Governance 101 For Directors With Two Hats
from
March/April 2006
by Constance Loizos
More and more venture capitalists, members of buyout firms, and
other big-time investors are joining the boards of companies in which
their businesses have a stake. That can be good news for the
individuals, who get a chance to make important new contacts while
keeping an eye on their outfit’s money, and for the companies
themselves.
Says Kurt Jaggers, a managing director at TA Associates, a private-equity buyout firm headquartered in Boston, “Boards have to have a combination of skill sets. People with operating experience are always key, but half of the issues you run into are financial. How do you structure an acquisition? How do you position the company to investors?” Like others at his firm, Jaggers has firsthand experience of this. He’s a director of WebSideStory, which sells software that lets you monitor website activity and which went public in 2004. TA is a “significant” shareholder in the company, he says.
But investors who serve on boards may have conflicting interests. This was at issue four years ago in a celebrity-studded lawsuit involving Martha Stewart Living Omnimedia Inc.; Kleiner Perkins Caufield & Byers, Silicon Valley’s legendary venture capital firm and a big investor in Omnimedia; and John Doerr, a partner in the firm and also an Omnimedia director. Omnimedia shareholders sued Doerr and Kleiner Perkins after learning that the firm had sold some $29 million in stock shortly before news of Stewart’s legal problems became public. The suit was dropped, but the investment firm’s reputation took a drubbing. To prevent a repeat, the firm set up a policy by which “if KP owns shares and we have some kind of decision to make about those shares, we do it without that person who’s a board member being present, period,” says a Kleiner Perkins insider.
Anybody who wears the two hats of investment-firm partner and board member should insist that the firm and the company set up a similar Chinese Wall, and put it in writing. Some think this may not go far enough. Carl Metzger, a partner in the litigation group of the Boston law firm Goodwin Procter LLP, says stock can still be unloaded “on a wink and a nod. Just because a person on a board didn’t participate in the decision doesn’t mean that the SEC or a plaintiff’s class-action attorney won’t come knocking.”
Metzger says a better way to prevent lawsuits is for the investment firm to establish a so-called 10b5-1 trading plan, which sets up a program for trading the company’s stock based on a predetermined schedule or prices. With one of these filed with the SEC, he says, the investor-director and his firm are protected against accusations of insider trading.
Goodwin Procter’s clients include enough venture capital and private-equity firms whose members have joined boards that it dispatched an “informational newsletter” outlining 12 boardroom danger areas. Some will seem old-hat to directors with time under their belts (executive compensation is “a minefield”). Other risks are more specific to directors who also wear the investor’s hat. In particular, mergers-and-acquisitions activity is “one of the riskiest danger zones,” and “most people think that insider trading is something done by crooks or fools or both. In fact, the insider trading rules can be highly technical traps for the unwary or unlucky alike, and it is easy for even careful and well-intentioned directors to find themselves in situations where they are investigated for possible unlawful insider trading.” So if an M&A is being discussed, the investor-director should either vote in the best interests of the company or abstain from board deliberations and voting.
And, again, put the policy in writing.
