Shareholder Nominated Directors–Condemned to a Life of Lonely and Ineffective Dissent?–Maybe Not

             One of the topics that this blog has followed on a regular basis is the effort to allow shareholders to nominate candidates for positions on corporate boards of directors in publicly held corporations.  Another subject which has been explored on this blog is the struggle to obtain gender and ethnic diversity on such boards of directors.  One of the most important objectives of these reforms is to break the stranglehold of top management (particularly the CEO) over the boards that are supposed to be supervising them.  Other posts on this blog have ably rebutted the arguments against such changes, e.g., that enhancing shareholder access to the board selection process will enable “special interest” groups to get directors elected to the board who are only interested in furthering their particular special interest.

            One objection has not been addressed.  The objection is that even if increasing shareholder access to the directorial nominating process and efforts to increase diversity on boards allow the selection of board members who are not beholden to top management,  and who do not share the visions and viewpoints of that group, the new board members will be condemned to service as lonely and ineffectual dissenters and completely marginalized.  The predicate assumption of the objection is almost certainly correct.  Even the most ardent supporters of the reforms do not suggest that they will lead to boards of directors in which a majority of the members are truly independent of the CEO and other top managers.  Even if the reforms are fully implemented, the likelihood for the foreseeable future is that the boards of publicly held corporations will continue to be dominated by directors selected by top management who tend to think like top management.  However, the conclusion that the presence of one or two directors who do not share the viewpoints of top management will be totally ineffectual is not necessarily correct.

             Well established and tested principles of social psychology suggest that the mere presence of even solitary dissenters can have a significant impact on the quality of decision making of groups such as a board of directors.  Over sixty years ago, psychologist Solomon Asch demonstrated how group dynamics can lead to erroneous decision making.  In Asch’s most famous experiment he placed the subject of his experiments in a room with several other “subjects” who were in fact actors who were collaborating with Asch.  The subjects were instructed to pick out a which of three lines was closest in length to a fourth line.  The “fake subjects” all sequentially announced their choice of which line, and deliberately chose the same blatantly wrong answer.  Three quarters of the subjects were influenced by the fake subjects to choose the same wrong answer in at least one iteration of the experiment.

            The ability of a even a lone dissenter to break the hold of group conformity was demonstrated in later experiments by Asch, and even more dramatically by an experiment in the early 1970s by psychologists Vernon Allen and John Levine.  Allen and Levine used the same basic framework as Asch but expanded it in several respects.  One of those ways was to break the fake subjects into three different groups.  In one group, the “fake subjects” all unanimously adhered to the same opinion.  In a second group, a fake subject dissented from the group consensus.  However, the fake dissenting subjects convinced the real subjects (and the person purportedly “conducting” the experiment) that they were visually impaired and literally guessing at random.  The researcher purportedly conducting the experiment “informed” the fake subjects, in front of the real subjects, that the fake subjects’  answers would not be recorded or count in the study.   In the third group the dissenter was represented as no different from other members of the group.

            Not surprisingly, the third group showed by far the lowest conformity among the real subjects of the experiment to deliberately wrong answers chosen by the majority of fake subjects.  What is surprising is that conformity to wrong answers among the real subjects was significantly lower in the second group than in the group where no dissenter was present.  The presence of a dissenting person whom the real subjects viewed as physically unable to ascertain a correct answer still seemed to reduce by a meaningful amount group pressure on the real subjects to pick an incorrect answer.

            Do these experiments mean that directors who are selected by persons other than the top managers of publicly held corporations will routinely be able to prevent mistakes by directors who are dominated by the top managers of the corporation?  Hardly.  Unlike the true subjects in the psychological experiments, the continued participation of the board members on the board is usually dependent upon the good graces of top management.  Nonetheless, the experiments do give some hope that the presence of shareholder nominated directors may sway some other directors to challenge some of the more irrational or ill considered decisions pushed by top management of publicly held corporations.  We may not see a major change in the quality of board decision making, but we may see a decrease in decisions which, when considered in retrospect, cause observers to ask “how could the board possibly have believed that"? or “didn’t anyone see the obvious possible problems"?

Note: For a fascinating application of the above psychological studies to Supreme Court decision making (including very interesting comments on the process by Justice Breyer) see Ori & Rom Brafman, SWAY ch. 8 (2008).