Fifty years old and I still haven’t kicked the habit of the end-of-summer book report. Sad really.
I must admit I didn’t think that Steig Larsson’s first thriller would provide food for NACD thought, but listen up all you private company directors, nomination and governance chairs worried about CEO succession, and anyone concerned with boardroom ethics and director independence. This book review is for you.
He died before his trilogy of crime stories became best sellers.
He was Swedish.
He was a former journalist who was expert in covering right-wing extremism.
It is not known how much he knew or cared about fiduciary responsibility or the governance practices of the best-run family businesses, and midway through the book it becomes obvious that the corporation and the magazine company around which most of the action is set, have not based their governance practices on the NACD Key Agreed Principles. Sure, both are private (not public) companies and being based in the frozen north of Sweden and in Stockholm respectively, are not bound by U.S. law. Nonetheless, the conditions under which old man Vanger joins the magazine company board, and the threats subsequently made to the company co-founders, would raise the eyebrows of anyone with even a rudimentary knowledge of the Duty of Loyalty. Transparency is not a core value and self-interest rules the day.
The Vanger family who run the company—and, indeed, the community at the heart of the book—would benefit from attending the family business session at this year’s NACD conference. As usual, the session will be facilitated by Jack Moore, a member of the Benjamin Moore Paint family and well-seasoned in helping directors and executives of family-run companies deal with some very sensitive interpersonal issues. Jack will be joined by Linda Thomas, the CEO of Wilcox Farms, an egg distribution company based in the Pacific Northwest. Chris Wilcox, one of the family members now involved with running the 100-year-old egg farm, will be there too. This will be textbook—not crime thriller—corporate governance, but the panel have promised some lively stories even if they can’t manage mystery and intrigue. Don’t miss it.
Later in Larsson’s novel (and I must be careful not to give away the plot) there are serious questions about who should lead the Vanger empire, although the old man is still very much alive at the end of the story. It all comes out all right in the end, but there’s no doubt that their succession planning and executive evaluation process was sadly lacking. The company counsel, Frode, is pretty much a good guy throughout, but really questions must be asked about the board process and how he allowed it to become so compromised. HealthSouth director and law professor Charles Elson, Heidrick and Struggles’ Bonnie Gwin, and Peter Wiley, chairman and former CEO of Wiley and Sons, will discuss C-suite succession planning at the NACD Conference. Join them to find out how it should be done.
And if a girl with a dragon tattoo offers to invest in your latest venture, give her a wide berth. I have reason to believe her fortune was not made honestly.
Today is Day Three of your M&A Litmus Test (three down, two to go!), so we’ll continue by testing your sense of…
Does your board know its role in strategy? NACD has been emphasizing the importance of board involvement in strategy since time immemorial. Most recently, NACD, with the help of wise counsel (thank you, Ira Millstein and Holly Gregory of Weil Gotshal), boiled down governance guidance from boards, shareholders, and management into ten Key Agreed Principles, including Principle VII: Attention to Information, Agenda & Strategy. We declared that “Governance structures and practices should be designed to support the board in determining its own priorities, resultant agenda, and information needs and to assist the board in focusing on strategy (and associated risks).”
So true! The Report of the NACD Blue Ribbon Commission on the Role of the Board in Corporate Strategy provides specific guidance:
Boards should be constructively engaged with management to ensure the appropriate development, execution, and modification of the company’s strategy.
The nature and extent of the board’s involvement in strategy will depend on the particular circumstances of the company and the industry in which it is operating
While the board can—and in some cases should—use a committee of the board or an advisory board to analyze specific aspects of a proposed strategy, the full board should be engaged in the evolution of the strategy
Moreover, strategy development should be a cooperative process.
Management and the board should jointly establish the process the company will use to develop its strategy, including an understanding of the respective roles of management and the board.
Management and the board should agree on specific steps for strategy development.
To participate effectively in the strategic thinking process, boards should be prepared to ask incisive questions—anticipating, rather than reacting to, issues of major concern.
So, what does this have to do with M&A? Here’s your answer (with help from the McGraw-Hill M&A Series that yours truly coauthors).
By being actively engaged in the formulation of strategy, boards will typically already have some involvement in considering possible acquisitions, since all acquisitions should be consistent with a company’s strategy.
The extent of the board’s involvement in a proposed transaction (for example, questions of disclosure, financing, pricing, structuring, and due diligence) will vary depending on the size of the acquisition and the risks that it may pose. If a very large company regularly buys small companies in its industry and has already developed a process for finding, acquiring, and integrating these small transactions, boards don’t have to focus on the details of any particular transaction. They can and should, however, periodically review the entire merger process, from strategy to integration, in the context of strategy opportunities, attendant risks, and operational implications, to make sure that the process is working.
Selling is a big decision, whether or not a company is private or public. Back during World War II, my dad founded a research company, which he sold after twenty years for one million dollars—in paper. The disastrous experience forced him to launch the publication, Mergers & Acquisitions, in 1964—and it’s still going strong. For public companies, the negotiation is even more critical, involving not only an entrepreneur’s wealth, but a host of fiduciary and disclosure considerations.
The board of directors of a public company being acquired via a tender offer must be mindful of its fiduciary responsibilities under state corporate law. Traditionally under state law, as represented by Delaware law and the Model Business Corporation Act, the directors’ fiduciary duty is to shareholders. In the landmark case of Revlon Inc. vs. MacAndrews & ForbesHoldings, Inc. (1986), the court described the role of the board of directors as that of a price-oriented “neutral auctioneer” once a decision has been made to sell the company.
Whether buying or selling, don’t let M&A transactions trigger micromanaging on the part of the board. Directors can help management achieve greater effectiveness. Individual board members may have expertise in various phases along the M&A route, and can help improve the process. Management would be wise to take full advantage of this expertise on an as-needed basis. Major transactions merit formation of an independent committee of the board to analyze the value of the transaction with the help of an independent third party, who can render a fair opinion. But don’t leave valuation up to the experts; boards can take an active role in determining the value of the company they are buying or selling. A great source for that knowledge is the Report of the NACD Blue Ribbon Commission on Performance Metrics, co-chaired by John Dillon and Bill White. Also, there are numerous good books on corporate valuation. (I know because I just coauthored one with Bob Monks and the worthy competition could well kill us!)
Shout Out to Sources
NACDKey Agreed Principles to Strengthen Corporate Governance for U.S.Publicly Traded Companies. Download a complimentary copy at www.NACDonline.org/LeadingtheWay.
How effective is your board? M&A can be your litmus test. If you are making a buy/sell/merge decision, the experience will reveal your board’s capabilities in myriad areas, especially these:
Information Flow, and last, but not least
Good Business Sense
Today is Day One of your M&A Litmus Test, so we’ll start by testing your board’s…
… M&A IQ.
Does your board know why M&A matters? The wise board won’t leave mergers and acquisitions to external advisors—or wait until the last minute to bring them in. The decision to buy or sell a company of significant size is clearly a matter meriting board attention. On the sell side, time may not be on your side.
Directors serving on public company boards understand that any public company, by definition, is vulnerable to a hostile takeover (since any person with enough funding can buy their shares on the open market through a tender offer and gain control). In 2010, so far there have been nearly 20,000 announced deals worth more than $1 trillion. Some 7 percent of all announced deals worldwide—nearly 1,400 transactions—were unsolicited (hostile) bids.
Directors serving on private company boards need to understand that sometimes M&A is the company’s only exit strategy when the founder wants to retire and there is no next generation of family and/or employees to continue the legacy.
Next, you’ll be tested on fiduciary duties in the sale of a company. See you in class!
Shout Out to Sources
NACDKey Agreed Principles to Strengthen Corporate Governance for U.S. Publicly Traded Companies. Download a complimentary copy at www.NACDonline.org/LeadingtheWay.