Douglas Gordon: Welcome to The Buck Stops in the Boardroom: Empowering Today's Directors. We start with a true story I call A Bird in the Hand. Well, I didn't come up with the name. That's how the Wall Street Journal titled their article about the acquisition of Gordon Jewelry Corporation by Zale Jewelers in 1989. Today you'll discover much, much more of the story than the Wall Street Journal could ever tell you.
At the time Gordon's was the second largest retail jeweler in the country with over 660 stores in 44 states and Puerto Rico, and with over $500 million in annual revenue. Zale was the largest retail jeweler in the United States with over 1100 stores and $1 billion in annual revenue.
Gordon's was founded by my grandfather MM Gordon with one store in 1905 in Houston, Texas. My father and uncle grew the company into the second largest retail jeweler. Gordon's stock had been publicly traded since 1963 on the New York Stock Exchange and Gordon's was family managed and controlled at the time of the acquisition in 1989.
At that time, I was a member of the board and the Executive Vice President of Gordon's. Zale and Ratner's Jewelers, the largest retail jeweler in England, were the final two bidders to buy Gordon's after a three month long auction sales process. At Gordon's upcoming board meeting, Zale and Ratner's were going to make their best and final offer to acquire Gordon's. The critical issue for the board at our meeting in February of 1989 was price versus certainty, and since our board had decided months before that it was in the best interest of the company and its shareholders to put the company up for sale, the board now had a duty to our shareholders to maximize the purchase.
At 2:00 in the morning, and after eight hours in our board meeting, the time had come for the board to choose Zale or Ratner's offer. Zale's CEO and his team had flown from Toronto to Houston in their private jet and had been waiting for over 12 hours for our board to accept or reject their take it or leave it offer. However, by 2:00 in the morning, Zale was tired of waiting.
Further, about that time, our board and its advisors, Goldman Sachs and our Wall Street law firm, had just finished a conference called to England with Gerald Ratner, Ratner's CEO, in which he assured our board that Ratner's offer was conditioned only on a rubber stamp approval from the Ratner's board in England and that approval would be coming in just a few hours.
Our board had two choices; accept Ratner's conditional $39 per share all cash offer conditioned only on a rubber stamp approval by Ratner's board of directors, or accept Zale's unconditional but lower take it or leave it offer of $37.50 per share all cash, a $1.50 less per share than Ratner's.
Our board primarily based our decision on the following: Ratner's higher offer would provide $38 million more in cash to our shareholders than Zale's lower offer. Ratner's had acquired retail jewelry chains in the US in the past, so Ratner's had a track record of closing acquisitions in the US. The representations by Gerald Ratner in our conference call that his board's approval would be a rubber stamp and that approval would be delivered in just a few hours. Both Goldman Sachs and our legal advisors recommended we accept Ratner's offer, and our board analysis and discussion of the price versus certainty issue. We felt reasonably certain that the risk of Ratner's board not approving the offer was relatively small compared to the extra $38 million in cash our shareholders would receive if Ratner's board did approve. In short, we relied on Gerald Ratner's word that his board approval would be a rubber stamp. Based on all of the above, our board voted unanimously to accept Ratner's $39 offer, and to reconvene the board meeting at 2:00 PM later that day to confirm receipt of Ratner's board's approval. Zale gracefully accepted the disappointing news that we had rejected their offer. They immediately flew back to their headquarters in Toronto.
I went to bed that morning feeling that our board had made the right choice. Later, as I walked into our reconvened board meeting that afternoon, I was shocked to see our Wall Street attorney lying on his back on the floor of the boardroom. That definitely was not a good sign. He said his back was bothering him, and after I saw some rather glum faces in the room, I knew why his back was hurting. The rubber stamp approval was a dead duck. Ratner's board did not approve the offer. Its $39 offer vanished into thin air.
After a very quick board discussion, we decided to ask Goldman Sachs to advise Zale that we were now ready to take their $37.50 offer that we had rejected only a few hours before. Zale responded that they were still interested in the acquisition, but only at $33 per share, $4.50 less per share than their previous $37.50 offer.
Fortunately, however, the story has a happy ending. Thanks to the negotiating skills of Goldman Sachs, Zale acquired Gordon's at $36.75 per share, only 75 cents less per share than Zale's $37.50 offer.
The moral of the story, a bird in the hand is worth two in the bush. The Zale unconditional $37.50 offer was our bird in the hand, and Ratner's conditional $39 offer was the two in the bush. The board blew it, but thank goodness for the business judgment rule. From a legal perspective, the Gordon's board satisfied their duty of care to the company to maximize shareholder returns, even though we made a unanimous but totally wrong decision in choosing Ratner's over Zale. That decision, and all board decisions, are generally subject to the protection of the business judgment rule.
The business judgment rule provides that in lawsuits against a director alleging breach of the director's duty of care to the company, courts will evaluate the case based on the business judgment rule. Under this standard, a court will uphold the decisions of a director if they are made in good faith, with the care that a reasonably prudent person would use, and with the reasonable belief that the director is acting in the best interest of the company. In practical terms, the business judgment rule is a presumption in favor of the board, sometimes referred to as the business judgment presumption.
There are ways to defeat the business judgment rule if the director acted in bad faith, committed fraud or gross negligence, had an undisclosed material conflict of interest, or engaged in self dealing with the company. And if the court finds that the business judgment rule does not apply, then the board must prove that the process and substance of the transaction was fair.
Two program notes. First, regarding legal professionalism. To best represent corporate clients, boards, or individual directors, lawyers should know and understand corporate governance and how it affects the corporation and its directors, shareholders and stakeholders. Best corporate governance practices make a corporation more valuable, and your knowledge and understanding of these best practices should make you more valuable to your client as well.
Second, the obligatory legal disclaimer. This presentation and materials do not constitute legal advice. Rather, they are intended to provide an overview of the topics contained herein. If a particular issue arises regarding any of the matters contained herein, the advice of competent counsel should be sought.
Our next topic is the mission of this program, and that mission is to empower today's directors to create strong proactive boards. But what about weak, passive boards? No, no. No, no. Boards need to know how powerful they are so they can make informed decisions on how proactive they want or need to be to do what's best for the company. The board should be a strategic asset to the company that maximizes shareholder returns, and the board should get an A, not just a passing grade, on doing their job.
Directors, blame thyself. President Truman had a sign on his desk in the White House that read The Buck Stops Here. A sign like that should be in every boardroom in America because the buck does stop in the boardroom. Directors must blame themselves for ignoring shareholders or allowing mismanagement or fraud at their company.
What's the first question an inquiring mind should ask when fraud or mismanagement, or other serious problems, are discovered at a company? Where was the board?
As the slide shows, the board is the first and best line of defense against mismanagement and fraud. Everything that management did or didn't do, know or didn't know, is subject to board review. The board's in the best position to supervise management since the board has the undisputed legal power to access anything or anyone related to the company, including but not limited to, access to its employees, outside accountants and attorneys, consultants, and all company records of any kind. In supervising management and holding management accountable, the board is more powerful than the company accountants and attorneys, the SCC, and the stock exchanges, the stock analysts and media who follow the company, the stock holders, and last but not least, the plaintiff's attorneys.
Corporate governance at gunpoint. What is it? It's defined as shareholder lawsuits forcing companies to change their corporate governance practices for the better. Shareholder lawsuits are not just about money anymore.
Bill Lerach, based in San Diego, California, was one of the most successful, if not the most feared, plaintiff's class action securities lawyer in the nation in the early 2000s. Lerach said the following at a meeting of the Institutional Shareholder's Association, "Oftentimes more is obtained with a kind word and a gun than a kind word alone." By the way, Lerach's quote was first said by Al Capone, the infamous mobster, almost 80 years before.
Some companies in the early 2000s were so concerned with being sued by Lerach, that his last name became a verb. No company wanted to be lerached. However, the defense bar wouldn't have to be much concerned with Lerach anymore when Lerach suffered a reversal of fortune in 2008. He was sentenced in federal court to two years in prison, fined $250,000, and ordered to complete 1,000 hours of community service for his part in a kickback scheme involving class action lawsuits against some of corporate America's biggest names.
Corporate defense litigators despised Lerach in particular, disliked many of the plaintiff's securities lawyers in general, and bemoaned all the unfounded, that's their word, unfounded, shareholder lawsuits that they had to defend on behalf of their corporate clients. However, while defense lawyers were likely glad to see Lerach get his comeuppance, these defenders of corporate America should perhaps also be thanking their lucky stars for Lerach and his ilk and their progeny. In simple terms, more shareholder lawsuits mean more legal fees for the defense bar, which is a good thing if you're a defense lawyer, and they've got that going for them, which is nice.
Siebel's Systems is a landmark corporate governance at gunpoint case. Siebel was a software company in 2003, that was later sold to Oracle for $5.8 billion, that was sued by a plaintiff's lawyer not named Lerach. Siebel settled the shareholder lawsuit by paying the plaintiff shareholder, who is the Teacher's Retirement System of Louisiana, $900,000 in legal fees and agreeing to change Siebel's executive compensation practices and improve disclosure of executive pay. The settlement represented a shift in the balance of power between shareholders and management. Lawsuits were not just to recoup money anymore, they involved forcing the company to change their corporate governance practices.
Siebel's general counsel commented on the settlement at the time by happily saying, "As a company, we have always been committed to high standards of corporate governance and disclosure practices. So, we are happy any time that we have a chance to enhance those practices. The settlement gave us the opportunity to do so."
My reaction to Siebel's general counsel's comment, it's a clever way to spin the facts but why doesn't Siebel just enhance its corporate governance practices on its own initiative without waiting for a lawsuit and having to pay almost a million dollars in legal fees to the plaintiff's lawyers, and perhaps another million or more to Siebel's own defense lawyers, to make the needed corporate governance changes? If Siebel were in Las Vegas, the locals would say Siebel was doing it the hard way by defending a lawsuit, instead of the easy way by reviewing its existing corporate governance practices on a regular basis. My recommendation to any company, be happy by making needed corporate governance changes the easy way.
Our next topic is independent directors. The definition? Independent directors are not employees of the company and have no material relationship with the company. NASDAQ listing rules 5005(a)(20) and 5605(a)(2) define a material relationship as a, "relationship that, in the opinion of the board of directors, would interfere with exercising independent judgment in carrying out a director's responsibilities." Now that we know what an independent director is, it's important for a director to act independent and not just be independent.
For NASDAQ and New York Stock Exchange listed companies, a majority of the board members must be classified as independent, but the classification only means that a director satisfies the material relationship test, in the opinion of the board. The test says nothing about how a director should act independently.
So how should an independent director act? As a helpful skeptic who trusts their gut or intuition, who assumes nothing, who questions anything, encourages discussions, suggests alternatives, respects others' opinions, and brings constructive friction to the boardroom, and if appropriate, be the lone wolf.
The Medtronic story, which is a true story, is the quintessential example of a lone wolf director. The board of Medtronic, a large medical device manufacturer, had, after much discussion and deliberation, just voted 10 to one to approve the acquisition of a $2 billion company. However, the one director, the lone wolf that voted against the acquisition, did not give up. That same day, he telephoned the chair, re-argued his case, and pleaded with the chair to call a new board meeting for the next day to reconsider the board's decision to approve the acquisition. The chair agreed, and at the new meeting the next day, after much discussion, the board totally flipped and voted unanimously 11 to zero to reject the acquisition it had overwhelmingly approved just the day before. Later, the chair told the lone wolf how much he admired his courage and willingness to stand against the board. Thomas Jefferson said it best, "One man with courage is a majority." And nowhere else do Jefferson's words apply more than in the board room.
Our next topic is one of the hottest topics in corporate governance today, diversity mandates for the boardroom courtesy of the SCC, the California and New York legislatures, NASDAQ, and the Proxy Advisory Services companies. The SCC issued the following diversity requirement in 2019 for all Reg S-K filings:
Item 401 requires a company to "briefly discuss the specific experiences, qualifications, attributes or skills that led to the conclusion that the person should serve as a director." In other words, disclose why the person is on the board.
Item 407 requires a company to disclose whether its nominating committee, or the board, has a policy with regard to the consideration of diversity in identifying director nominees. California S.B 826, which was signed September 30 of 2018, applies to corporations, whether organized in California or elsewhere, with securities listed on a major US stock exchange and principal executive offices located in California. Beginning December 31, 2021 such companies must have three female directors if the company has six or more directors; two female directors if the company has five directors; and one female director if the company has four or fewer directors. 766 California public company board seats were held by women in 2018, but 1,275 were held by women in 2020, an increase of 67%. Seems like this is working in California.
New York S.4728, effective June 27, 2020, applies to domestic or foreign corporations authorized to do business in New York. Corporations must file a biennial statement with the New York Department of State disclosing the total number of directors and the number of female directors on the board.
California AB 979, signed September 30, 2020, applies to a publicly held domestic or foreign corporation whose principal office is located in California. Not later than the end of 2021, a corporation must have one director from an underrepresented community. Not later than the end of 2022, a corporation with more than four but fewer than nine directors must have two directors from an unrepresented community, and a corporation with nine or more directors must have a minimum of three directors from underrepresented communities. Underrepresented community means an individual who self-identifies as black, African-American, Hispanic, Latino, Asian, Pacific Islander, Native American, native Hawaiian, or Alaska native, or who self-identifies as gay, lesbian, bisexual, or transgender.
NASDAQ's diversity proposal. These are new rules that went into effect December 1, 2020, and it applies to NASDAQ listed companies, subject to exceptions. But Rule 5605(f) each company has to have, or publicly explain why it does not have, at least two diverse directors on its board. Each company must have at least one director who identifies as female and one director who self-identifies as female and one director who self-identifies as an underrepresented minority. For example, black or African-American, Hispanic, Hispanic or Latinx, Asian, Native American or Alaska native, native Hawaiian or Pacific Islander, or LGBTQ+.
The Proxy Advisors. Now these companies advise shareholders of public companies how to vote in board elections. In 2021, Glass Lewis expressed concern about boards with less than two female directors. After January 1, 2022, Glass Lewis will recommend that shareholders vote against the election of the director, who is a chair of the company's nominating committee, if the company has less than two female directors.
Institutional Shareholder Services, ISS, another proxy advisor, says starting February 1 of 2021, ISS will recommend against voting for the election of the nominating committee chair if there are no women on the board. Starting February 1, 2022, ISS will recommend voting against the election of the nominating chair of a board with no apparent or ethnically diverse members.
The next topic is the 10 commandments for the board. These commandments form the core of best corporate governance practices.
Commandment number one, know your duties of care and loyalty. First, the duty of care. The duty of care refers to a fiduciary responsibility held by directors to exercise the utmost care in making business decisions. This duty requires directors to make decisions in good faith, in a reasonably prudent manner, in the company's best interest, and makes decisions that are financially, ethically and legally sound, and that are made after taking all available information into account.
The duty of care also requires directors to know the difference between shareholders and stakeholders. The first group, shareholders, they own part of the company through owning shares of stock. In other words, they have equity in the company. The second group, stakeholders, they own no stock or any part of the company and have no equity. They include employees, consultants, suppliers, vendors, customers, lenders, debtors, public groups, and the community. The third group are stakeholder shareholders. They are stakeholders who are also shareholders. These stakeholders own equity in the company just like shareholders.
So what do shareholders and stakeholders want? Shareholders prefer stock and profits. Shareholders are more concerned with stock appreciation, dividends, and profits. They have a financial interest in the success of the company, not in the success of the employees who work there. Shareholders are more likely to advocate for growth, expansion, acquisitions, mergers, and other acts that will increase the company's profitability. Stakeholders, on the other hand, prefer salaries and benefits. Stakeholders are more concerned with the longevity of their relationship with the company and providing a better quality service or product. Employees are likely more interested in their salaries and benefits than company profits.
Next topic is shareholder primacy. The shareholders are a clear number one if state law follows the shareholder theory that the board has a primary duty to maximize shareholder returns. For example, in Delaware, shareholders are number one and stakeholder interests may be taken into account only to promote shareholder welfare. However, if state law follows the stakeholder theory, the board has a legal duty to both shareholders and stakeholders to ensure that the activities that benefit the company don't harm.
Consider my case study called The Home Co. Civil War: Shareholders versus Stakeholders, Battle Lines Drawn. Home Co. is a large manufacturing company with its entire operations in a small town of 20,000. Home Co. employs half the town and the other half owe their livelihood to Home Co. as well. All of Home Co. customers and suppliers are located in the USA. Home Co's business is great and has always been great since it started 60 years ago. However, Home Co's stock price has always traded at a significant discount ever since it went public over 30 years ago.
Offshore, Inc. has decided to remedy that price disparity and has made a final offer to purchase all of Home Co's stock in a fully financed, all cash transaction at $40 per share, twice its current price. Offshore will move all Home Co. operations offshore, and terminate all Home Co's employees which will decimate the whole town. Offshore will replace all of Home Co's domestic suppliers with foreign suppliers, and will focus Home Co's sales and marketing efforts on developing new foreign customers to the detriment of Home Co's current domestic customers. Many of Home Co's employees, suppliers and customers have been picketing outside Home Co's headquarters to protest any potential sale to Offshore, but there are no regulatory objections and shareholders have been doing back flips over the possible sale to Offshore.
The only other viable bidder, White Knight, will keep all Home Co. operations, facilities, employees, suppliers, and customer base intact, but its final offer of a fully financed, all cash purchase is only $30 per share, $10 less than Offshore's offer. The board has decided to accept either the Offshore or White Knight offer, which should they accept and why? In other words, should Home Co's board accept Offshore's higher offer and make the shareholders happy but harm the stakeholders, or accept White Knight's lower offer and make the stakeholders happy but harm the shareholders?
If Home Co. is incorporated in Delaware, the board should take Offshore's higher offer since shareholders come first in Delaware. However, if Home Co. is incorporated in a state other than Delaware, then the laws of that state may require the board to take the interests of the stakeholders into consideration and not just the interests of shareholders. Therefore, if the law of the state of incorporation follows the stakeholder theory, the Home Co. board should take White Knight's lower offer to still benefit the shareholders but not harm the stakeholders.
After the duty of care comes the duty of loyalty. The definition of the duty of loyalty. The company comes first, no exceptions. The following requirements comprise the director's duty of loyalty.
Directors must keep the company's information private. Directors must not misappropriate a corporate opportunity for their own personal gain. Directors must avoid having a personal interest in transactions between the company and another party. Directors must report all conflicts of interest, whether actual or potential, real or perceived, to the board of directors. Directors must obtain legal advice in cases where it is unclear whether or not a conflict exists. In cases where a conflict exists, the director should be fully transparent about it and disclose all relevant information.
Please consider the following hypothetical. The director has a conflict of interest regarding a proposed office lease transaction since he owns the office building that the company wants to lease. The board decides that the lease terms are just and reasonable to the company since the rent is below market rates and the conveniently located building is in move-in condition. Since the board considers the lease terms just and reasonable, in spite of the conflict, it can approve the lease transactions by complying with the following safe harbor provisions.
The conflicted director should disclose all relevant information to the board and should not vote on the lease transaction. The board should, in writing, acknowledge the conflict and approve the lease transaction for the reason stated above; i.e, below market rental rates, et cetera.
Commandment number two, exercise ultimate authority. The buck stops in the boardroom. Since the board has ultimate responsibility for everything that happens or doesn't happen at the company, the board must use their matching authority, oversee the company, but don't manage it. Day to day operations belong to management.
Commandment number three, oversee by establishing controls, systems and procedures, call them CSPs. Make sure CSPs are in place, emphasized, and enforced for every area of the company, such as cyber, financial, human resources, operations, legal compliance, emergency response plans, corporate governance, diversity requirements, conflicts of interest, et cetera.
Here's an example, real life. Farmers Insurance human resources department misclassified non-exempt employees as exempt employees. Farmers was hit with a $90 million judgment in California for the misclassifications. Accurate CSPs should have helped prevent the mistakes. The moral, make sure CSPs are periodically evaluated and updated.
Commandment number four, delegate duties and rely on outside experts. The board can't and shouldn't try to do everything themselves. Delegate day to day operations to management. The board can also rely on reports and advice from outsiders, such as consultants, accountants, and attorneys, and other types of experts.
However, are any of these outsiders biased? Do they fear losing the company's business if they speak truth to power? In other words, speak truth to the CEO, the CFO, and/or the board? Do the outsiders have a current or past personal, family or business relationship with anyone at the company? The board should determine whether the experts have any current or prior business or personal relationship with the company. Directors should also ask probing questions at the board meeting and challenge assumptions, processes, findings, and recommendations of the experts.
Commandment number five, act only as a full group at a board meeting or by unanimous written consent without a meeting. Telephone or Zoom meetings are okay, but be careful to avoid deciding complex issues that are best discussed in person, such as complicated mergers or acquisitions. Use a written consent for simple matters that need no discussion. For example, to confirm a previously agreed upon action. Unlike officers who have actual or a parent authority to act for the company, individual board members have no authority to act for the company unless specifically authorized by the board.
Commandment number six, own the strategic and annual operating plans. Give input to, review, revise, improve, understand, and approve these plans prepared by the CEO and senior management, but hold them accountable. A couple of typical questions from a board member to management could be, are the primary risks to the company identified and prioritized in the plans? Who monitors these risks on a current basis? The board should help management create the best plans possible and help them stay on track and make adjustments needed.
Is the board committed to the plan or just involved with the plan? Consider the classic American bacon and eggs breakfast. If you look at your plate of bacon and eggs, you'll see that the chicken was involved with your breakfast but the pig was committed to your breakfast. So metaphorically speaking, directors should be a pig with the plans, be committed like the pig, not merely involved like the chicken.
Commandment number seven, take cradle to grave responsibility for key executive management. For example, the CEO or the CFO. Cradle to grave means the board finds, hires, compensates, evaluates, plans for their successors, and if necessary, terminates the CEO. The selection, compensation and evaluation of the CEO could be the single most important function of the board. The board has a clear legal right to terminate a CEO's employment contract, but the company could be liable for damages. CEOs are typically terminated once the board loses confidence in the CEO's ability to get the job done or just loses trust in the CEO.
Commandment number eight, consider setting limits on the CEO's authority. Nature abhors a vacuum and so do CEOs. If the board doesn't set limits on the CEO's authority, they have no one to blame but themselves if the CEO exceeds his authority since they never defined where his authority stops. Should the board just trust the CEO to know what he can do or not do without board approval? Or should the board clearly limit the CEO's authority so the board can maintain checks and balances on the CEO?
Only the board can issue stock, declare dividends, and hire and fire officers, and the CEO has no authority to do any of those things. However, should the CEO be required to get board approval for other matters, such as one or more, or the following? Approval to acquire business, any size business or only one above a certain dollar amount? How about commencing or settling major litigation? What about establishing a major strategic alliance? Or making a commitment for more than X years or Y dollars? Or making material changes to the annual plans or budgets? Or making material changes to insurance coverage? Or selecting legal counsel for the company, or for the board, or for a board committee? And the CEO should advise the board of preliminary indications of interest to buy the company?
Well, the true story here is the CEO of an auto parts manufacturing company called DANA Corporation is on a phone call with the CEO of a competitor, when the CEO competitor out of the blue offers to buy DANA for $2 billion. Must the DANA CEO legally tell the DANA board about the offer? The answer is no. Since the offer is not in writing, it is not a formal offer. It's just a preliminary indication of interest. Should the DANA's CEO tell the board about the call from the competitor's CEO even though not legally required to do so? Yes. It's in the best interest of the company for the CEO to tell the board. In other words, why not tell the board? A board can be especially helpful to the CEO in this situation. Further, the CEO telling the board about the offer, or preliminary indication of interest in this case, can help get the monkey off his back if the board later questions how the CEO should have handled the preliminary indications of interest.
Commandment number nine, get unfiltered information for decision making. Is the board getting the whole story or just the CEO's side? What's the tone at the top of the company? Does the CEO consider the board an adversary, a subordinate, a nuisance, or a strategic asset? Warren Buffet described good board members as talented peers with a hat pin to burst the CEO's bubble. Is the board a mushroom board, always kept in the dark? Is the board a Southern board, always the last ones to know what's really happening at the company? In other words, the board is always on the southbound end of the northbound donkey. Is the CEO the gatekeeper for information flow to the board? Therefore, the only information that goes to the board is the information the CEO has approved in advance? Does the CEO justify his gatekeeper role by ensuring that the board will receive only relevant and accurate information if the CEO is the gatekeeper?
Get all the facts, and not just from the CEO, including getting the facts from other management, outside counsel, auditors, et cetera. And the corporate governance committee or the chair of the board, not the CEO, should be responsible for overseeing the information flow to the board.
Commandment number 10, evaluate the board, each board committee, and each individual director. The company doesn't keep slackers on its sales force, why should it keep slackers in the boardroom? A board position is not permanent. The corporate governance committee of the board should be responsible for overseeing the annual evaluations to get the right mix of skills and experience on the board.
Our next topic is the director bill of rights. They are for individual directors and are subject to common sense limitations.
Director right number one, the right to participate in meetings and make informed decisions, including the right to request items to be placed on the board meeting agenda, the right to request key employees and advisors make presentations and answer questions at meetings, and the right to receive board meeting information, the board packet, at least a week in advance to have enough time to properly prepare for the meeting and to request additional information from the company.
Every board member is equal in the boardroom. But what if there are five directors, and one of them is you, and the other four are Elon Musk, Jeff Bezos, Steve Jobs and Warren Buffet? We'll call them The Fab Four. What if The Fab Four were unanimous in agreement on an issue being discussed in the boardroom? However, you disagree with them, but are remaining silent in deference to their rockstar status. Should you be intimidated? No. Hard no. Every director is equal in the boardroom. Every director has the right, and a fiduciary duty, to speak up and say what's on their mind. Should you give The Fab Four the benefit of the doubt in board deliberations and not ask them the hard questions? No. They're only human and humans, including The Fab Four, make mistakes.
Director right number two, the right to inspect company property. Anything and everything related to the company. Nothing is sacred except the formula for Coke, for example. But of course, give management reasonable time to comply with your request, and per your duty of care, you must protect all confidential information. From software to plant and equipment and beyond, if it exists you have a personal right to inspect it. But do you also have a right to keep a copy of the documents? Generally, yes.
Consider this true story. At the end of a board meeting, the chair told all the directors to "leave the papers" that had been distributed earlier in the board meeting. The chair wanted the highly confidential documents kept in one secure place. However, one board member refused to return the papers, but the chair back down and let them keep them, which was the right thing to do since the director, and all directors, have a duty to keep the papers confidential.
Director right number three, the right to communicate with anyone. You can talk to anyone with or without management present, including speaking with employees, shareholders, accountants, attorneys, or any outside advisors or consultants. However, you cannot be disruptive. Further, when you talk to someone, clarify that, as a director, you're there to listen and learn, not to advise or direct the other party. You have no individual authority as a director to act on behalf of the company or the board.
Outside directors, those who are not employees of the company, have a huge information disadvantage when compared to senior management. Senior managers, CEO, CFO, et cetera, may each spend over 3,000 hours per year working for the company as an employee. While the director may only spend 25 to 300 hours per year, working for the company as a director. Outside directors can minimize the huge information disadvantage by walking around the company and getting information from multiple sources inside and outside the company.
Director right number four, the right to do your own due diligence between board meetings. Examples; visit the offices and plants with or without senior managers present to see things firsthand and talk with key employees in person, visits, of course, should be arranged in advance by management, request company information that particularly interests you beyond what would normally be included in your board packet, and research competitor information online. For example, a competitor's SCC filings. The benefits of your due diligence; you mitigate the information disadvantage that you have as an outside director, your increased knowledge of the company or its competitors adds value in the boardroom. Also, you should consider sharing your information with the board.
Director right number five, the right to dissent and resign. Dissent in board meetings is not only good it's required to get the best results from the board deliberation process. Dissenting directors can always find eternal support in the words of General Patton, one of America's greatest generals, "If everybody's thinking alike, then somebody's not thinking." Board decisions can be made unanimously or with a simple or super majority. However, if you tell the board who you are and what you stand for, but they never see it your way, consider resigning and getting the heck out of Dodge.
And please note the 10 commandments and director bill of rights fit on the back of my business card.
And now for our final program topic, boardroom tips from the movie 12 Angry Men. 12 Angry Men starred Henry Fonda and received four Oscar nominations in 1957, including one for best picture. The movie takes place almost entirely in a jury room where the 12 all male jurors deliberate the guilt or innocence of a boy accused of murdering his father with a knife. If the boy is found guilty of first degree murder, the death penalty is mandatory. While there are differences, jurors and directors are remarkably similar, which makes this movie especially relevant to boardroom behavior and tactics.
Here is some of the similarities. Both jurors and directors are charged with making critical decisions through deliberation. All jurors are equal in the jury room. All directors are equal in the boardroom. Each group has a designated leader. Jurors have a jury foreman, and directors have a chairman of the board. And jury deliberation rooms and board rooms are both private. In summary, all directors should act in the boardroom exactly like Fonda's character acted in the jury room. His character is the quintessential board member.
Boardroom tip number one, the phrase, "Let's talk about it," starts a discussion. At the beginning of the movie, Fonda immediately discovers he's the lone wolf in the jury room after the first vote. He's the only juror voting not guilty. The jurors turn to Fonda and want to know what to do next about Fonda's lone wolf recalcitrance. Fonda basically replies, "Let's talk about it." The phrase, "Let's talk about it," is a great way to start any discussion in the boardroom.
Boardroom tip number two, the phrase, "I don't know," alerts the board to your concerns. Right after the first vote, the jurors ask Fonda why he thinks the boy is not guilty. And he responds, "I don't know." The phrase, "I don't know," alerts the board that you have concerns that should be addressed in the meeting.
Boardroom tip number three, the phrase, "I have some questions," fuels deliberation. In this scene, Fonda explains why he thinks the boy may not be guilty. "There were a lot of questions I would've liked to ask in the courtroom." As a juror, Fonda has an excuse for not asking questions in the courtroom, but directors have no excuse for not asking questions in the boardroom. Asking questions in the boardroom is one of the best ways a director can add value to a boardroom discussion. Be skeptical, ask questions.
Boardroom tip number four, trust your gut. Fonda says he got "Got a peculiar feeling" about the trial and he explains why. "Everybody sounded so positive. Nothing is that positive. The defense let too many things go by, little things. It's possible for a lawyer to be just plain stupid. They're only people and people make mistakes. Could they be wrong?" In summary, it doesn't matter what you call it, intuition or a peculiar feeling or something else, you'll know it when you feel it. And if something doesn't feel right, even if you can't explain why, it's likely not right. In short, trust your gut.
Boardroom tip number five, pay strict attention. In this scene, the jury foreman tells Fonda that it's Fonda's turn to talk. Fonda replies that he didn't expect a turn and thought it had been agreed that all the other jurors were supposed to talk first. Quickly, one of the other jurors confirms this agreement by saying, "Yes, that was the idea." Like this juror who added value in the jury room by confirming what happened earlier, a director who pays strict attention in the boardroom adds value not only by possibly clarifying what was said earlier, but also by carefully listening to everything that was said in the meeting. Strict attention during the meeting may enable a director to make more informed judgements and decisions during and after the meeting.
Boardroom tip number six, it's okay to switch sides. In this scene, one juror suggests he may be changing his vote to not guilty, but another juror immediately accuses him of being disloyal to the group that voted guilty. However, in the jury room and in the boardroom it's okay switch sides. You shouldn't be loyal to one side or the other. A director's loyalty runs only to the corporation and its shareholders, never to a director or a group of directors. Therefore, during boardroom discussions and voting a director can switch sides as many times as he wants, as long as he remains loyal to the corporation and its shareholders.
Boardroom tip number seven, it's okay to forget something and ask to have your memory refreshed. In this scene, Fonda admits he forgot the exact location of a witness's bedroom and asked the jury foreman to request a trial exhibit. One of the other jurors ridicules Fonda, "I thought you remembered everything. Don't you remember that? How come you're the only one in this room asking for exhibits all the time?" Directors can feel better about forgetting something and needing their memory refreshed if they consider the story of Albert Einstein and his telephone number. One of Einstein's colleagues asked him for his telephone number. Einstein reached for a telephone book to look it up. "You don't remember your own telephone number?" The startled man asked Einstein. "No," Einstein answered. "Why should I memorize something I can easily get from a book?" Therefore, if Einstein didn't memorize his own telephone number, it's okay for a director not to memorize all the information he needs to know, and it's okay to have his memory refreshed.
Boardroom tip number eight, the chairman should point out good ideas. In this scene, the jury foreman points out a good idea proposed by another juror. The foreman says, "No, no, no. That's a good idea." The jury foreman and board chair are basically equivalent leadership positions. And one great way to show leadership is by recognizing good ideas.
Boardroom tip number nine, the chair should use the once around the table technique. The simplest and easy way to make sure each director has his say on an important issue is for the chair to ask each director to speak on the issue in their seating order around the boardroom table. This technique is appropriate to get newer directors and less confident directors to speak up, or to prevent one or two directors from dominating the discussion. Also, this technique is another great way for the chair to show leadership, and more importantly, ensure total participation by each director in the discussion. However, this technique should only be used when necessary, since not every agenda item deserves this time consuming but truly egalitarian technique.
And our final tip is boardroom tip number 10, the chair should eliminate sidebar conversations. In this scene, two jurors engage in a sidebar conversation and the foreman interrupts by rightly saying that sidebars slow down deliberations, and by asking them to join the full board discussion. In short, sidebars prevent full participation by the board in the discussion process and therefore undermine the process. However, sidebars do occur and the chair must handle them appropriately lest he lose control of the board meeting. The chair should interrupt the sidebar and ask them to join the full board discussion, and ask whether they would like to share the subject of their sidebar with the board. Sometimes the sidebar relates to issues being discussed by the board and adds value if shared with the whole board.
That concludes our program. Thanks for listening. I look forward to your comments, questions and suggestions. Also, please let me know if you'd like one of my business cards with the 10 commandments for the board and director bill of rights on the back.
