Choate Co-Sponsors Event on Changing Boardroom Dynamics
Choate Event Announcement
| January 27, 2010
| William Asher, Michael Gass and John Meltaus
Event: Boardroom Dynamics in 2010: Changing Roles for Management, Independent and Investor Directors
Organization: Association of Corporate Counsel
TOP 10 TAKEAWAYS
Boardroom Dynamics in 2010: Changing Roles for Management, Independent and Investor Directors
Choate and the Association of Corporate Counsel hosted a program on January 27th addressing changing boardroom dynamics.
- Dina Ciarimboli, General Counsel, Prism Venture Partners
- Sheila Flaherty, Executive Vice President and Chief Legal Officer, Stream Global Services
- Karen Higgins Valentine, Vice President and General Counsel, Antigenics
- William Asher, Co-Chair of Choate’s Business & Technology Group
- Michael Gass, Chair of Choate’s Securities Litigation Group
- John Meltaus, Partner in Choate’s Business & Technology Group
Below is a list of ten key takeaways from the program.
1. Recognize the different perspectives that directors bring to the boardroom. Management directors offer a deep knowledge of the business, but may be influenced by compensation incentives and allegiances to employees and commercial partners. Representatives of institutional investors often have broad knowledge about competitors and the market, but may have divided fiduciary loyalties and different agendas as between the company and their own investors. Independent directors have been deputized by the government to play a compliance role in overseeing management, face constant scrutiny and are frequently called upon for “mission critical” situations.
2. Independent directors are increasingly expected to provide oversight over management. Regulatory changes from Sarbanes Oxley forward, stockholder activism and recent spikes in shareholder and derivative litigation are increasing the pressure on independent directors to oversee management, not just to provide advice. This in turn raises the stakes on the board to anticipate, identify and address issues of management performance.
3. A committee of independent directors must have unlimited access to information. If an occasion arises to establish a committee of independent directors, care must be taken not to limit committee access to corporate information or expert advice. Where independent legal counsel is not hired, the burden often falls on general counsel to ensure that the flow of information is unrestricted, that relations between management and the board are not harmed by the process and that the independence of the committee is preserved.
4. Boards are increasingly tasked with compliance roles, but still need to focus on the overall strategy and direction of a company. The list of compliance-related activities tasked to board members seems never-ending, but boards still need to carve out time to consider the strategic options and directions of the company. Some boards are scheduling time to consider these matters outside of traditional meetings, and are engaging in more direct, informal conversations with management.
5. SEC disclosure regulations will inevitably drive substantive changes. The SEC has recently adopted new disclosure regulations that will invariably result in substantive changes in the way that boards address their responsibilities. For example, disclosure of directors’ qualifications, or whether the board has a diversity policy, may affect the way that boards recruit new members or undertake self-evaluations. Disclosure of the relationship between compensation practices and corporate risk-taking, as well as the prospect of “say on pay” shareholder advisory votes, will inevitably also influence how compensation committees make executive compensation determinations. At a minimum, boards are being required to express judgments on issues that may be fraught with legal risk. The phenomenon of disclosure rules begetting substantive changes in practice and policy is well established in the post-Sarbanes era.
6. Companies are still determining how best to comply with SEC requirements to disclose the qualifications of directors. Disclosing individualized qualification attributes of directors at the level expected by the SEC could test the diplomatic skills of the board chair or lead director. The new disclosure requirements may pose particular challenges for directors who are representatives of institutional investors, where board designations are often based on the needs of the investor and not the company.
7. Evaluate various methods on how to best educate the board about corporate risk. A major challenge for general counsel is to ensure that the board has adequate information to assess the company’s risk profile and to oversee management’s handling of risk. Some CEOs take a strong role in educating the board about corporate risk, but other boards may be better served with designated management liaisons. General counsel may need to serve as an “honest broker” in this process, to make sure both that the board is asking the right questions and that management is proactive in educating the directors.
8. Recent Delaware case law calls into question fiduciary duties that directors owe to common and preferred shareholders. The recent Delaware decision in Trados Incorporated Shareholder Litigation reminds directors that they must take extra care of their fiduciary duties (e.g., acting in good faith, in the best interests of the stockholders and not in one’s self-interest) in situations where the interests of common shareholders are at odds with those of preferred shareholders. Balancing these interests can be a particular challenge for board representatives of institutional investors. The presence of institutional investors on the board may raise the advisability of handling important transactions through a special committee of independent directors.
9. Boards of directors should evaluate whether recent cost cutting measures may increase the risk of fraud. Fewer employees with greater responsibilities in sensitive areas are a risk factor for potential fraud. Boards should consider the impact of cost cutting measures during the economic downturn and evaluate areas where risks have increased as a result.
10. Management is best suited for interacting with shareholders. Despite increasing shareholder pressure to meet with directors, boards are generally more comfortable having management represent the company in dealing with shareholder relations.