D&O Liability: A Downside of Being a Corporate Director

June 4th, 2015 | By

One of the few downsides to board service is the exposure to liability that directors of all corporations potentially face, day in and day out, as they perform their fiduciary duties. The chance of being sued for a major merger decision is now 90 percent; but that well known statistic is just the tip of an even larger iceberg. The Court of Chancery for the state of Delaware, where some one million corporations are incorporated (among them most major public companies), hears more than 200 cases per year, most of them involving director and officer liability. And given the high esteem in which Delaware courts are held, these influential D&O liability decisions impact the entire nation.

This ongoing story, covered in the May-June issue of NACD Directorship, recently prompted NACD to take action. Represented by the law firm Gibson Dunn & Crutcher LLP, NACD filed an amicus curiae (“friend-of-the-court”) brief in the matter of In re Rural/Metro, a complex case likely to continue throughout the summer. Essentially, the Court of Chancery ruled against directors and their advisors, questioning their conduct in the sale of Rural/Metro to a private equity firm.

Why did we get involved? Since its founding in 1977, NACD has striven to serve members in many ways.  Through research reports, webinars, and live events, we provide directors with the information, insights, and networks they need to become effective board leaders. Yet there is another important way in which NACD has been helping directors over the years. From time to time, when directors express concerns about pending policy matters, we amplify those concerns to the powers that be—including all three branches of the federal government as well as state courts, particularly Delaware’s. In this way, we can be the “voice of the director.”

In our Rural/Metro brief, we spoke on behalf of the directors in this case (who, because they had settled out of court, could not directly represent themselves);  far more importantly, however, we spoke on behalf of all directors in every state, addressing the legal principle at issue. We urged the Delaware Supreme Court to reverse Chancery’s finding that Rural/Metro’s directors had breached their fiduciary duties when they approved the company’s sale. NACD believes the Court of Chancery’s decision may expose directors of Delaware corporations to an unreasonable risk of litigation and personal liability for good-faith decisions made on the basis of their reasonable business judgments and in consultation with expert advisors.

Will our line of reasoning in the Rural/Metro amicus brief prevail? Whatever the outcome, NACD’s messages is likely to keep Delaware’s courts focused on standards of good faith rather than an ideal but unreachable goal.

In this regard, we can take heart from precedent. The Rural/Metro  friend-of-the-court brief was the second one NACD has filed in recent years. The previous amicus brief, written in 2008 and presented by the law firm of Sidley Austin LLP, addressed the issue of indemnification in the matter of Bohnen v. Troy Corp. 962 A.2d 916 (Del. 2008). NACD asserted that the indemnification protection of former directors should continue past their years of service in legal matters that involved those same years.

Initially, the court could not consider our brief for technical reasons. However, NACD’s  position was ratified in 2009 when, in response to concerns expressed by various parties including NACD, the Delaware legislature amended Section 145(f) of the Delaware General Corporate Law. As revised, Section 145(f) provides that a director’s right to receive indemnification or advancement pursuant to a company’s charter or bylaws generally “shall not be eliminated or impaired  … after the occurrence of the act or omission that is the subject of the … indemnification or advancement.”

Even now the issue of indemnification remains current. Late last month, in the case of Blankenship v. Alpha Appalachia Holdings Inc., C.A. No. 10610-CB (Del. Ch. May 28, 2015), the Delaware Court of Chancery upheld and clarified  the rights of former directors and officers to receive advance defense costs when they are named in litigation connected to their past board service. As stated in a recent article from Gibson Dunn, “This decision reaffirms the strong protection of director and officer indemnification and advancement rights under Delaware law.” The decision in this case cites Section 145 of the Delaware Code more than a dozen times, which demonstrates that NACD is truly making a difference for directors and the companies they serve.

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Cyber Savvy: Five Imperatives for a Technology Executive Whose Time Has Come

May 7th, 2015 | By

Last month when NACD joined the Global Network of Director Institutes (GNDI) to convene a “cyber summit,” the 200-seat event filled quickly with the key to the future: people—namely directors, chief executives, and information executives empowered to build corporate value and form a powerful bulwark against information destruction.

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As information technology – including especially cyber security – rises as a board-level priority, the solution for addressing it is talent. Not every board can have a cyber expert, but today directors are all the more eager to hear from IT executives, and to consider them for ever-higher posts of company leadership. Chief technology officers, chief information officers, and chief information security officers form a “cyber-C-suite” that can make a critical difference in companies’ futures.

Board Priorities

Every year NACD surveys corporate directors to find out their views on a number of issues, including their “leading issues” for the coming year. NACD’s governance surveys are still in the field, but preliminary data from this year’s survey shows that information technology currently ranks 14th as a board priority; and a newly added category, “cyber security risk,” currently ranks seventh. Information technology ranked tenth in 2014 and thirteenth in 2013.

The NACD’s current survey results also show that boards are gaining more cyber knowledge. Based on responses received so far this year, 37.1 percent of respondents feel that they do not receive enough information regarding cyber security and IT risk, and 27.7 percent are dissatisfied or very dissatisfied with the quality of information of these matters. This represents an improvement in the situation. In 2014, when this was a new survey question, more than half (52.1 percent) indicated a shortage of information and a little more than one-third (35.5 percent) expressed dissatisfaction with cyber information quality.

Moreover, in NACD’s ongoing survey, 13.0 percent of respondents said their boards have “high level of knowledge” of cyber, 66.6 percent said they had “some knowledge, and 19.7 percent said they “little knowledge.” (Incidence of “no knowledge” was less than 1 percent.) These preliminary findings represent a slight improvement over last year, when only 10.5 percent of respondents claimed advanced knowledge.

Cyber Expert on Board?

So how do boards get cyber expertise? Is having an expert on board the answer? Not every board has room. After all, boards need to cover many areas of expertise with their available seats, and the typical board size is smaller than a dozen (8-11 is the range, depending on company size).

To get a handle on board talent recruitment, we asked directors what two attributes were most desirable for new director candidates to possess. The data collected thus far for the 2015 edition of the NACD Public Company Governance Survey shows that information technology ranked fifth, up from eighth in 2014 and up from ninth in 2013.

Preliminary survey findings – subject to change

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Dos and Don’ts for Board Reports

Clearly based on the above trends, information technology experts have an open invitation to give reports to the board – an experience that can enhance any career.

If you are an information technology expert who has an opportunity to give a report at a board meeting, here are five imperatives to consider.

  • Use plain English, not jargon. Present your material in clear, actionable terms.
  • Help the board understand the quality of leadership. This is not a time to stand out as a company savior; if the CEO is not the smartest one in the room, the company has a problem. As the recent cyber summit showed, cyber security should be viewed not as a technological issue, but as an enterprise risk that is addressed like all other risks disclosed in the MD&A. As such, the CEO is the star of this show.
  • Link your comments to the company’s strategy – the more concretely the better. If you work for a public company, one of the best places to find the strategy spelled out will be in the CEO’s annual letter to shareholders. As stated in a recent NACD blog, the CIO—and/or or CISO or CTO—can play a significant a role in strategy and tactical decisions.
  • Help the board prioritize the assets that can be enhanced through IT and protected through cyber security. Companies need to assess their most valuable and vulnerable points, including the potential strengths and weaknesses of third-party contractors.
  • Show them the money! Working with your CEO and CFO, take any opportunity offered to make the business case for a strong IT function. IT and cyber expenditures may not show up on the balance sheet as assets but they are in fact investments in the company’s future and a major contributor to financial value.

If you follow these suggestions, your company, and your career, will be the better for it!

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Note: Ted Sikora, NACD Research Analyst, contributed to this report.

This post was originally published on BlueSteps.

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Global Cyber Summit Sends Message to Boardrooms

April 28th, 2015 | By

Corporate directors’ mindsets regarding cybersecurity fundamentally need to change. As one participant at April’s inaugural Global Cyber Summit hosted by the Global Network of Director Institutes (GNDI) noted, “We have to go from ‘is it possible we’ll be attacked?’ to ‘it’s probable;’ from ‘how much does it cost?’ to ‘how much should we invest?’; and from ‘can we control cyber threats?’ to ‘how can we keep pace?’”

In the words of another participant, “Yesterday’s approach to cyber at many companies was compliance. Today, the approach is risk management, and the imperative for the future is resiliency.” With the passage of last week’s Protecting Cyber Networks Act and National Cybersecurity Protection Advancement Act, the nation moved one step closer to greater resiliency. Both bills made clear lawmakers’ expectation that companies should share information regarding cyber breaches not just with the government, but also with each other. By sharing information about cyber hacks with peers—via information sharing and analysis centers (ISACs) or information sharing and analysis organizations (ISAOs)—and the Department of Homeland Security, companies may be able to improve their cyber defense. Experts at the summit discussed information sharing in light of the massive threat cyber-breaches pose. While information sharing is important to an effective cyber defense, corporate directors should not view it as a panacea. Instead, “it is another tool in the company’s toolbox.”

At April’s summit, the GNDI, the National Association of Corporate Directors (NACD), and the Washington Board of Trade convened more than 200 directors and cyber experts from around the world for a three-day conference to explore the board’s role in effectively overseeing their companies’ cyber defenses. Supported by AIG, the Center for Audit Quality (CAQ), and KPMG, the event provided directors the opportunity to gain insight from experts including Shawn A. Bray, director of INTERPOL Washington; Larry Clinton, president and CEO of the Internet Security Alliance; Richard Knowlton, director of the Internet Security Alliance for Europe and group corporate security director at Vodafone; Jan Hamby, rear admiral, U.S. Navy (Ret.) and chancellor of the National Defense University; Tim McKnight, chief information security officer of General Electric; and Arne Shönbohm, president of the Cyber-Security Council Germany.

Five boardroom imperatives emerged from the event:

  1. View cybersecurity as an enterprise-wide risk issue. Without a doubt, cyber-risk poses a significant threat to companies of all shapes and sizes. From the boardroom perspective, however, it should be viewed not as a technological issue, but as an enterprise risk that is addressed like all other risks disclosed in the MD&A. “Security—not merely cybersecurity—is the key.” Directors should ensure that the company is properly structured to respond to an attack and has plans for both breach prevention and cyberattack response. And don’t be complacent. As one participant at the cyber summit advised, “If you ask management how we’re doing on cyber-risk management and they say, ‘great,’ don’t accept that as an answer.”
  2. Identify your critical assets. Throughout the summit, speakers noted the interdependent nature of cyberattacks. No company is an island, so achieving a perimeter-defense strategy that attempts to protect the entire enterprise is virtually impossible. Instead, management must identify what assets, if breached, would bring the company down: the “crown jewels.” Directors should ensure that defense efforts identify and prioritize them. As part of this identification process, the company also can assess its most vulnerable points, making sure to account for third-party contractors’ potential weaknesses. If a vendor in your supply chain is hacked, are your assets still protected?
  3. Ensure adequate resources for your information technology (IT) teams. Cybersecurity should be viewed as an investment in the company’s future, not as a cost center. Panelists noted a growth in the use of a chief information security officer (CISO), separate from a chief information officer (CIO). Regardless of the leadership structure employed, however, directors must remember that cybersecurity is largely a human issue. Does the c-suite have the staff and training needed to effectively defend the company against hacks? If the company is not going to develop an internal security defense program, how will it acquire one from outside? Is the IT team staffed with both technology professionals and security experts? Broadly, the company should run ongoing employee cybersecurity education programs throughout the enterprise.
  4. De-jargon the board dialogue. The technical nature of cybersecurity can create a formidable barrier to effective board oversight. While it is critical for the board to receive reports on the company’s cyber efforts on a continuous basis, CIOs, chief technology officers (CTOs), or CISOs may deliver the reports in jargon. Panelists noted that the solution, however, is not necessarily to invite a cyber expert to sit on the board. Instead, the entire board should comprise directors who are equipped to ask the probing questions necessary for effective oversight. The board can invite experts to speak to the board on cyber issues and ask management to provide “de-jargoned” reports in clear, actionable terms.
  5. Incorporate cyber into your strategy and every business decision. Panelists stressed the need for directors to address cyber issues proactively—starting with prevention—rather than waiting to respond to a breach. To do so, cyber should be an aspect of the front-end of business decisions: strategy, legal, and financial. Does the CIO (or CISO, CTO) play a role in strategy and tactical decisions? Does the CIO have a working relationship with the IT teams at third-party vendors? In an M&A scenario, do you assess the cyber vulnerabilities of the target company? These questions can help bring cyber-consciousness to board decisions.

For more on guidance on the board’s role in cyber-risk oversight, download the NACD Cyber-Risk Oversight Handbook here. Kate Iannelli, Alexandra Lajoux, and Ashley M. Marchand contributed to this report.

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