Note: This story has been updated.
While it is rare for a member of a company’s board of directors to go rogue—as J.C. Penney Co. Inc.’s just-resigned William Ackman did—it does happen occasionally. Companies—and their general counsel—need to plan for it as they do any other crisis management moment, experts say.
A feud between management and a director who goes public “is not a common occurrence,” concedes Stephanie Mullette from CEB (formerly the Corporate Executive Board). She said the last one she remembers was in 2006 when Hewlett-Packard Company had a director who was leaking information to the media and, when caught, refused to resign.
(Of course he was caught through the use of illegal pretexting, and that scandal took over the headlines, costing HP GC Ann Baskins her job.)
“But we talk to our general counsel members a lot about this [type of director crisis] because when it happens, it is hard to build a functioning board. It affects shareholder support and trust,” Mullette said.
In the Penney case Ackman, founder and chief executive of Pershing Square Capital Management, went public about his feud with board chairman Thomas Engibous over finding a new chief executive for the clothing retailer. In an August 9 open letter that Ackman released to the media, he said Penney was “at a critical stage in its history and its very existence is at risk.”
Engibous responded with a public statement the same day, saying board members were fully informed and “are making decisions as a group.” He called Ackman’s letter “misleading, inaccurate and counterproductive.”
After several days of going back and forth, the company announced Tuesday that Ackman had resigned and a new board member was named to replace him. In the company statement, Ackman was quoted as saying his stepping down “is the most constructive way forward for J.C. Penney and all other parties involved.”
Ackman, Penney’s largest shareholder, did not indicate what he would do with his stock.
Mullette, of CEB, an executive advisory company, told CorpCounsel.com the key role a general counsel can play in such a situation is to “keep the dialogue open” with the board–and with the investor base. It’s important to do that throughout the year, and not just when a crisis arises, she added.
J.C. Penney declined to make General Counsel Janet Dhillon available for comment. So it’s not clear what role she played, if any, in the resolution of the feud.
Another expert, Patricia Lenkov of the executive consulting firm N2growth, called the Penney conflict “sad and out of control. It went too far.”
Lenkov said diversity in the boardroom is usually a good thing, but not when it causes seismic clashes. “If you look at Penney’s board,” Lenkov said, “it’s all one type — retired senior executives from corporate America . . . who have a different mentality, experience, mindset, and speed of action than [still-active finance executive] Bill Ackman,” she said. “They look like one club, and he’s from a different club. He’s a bull in the china shop.”
Penney replaced Ackman with Ronald Tysoe, a former vice chairman of Federated Department Stores Inc. (now Macy’s Inc.). In other words, the board added another member of the more-familiar club.
Lenkov said the general counsel’s role in such a feud is “to be the grownup, to keep rational, and to focus on practicality. The general counsel should be the voice of reason in all this.”
The general counsel, Lenkov added, can be a buffer “with a laser focus to get the job done.”
She noted that as soon as the crisis is resolved, the general counsel needs to get the executives “thinking proactively about what the company’s next chapter might look like,” including a line of succession for the chief executive’s office.
