Rob Swystun, Pristine Advisers
A while ago, a colleague asked me to try and talk him out of something he was thinking about doing (writing a book, specifically). It’s not that he didn’t want to write it (he did) but he just wasn’t sure if his book idea was going to be worth the enormous time commitment that writing a book involves.
So, he wanted me to play Lucifer’s Proponent and point out to him all the reasons why he shouldn’t spend a ton of time writing his book. (For the record, I wasn’t very good at it, but he still decided against spending the time on this particular project.)
My colleague’s strategy of having me point out the flaws in his idea so he’s forced to consider them is an old one and now a new paper suggests that public companies would benefit from having a director to give contrary viewpoints and analysis to encourage other directors to look at issues differently … a Satan’s Campaigner, if you will.
The concept of public companies appointing a director specifically to challenge management recommendations in a systematic way comes from the winning paper in the 2015 Cambridge-McKinsey Risk Prize at the Centre for Risk Studies at University of Cambridge Judge Business School. This “Contrarian Director” (CD) would also provide alternative recommendations to management.
Just how old is this concept? It dates back to the ‘80s … the 1580s, that is. Introduced in 1587 by the Catholic Church, that organization would have an individual argue against a candidate’s canonization to uncover character flaws so others would be forced to recognize them and take the into account when considering the person for sainthood. They had a catchy name for it, too. Something about advocating for the devil, I think.
Although it’s inspired by the church, as John O’Hanlon writes for Europe Business Review, the corporate role would actually be more akin to the Advocate General of the European Union, who delivers impartial recommendations to the full EU Court of Justice.
“The introduction of the CD institutionalizes the ability to stand outside the tide of Groupthink and effectively warn and caution the board,” Siobhan C Sweeney, the paper’s author, said. Sweeney was a corporate lawyer in Australia before beginning the Cambridge MBA program last year.
In sticking with the origin of the name, derived from the literal Greek translation of “contrarian” — one who habitually opposes or rejects prevailing opinion or established practice — the CD would do just that while also providing significant recommendations to the board.
According to the paper, entitled “The creation of the Contrarian Director and their role in achieving workable board independence and better risk oversight” the CD would prevent rubber-stamping of management decisions by boards who have become a little too chummy and who aren’t really independent anymore.
The paper proposes that companies state right in their charters 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.”
The CD’s role then is to get the board to “assess the strength of the negative hypothesis to assist the board to form a balanced opinion.”
CDs don’t just grow on trees, though. To help companies choose legitimate CDs, the paper proposes establishing a new Institute of Contrarian Directors. This institute would be established in order to maintain a list of qualified CDs, which the paper describes as 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 act on the Institute’s suggestion and appoint the person it has suggested, the Institute would refrain from making a further suggestion to that company for five years. This would prevent companies from “shopping for an amenable CD.”
In the paper, Sweeney notes significant failings of boards recently, pointing to the recent financial crisis and other corporate failings.
“Social and psychological incentives propel directors towards collegial consensus,” the paper says, adding that directors who take it upon themselves to act as devil’s advocates in the boardroom put themselves on a dangerous career path. But, a CD, who is appointed specifically to do that, wouldn’t have to worry about jeopardizing their career by constantly taking the contrary viewpoint.
This makes appointing CD 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 paper concludes.
It’s a novel idea and one that may have some traction to it. Now if boards would just agree to do it. There must be some downsides to appointing a CD, though. If only there were someone here to argue against it …