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Director Risk Mgmt October 2009

  1. Director Risk Management: Planning for the End Game Prepared by W ayne Wilson for A Board of Directors Retreat
  2. Begin with the END in Mind.
  3. Liability is in the Eye of the Beholder.
  4. My Personal Guidelines
  5. Q & A

Editor's Notes

  1. Thank you Charley. Good morning and thanks for the opportunity to be with you today! During the next hour, I hope to: offer you a few thoughts about how we as individual directors can manage the risk of being a public company director in today’s difficult economic and regulatory environment
  2. First an obligatory disclaimer - These remarks were prepared to facilitate a discussion among directors I am not an attorney, nor am I in the business of advising boards of directors
  3. A bit about my background – I have served on several boards… … been a public company CFO and COO … audited public companies, including banks. I’ve run special investigations, and I’ve been sued personally.
  4. Our topic today is like so many others – to develop a plan for where we want to go, we must first: Begin with the END in mind. Where are we headed? What will it look like when we get there? What’s the plan to get there?
  5. As we start to think about the end of our board service, Are we strolling through the garden…
  6. OR are we stumbling through A minefield?
  7. Our topic is managing the risk of serving as a director. But most of that risk results from risks faced by the businesses on whose boards we serve. Here is one way to think about those enterprise risks… … broken down between various types of risk and … the sources of those risks.
  8. Buying and selling businesses is especially risky for directors Why did you buy that clunker? How do you extricate the company from non-core operations? And then there is the ultimate board decision – whether, when and for how much to sell the company?
  9. Fair value accounting has been covered prominently in the press over the last year But more is coming as the FASB and IASB seek to harmonize accounting standards A recent FASB working proposal would apply fair value accounting to all financial instruments, including bank loans!
  10. To paraphrase the old saying, “ Liability (like beauty) is in the Eye of the Beholder.” When things go badly, different people will assign blame differently, But they will all point their fingers at you – “where were the directors?!”
  11. As we think about strategies to protect ourselves as directors, these themes continue returning to the fore: Protect shareholder interests Avoid conflicts of interest Follow proper board processes Reduce those charter and by-law indemnification provisions to contractual agreements Regularly review and update your D & O insurance policies.
  12. These are the primary duties of directors under Delaware law. I suspect Virginia statutes have similar provisions. The key duties are: … the duty of care – did you do what you were supposed to do – thoroughly and carefully? and … the duty of loyalty – were you focused solely, without conflict, on the interests of the corporation and its shareholders? The duty to monitor or duty of oversight is an increasingly contested area. the Delaware courts carved out the duty of oversight in their 1996 decision in Caremark and further defined it in the 2006 Disney case. Disney facts and court’s list many current lawsuits, regulatory and Congressional proposals would establish oversight as a formal board duty with heightened responsibilities and penalties for inadequate performance. The goal is often to move the duty of oversight from the duty of care umbrella to make it part of the duty of loyalty. Why? Lose the protection of exculpatory provisions in charter and bylaws Lose the protection of the Business Judgment Rule
  13. Real or perceived conflicts of interests can seriously taint board deliberations and decisions. In addition to director business relationships with the company on whose board they serve, There have been added concerns about other personal or institutional director relationships: … An Oracle special litigation committee valuation decision was thrown out by the courts because the two “independent” directors were affiliated with Stanford University, recruited by another Stanford-affiliated director whose conduct was in question. Other defendant directors had Stanford connections and Larry Ellison, Oracle’s CEO, was a major benefactor of Stanford. And then there are those related party transactions. In addition to issues about transaction valuation and accounting is the question of “Who’s benefiting?” A classic example is Lord Conrad Black, the founder and controlling shareholder of Hollinger International, a major newspaper company. Black was sued by the SEC and ultimately also convicted in a criminal trial for fraudulent abuse of related party transactions.
  14. Everywhere I go, the message I hear is that A cardinal principle of director self-protection is proper board process including Independent advisors, Adequate and timely information, and Full and careful deliberations in the absence of conflicts of interest If these criteria are met, including the duties described earlier, most board decisions should be protected by the “Business Judgment Rule”, I.e., the courts will not second guess your decision, be it good or bad, as long as you followed proper process. Process is the essence of the duty of care.
  15. Most directors rely on the provisions of their corporate charters and bylaws to ensure that they will be fully indemnified in the face of legal challenges to their actions and decisions as board members. The charter and bylaws may not be sufficient. All of the boards on which I have served provided contractual indemnification agreements for all directors and executive officers. In a 2008 court case, Schoon v. Troy Corp., the Delaware courts denied a former director’s claim for advancement of expenses based on the board having changed the bylaws to exclude indemnification for “former” directors. The lesson of the Schoon case makes it imperative that all boards consider whether their current indemnification arrangements are sufficient.
  16. Beyond corporate assets, all directors look to their D & O policies to cover them should they get into trouble. The question is will the money be there when you need it?
  17. Here are some of the current hot button issues for which every D & O policy should be reviewed.
  18. And here are some more.
  19. Now, all the good board processes, indemnification agreements and D & O insurance may still not be enough to keep you out of trouble if You join the wrong board Don’t know what you’re doing, or Are not paying attention.
  20. Here are some of the principal criteria I have used over the years to screen various board opportunities which have come my way.
  21. This is really part 2 of the screening process.
  22. Finally, here are my 3 Cardinal Rules of board service.
  23. Thank you for your time and attention this morning. And now, I would be happy to take questions if we have time. I will also be available during lunch if there are matters you wish to discuss.