Yahoo's board members may or may not be "doofuses" as
departed Yahoo CEO Carol Bartz declared after they sacked her, but the one
thing for sure is that the events surrounding her firing, and the more recent
CEO turnover at H-P, sure have folks riled up. Whatever else you want to say
about these events, they certainly have provoked an interesting dialogue about
the role and function of corporate boards.
A particularly interesting discussion of these issues
appears in Alison Frankel's September 23, 2011 article on Thomson Reuters
News & Insights entitled "Want More Board Accountability? It Won't Come
Through Litigation" (here).
Her opening salvo in her call for board reform is that shareholders have
"precious little power over corporate directors." She notes that while derivative
lawsuits "give investors an opportunity to blame boards for breaching their
duties, " all the suits really do is to provide shareholders "an opportunity to
air allegations without a lot of hope they'll make difference."
Frankel is particularly concerned that when derivative
suits are filed, board members are able to rely on the business judgment rule
and also on the procedural requirement that shareholders first make a demand on
the board to take up the claim before pursuing the lawsuit. She also is
concerned that derivative litigation defense expenses and rare settlement
amounts are often paid by insurance. As a result she says, "there's really
little consequence for board members from even the rare derivative suit that ends
with a sizeable payment to shareholders." She concludes by questioning
how boards can be reformed "when board members have so little incentive to
Frankel makes a number of interesting points, and as
usually is the case for her, she makes her points well. Nevertheless, I have a
number of comments about her article. I want to emphasize at the outset that by
offering these comments I mean no disrespect -- I am in fact a huge fan of
Frankel's. I offer these thoughts here purely in the interests of the
exchange of ideas.
I should also acknowledge my biases. I have basically
spent my entire career involved one way or the other with the interests of
corporate boards. I tend to look at things from the perspective of corporate
officials, which undoubtedly affects my view - although I do not think that
disqualifies my opinions. What it means is that when some people think of
corporate board members, they can only think of fat cats in fancy suits
lighting cigars with hundred dollar bills. Whereas I think of the
conscientious, hard-working, well-intentioned men and women I have known over
the years who try hard to do what is best for their companies.
There is some irony that this debate is arising in the
context of two recent board actions to fire their companies' CEOs. It used to
be that boards were criticized for being too cozy with the CEOs they were
supposed to be supervising. Now Yahoo's and H-P's board are being criticized
for the actions they took in throwing their CEOs out. I think a fair case could
be made that these events played out the way they did not because the boards
lack "incentives" to change as Frankel asserts, but rather because the boards
are under excruciating pressure and feel a tremendous urgency to act
forcefully. We may or many not agree with their actions or the way they went
about it, but no one can question their willingness to act aggressively to try
to make changes they think are necessary.
I think it is important to keep the extraordinary
pressure facing board members today in mind when thinking about the
desirability of trying to hold directors more accountable through shareholder
derivative litigation. My own view is that it would be highly detrimental to
the general aims and purposes of the corporate business enterprise if the
defensive safeguards to derivative litigation were significantly reduced.
The expression of the need to "hold boards accountable"
represents fine sentiment. But does anyone think that the economic purpose of
the corporate business enterprise would be advanced if corporate officials
could more easily be hauled into court and more frequently forced to defend
their business decisions in court? In particular, does anyone really think that
the increased threat of litigation would produce better business results and
outcomes? And what would this omnipresent threat of litigation do to corporate
decision-making if at the same time these corporate officials could not resort
to insurance to protect themselves?
Personally, I have an experienced-based bias against
anything that would encourage more litigation. I began my career litigating
business cases. It is very hard to come in contact with our civil litigation
system without concluding that the litigation process in our country is a
colossal waste of time, energy and resources. All too often, the only ones who
benefit from the system are the lawyers, and even they hate it. While I will
concede that there are meritorious cases, it is the rare case indeed that
produces benefits even remotely commensurate with the hideous waste of
resources the process entails. It is impossible for me to believe that removing
barriers to litigation will do anything to improve corporate performance or
It is far likelier that increased litigation threats and
liability exposures will undermine the kind of decision-making our companies
need to be able to compete in the global economy. It could also exacerbate the
enormous pressures that directors already face and magnify the kinds of
pressures that arguably caused the Yahoo and H-P boards to act precipitously in
their recent actions.
The fundamental issue here is the question of what it
means to "hold boards accountable." I start with the proposition that the
corporate enterprise is a financial venture pursuing a business purpose and run
by a group of individuals. Investors' participation in this venture is purely
voluntary and entirely optional, and based on the investors' own assessment of
the venture and the individuals trying to run it. Whether to invest, to
stay invested or to stay away altogether are the tools investors have - and
they are powerful tools, as in the end access to investment capital could be
determinative of whether or to what extent the venture succeeds. Investment
selection is the truest and most effective form of shareholder democracy.
One valuable thing that has emerged from the recent
events and the ensuing discussion is a renewed appreciation for the importance
of board functioning. An effective board is an important part of any successful
corporate enterprise. But rather than producing bigger cudgels with which to
chastise boards of lagging enterprises, what we need are better tools to
understand how to identify companies with effective boards. In the long run,
picking winners rather than punishing losers will be better for individual
business enterprise and for our general economic well-being.
I would like to see improved board functioning as much as
anyone else. In a highly competitive global economy it is going to be increasingly
important for companies to have wise and visionary leadership. But subjecting
corporate stewards to increased hindsight second-guessing in a courtroom will
do little to bring that type of leadership about.
My earlier post discussing the question of whether
directors should be held liable more often can be found here.
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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