With the enactment of the financial regulation bill with its drastic improvement in proxy access terms appearing imminent, it is important to reflect on how corporate governance devotees need to respond. Specifically, we need to acknowledge that enhanced access is only one step –albeit a huge step – of the journey toward better governance, and that the performance of the newly empowered candidates and directors is equally important.
Simply getting non-management candidates onto proxy cards and boards will not suffice if such persons do not play a meaningful role in improving decision-making by holding management accountable and bringing about better decisions. In the first instance, this means that all candidates need to be thoroughly educated as to their substantive and procedural obligations, and willing to follow through accordingly. “Directors’ colleges,” if they are developed by organizations such as CALPERS, CalSTRS and TIAA-CREF for potential candidate pools, could be an excellent place to start.
While there is no shortage of good quality handbooks for this purpose which can and should be utilized, such as the Corporate Director’s Guidebook promulgated by the American Bar Association and http://www.tankless.com/assets/files/governanace/SKYE_Corporate_Governance.pdf [example of a specific company’s effort, emphasizing securities law] and http://www.flofr.com/banking/forms/dfi_directorhandbook08.pdf, [pertaining specifically to financial institution directors], especially with respect to the mechanical part of the job, they are far from sufficient. What is critical is that everyone on a board, genuinely participate in the substantive consideration of each material matter which is presented, and insist that all material matters be presented, and that appropriate consideration be given on an ongoing basis of whether prior decisions remain correct for the firm.
The focus must be on the quality of the decisions which emanate from boards. All directors, whether representative of minority holders or otherwise, must have or commit to promptly develop sufficient expertise in the matters pertaining to their firm’s business and industry in order to pursue their candidacy. More importantly they must use that capability. Simply causing the empanelment of candidates proposed by unions, pension funds, hedge funds or any other constituency will not of itself result in any improvement of board performance.
This means being willing and able to responsibly and knowledgably challenge management as to matters of business strategy in order to ensure a full vetting of material decisions, whether they are nominally in the ordinary course or involve traditionally characterized “major corporate transactions.” This requires not only using and understanding, but also critiquing the briefing books supplied by management, as well as recognizing their limitations and demanding additional material where needed.
In recent years, especially in the financial sector, we have seen far too many debacles result from either gradual changes in strategy or sudden changes outside the M&A or financing areas, not addressed in a meaningful manner by boards.
Prof. Eric Pan has written an excellent discussion of the board’s duty to monitor and how it needs to be implemented and refined, the current version of which is at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1593332. The author of this post has also suggested an additional focus by boards on outcomes instead of process, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1570111
All directors must remain cognizant of where their organization is – per financial statements – and where it appears to be headed, and push management to justify actions which appear to defy common sense, are not well supported or do not pass the “smell test.” Where it appears that major changes are afoot, but the board has not been properly consulted, someone needs to speak up.
Even where there is no doubt as to the use of proper process contemplated by statute or by Smith v. Van Gorkom, Revlon, etc., directors must keep in mind whether the decisional outcome of this process makes sense in the broader context.
Similarly, where it appears that a decision which was previously and properly made is no longer appropriate on account of changed circumstances, new information or simply is not working out as hoped, someone needs to speak up before it is too late for the individual firm or the economy.
Proxy access is a powerful tool in the effort to improve governance, but like all other tools, it must be used judiciously, but vigorously when necessary, and in conjunction with other appropriate tools.
Publisher’s Note: Thanks for guest post from Martin B. Robins, an adjunct professor in the Law School of Northwestern University. He is presently, and for the past 10 years has been, the principal of the Law Office of Martin B. Robins where his practice emphasizes acquisitions and financings, technology procurement and licensing, executive employment and business start-ups. The firm represents clients of all sizes, from multinational corporations to medium sized businesses to start-ups and individuals.