One Board’s Learning Curve
from March/April 2003
Betsy Atkins has served on various boards—including Lucent Technologies’, where she was a member of the audit committee—and has experienced shareholder suits firsthand. Here’s a lesson for directors from one of those cases.
A software company, Company X, as we’ll call it, was in a brutally competitive environment where many smaller companies were underpricing it in a desperate effort to stay in business. These weaker competitors had inferior products but were gaining significant market share.
To get information about this below-market pricing, Company X hired the sales representative of a weakened competitor. The new hire brought her old company’s price list with her when she changed jobs. Although Company X had a corporate code of conduct prohibiting the theft of proprietary competitive information, it did not enforce it. In fact, Company X was so excited about obtaining the price list that it published it on the company intranet. The weakened competitor brought suit—against the company and its board—and obviously had a very strong case.
This situation was brought belatedly to the board’s attention after management recognized the possible cost of the suit. In response, the board immediately formed a special litigation investigative committee of directors to determine how far up the management chain the problem had gone, investigate the behavior of the involved employees, and recommend to the full board what corrective actions should be taken.
The special committee engaged independent legal counsel, answerable only to the board, to advise it. These lawyers concluded that the facts of the case were “unfriendly” to the company, that the plaintiff might win a huge judgment, and that the legal costs of fighting the case could be enormously high. In the face of those risks, the advice was to settle. The board agreed, and Company X did so for about half the amount that the board’s lawyers had thought the plaintiffs might win in court.
Looking back, it’s clear that the board was not informed until way too late that the company had become legally compromised and was vulnerable to a costly lawsuit. A big reason for this was that the internal lawyers were focused on damage control and did not want to raise the issue with the board. They were conflicted by loyalty to their client, the corporation, and were subjected to inside political pressure in their reporting chain. Consulting Company X’s outside law firm was not the right course for the board either. For one thing, the firm’s objectivity could be compromised by the desire to preserve relationships with inside counsel and the company’s top management. Only when the special committee hired its own lawyers to assess the plaintiff’s case was the board able to make an informed business judgment about how to proceed.
