When disgruntled shareholders marched Disney’s board of directors into a Delaware courtroom seeking to hold them accountable for the Michael Ovitz debacle, board members across the country experienced a vicarious chill.
While the Disney directors were found in the clear of breaching their fiduciary duties, more than a year later the paranoia about increased scrutiny remains.
“Boards have gone from a rubberstamp function to being very active, and the relationships with management have become much more complex,” said Seth Jaffe, senior vice president, GC and secretary of Williams-Sonoma Inc. “A lot of it falls to the
general counsel to figure out how to make sure everybody plays well together.”
Jaffe isn’t alone in confronting the challenges in-house counsel face in an environment in which shareholders and regulators question every boardroom decision. He and other attendees at a recent Martindale-Hubbell Counsel To Counsel Forum in San Francisco, titled “Navigating Relationships With the Board, CEO and the Audit Committee,” shared their best practices on how in-house counsel can actively educate boards on their duties and manage processes to alleviate future liabilities.
“In the past the corporation took a bullet for the executives and the government coffers were increased and everybody went away reasonably satisfied with the result,” said William Cosden, vice president and GC of software provider Active Technologies. “Now we’ve seen a real sea change. The government is literally asking companies to put senior management’s heads on a platter. Things have gotten so paranoid that senior management isn’t even comfortable talking to the general counsel.”
Back To School
In-house counsel play a particularly vital role in educating board members about their responsibilities as directors. One way to get new directors up to speed is through executive education programs such as the Harvard Business School Executive Education program and its Stanford counterpart. Attendees agreed that such programs help board members display good governance to stakeholders and sharpen their oversight skills.
Financial services company Fremont General Corp. will pay for any of its outside directors to attend the Stanford program, according to Alan Faigin, the company’s secretary, general counsel and CLO. However, Faigin was the only attendee who could boast a near-perfect attendance rate at one of those programs. Many board members are simply not willing to take the time to attend such a program.
One alternative approach to educating directors that worked for John Henry, senior vice president, GC and secretary of Investors Financial Services Corp., involves tailor-made programs that come directly into your boardroom.
“At education sessions you’re lucky if 10 percent of what you sit through applies to what you’re doing,” Henry said, adding that his company hosts three sessions a year where they bring in outside experts to educate board members on industry-specific subject matter. “We can better manage their time and better manage the message they are getting.”
Similarly, Michelle Banks, vice president and associate general counsel of Gap Inc., found that an in-house approach worked best.
“Every other month we have a board meeting, and we do a dinner the night before,” she said. “We don’t use every one of those dinners for education, but we probably use two or three of them a year.”
In addition to educating members on the basics of their roles and making Sarbanes scholars out of beginners, education programs also can be used to help members gain a better understanding of the company’s operations.
One common concern was the difficulty of onboarding new members. In-house counsel need to educate directors on the issues that impact your industry.
At Williams-Sonoma, Jaffe encourages his new directors to visit their stores and their distribution center in Memphis. “I consider our role in the general counsel’s office as sort of their field guide toward learning the company,” he said.
On-site education is particularly important if your company operates in a high-risk industry with which board members may not be familiar. Rich Parry, senior vice president and general counsel at Idaho-based Washington Group International Inc., encourages location-specific tutorage in order to acclimate new members to the volatile nature of the construction industry.
“We often hold board meetings in cities where we have a large project,” Parry said. “It helps the directors understand the risks we encounter in our business and how we operate.”
Once members have a solid understanding of the company’s operations, it’s essential that they have an easy way of communicating with each other. One method is to use a secure intranet site for all board communications.
Jaffe uses Menlo Park, Calif.-based BoardVantage, which offers a hosted service that centralizes board documents in a secure Web portal. Thus far, Jaffe has been pleased with the results.
“We recently had a nominations and corporate governance committee meeting with four members, no two of whom were closer than 3,000 miles apart,” Jaffe says. “It was pretty easy because they had all of the materials in front of them at the same time.”
While using an intranet system may ease communication, it raises concerns about creating a trail of electronic documents that could come back to haunt you. GCs need to be constantly vigilant about what kind of record the board is creating. Depending on their contents, e-mails can either demonstrate that the board followed good processes to come to a decision, or simply “rubberstamped” whatever management wanted to do.
“In the wake of recent highly publicized court cases, board members are often increasingly anxious about the record created by meeting minutes, but are surprisingly lax about the record created by e-mail chains,” said Bradley Rock, a partner at DLA Piper Rudnick Gray Cary.
The legal department must educate board members about the dangers of “bad process” e-mails containing such casual statements as, “we need to support management, let’s just approve it.”
Some attendees have taken a proactive role in developing processes to ensure that rubberstamping is a thing of the past.
Microsoft Corp.’s deputy general counsel John Seethoff promotes a system he calls the “two meeting rule” to ensure that all board decisions are well considered. The initial meeting allows members to discuss relevant issues without reaching any conclusions. It also offers a way to structure the decision making so that the board can have a record of any sort of significant decision having been discussed and then reported in the minutes and at least two meetings.