Counseling the Corporate Board

For many directors, the lawyer should be able to review publicly available information. One way is through the annual report of the company, which provides the most basic of biographical information. Another way is by Googling each director, which provides news articles, other board memberships, lawsuits, club memberships and so forth. This basic information provides insight into the seniority and experience of the director, the rationale for the particular member's inclusion on the board and the role the particular directors play on the board.

Insight into a directors motivations, interests, skills, experience and perspective is critical to counseling the board. Is this director serving because of general financial independence or dependence to the corporation? Does the director have some expertise, experience, financial control, interconnection or some other special skill? Is the director active, interested and engaged? Is the director socially connected to others on the board either through personal friendships, other business or civic boards, other clubs or political affiliations? Is the director an opinion leader? Does the director have alliances with other directors? How does the director approach issues? Deductively? Intuitively? Financially? Is the director knowledgeable about, or experienced in, particular matters? Knowing the answers to these questions informs the lawyer not only about the director, but also about the dynamics of the board as a whole.

Another, more formal, way of understanding the board is to conduct self-evaluations and assessments of the board as a whole. Using standard rankings and open-ended comments, a self-evaluation questionnaire may ask the board to reflect on its efficiency and functionality. Further, the questionnaire may solicit feedback on a number of crucial board aspects, including board meeting mechanics (adequacy of pre-meeting information, agenda setting, between meeting communications), board meeting content and conduct (balance between strategy and operations, coverage of corporate governance issues, time for discussion), the board's general organization (number of board members, exposure and access to management, mix of skills present on the board), the board's practices (CEO performance review, board member selection processes, compensation of directors), and the board's performance (rate of meeting attendance, involvement during meetings, general level of understanding the business strategies in play). This information will increase counsel's acumen for dealing with the board and the board's concerns.

The Formal and Informal Board

The way the board is formally organized to accomplish its mission is important to understanding the board. The organization of the board is also critical to understanding the members and how they interrelate. Who prepares the board agenda? Management? The board chair? The CEO? Also critical is what information and materials the board receives, and when it is received. Does the board receive materials 'just in time' for the meeting? Finally, the formal committee structure influences how board members interact and what individual skills are amplified or muted when committees make decisions.

Beyond the formal organization, the board typically will have informal opinion leaders and informal blocs of members who tend to understand issues in a similar way. Of course, there is no guidebook on these social issues. But by observing a board interact on different issues, the general counsel should be in a position to understand which members lead opinion on which issues and which members tend to understand issues in similar ways. So, the lawyer needs to understand that boards function on an informal, as well as a formal, level.

Indeed, most boards reach decisions by consensus and unanimity. Consensus is generally considered the preferred outcome. In a well-run organization, the consensus-building process ultimately airs all issues and accommodates all views, perspectives and arguments. Consensus is oftentimes reached not at formal board meetings, but through other, offline conversations among board members. Recognizing that, the lawyer must be prepared to advise not only at the board meeting, but also in response to informal discussion between meetings. Far from being a passive observer, the lawyer can proactively identify issues for consideration, suggest ways to build consensus and address the types of issues that will be of concern to her board members.

Common Concerns

The common concerns of the corporate board should be the concerns of its lawyers. Lawyers familiar with the directors will best be able to predict the concerns of the boards as a whole. While the concerns of directors will naturally vary, directors are commonly concerned about themselves and their reputations, their potential legal liability, and the governance of the company. They know and understand that their reputations are critical and act to preserve and to enhance their reputations. Directors are ' and should be ' concerned with whether the conduct of the board is appropriate if examined under a microscope in litigation, or more broadly, in the media. And, like everyone else, directors react to media reports about hot issues such as backdating stock option grants, executive compensation, Sarbanes-Oxley, new SEC rules and regulations, personal director liability and the state of pension reform.

Also, directors are concerned with the risk and reward of board service. What do they give? What do they get? Board members serve on boards for many reasons, ranging from the benefit of being important to a business enterprise, to the economic benefit, to board compensation or other things that may enhance their reputations and careers. These costs and benefits often fall into similar columns, including financial gain and liability, prestige, time, commitment and interconnections to the board member's career stage.

Directors are concerned about their own personal legal and risk liability. In the wake of corporate scandals, legal risk and liability often tops the list of directors' concerns. Demystifying the subject of the board's legal liability, and the general scheme for the board's legal liability, aids to inform concerned board members. Major topics to be discussed include how the company indemnifies the board under the ruling state law, the proper exercise of fiduciary duties, directors' and officers' liability insurance and the basic laws regarding bankruptcy or insolvency. Further, CEOs and CFOs will have particular issues with certification requirements; all members on the board who own stock will need to be schooled in insider-trading laws; and other specialized roles (lead directors, non-executive chairmen, financial experts, et al.) will have concerns unique to their position and directives.

Directors are also concerned with corporate governance. Is the governance structure 'state of the art'? The effectiveness of the governance structure involves the creation, sustaining, and efficacy of corporate governance committees. Looking to a case study, the Whirlpool Corporation created such a committee to provide oversight on the broad range of issues surrounding the composition and operation of its Board of Directors. The committee aimed to assure the composition, practices, and operation of Whirlpool's board of Directors contributed to value creation and effective representation of Whirlpool shareholders. With members appointed and removed by the board, the committee focused on specific duties, including the evaluation and creation of recommendations to the full board concerning the number and accountability of board committees, committee assignments and committee membership rotation practices. Further, this committee regularly reviewed corporate governance issues and offered routes the board could take in Director orientation, compensation and continuing education. Lastly, the committee led the annual evaluation of its performance in accordance with applicable NYSE listing rules and law. These goals, while specific to the corporate governance committee, were not necessarily thrust only upon this one body; for example, the audit committee, finance committee and human resources committee connect with similar tasks to ensure that the corporate governance committee does not serve as the only adviser to Whirlpool's Board of Directors in regards of diligence to corporate governance. Together, these committees build a coalition that places the Board in a more educated and, connectedly, more efficient position to comply with the latest laws regarding corporate governance.

To Split or Not to Split

Many corporate boards face a critical question: Should the CEO and the Chairman of the corporation be the same person? If so, the board must agree on how that division will occur. The lawyer needs to counsel on the legal and practical effect of such a division. Clarity on the specific duties helps engender cooperation and boundaries between the two appointed individuals, a notably important function when the previously titled Chairman and CEO may fill only one of the two newly created positions. Generally, the Chairman will set agendas for the board meetings, work as a conciliator and moderator at board meetings, set the structure of the corporate board with committee assistance, serve as a liaison between committees and the board, and, in sum, ensure the board actualizes the corporation's set strategy. The CEO, on the other hand, needs to focus on longitudinal goals, including being a public relations personality to major players, building an operational and cohesive executive team and assuming responsibility to the board for the corporation's performance. Again, remember that these duties will bend and mold to what the board needs and wants; counsel, though, should be prepared to offer advice on these matters.

What Does Counsel Tell the Board?

Once the makeup and ethos of the board are understood, the main goal of actually advising the board comes into focus. What does the lawyer actually tell the board? Lawyers may find it best to start with the basics in order to make sure that no board member is uneducated, and then proceed at a conforming pace.

A primary place to start educating the board is in the area of basic fiduciary duties. At the foundation of fiduciary duties lies the difference between the duty of care (good faith and in the best interest of the corporation), the business judgment rule (no judicial second guessing absent gross negligence or conflict of interest) and the duty of loyalty (the corporation should be placed before personal loyalties). As to the duty of care, the Caremark doctrine says corporate directors have a duty not only to exercise care in their decisions, but also to ensure proper oversight procedures for the company. See, In re: Caremark International, Inc. Derivative Litiga-tion, 698 A.2d 959, 969 (Del. Ch. 1996). The duty of loyalty, however, puts forward that transactions may be rescinded and that personal liability may fall to the Director, as there exists no indemnification for misstatements. When discussing the concepts central to basic fiduciary duties, counsel should emphasize dynamic process orientation to the duties and encourage continuing education regarding what exact fiduciary duties apply to the corporate board being advised.

The lawyers should also impart the basics of federal securities law, again conforming issues to the knowledge basis previously held by the board. For example, the lawyer should explain that under Section 11 of the Securities Act, directors may be held liable for untrue statements of material fact, or any failure to state a material fact, in an effective registration statement. A due diligence defense may be used against such liability claims. If a director can show, after reasonable investigation, that the director had reasonable ground to believe, and did believe, that the misstatements made in the registration were true and contained no material omission, then that director is not liable. See, Escott v. BarChris Const. Corp., 283 F. Supp. 643, 687-92 (S.D.N.Y. 1968). Another example: The lawyer should explain director liability as 'controlling persons' under Exchange Act '20(a), which imposes liability for actions committed by another person under direct or indirect control of a defendant. See, In re: JWP Inc. Securities Litigation, 928 F. Supp. 1293, 1259-61 (1996). Directly, there is no liability if the controlling person acted in good faith and did not induce the other person to commit the violation; directorship alone does not create a controlling position.

After these basics of fiduciary and securities law, a host of topical and shifting topics surface that requires an increase in the level of familiarity and compliance with the law. Remember that when the hot topics of Sarbanes-Oxley, NASDAQ and NYSE requirements either shift or are replaced in substance, they will be replaced by the latest brigade of issues pertinent to corporate boards. Again, the best way to approach these topics is through the general best practices for dealing with the corporate board: learn the individuals on, and the structure of, the corporate board being advised, educate oneself about potential concerns, and facilitate a discourse that best highlights the skills and abilities of the corporate board.

The lawyer needs to be prepared to address these concerns proactively before, and as, they arise. For example, a ready explanation of how pension reform will affect the company is something every board lawyer should be prepared to address; or, how a new SEC rule or accounting rule affects the company. Moreover, the lawyer should be able to address and put into context the communal and individual concerns of board members. In recent years, the reports from WorldCom have made board members more concerned about their personal liability; instead of inundating the board with unintelligible PowerPoint presentations of how directors and officers liability coverage works, the board lawyer should explain the rarity of the Worldcom situation, the way in which most state corporate law regimes allow the corporation to indemnify board members, and a simplified explanation of directors' and officers' liability policies as they pertain to the company. Measured advice is prudent.

In most instances, board members turn to the general counsel to advise them. However, the general counsel is the lawyer for the company and sits as part of the organization. As a matter of sound corporate governance, on some occasions the board, or one of its committees, may need independent or special counsel to conduct an investigation or counsel on an issue. On other occasions, directors choose to turn to their own personal lawyer to receive advice on any number of issues of personal concern, such as insurance coverage, asset protection or their role on multiple boards. Another method is to make available to the directors, at the company's expense, a pre-selected lawyer to whom the board can turn for independent advice. The proper mixture of internal and external advice will be idiosyncratic to each board, but generally, the board members will find that they receive ample advise from the general counsel.

The composition of the modern corporate board has evolved into a complex and sophisticated governing body that places increasing demands on the lawyers. In the post Enron and Sarbanes-Oxley world, corporate boards continue to be comprised of directors with their own myriad personal and business agendas. These boards, however, have also become more mindful and responsive to watchdog agencies, and have a renewed focus on board independence, financial expertise and diversity. There is, therefore, an increased need for adaptable, experienced, and informed lawyers ' both in house as well as outside a given company ' to counsel the board and its members on these and other controversial issues. The best practices for doing so, including those addressing how to better understand the client board's structure, culture and goals, as well as the board member's personal concerns, is the subject of this piece.

Getting to Know You (and You and You and You)

The corporate board is not a monolithic group. Rather it is the sum of its constituent directors. Advising the board necessarily requires advising the individual directors. In order to effectively advise the board, lawyers need to know the individual directors, which provides a solid foundation for counseling the board on a panoply of issues.

For many directors, the lawyer should be able to review publicly available information. One way is through the annual report of the company, which provides the most basic of biographical information. Another way is by Googling each director, which provides news articles, other board memberships, lawsuits, club memberships and so forth. This basic information provides insight into the seniority and experience of the director, the rationale for the particular member's inclusion on the board and the role the particular directors play on the board.

Insight into a directors motivations, interests, skills, experience and perspective is critical to counseling the board. Is this director serving because of general financial independence or dependence to the corporation? Does the director have some expertise, experience, financial control, interconnection or some other special skill? Is the director active, interested and engaged? Is the director socially connected to others on the board either through personal friendships, other business or civic boards, other clubs or political affiliations? Is the director an opinion leader? Does the director have alliances with other directors? How does the director approach issues? Deductively? Intuitively? Financially? Is the director knowledgeable about, or experienced in, particular matters? Knowing the answers to these questions informs the lawyer not only about the director, but also about the dynamics of the board as a whole.

Another, more formal, way of understanding the board is to conduct self-evaluations and assessments of the board as a whole. Using standard rankings and open-ended comments, a self-evaluation questionnaire may ask the board to reflect on its efficiency and functionality. Further, the questionnaire may solicit feedback on a number of crucial board aspects, including board meeting mechanics (adequacy of pre-meeting information, agenda setting, between meeting communications), board meeting content and conduct (balance between strategy and operations, coverage of corporate governance issues, time for discussion), the board's general organization (number of board members, exposure and access to management, mix of skills present on the board), the board's practices (CEO performance review, board member selection processes, compensation of directors), and the board's performance (rate of meeting attendance, involvement during meetings, general level of understanding the business strategies in play). This information will increase counsel's acumen for dealing with the board and the board's concerns.

The Formal and Informal Board

The way the board is formally organized to accomplish its mission is important to understanding the board. The organization of the board is also critical to understanding the members and how they interrelate. Who prepares the board agenda? Management? The board chair? The CEO? Also critical is what information and materials the board receives, and when it is received. Does the board receive materials 'just in time' for the meeting? Finally, the formal committee structure influences how board members interact and what individual skills are amplified or muted when committees make decisions.

Beyond the formal organization, the board typically will have informal opinion leaders and informal blocs of members who tend to understand issues in a similar way. Of course, there is no guidebook on these social issues. But by observing a board interact on different issues, the general counsel should be in a position to understand which members lead opinion on which issues and which members tend to understand issues in similar ways. So, the lawyer needs to understand that boards function on an informal, as well as a formal, level.

Indeed, most boards reach decisions by consensus and unanimity. Consensus is generally considered the preferred outcome. In a well-run organization, the consensus-building process ultimately airs all issues and accommodates all views, perspectives and arguments. Consensus is oftentimes reached not at formal board meetings, but through other, offline conversations among board members. Recognizing that, the lawyer must be prepared to advise not only at the board meeting, but also in response to informal discussion between meetings. Far from being a passive observer, the lawyer can proactively identify issues for consideration, suggest ways to build consensus and address the types of issues that will be of concern to her board members.

Common Concerns

The common concerns of the corporate board should be the concerns of its lawyers. Lawyers familiar with the directors will best be able to predict the concerns of the boards as a whole. While the concerns of directors will naturally vary, directors are commonly concerned about themselves and their reputations, their potential legal liability, and the governance of the company. They know and understand that their reputations are critical and act to preserve and to enhance their reputations. Directors are ' and should be ' concerned with whether the conduct of the board is appropriate if examined under a microscope in litigation, or more broadly, in the media. And, like everyone else, directors react to media reports about hot issues such as backdating stock option grants, executive compensation, Sarbanes-Oxley, new SEC rules and regulations, personal director liability and the state of pension reform.

Also, directors are concerned with the risk and reward of board service. What do they give? What do they get? Board members serve on boards for many reasons, ranging from the benefit of being important to a business enterprise, to the economic benefit, to board compensation or other things that may enhance their reputations and careers. These costs and benefits often fall into similar columns, including financial gain and liability, prestige, time, commitment and interconnections to the board member's career stage.

Directors are concerned about their own personal legal and risk liability. In the wake of corporate scandals, legal risk and liability often tops the list of directors' concerns. Demystifying the subject of the board's legal liability, and the general scheme for the board's legal liability, aids to inform concerned board members. Major topics to be discussed include how the company indemnifies the board under the ruling state law, the proper exercise of fiduciary duties, directors' and officers' liability insurance and the basic laws regarding bankruptcy or insolvency. Further, CEOs and CFOs will have particular issues with certification requirements; all members on the board who own stock will need to be schooled in insider-trading laws; and other specialized roles (lead directors, non-executive chairmen, financial experts, et al.) will have concerns unique to their position and directives.

Directors are also concerned with corporate governance. Is the governance structure 'state of the art'? The effectiveness of the governance structure involves the creation, sustaining, and efficacy of corporate governance committees. Looking to a case study, the Whirlpool Corporation created such a committee to provide oversight on the broad range of issues surrounding the composition and operation of its Board of Directors. The committee aimed to assure the composition, practices, and operation of Whirlpool's board of Directors contributed to value creation and effective representation of Whirlpool shareholders. With members appointed and removed by the board, the committee focused on specific duties, including the evaluation and creation of recommendations to the full board concerning the number and accountability of board committees, committee assignments and committee membership rotation practices. Further, this committee regularly reviewed corporate governance issues and offered routes the board could take in Director orientation, compensation and continuing education. Lastly, the committee led the annual evaluation of its performance in accordance with applicable NYSE listing rules and law. These goals, while specific to the corporate governance committee, were not necessarily thrust only upon this one body; for example, the audit committee, finance committee and human resources committee connect with similar tasks to ensure that the corporate governance committee does not serve as the only adviser to Whirlpool's Board of Directors in regards of diligence to corporate governance. Together, these committees build a coalition that places the Board in a more educated and, connectedly, more efficient position to comply with the latest laws regarding corporate governance.

To Split or Not to Split

Many corporate boards face a critical question: Should the CEO and the Chairman of the corporation be the same person? If so, the board must agree on how that division will occur. The lawyer needs to counsel on the legal and practical effect of such a division. Clarity on the specific duties helps engender cooperation and boundaries between the two appointed individuals, a notably important function when the previously titled Chairman and CEO may fill only one of the two newly created positions. Generally, the Chairman will set agendas for the board meetings, work as a conciliator and moderator at board meetings, set the structure of the corporate board with committee assistance, serve as a liaison between committees and the board, and, in sum, ensure the board actualizes the corporation's set strategy. The CEO, on the other hand, needs to focus on longitudinal goals, including being a public relations personality to major players, building an operational and cohesive executive team and assuming responsibility to the board for the corporation's performance. Again, remember that these duties will bend and mold to what the board needs and wants; counsel, though, should be prepared to offer advice on these matters.

What Does Counsel Tell the Board?

Once the makeup and ethos of the board are understood, the main goal of actually advising the board comes into focus. What does the lawyer actually tell the board? Lawyers may find it best to start with the basics in order to make sure that no board member is uneducated, and then proceed at a conforming pace.

A primary place to start educating the board is in the area of basic fiduciary duties. At the foundation of fiduciary duties lies the difference between the duty of care (good faith and in the best interest of the corporation), the business judgment rule (no judicial second guessing absent gross negligence or conflict of interest) and the duty of loyalty (the corporation should be placed before personal loyalties). As to the duty of care, the Caremark doctrine says corporate directors have a duty not only to exercise care in their decisions, but also to ensure proper oversight procedures for the company. See, In re: Caremark International, Inc. Derivative Litiga-tion, 698 A.2d 959, 969 (Del. Ch. 1996). The duty of loyalty, however, puts forward that transactions may be rescinded and that personal liability may fall to the Director, as there exists no indemnification for misstatements. When discussing the concepts central to basic fiduciary duties, counsel should emphasize dynamic process orientation to the duties and encourage continuing education regarding what exact fiduciary duties apply to the corporate board being advised.

The lawyers should also impart the basics of federal securities law, again conforming issues to the knowledge basis previously held by the board. For example, the lawyer should explain that under Section 11 of the Securities Act, directors may be held liable for untrue statements of material fact, or any failure to state a material fact, in an effective registration statement. A due diligence defense may be used against such liability claims. If a director can show, after reasonable investigation, that the director had reasonable ground to believe, and did believe, that the misstatements made in the registration were true and contained no material omission, then that director is not liable. See , Escott v. BarChris Const. Corp. , 283 F. Supp. 643, 687-92 (S.D.N.Y. 1968). Another example: The lawyer should explain director liability as 'controlling persons' under Exchange Act '20(a), which imposes liability for actions committed by another person under direct or indirect control of a defendant. See, In re: JWP Inc. Securities Litigation, 928 F. Supp. 1293, 1259-61 (1996). Directly, there is no liability if the controlling person acted in good faith and did not induce the other person to commit the violation; directorship alone does not create a controlling position.

After these basics of fiduciary and securities law, a host of topical and shifting topics surface that requires an increase in the level of familiarity and compliance with the law. Remember that when the hot topics of Sarbanes-Oxley, NASDAQ and NYSE requirements either shift or are replaced in substance, they will be replaced by the latest brigade of issues pertinent to corporate boards. Again, the best way to approach these topics is through the general best practices for dealing with the corporate board: learn the individuals on, and the structure of, the corporate board being advised, educate oneself about potential concerns, and facilitate a discourse that best highlights the skills and abilities of the corporate board.

The lawyer needs to be prepared to address these concerns proactively before, and as, they arise. For example, a ready explanation of how pension reform will affect the company is something every board lawyer should be prepared to address; or, how a new SEC rule or accounting rule affects the company. Moreover, the lawyer should be able to address and put into context the communal and individual concerns of board members. In recent years, the reports from WorldCom have made board members more concerned about their personal liability; instead of inundating the board with unintelligible PowerPoint presentations of how directors and officers liability coverage works, the board lawyer should explain the rarity of the Worldcom situation, the way in which most state corporate law regimes allow the corporation to indemnify board members, and a simplified explanation of directors' and officers' liability policies as they pertain to the company. Measured advice is prudent.

In most instances, board members turn to the general counsel to advise them. However, the general counsel is the lawyer for the company and sits as part of the organization. As a matter of sound corporate governance, on some occasions the board, or one of its committees, may need independent or special counsel to conduct an investigation or counsel on an issue. On other occasions, directors choose to turn to their own personal lawyer to receive advice on any number of issues of personal concern, such as insurance coverage, asset protection or their role on multiple boards. Another method is to make available to the directors, at the company's expense, a pre-selected lawyer to whom the board can turn for independent advice. The proper mixture of internal and external advice will be idiosyncratic to each board, but generally, the board members will find that they receive ample advise from the general counsel.