CEOs' Reproach of Dissenting Directors Hurts Investors

Editor's Note: Jim Seymour's column runs exclusively on RealMoney.com; this is a special free look at his column. For a free trial subscription to RealMoney.com, click here. This article was published Dec. 27 on RealMoney.

Have you noticed the CEOs circling the wagons -- against their own directors?

The herd instinct is at work again as CEOs, worried by the stand of Hewlett-Packard (HWP Quote) director Walter Hewlett against the company's proposed merger with Compaq (CPQ Quote), have begun speaking out, often petulantly, about the role of board members.

Last week on CNBC's "Squawk Box," we had Jack Welch, former head of General Electric, railing against Hewlett, insisting that boards have to stick together, that directors have to support their companies. Fight the fight in the boardroom, Jack was saying, with all the vigor you want. But when that meeting is over, directors need to line up behind the decisions the board takes.

Even if they profoundly disagree, Jack?

I've been on several boards, and I remember that pressure all too well. When the vote's taken on what is perceived as a big issue -- let's say it went 6-3, yea -- the chairman often says something like this:

"Well, I'm glad that's over and we have a clear decision. I think it would be good for public consumption if we went out of here with a unanimous vote. Let's try it one more time."

In other words: "If you sorry losers don't fold here and vote with the majority, we're in trouble." And implicitly, "You will be, too."

But what about directors' fiduciary duties? What about their responsibility to the company's owners, the shareholders? If a director has made it clear he thinks Plan A is a bad idea and wrong for the company, who's to say he shouldn't vote -- and keep voting -- that way?

Especially in cases such as that of the Hewlett heir (whom I do not know), in which the director has made clear to the board the depth of his disagreement with the majority, it's a shallow principle, indeed, to insist that he then line up with the other directors in a phony unanimous decision.

By all accounts, Hewlett made clear to the attorney who the board had brought in for this merger matter -- the estimable Larry Sonsini of Silicon Valley powerhouse Wilson Sonsini Goodrich & Rosati -- that he could not support the decision. Would it be right for him to join the other directors in voting for the merger, for appearances -- then to go out and vote his sizable block of H-P against the merger? Would it be legal?

Sure, Sonsini told him. Sure, you can vote one way now and vote your shares the other way later. There's no dispute about that exchange; even Sonsini confirms it.

But now H-P's other directors and managers are coming down on Hewlett for his actions -- actions that cannot come as the slightest surprise to them after his outspoken stance against the deal in a board meeting before the final vote.

And U.S. CEOs are seizing this moment to, in effect, lecture their board members in public, making clear that they had better not get out of line like ol' Walter on big decisions at their companies. It's as if those boards are supposed to be the CEO's sycophantic cheerleaders -- rather than his supervisors, the people who hired and may well someday fire him.

Phooey. Right or wrong on this deal, Hewlett got steamrollered into a yea vote on the merger solely for the purpose of appearing to present a united front to shareholders, Wall Street, employees and customers. Now he's saying what he believes is right for the owners and other stakeholders of Hewlett-Packard.

More power to him.

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I ran through this routine at a dinner party a couple of nights before Christmas. Most of the people -- decent people, most of them investors, some with very fat portfolios -- agreed with me. But one outspoken guy said I was naive and dead wrong. Boards, he said, are utterly obsolete today, a romantic notion left over from the old days. In the star-CEO era, he said, boards are simply decoration, intended to give the illusion of shareholder management of the company.

"Today," he said, "companies are run by their CEOs, period. You can't have a bunch of coupon-clipping old meddlers second-guessing the management team."

Whew. I sure hope he's wrong -- I profoundly believe he's wrong -- or we're all in deep, deep trouble. And I know an awful lot of corporate directors who are far from his malign vision of drooling old geezers.

If what comes out of this incident is that many directors of U.S. corporations are cowed into a "go along to get along" stance, then they, and all of us, are big losers. But if what comes out of this is a greater willingness on boards to listen to principled dissenters among their number and to deal with that dissent in a productive way -- not just hope that after a vote based on stagecraft more than conviction, the dissent will somehow go away -- then this can be an important step in improving corporate governance. Whatever happens with this proposed merger.

Sorry, had to get that out. I've been stewing about it for a week. Tomorrow, back to winners and sinners in the market.