While in golf it’s nice to take a “Mulligan” or “breakfast ball” after you put your first tee shot into the parking lot, it’s a little harder to take back a bad business decision. Sure, we’ve all made them, but rarely are there “do-overs” in the boardroom. Worse still, some poor business decisions come because directors didn’t have enough information, or, perhaps, the right information at the right time.

It can be extremely challenging to recognize how much information is enough before making a critical business decision, and sometimes equally hard to recognize the most important information. To return to the golf analogy, a good caddy knows just how much and what information to give a player and what is overload that wouldn’t help.  Failures at company boards may result from directors not asking the right questions, not probing deeply enough, or not corroborating initial answers received from the CEO with other company executives or information available.

GM Board’s ‘Vague’ Notion

Looking at the ignition switch fiasco, the General Motors’ board now stands accused by GM shareholders of failing to carry out its fiduciary responsibilities. Reports indicate that the board took a “mostly hands off” approach and rarely discussed the topic. Indeed, Board Chairman Theodore Solso told the New York Times that he had only a vague recollection of details, and “I can’t remember the specifics.” Well, the “specifics” resulted in multiple deaths and injuries, the recall of about 30 million vehicles, a badly tarnished brand, and billions of dollars in costs, as well as continuing investigations by the Justice Department, Securities and Exchange Commission, and 45 state attorneys general.

The statements about “vague recollection” and not remembering the “specifics’’ may be only a couple Solso would like to reconsider. Others attributed to him that he would almost surely want to have as a “do-over,” include: “It was a period of time that we learned how serious the situation was [and] when we had all the facts, we did our job,” and “We didn’t understand the enormity of the situation at the beginning, because I don’t think management did.” Shareholders who believe the board was not doing its job are suing the directors for failing to carry out their fiduciary duty to oversee management, with some claiming board members are “guilty of sustained and systematic failure.”

Caremark, continues to provide ground rules for director performance. It states that a corporate compliance program should provide timely, accurate information sufficient to allow management and the board, each within its scope, to reach informed judgments concerning both the corporation’s compliance with laws and its business performance.

Well, just what constitutes directors doing their job? Formally, it means carrying out duties of care and loyalty, including acting in good faith. In layman’s terms, in this context, it includes obtaining needed information and acting on that information, rather than turning a blind eye to it. There’s a good deal of case law on this point, much of it from the Delaware Chancery Court.

One case in particular, Caremark, continues to provide ground rules for director performance. It states that a corporate compliance program should provide timely, accurate information sufficient to allow management and the board, each within its scope, to reach informed judgments concerning both the corporation’s compliance with laws and its business performance.  

Reflecting on Solso’s words, plaintiffs’ lawyers can be expected to focus sharply on the extent to which the board did or did not obtain relevant information on a timely basis. Did the board have a process to obtain “all the facts?” Should it have “known earlier?” And, why didn’t management “understand the enormity of the situation?”

The courts will decide whether the GM directors carried out their responsibilities under the law. Certainly, directors need to have sufficient information to make informed decisions. When it comes to critical issues, leading practice supports the notion that it is insufficient for the board to simply obtain reports from management and ask a few questions. Rather it is necessary for directors to obtain information from both management and external sources as needed, and probe as deeply as necessary, in order to be positioned to make an informed judgment.

It’s also essential that the board is comfortable that senior management has processes in place to ensure that it has the requisite information. Well, reports say a number of managers at GM were indeed aware of the ignition switch issue up to ten years before the problem became public knowledge. So important questions will include whether senior management had such information, and if not, why not? Another relevant question is why it seems the board didn’t probe deeply enough to recognize the seriousness of the issue and take action to deal with it on a timely basis.

Banking Breakdown

Another instance where directors are facing a lawsuit is Cooperative Bank of Wilmington, N.C. Here the Federal Deposit Insurance Corp. sued the officers and directors for a program it says allowed real estate developers to buy what turned out to be highly overpriced building lots with no money down, no closing costs, and no payments of principal or interest for two years. The FDIC said the board failed to ensure the officers followed the bank’s own rules or comply with federal and state bank examiners’ recommendations. Here, too, questions have surfaced about whether the board obtained sufficient information.

The FDIC has alleged that the bank’s CEO told the board that the lot loans would have at least 10 percent equity and be interest bearing. Well, according to the regulator, the reality is that the developer not only lent the buyer the down payment, but with the inflated sale prices, the developer walked away with a huge up-front profit funded by the bank’s loans.

A month or so ago the judge dismissed the suit, but the FDIC said it would appeal. The regulator says that in the 26 actions it brought against failed banks, in every case it reached a settlement, except for one, which the FDIC won in a jury trial. What happens in its appeal of the Cooperative Bank suit remains to be seen, but we can expect a prime focus on whether the directors obtained sufficient information to make an informed judgment—or whether the judgment was so egregious as to fail to satisfy the business judgment rule.

Getting it Right

As I advise boards of directors, an issue that continually arises is knowing how much information the directors need, and whether it’s the right information. Is it sufficient to rely entirely on the CEO, or is it necessary to hear directly from other executives, external sources, and possibly outside experts?

One board I’m working with has been struggling with a number of issues, including those related to cyber-risk. The board knows the company is subject to many, sometimes hundreds, of cyber-attacks daily and is trying to get its arms around defenses currently in place, and what may be needed. It has identified a cyber-risk expert to be added to the board, who will help to ensure that the right information is obtained on cyber-security testing, prevention, detection, containment, and response, and is adequately considered at the board level and acted on. While not every company needs this expertise at the board level, this particular board is fully justified in deciding to add such an individual.

There are many other matters that most boards of directors struggle with, including whether it is receiving the right information, from the right sources, and with clear issue-identification and effective related analysis, and on a timely basis. Whether or not a board does this well can and does make the difference between corporate success and failure, and between being pulled into the courtroom and staying out of it.

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