Presentation on theme: "Understanding Opportunities & Liabilities in the Current Governance Environment Holly J. Gregory Washington, DC March 14, 2006."— Presentation transcript:
Understanding Opportunities & Liabilities in the Current Governance Environment Holly J. Gregory Washington, DC March 14, 2006
Pressures for Greater Accountability Corporate Boards & Senior Management ISS Governance Metrics International Corp. Governance Network Corporate Library Sustainability indices (e.g., Dow Jones) Shareholder suits (e.g., Abbott, Oracle, Caremark, Disney) State Attorneys General Increased criminalization of certain corporate activities Courts & Legal Governance Rating Standards Fund managers (e.g., Calpers, TIAA- CREFF) Labor (e.g., AFL-CIO) Non-Governmental organizations (e.g., bioethics) Stakeholder/ Advocacy Courts are developing heightened standards of due care and good faith Credit Rating services Equity analysts Insurance underwriting standards Capital Markets The primary focus to date has been on regulatory and legal compliance and on board structure Sarbanes-Oxley Act SEC NYSE/ Nasdaq Heightened disclosure/ Reg. FD FDA Regulatory Heightened Media Scrutiny
Central Role of the Board: Directing the Affairs of the Company Forward looking – strategic positioning Backward looking – monitoring corporate performance & compliance adjustments in strategy / executive leadership?
Requires Board Understanding of “SWOT” ORGANIZATIONALENVIRONMENTAL S trengths W eaknesses T hreats O pportunities STRATEGIC CHOICES
Compliance Is Necessary but Not Sufficient Corporate crises often occur under the watch of honest directors whose downfall is simply not knowing In an environment of heightened expectations: boards cannot fulfill their duties without relevant and timely information about strategy and risks due care, loyalty and good faith
Booz Allen Hamilton Study Shareholder value lost (1999-2003): Compliance failures: 13% Strategic / Operational failures: 87%
2005 McKinsey Survey Directors want to: Focus more on the long-term health of the company – developing corporate strategy Spend less time on audit, compliance and compensation
2005 McKinsey Survey Directors want more information about: market health (70%); the state of the organization (50%); the nature & level of regulatory risk (40%); public, media & community attitudes toward the company (40%).
2005 McKinsey Survey Limited board understanding of company’s: current strategy: 30% of directors long-term prospects: > 50% of directors
The Independence Paradox More directors without relationships to the company means more dependence on management for information
Key Board Responsibility Figure out – Given unique circumstances of the company – What the board should focus on and in what priority.
Cadbury Principle Board should attend to those things that senior executives cannot, due to inherent conflict.
Board Focus Setting expectations about the tone and culture of the company. Ensuring that management has and exhibits integrity. Formulating with management corporate strategy. Ensuring that the corporate culture, the agreed strategy, management incentive compensation, and the company’s approach to audit and accounting, internal controls and disclosure are consistent and aligned. Understanding the expectations of shareholders and regulators. Responding quickly and responsibly to corporate problems as they arise.
The Evolving Duty of Good Faith Director passivity regarding agenda issues and information needs is dangerous: Disney directors adopted a “we don’t care about the risks” attitude Abbott Labs directors failed to act “in conscious disregard of a known risk” WARNING: Director passivity regarding agenda issues and information is dangerous.
The New [?] Governance Environment It is an “elementary fact that relevant and timely information is an essential predicate for satisfaction of the board’s supervisory and monitoring role under Section 141 of the Delaware General Corporation Law.” - In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, Del. Ch. 1996 It is an “elementary fact that relevant and timely information is an essential predicate for satisfaction of the board’s supervisory and monitoring role under Section 141 of the Delaware General Corporation Law.” - In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, Del. Ch. 1996
Disney Decision Post Trial No Liability: each director “fulfilled... obligation to act in good faith and with honesty of purpose” – no intent to shirk duties Business Judgment Rule Alive and Well Aspirational Standards ≠ Liability (Fiduciary Duty) Standards Post-Reform Standards Don’t Apply to Pre-Reform Behavior Breach of Duty of Good Faith Appears to Require Intentional Failure
Key Federal Liability Concerns Directors can be personally liable under federal securities laws – even without intentional wrongful conduct. Classic federal securities claims such as fraud and insider trading require intentional wrongful conduct However, a claim for registration statement liability does not
In Re: WorldCom, Inc. Securities Litigations No Summary Judgment for WorldCom Director: Due diligence and good faith defenses not established for summary judgment purposes: factual issues remain concerning director’s level of investigation and whether director should have recognized “red flags” given his expertise in the industry (S.D.N.Y. March 21, 2005)
WARNING WorldCom settlement reminds that a director of a public company always has personal assets at risk... even with maximum available indemnification, D&O insurance and exculpatory charter provisions Key: Board Process – and Best Practice
Board Practices to Help Avoid Liability: Foundation Assess: management integrity quality of fellow directors own interest and time Know the business and strategy Understand controls legal obligations disclosures
Board Practices to Help Avoid Liability: Process Focus on the agenda and information flow Attend – prepared to participate actively and skeptically Review minutes Hold executive sessions Require updates
Board Practices to Help Avoid Liability: Process Understand what you sign and review carefully all proposed public filings Give special care to: registration statements interested party transactions other conflicts Rely on experts, as appropriate Embrace best practice Resist complacency