John Coffee observes of the recent DuPont proxy fight:
... that the governance professionals at pension funds and mutual funds now favor (or at least are open to) the idea of a divided, factionalized board. Putting Nelson Petz on DuPont’s board struck many of them as a low-cost means, with little downside risk, of keeping DuPont “in play” and signaling the shareholders’ desire for more spinoffs and less investment in long-term capital projects, including research and development.
I think that's correct, but the question is why shareholder activists and other institutional investors have developed a tolerance--if not an outright preference--for factionalized boards?
My own view is that factionalized boards are generally bad news. We know a fair bit about factionalized boards from observations of boards elected by cumulative voting. As I observed in The New Corporate Governance in Theory and Practice
Granted, some firms might benefit from the presence of skeptical outsider viewpoints. It is well accepted, however, that cumulative voting tends to promote adversarial relations between the majority and the minority representative. The likelihood that cumulative voting results in interpersonal conflict rather than cognitive conflict thus leaves one doubtful as to whether firms actually benefit from minority representation. There will be a reduction in the trust-based relationships that cause horizontal monitoring within the board to provide effective constraints on agency costs. There also likely will be an increase in the use of pre-meeting caucuses and a reduction in information flows to the board.
So where's the evidence that short slates nominated by shareholder activists will produce better results?
