In my last post, I expressed some thoughts about the need to address our history and continuing practice of racial discrimination and inequality. I’m still thinking about specific actions that I can take to put my actions where my mouth is. However, in the meantime, I want to share a communication I received today
Pandemics may come and go, but governance marches on. That’s the message BlackRock seems to have sent earlier this week, when it distributed its “Engagement Priorities for 2020.” Of course, the document was completed well before the onset of the COVID-19 pandemic. However, you’d think that BlackRock, ordinarily a reasonable player in the governance sandbox, would have added a last-minute addendum to the document or at least made public statements acknowledging that the current situation is extraordinary and might be taken into account in evaluating how companies are doing in that sandbox.
Not so, apparently. In fact, some BlackRock spokespeople have suggested that the crisis will separate the governance wheat from the chaff. I suppose that’s true to some extent, but when a company is struggling for its very existence, with many jobs at stake, is it really necessary that it worry about having non-executive board leadership? (Those of you who’ve read this blog probably know my views on board leadership. For those of you who have not followed my screeds, I have seen independent board leadership work wonderfully, and I’ve also seen it fail miserably. So, to me, it’s really not that big a deal.)
About a year ago, I was speaking with the governance committee of a prospective client. One of the committee members asked me what the “best practice” was in a particular area. I said that I hate the term “best practice,” because one size never fits all, there is almost always a range of perfectly fine practices, and that a company needs to think about how a particular practice would work (or not) given its industry, its history, and its culture, among the many things that make a company unique. Afterwards, I wondered if my candor would result in not getting the work, but evidently the committee agreed, and the rest is history.
At the time, I’d forgotten about a 2015 blog post I’d written on so-called best practices. In fact, I continued to forget about it until I recently read a fantastic paper published by the Rock Center for Corporate Governance at Stanford. Loosey-Goosey Governance discusses four misunderstood governance terms: good governance, board oversight, pay for performance, and sustainability. Along the way it demonstrates how wrong “conventional” wisdom can be – and is – regarding what companies should and should not do in the governance realm. Some examples:
- Independent chairmen: There are those in the institutional investor community, the media, and elsewhere who seem to believe that having an independent chairman (or woman) of the board is the sine qua non of corporate governance. I’ve long disagreed with this notion (see my earlier blog post), and Loosey-Goosey agrees with my view. In fact, it points out “that research shows no consistent benefit from requiring an independent chair.”
- Staggered boards: Similarly, the conventional wisdom holds that staggered boards are the next best thing to satanic. Loosey-Goosey sticks a pin in this balloon by noting that “research shows quite plainly that the impact of a staggered board is not uniformly positive or negative.”
- Dual-class shares: I am not a fan of dual-class shares, particularly when they prevent boards of directors from having any meaningful role in governance. (As my good friend Adam Epstein has noted, it’s hard to understand why anyone would join a board of a corporation that doesn’t permit him/her to govern.) However, here again, Loosey-Goosey points out that “[w]hile…research…on dual-class share structures tends to be negative, it is not universally so,” and that a dual-class structure can provide benefits.
A few years ago, a wonderfully outspoken member of the institutional investor community congratulated me on a corporate governance award I’d received. She apologized for not being able to make it to the awards ceremony, referring to it – very aptly, IMHO – as the “nerd prom.”
Well, we’ve progressed from the nerd prom to a nerd war – specifically, the nasty fight over the August 19 Statement on the Purpose of the Corporation, signed by 181 CEO members of The Business Roundtable. The Statement suggested that the shareholder-centric model of the modern American corporation needs to be changed and that “we share a fundamental commitment to all of our stakeholders.” The stakeholders listed in the Statement were customers, employees, suppliers, and the communities in which the companies operate; however, other stakeholders were referred or alluded to, such as the environment. And the final bullet point in the list stated that the signers were committed to:
“Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.”
I recently came across an article reporting that the interim president of a state university system had failed to report a number of corporate board seats on his ethics forms. That got me thinking about the forms he may have been asked to complete, which in turn got me thinking about D&O questionnaires.
Getting directors and officers to accurately complete and return questionnaires in a timely manner is one of the most frustrating tasks faced by corporate secretaries. Years ago, I was speaking at a program for aspiring corporate governance nerds, when a young aspirant asked me if I had the secret to getting this task done. If memory serves me correctly, my response was to the effect that if I had the answer to her question, I could retire.
However, I sometimes think that people who circulate questionnaires are their own worst enemies. For example, a recent study reported that D&O questionnaires averaged 40 pages and 65 questions. That means that some, perhaps many, questionnaires are far longer. It’s unrealistic to expect someone with a life – much less a day job – to devote the amount of time necessary to complete a 40-page (or longer) questionnaire, particularly when many questions don’t lend themselves to simple “yes” or “no” answers.…
Continue Reading The lowly D&O questionnaire
For those of you who’ve heard me sing, rest easy – I’m not going to break into “As Time Goes By.” But the lyric I’ve quoted in the title is worth noting. In fact, it was noted, albeit in substance rather than form, in the June 18 opinion of the Delaware Supreme Court in Marchand v. Barnhill. The opinion, written by soon-to-retire Chief Justice Leo Strine (more on that below) addressed two fundamental matters – director independence and the board’s oversight responsibilities.
The case resulted from a listeria outbreak caused by contaminated ice cream. (The thought of contaminated ice cream is too upsetting, but that’s for another day.) The key holdings referred to above were as follows:
- Director Independence: The trial court had dismissed the complaint for failing to make a pre-suit demand on the board, based on its conclusion that the a majority of the board – albeit the slimmest majority of one director – was independent. However, when the Supreme Court considered the background of that one director, it determined that he was not independent. Thus, the slim majority went away. The relevant facts included that the director had worked for the company in question for 28 years, including as its CFO and a director, and that the company’s founding family had helped to raise more than $450,000 for a local college that named a building after the director. The fact that the director had supported a proposal that the founding family opposed – i.e., separating the chair and CEO positions – was deemed by the Supreme Court to be insufficient to support a finding of independence.
- Board Oversight: The Delaware Supreme Court found that the board had breached its fiduciary duty of loyalty by failing to oversee a significant risk – product contamination – leading to the conclusion that the board had demonstrated bad faith. As is usually the case, Chief Justice Strine says it better than I possibly could. Citing the landmark 1996 Caremark decision, he writes:
“Where was the board?” It’s a question we hear whenever something – anything – goes wrong at a public company. The question has been asked in all sorts of circumstances, ranging from failing jet systems, to networks being hacked, to harassment allegations, and so on.
Don’t get me wrong – there are most assuredly cases in which the question needs to be asked. Without naming names, there have been numerous instances where it seems apparent (and in some cases has been proven) that the board elected not to see or hear evil and thus hadn’t a clue that there was a problem, and other cases where the board created or fostered a rotten culture that seemed to beg for problems. However, what concerns me is that society at large seems to think that the board is or should be responsible for every sin of commission or omission by the company. And that just seems wrong.
Boards are charged with oversight. And while the definition of that word can be difficult to pin down, it seems clear that the board was never supposed to be a guarantor. Yet that’s precisely where we are headed – or perhaps where we’ve arrived. You even see it in articles and treatises by governance nerds who should know better: “The board should ensure that…”. Boards cannot “ensure” anything. They are part-time consultants, and even the best boards cannot possibly know everything that a company does.
As a result, we’ve seen an upswing in suggestions as to how to help boards, including the following:…
Continue Reading The board is dead! Long live the [to be provided]!
There probably aren’t too many subjects nerdier than corporate minutes. Lawyers (among others) tend to focus on exciting (dare I say sexy?) matters like M&A, activism, and bet-the-company litigation. Those and other topics are surely exciting, but failing to pay attention to minutes can cost big time. Like it or not, minutes are among the few pieces of evidence – sometimes the only evidence – that boards and committees have properly executed their fiduciary duties. Did the board give a matter due consideration? Did the directors ask the right questions? Any questions? Did they consider the risks as well as the benefits of an action or of inaction? If these and other questions are not answered by reading the minutes, they may not be answerable at all.
Failing to have good minutes can have serious adverse consequences. Aside from the potential liability and reputational damage associated with a failure to fulfill fiduciary obligations, transactions can be voided, and so on. And in one recent case, the Delaware Supreme Court found that in the absence of minutes, plaintiffs making a “books and records” demand on a company would be able to see emails between directors, among other things. (You can find my prior posting on that case here.) If that doesn’t put butterflies in your stomach, nothing will.…
Continue Reading Goldilocks and the three sets of minutes
In case you think that corporate minutes and other corporate formalities are for sissies, think again. And read the opinion in the case of KT4 Partners vs. Palantir, decided by the Delaware Supreme Court in January 2019.
KT4 had submitted a demand under Section 220 of the Delaware General Corporation Law, seeking to inspect Palantir’s books and records. Because such an inspection must be for a “proper purpose,” KT4 noted that, among other things, Palantir had failed to hold stockholder meetings and to give proper notice under stockholder agreements.
The demand ended up in the Delaware Court of Chancery, which granted some of KT4’s demands but rejected demands for emails exchanged among directors and officers relating to an investor rights agreement. KT4 appealed to the Delaware Supreme Court, which reversed that rejection.
A while back – March 2017, to be exact – I posted a piece entitled “Beware when the legislature is in session”, citing a 19th Century New York Surrogate’s statement that “no man’s life, liberty or property are safe while the legislature is in session.”
It may be time to amend that statement, for Washington seems to be at it regardless of whether the legislature is in session. A very rough count suggests that there are more than 20 pending bills dealing with securities laws, our capital markets, corporate governance and related matters. And that does not include other initiatives, such as the President’s August 17 tweet that he had directed the SEC to study whether public companies should report their results on a semi-annual, rather than a quarterly, basis.
Problems with the Approach
I’m not saying that all of the ideas being floated are awful, or even bad. (One good thing is that our legislators seem to have decided that trying to give every statute a name that can serve as a nifty acronym isn’t worth the effort.) In fact, some of the ideas merit consideration. However (you knew there would be a “however”), I have problems with the way in which these bills deal with the topics in question. (I have problems with some of the ideas, as well, but more on that later.)
- First, in my experience, far too many legislators do not understand what our securities laws are all about, and some do not want to understand or do not care. I will not cite particular instances of this, but I’ve been surprised several times with the level of ignorance or worse (i.e., cynicism) demonstrated by legislators and their staffs about the matters their proposals address. At the risk of hearing you say “duh”, this does not lead to good legislation.
- Second, these bills represent a slapdash approach when what is needed is a comprehensive, holistic one. Even the best of the pending bills and proposals is a band-aid that will create another complication in an already overcrowded field of increasingly counterintuitive and/or contradictory regulations, interpretations, and court decisions.
Problems with the Proposals
As promised (threatened), I also have concerns about a number of the proposals being bruited about, but for the moment I’ll focus on two of them – eliminating quarterly reporting and Senator Warren’s “Accountable Capitalism Act”.…
Continue Reading Dear Washington: How can we miss you if you don’t go away?