Outside Board Advisors—When to Use…or Not to Use
Posted November 6, 2009 9:56:40
It has been an interesting several weeks for anyone who is curious like me about the inner workings of corporate law and its effect on the boardroom and governance as a whole. First, we had Stephen Lamb as our knowledge partner on “This Week in the Boardroom” discussing the liability of serving as a director on one of today’s public company boards. Stephen is the former Vice Chancellor of the Delaware Court of Chancery and is now a partner with the law firm of Paul, Weiss, Rifkind, Wharton & Garrison LLP. Then yesterday, I had the pleasure of partaking in some governance banter with William Allen, the former Chancellor of the Delaware Court of Chancery and Director of the Center for Law and Business at NYU. Bill serves on Corporate Board Member’s Academic Council and visited This Week in the Boardroom as a guest on our education segment.
In the past, Bill and I have had what might be described as some emotionally charged discussions about when boards should seek outside advisors if they are facing a critical board decision that could significantly affect a company’s performance and shareholder value. Now I’m not talking about an M&A transaction or a FCPA lawsuit, where outside counsel and/or forensic investigators are a must. But say there is a billion-dollar capital expense that involves technology that forms the basis for a new company direction, or a proposed $100 million off-balance-sheet transaction that is not standard in the industry. In this very litigious and ever more transparent bubble in which directors must govern, is there any guideline, both “liability-wise” and “health of the company wise,” that says “our board doesn’t have the expertise in this area even to ask the right questions, so should we get professional help?” And even if you forget the personal liability issue, many fear the company or director reputational blemish more than the remote chance that you would be personally liable.
Actually, Bill and I agree on most of the foundations from which to make that decision. Those are:
1) Start with selecting and trusting the right management. If you are on solid ground with trusting the CEO and key officers, you can feel very confident with the background that they provide for important decisions.
2) You can’t hire outside advisors for every decision the board doesn’t feel comfortable with. Yes, you have the duty as a director to be informed and ask questions, but the law does provide for a board to make mistakes if it makes an honest effort to be informed. (Again, that may not help a reputational disaster, but many of those are hard to predict anyway and you just can’t tiptoe around the boardroom and expect to be a good board.)
3) You are on the board, at least partially, because of your good judgment. Not much these days is really black and white, so using one’s experience and listening to your gut is often required.
Despite our agreement on the above, we had trouble pinning down when the risk magnitude of the decision requires a board member to ensure (even past management’s information) that he or she is supporting the right recommendation or direction and not potentially putting the company in financial or reputational peril. After 20 minutes of debate we jointly acknowledged that while those situations do occur, there is no way to create a standard or guideline that covers when to seek paid professional advice to help with board decision making.
Furthermore, as we all know, hiring outside advisors is no guarantee that you will have solved your informational gap and will blissfully walk away fat, dumb, and happy. As stated above, you would be equally foolish not to use professional advisors in many governance and operation scenarios, but deciding when it makes sense is not something on which this blog will be able to give you absolute guidance. My best advice is to recount a discussion a director had with me in my bank leadership days after we recommended to the board that we truncate customers’ checks and then just send them an electronic listing without the actual checks. His words were, “This sounds like a giant dissatisfier for our customers, but I trust that your team has thought this through.” Fortunately, for us, we had!