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:


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“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:
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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.
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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”.
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Earlier this month, the Federal Reserve proposed changes to its guidance on corporate governance for banking organizations.  The proposals suggest a new approach to corporate governance that could extend beyond the banking industry; among other things, they suggest that boards should spend more time on more important matters, such as strategy and risk tolerance, than on compliance box-ticking. However, taken as a whole, the proposals strike me as being something of a mixed bag.  And some of the positive aspects of the proposals are already being subjected to attacks.

The Good News

The good news is that the Fed seems to be acknowledging that the board’s role is that of oversight and that boards are spending far too much time micro-managing compliance and should focus on big picture items such as strategy and risk.  Those of us who speak with board members know that this has been a significant concern since the enactment of Dodd-Frank.


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monkey-557586_1920A few weeks ago, The Wall Street Journal reported that two former directors of Theranos – the embattled blood testing company – “did not follow up on public allegations that…the firm was relying on standard technology rather than its much-hyped proprietary device for most tests”.

The report states that the two board members in question – a former admiral and Secretary of State, respectively – were on the Theranos board when concerns about the company’s device were aired publicly.  However, they seem to have believed that it wasn’t their job to ask questions, at least not in the absence of some sort of proof that the concerns were valid.  The former admiral said he “did not have the information that would tell me that it’s true or not true”; the former Secretary of State said that “it didn’t occur to” him to ask questions, adding “[s]ince I didn’t know, I didn’t have anything to look into”.
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money laundering
Photo by Seth M.

In recent years, the Financial Crimes Enforcement Network (“FinCEN”) and federal regulators of the financial services industry have more aggressively enforced the Bank Secrecy Act (“BSA”) and the economic sanctions imposed by the US Treasury’s Office of Foreign Assets Control (“OFAC”).  While this should in of itself be a matter of particular attention to the directors and officers of those entities in the financial services industry, so too should the recent trend toward increased scrutiny for directors and officers failing to address alleged BSA or OFAC compliance shortfalls. An August 2014 agreement reached by FinCEN and a former casino official permanently barring the official from working in any financial institution drives the point home: When it comes to liability for BSA or OFAC violations, FinCEN and federal regulators might not limit penalties to the entity actually committing violations, and instead, may also penalize the individual directors and officers of those entities. 

Even before FinCEN’s August 2014 bar of the casino official, a number of enforcement actions assessed personal monetary penalties against financial institution directors and officers over the past few years. In February 2009, the directors of Sykesville Federal Savings Association were collectively fined
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Congress to rescue public companies from proxy advisory firms?Who says Congress isn’t popular?  Well, Congress may become much more popular with public company executives if Congressman Patrick McHenry (R-NC) can make good on his recent promise to challenge the power of proxy advisory firms if the SEC doesn’t act.  In a recent keynote speech at an American Enterprise Institute conference on the role of proxy advisory firms in corporate governance, Rep. McHenry stated that proxy advisory firms are a significant issue on Capitol Hill.

As I have blogged about before, there are some real questions as to whether proxy advisory firms actually serve investors’ interests.  While ISS and Glass Lewis are entitled to create a business model based on providing services to institutional investors, there has been either a market or regulatory failure that has forced public companies to consider corporate governance policies promulgated by two unregulated proxy advisory firms before making business decisions.  Public companies should be making decisions based on what makes sense for their company and their shareholders and not based on trying to meet arbitrary policies of ISS or Glass Lewis (policies that seem to be continuously tweaked to keep the proxy advisory firms services relevant).  To be fair, ISS and Glass Lewis claim that their policies aren’t arbitrary at all, but rather their policies reflect their clients’ views.  Of course, for that to be the case, all of their institutional investor clients would need to have a monolithic view toward corporate governance.

Because institutional investors may own hundreds or even thousands of positions in public companies, institutional investors do not have the ability or the resources to research all of the issues facing each of those holdings.  That is where ISS and Glass Lewis step in to provide guidance to these institutional investors.  While some institutional investors have robust voting policies and attempt to make educated and informed voting decisions,
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Golden leashes
Photo by Don Urban

The compensation disclosure rules contained in Regulation S-K are intended to provide meaningful disclosure regarding an issuer’s executive and director compensation practices such that the investing public is provided with full and fair disclosure of material information on which to base informed investment and voting decisions. However, as we pointed out in a blog from last year, not all compensation is covered by these rules, including compensation paid to directors by third parties (e.g., by a private fund or activist investors). These arrangements are commonly known as “golden leashes.”  The two examples I discussed previously related to proxy fights involving Hess Corporation and Agrium, Inc. In each case, hedge funds had proposed to pay bonuses to the director nominees if they were ultimately elected to the board of directors in their respective proxy contests. Additionally, in the Agrium, Inc. case, the director nominees would have received 2.6% of the hedge fund’s net profit based on the increase in the issuer’s stock price from a prior measurement date. The amounts at issue could have been significant considering this particular hedge fund’s investment in Agrium, Inc. exceeded $1 billion, but none of the nominees were ultimately elected to the Agrium, Inc. board.

Considering the large personal gains these director nominees could potentially realize under these types of arrangements, it could pose a problem from a corporate governance standpoint as it is a long-standing principal of corporate law that directors are not permitted to use their position of trust and confidence to further their private interests. Recognizing this potential problem, the Council of Institutional Investors (“CII”), a nonprofit association of pension funds, other employee benefit funds, endowments and foundations with combined assets that exceed $3 trillion, recently wrote the SEC asking for a review of existing proxy rules “for ways to ensure complete information is provided to investors about such arrangements.”

In its letter, the CII points out that existing disclosure rules do not “specifically require disclosure of compensatory arrangements between a board nominee and the group that nominated such nominee.” The CII believes that disclosure related to these types of third party director compensation arrangements are material to investors due to the potential
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Golden leashes
Photo by Don Urban

The compensation disclosure rules contained in Regulation S-K are intended to provide meaningful disclosure regarding an issuer’s executive and director compensation practices such that the investing public is provided with full and fair disclosure of material information on which to base informed investment and voting decisions. However, as we pointed out in a blog from last year, not all compensation is covered by these rules, including compensation paid to directors by third parties (e.g., by a private fund or activist investors). These arrangements are commonly known as “golden leashes.”  The two examples I discussed previously related to proxy fights involving Hess Corporation and Agrium, Inc. In each case, hedge funds had proposed to pay bonuses to the director nominees if they were ultimately elected to the board of directors in their respective proxy contests. Additionally, in the Agrium, Inc. case, the director nominees would have received 2.6% of the hedge fund’s net profit based on the increase in the issuer’s stock price from a prior measurement date. The amounts at issue could have been significant considering this particular hedge fund’s investment in Agrium, Inc. exceeded $1 billion, but none of the nominees were ultimately elected to the Agrium, Inc. board.

Considering the large personal gains these director nominees could potentially realize under these types of arrangements, it could pose a problem from a corporate governance standpoint as it is a long-standing principal of corporate law that directors are not permitted to use their position of trust and confidence to further their private interests. Recognizing this potential problem, the Council of Institutional Investors (“CII”), a nonprofit association of pension funds, other employee benefit funds, endowments and foundations with combined assets that exceed $3 trillion, recently wrote the SEC asking for a review of existing proxy rules “for ways to ensure complete information is provided to investors about such arrangements.”

In its letter, the CII points out that existing disclosure rules do not “specifically require disclosure of compensatory arrangements between a board nominee and the group that nominated such nominee.” The CII believes that disclosure related to these types of third party director compensation arrangements are material to investors due to the potential
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