. While there will be some uptick in this type of activity, it won't be overwhelming. The real impact is going to be its impact on boards, themselves. I believe this change will prompt a preemptive "self help" movement in corporate America to improve the composition of boards. What are some of the things that boards need to do better when it comes to determining what they're looking for in a director? Of course, the spec sheet should define the desired credentials and experience, but it is also important to factor board dynamics into director selection. This rarely happens. For example, if a particular director is retiring who plays a good devil's advocate, you should replace not only his/her skill set but also make sure you're not loosing that devil's advocate voice at the board table. Consideration of director dynamics in this vein needs to go beyond some of the superficial terms that are commonly used in this context, like "collegiality." This term is hackneyed—often used but seldom defined. Does it mean someone who is respectful and constructive? Or is this someone who goes along with the herd in decision-making rather than raising contrary perspectives? That's a big distinction. What questions do you like to ask when you're interviewing someone to be on a board? The first thing I ask is "Why do you want to do this?" I'm not at all put off by someone who says "I want to do this for career advancement" or "it's an opportunity to learn and build a larger network." Those are fine reasons to join a board. However, I also want to know that they've done some homework on the company. I'm looking for someone who clearly has been observing this company and knows how it makes money. Someone who has thought about its challenges, and who, first and foremost, wants to represent the shareholders in guiding the company. Finally, it's hard work to achieve excellence in any job and corporate directorships are no exception. So I want someone who knows that. I'm also concerned about time commitment. Board composition needs to be balanced between active businesspeople and retirees. Some boards disparage retirees and say, "We want someone who's engaged and in the business world now." But if you have a crisis and your board is meeting three times a week, sitting CEOs or other executives don't have that kind of time—they're heading for the tall grass. Unless you have some retirees on your board who have the time, you're going to be in trouble. What are your views on retirement ages for directors? Retirement ages and term limits are both vehicles to try to refresh board composition but unfortunately, retirement ages too often delay the more difficult decisions and function as default flushing mechanisms which enable "dead wood" to sit around the board table until they reach the retirement age. Boards must become much more pro-active about managing director performance. Some people are extremely capable directors well over the age of 75, others may need to go at age 55 because they're ineffective. The ineffective 55 year old should not be allowed to stay in the boardroom for 20 years until he/she hits the retirement age. Streamlining the shareholder nominating process will also give impetus to this. What kinds of things should a board consider doing to better manage director performance? I'm a fan of director evaluation. On one board I served on, we did it with a questionnaire that each board member completed on all the other board members. Everyone received their own results and the Nominating Committee received a summary. It really causes people to reflect on their high and low scores. Human nature kicks in and things change. This process led to a number of open and candid discussions on that board. One director came into a meeting after he got his results and said, "O.K., you all gave me a "3" on this and I want to know why." I was the Chairman of that Board and if something came up from the process that I felt should be addressed more discreetly; I'd sit down privately with the director concerned and talk about it one-on-one. Overall, this was a valuable process, although you do not need to do it every year—that's overkill. When should a Nominating Committee start the process of looking for new director to replace one who is retiring? I think you should take a holistic view to board succession planning as opposed to a linear process that simply responds to departures and retirements. For example if four board members are retiring over the course of a three-year period, start a search now but be willing to take on a replacement for any one or more of the four regardless of retirement sequence. There is nothing wrong with even a few years of overlap between a new director's coming on and the retiring director's leaving. Some overlap between new recruits and retiring directors can actually be a good thing, particularly when a director is recruited to bring a specialized skill or perspective. By the same token, be willing to suffer a vacancy if the right person does not immediately appear for a particular spec. This more fluid approach gives an exponentially higher likelihood of finding the best candidates.

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