Illumina Proxy Fight Shows Director Independence Will Be Questioned More Often

Due to heightened scrutiny regarding director independence, board members should be prepared to answer the following questions.

The proxy fight between gene sequencing company Illumina and Carl Icahn is the latest indication that corporate boards are under increasing scrutiny to maintain fierce independence from the company CEO. Even the appearance of a conflict of interest could move activist investors like Icahn to seek removal of board members for being unduly influenced by the CEO. Corporate board members should understand that they may no longer get the benefit of the doubt.

The proxy battle between Illumina and Icahn focused on efforts to oust Illumina board chairman John Thompson and CEO Francis deSouza for their part in finalizing the $7 billion acquisition of cancer diagnostic firm Grail while the sale was under review by regulators in the U.S. and Europe. Regulators opposed the deal, and in the wake of Thompson and deSouza’s decision the Financial Times reported that Illumina’s market capitalization plunged from $75 billion in August 2021 to $32 billion in May.  Shareholders were so enraged that they voted Thompson off the Illumina board. Stephen MacMillan, CEO of medical device maker Hologic, was voted in as Illumina’s new non-executive chairman, and Edwards Lifesciences CFO Scott Ullem and Icahn board nominee Andrew Teno were voted in as independent directors.

When major decisions are made with the board’s approval and the outcomes are less than desirable, shareholders are increasingly questioning directors’ motives and competence. Although Thompson had impeccable credentials as the former CEO of Symantec and former chair of Microsoft, Icahn’s claims that he and other board members might be unduly influenced by deSouza led to his ouster. The other Illumina board members had the opportunity to strongly object to Thompson and deSouza pushing to close the Grail transaction, but since no opposition was made public, there is no way of knowing why they apparently went along with the decision. The assumption is that since deSouza helped several board members gain positions on the board, their loyalty to him may have played a role in what happened at Illumina.

Due to heightened scrutiny regarding director independence, corporate board members should consider preparing themselves to answer the following questions:

• Are the board members you serve with truly capable of being independent and committed to their fiduciary duty to shareholders?

• Can the board you serve on hold honest debates with opposing views and arrive at decisions in the best interest of shareholders?

• Under which circumstances would you consider publicly opposing members of your board or the CEO to shed light on a situation that was material to the growth and survival of your company?

• Under which circumstances would you consider resigning from your current board position due to disagreements with the CEO or board chairman?

The bar to demonstrate director independence has risen.

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