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.
This month, I had the pleasure of working with longtime NACD member, Professor Charles Elson,* from the Weinberg Center for Corporate Governance at the University of Delaware. In addition to his academic work, Charles is also a member of the HealthSouth board of directors.
Charles was talking about duty of loyalty and duty of care (“Don’t be sleazy; don’t be sloppy.”) and advising boards about how to stay on the right side of the law. He emphasized the importance of independence; of thinking through and detailing the board’s decision-making process; and of courage—the guts to do the right thing.
Courage is a concept we have been thinking about a lot at NACD, and, indeed, we have arranged a plenary session at NACD’s annual conference to explore just what it means in the boardroom.
They’ll speak about turning points in their own public service and board leadership and the times when they had to add courage to independence of thought and careful process. In addition to guts, both Ken and Norm have big hearts, sound judgment, and great senses of humor.
Don’t miss the chance to hear these two great storytellers reflect on their board experiences and share their passion for exemplary board and public service leadership at the NACD Corporate Governance Conference this October in Washington, DC.
Norm Augustine on Courageous Acts
Hear aerospace engineer Norm Augustine (also former chair and CEO of Lockheed Martin and former Undersecretary of the Army) talk about the courageous acts of 12 of his friends who walked on the moon – and the courage needed to face our energy crisis.
HBO History Makers Series featuring Kenneth M. Duberstein
Listen to the chairman and CEO of the Duberstein Group, Inc., who served as White House chief of staff during President Reagan’s administration, discuss his experiences.
*Coming soon: NACD’s multimedia, self-paced course, How to Be(come) a Director, will be available online later this year and is facilitated by Professor Charles Elson.
Today is Day Two of your M&A Litmus Test, so we’ll continue by testing how well you know your …
Do your directors truly understand their role as fiduciaries? Corporate directors have duties of care and loyalty under state law, and these duties apply to the merger context. (The overarching duty of good faith—basically meaning integrity—need not be discussed here.) The duty of care requires that directors be informed and exercise appropriate diligence and good faith as they make business decisions and otherwise fulfill their general oversight responsibilities. The duty of loyalty requires that directors act in the best interests of the corporation rather than in their own interests.
When reviewing plans to buy another company, sell a company unit, or merge with another company, the board needs to exercise proper oversight of management (duty of care) especially in issues of strategy, pricing, and compliance with various legal obligations, such as disclosure obligations.
The board also needs to exercise independence (duty of loyalty). It can do this by maintaining its independence, and by appointing a special committee of the board composed entirely of independent directors to review a particular transaction.
One director who appreciates the importance of fiduciary duties in mergers is NACD Advisory Board member and HealthSouth director Charles M. Elson, who directs the John L. Weinberg Center for Corporate Governance at the University of Delaware. Recently we discussed the following question: What are the most important cases alleging violation of fiduciary duties in a merger? Two of his top picks were Revlon and Smith v. Van Gorkom.
Here are case summaries, according to Charles:
1. Revlon Inc. v. McAndrews & Forbes Holdings, Inc., Del. Supr., 506 A.2d 173 (1986). The court held that once the sale of a company has become inevitable, the directors of that company must seek to maximize the sale price for stockholders’ benefit.
In June, 1985, Pantry Pride approached Revlon to propose a friendly acquisition. Revlon declined the offer. In August, 1985, Revlon’s board recommended that shareholders reject the offer. Revlon then initiated certain defensive tactics. It sought other bidders. Pantry Pride raised its bid again. Revlon negotiated a deal with Forstmann Little & Co. that included a lock-up provision. Revlon also provided Forstmann with additional financial information that it did not provide to Pantry Pride. Eventually, an increased bid from Pantry Pride prompted an increased bid from Forstmann Little. The new bid was conditioned upon, among other things, the receipt by Forstmann Little of a lock-up option to purchase two Revlon divisions at a price that was substantially lower than the lowest estimate of value established by Revlon’s investment banker. It also included a “no shop” provision that prevented Revlon from considering bids from any third party. The board immediately accepted the Forstmann Little offer, even though Pantry Pride had increased its bid.
The questions before the court were: 1. whether the lock-up agreements were permitted under Delaware State law and 2. whether the Revlon board had acted prudently.
The Delaware Supreme Court held the following:
Lock-ups and related agreements are permitted under Delaware law if their adoption is untainted by director interests or other breaches of fiduciary duties. The actions taken by the directors in this case did not meet that standard.
Concern for various corporate constituencies is proper when addressing a takeover threat.
Proper concern for multiple constituencies is limited by the requirement that there be some rationally related benefits accruing to the stockholders, and there were no such benefits in this case.
When the sale of a company becomes inevitable, the duty of the board of directors changes from preservation of the corporate entity to maximization of the company’s value at a sale for the stockholders’ benefit. (This has come to be called the “Revlon doctrine.”)
The board’s actions are not protected by the business judgment rule.
2. Smith v. Van Gorkom, Del. Supr., 488 A.2d 858 (1985). The business judgment rule fails to protect directors who make uninformed judgments.
Shareholders brought a class action against the board of directors of Trans-Union Corporation, alleging that the board was grossly negligent in its duty of care to the shareholders for recommending that the shareholders approve a merger agreement at $55 per share. Although the price per share was well above current market values, the shareholders alleged that it was inadequate. The Delaware Court of Chancery granted the directors summary judgment, and the shareholders appealed. The Delaware Supreme Court indicated that it would closely scrutinize the process by which the board’s decision was made.
Historically, courts generally did not interfere with the good faith business decisions of a corporate board; however, this case eroded that principle, and the court embarked on a road of increasing judicial scrutiny of business decisions. The court struck down the long-accepted practice of affording corporate directors the almost ironclad presumption that, in making business decisions, the directors act on an informed basis. Instead, it held that the determination of whether the business judgment of a board of directors is informed turns on whether the directors have essentially followed certain procedures to inform themselves prior to making business decisions. The court went on to say that there is no protection under the business judgment rule for directors who have made uninformed judgments.
Words to the wise from an experienced director!
Are you ready for Day Three?
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.