Board of Director's Duties

7/27/2019 Board of Director's Duties

1/22

Board of Directors:represent shareholders

Shareholders

Board ofDirectors

Management

Complex Operations

Legallyresponsible forthe firm, butmgt has time,

expertise,infrastructure

Theory: mgtserves theboard.Reality?


2/22

Board Composition

Size: Average 12 15 directors.

Outside directors: Average 75 80%

Insiders: Average 3

Diversity:

1 in 6 is a woman

1 in 8 not a corporate executive

2/3s have minorities


3/22

Board Committees

Audit

Nominating (sometimes corporategovernance)

Compensation

Executive

Insiders only?

Includes CEO / senior executives?Human resources


4/22

Boards of Directors:Duties and Functions

1. Select, evaluate, replace senior

management.2. Oversee: Strategies, management of

corporate resources.

3. Review, approve major plans and

actions.

4. Other functions prescribed by law.


5/22

Details of Directors Functions

Review financials and financial projections

Set long-term (strategic) goals

Set capital structure

Approve major debt financings Oversee resource allocations (investment)

Dividend policy

R & D Monitor competition

Evaluate global prospects


6/22

Director Liability

Adverse events causing losses toshareholders where directors failed toinform themselves and failed to assure thatthere was an adequate information andreporting system in place (= lack of goodfaith).


7/22

Concealing Informationfrom Directors

Case of RJR Nabisco and smokelesscigarette. CEO bought off directors with

elaborate perquisites.

Tambrands: CEO concealed information;rewarded friendly consulting firm.


8/22

Boards Must Command Information

Management sets agenda; discusses mattersit is interested in, avoids negative reflection

Test: Outside directors should be able to

discuss company matters knowledgeably Need more than financial information:

customer and employees opinions, quality etc.

Push and pull: Management providesbriefing, directors must demand otherinformation.


9/22

New Laws and Regulations:Sarbanes-Oxley and NYSE CG Rules

Board must have majority of independents

Audit committee must be totally independent withone or more financial experts

Outside audit firms activities restricted Management must certify for financial results

Criminal penalties for managers

New independence standards for directors

Whistleblower protections Requires code of corporate ethics.

Recommend director Code of Ethics

Governance committees recommended.


10/22

Defining Director Independence:SEC and SROs

A dependent director would be:

An employee of the company or affiliate in past threeyears

A material business relationship with the company inpast 3 years

An executive in another corporation wherecompanys executives serve on that firmscompensation committee or being a family memberof firm or affiliates in past 3 years

Financial literacy and / or accounting experience


11/22

CEO-Chairman: Duality

Duality: Chairman and CEO are same person

Makes mgt accountable to body led by mgt!CEO evaluating his / her own performance

In U.S.: 93% duality; in U.K. 33% Potential for conflict: Must give mgt enough

flexibility while maintaining accountability toshareholders

Proponents: Better strategic visioning, goalconsistency, objectives and strategies, clear-cut leadership and mgt responsibility.


12/22

Generalized Best Practices

Select the right directors

Train directors continuously

Give them the right information

Balance of power between CEO and directors

Nuture culture of collegial questioning

Enough commitment of time from directors

Measure board performance and improve


13/22

Selecting the Right Directors

1. Skills, expertise, personality

2. Diverse skills and knowledge moreimportant than insider-outsider balance

3. Portfolio of knowledge, businessacumen, technical know-how.

4. Support debate, dissent, active

engagement, rigorous discussion, charm,toughness

5. Willing to challenge management

6. Policing and exposing conflicts of interest


14/22

Anti-Takeover Defenses

Conflict in resisting takeovers: Interests ofmanagement, directors and shareholders

Managers and directors may try to protecttheir own interests to detriment ofshareholders.


15/22


16/22

Trans Union case cont.

Board approved but one shareholder sued

Court upheld suit, found directors grosslynegligent

Issue was not a wrong price

Issue was the faulty process

Board gave in too easily, failed in their

f iduc iary duty


17/22

Unocal vs . Revlon

Revlon adopted poison pill in reaction toPantry Prides offer of $45 per share.

PP raised offer to $53.

Directors found white knight who wouldoffer $54 and sold.

Court found board played favorites with

white knight: should have opened to freebidding and found best price.


18/22

Greenmail

Example: Raider takes large stake incompany, express interest in takeover

Management resists, offers to buy himout at large premium over market price.

Raider gets huge profits without evenbidding for firm. Managers keep jobs.

Shareholders get drpo in market priceof their stock.


19/22

Greenmail Example

Bass Bros. acquire 9.9% of Texaco stock,expressed interest in the other 90.1%.

Texcao paid $1.3 billion ($55 per share), $137

million over market price. Outside shareholders got $35 per share.


20/22


21/22

Poison Pills cont.

Flip-in Pill: Shareholders get right tobuy or sell shares in target company ata great price

Flip-over Pill: Shareholders get right tobuy or sell shares from acquirercompany at great price (e.g. 50%discount). Creates huge dilution ofacquirers company.

Chewable Pill:


22/22

Other Anti-Takeover Tools

White Knight: Friendly third party whoagrees to buy large block of shares tokeep it out of acquirers hands.

Sometimes a leveraged knight whobuys stock with larger voting power.

Crown Jewel: Target company sellsor locks-up its most valuable assets.

Pac-Man: Target makes bid foracquirer Ill eat you before you eat me

Board of Director's Duties

Documents