Tag Archive: Corporate Directors

Corporate Governance Lessons from the Girl with the Dragon Tattoo

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Fifty years old and I still haven’t kicked the habit of the end-of-summer book report. Sad really.

The Girl with the Dragon Tatoo

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.

Several things are well known about the author of The Girl with the Dragon Tattoo author, Steig Larsson:

  • 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.

 

The M&A Litmus Test: Part 4

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Today is the penultimate day of your M&A Litmus Test, so we’ll continue by testing your board’s…

…Info Flow.

How good is your information flow? For the board, knowledge is not merely a source of power; it is the very key to effectiveness. The following wisdom is adapted almost verbatim from the Report of the NACD Blue Ribbon Commission on Director Liability.

When it comes to M&A information, flow is critical.  The type, quantity, format, timing, and source of the information that fuels board knowledge will vary from board to board and will also change over time for a particular board. It will also vary among board members, who have different levels of experience and expertise with different topics.

Information flow is critical for directors with respect to capital allocation decisions—in particular, mergers and acquisitions. This area requires special attention to the long-term interests of the corporation and the ways in which management’s interests may affect transactions. As the report noted, the board and management need to regularly discuss the opportunities for and threats to the company, even in the absence of any planned or foreseen transactions, so that directors have an understanding of the business context in which these issues may arise.

Depending on the size and business context of the company, notes the report, directors should periodically receive information related to, and discuss with management, the following:

  • Comparative studies and analysis concerning whether the company would be more viable by merging with, or entering into alliances with, another candidate, or standing alone;
  • Possible acquisition candidates. When discussing the fulfillment of certain of the company’s business strategies, such as entering into new lines of business, directors should receive information on possible alternatives, such as an acquisition or strategic alliance, to achieve the same objectives; and
  • The merger activity of competitors, including the impact of recent activities on the company’s market share. Competitive analysis as to other suitors for the same potential acquisition candidates might also be warranted.

Maintaining an up-to-date understanding of these issues will help directors to remain prepared for the time when management actually proposes a transaction. This is particularly critical for directors of public companies, who should understand the company’s plans and legal options for responding to unsolicited takeover offers.

In evaluating a particular transaction, notes the Report, directors should seek specific information about the price, timing, and certainty of the transaction, and should be proactive in overseeing negotiations. Directors should understand how the transaction will be financed, and the projected financial impact on the company under reasonably likely scenarios. Where the sale of the transaction warrants it, directors should seek independent financial advice from outside experts to consider together with management’s financial assessment.

Directors should also obtain a high-level analysis of the merger documentation, including an understanding of the most important representations, covenants, and indemnities contained therein and their application to the company and the transaction. In addition, directors should receive input from market and investor relations experts about the best manner in which to position the transaction and the likely reception from investors and creditors. As with any other matter before them, directors should crucially evaluate all the information they have obtained and arrive at an independent assessment instead of relying exclusively on management’s views.

Directors should also be alert to differences between management and shareholder interests in negotiating a particular transaction. For example, shareholders will be far less interested than managers in knowing who will continue to work for the merged company and with what responsibilities. These employment issues are important but they should not override concerns about long-term returns to shareholders.

Shout Out to Sources

The M&A Litmus Test: Part 3

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Today is Day Three of your M&A Litmus Test (three down, two to go!), so we’ll continue by testing your sense of…

Strategy.

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).

Buy Strategy

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.

Sell Strategy

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 & Forbes Holdings, 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