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| Best Practices |
Constructive Contention
Suzanne McGee
06/01/2004
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Last autumn, Robert Mattson, co-chair of the corporate finance group in the
Irvine, Calif., offices of the global law firm Morrison & Foerster, received
a frantic telephone call from one of his clients, an anxious and slightly
irritated chief executive of a publicly traded, midsize software
company.
“He called to tell me that his directors had changed their
spots,” Mattson recalls. Instead of quickly approving the CEO’s plans for the
company, as they had done in the past, and as he had grown to expect, the
directors had started asking for additional data and analytical reports on even
the most routine proposals. Suddenly the company’s passive board had
become an active, questioning one. The flabbergasted CEO had no idea how to
respond, but Mattson did: “I told him he would have to find a way to live with
this and win them over,” he remembers. The days of independent directors opting
for dignified silence rather than risk being labeled troublemakers are vanishing
in the wake of the scandals that tarnished the directors of Enron, Tyco,
WorldCom and other companies.
Traditionally, boards were more than just
collegial—they were made up of cronies. It was not until 1962 that a Delaware
court articulated the “prudent man” rule, stating “directors of a corporation in
managing the corporate affairs are bound to use that amount of care which
ordinarily careful and prudent men would use in similar circumstances.” It was
not until 1978 that the American Bankers Association spelled out in its handbook
for directors that a board member’s responsibility to the business and its
shareholders must take precedence over the director’s individual interests, and
that the motivation in sitting on a board should not be to pursue personal
financial, professional or social gain. Most of the structures that governance
experts recognize as “best practices’—staffing an audit committee with
financially savvy individuals, keeping management off nominating and
compensation committees, excluding management from some portion of board
meetings to allow independent directors to speak more openly—have become
required by regulators only in the past two years.
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