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Corporate Governance Risk in Overlapping Roles
Perhaps nothing illustrates the clubby atmosphere of Silicon Valley quite like the tangled web of directors and consultants at many of the area's companies.
The many concurrent roles that Valley players often take on executive at one company, director at several others and at times consultants to still more is a big reason the Valley is such a good incubator for new businesses. A startup software developer can greatly benefit from a director who has spent years at larger rivals.
But companies that rely on people with overlapping fiduciary duties can potentially expose themselves to a thicket of litigation risks.
Recently a judge handling discovery in the "no poach" employment case against seven Valley giants had to wade into that thicket to decide whether Google Inc.'s communications with Intuit chairman Bill Campbell were privileged.
Corporate governance attorneys and others who advise companies say the situation is a reminder of the need to keep the lines as clean as possible.
"We conduct annual board assessments for our clients. It's something that needs to be looked at continuously," said Allison Leopold Tilley, a partner at Pillsbury Winthrop Shaw Pittman in Palo Alto, who is not involved in the anti-poaching litigation. "Anything that adds fuel to the fire can be something for plaintiffs lawyers to latch on to.".
In In re High-Tech Employee Antitrust Litigation, 11-2509, plaintiffs are attempting to show that Google, Intuit and other employers entered into no-poach agreements to suppress wages. Campbell, the former longtime Intuit CEO, was a Google consultant and is an Apple Inc. director.
U.S. Magistrate Judge Paul Grewal reviewed a small sampling of the emails and ruled that they are privileged. However, he agreed to an in camera review of a wider selection of emails. That is currently ongoing.
Whatever happens in that case, said DLA Piper's Edward Batts, "In the Valley, it is inevitable that things like that will continue to crop up."
Batts added that he doesn't see Valley technology companies as any worse than other industries. "The Google-Apple issue was a pretty good call to arms," he said, referring to the time in 2009 when Eric Schmidt, then the CEO of Google, stepped down from Apple's board as Google moved further into the mobile business.
One partner at a Silicon Valley-based law firm, who declined to be named to preserve client relationships with companies involved in the poaching case, said that there is a greater risk of conflicts and entrenchment on boards at Silicon Valley companies, especially the smaller ones.
There is often overlap on boards between companies in the same industry and that can present problems with potential business partnerships and acquisitions if the directors don't recuse themselves or step down, the attorney said.
The problem is real and can go well beyond privilege concerns, says another attorney who did not want to be named discussing a client. A company this lawyer represents has a venture capital investor sitting on its board someone the CEO would often bounce ideas off of. Now this board member has started his own competing company. The CEO hopes he'll step down, but so far he hasn't recused himself from any board activities.
"There are not a lot of executives willing to have that conversation with their boards," the attorney added.
These conflicts are difficult to navigate, and one lawyer says board members and others need to recognize these conflicts and act to resolve them, even if that means stepping down from or declining a directorship.
"When someone serves on numerous boards they owe the same responsibilities to each of those companies," said Nancy Wojtas, a corporate partner with Cooley in Palo Alto. "It is hard to compartmentalize that information."
It's a bigger concern than many in the Valley want to acknowledge, Wojtas said. "It's an ethical issue for these people. They need to be sensitive about who is serving on a board and to police it internally." Conflicted board members, she adds, are usually decent, responsible people, "but it is hard to unlearn things."
This article originally appeared in The Recorder.