Tuesday, September 18, 2018

Delegation of Board Authority: Nike's Kaepernick Ad Remains the Most Business Judgmenty Thing Ever

Last week, I made the argument that Nike's Kaepernick Ad Is the Most Business Judgmenty Thing Ever.  I still think so.  

To build on that post (in part based on good comments I received on that post), I think it is worth exploring that ability and appropriateness of boards delegating certain duties, as this impacts any assessment of the business judgment rule. 

As co-blogger Stefan Padfield correctly noted, directors "become informed of all material information reasonably available." However, does that apply to a particular ad campaign? Hiring of all spokespeople? Only certain ones? How about a particular ad?  Or is it the hiring of a marketing and ad team (internally or externally)? 

Nike has a long list of sponsorship (here) for teams and individuals. I sincerely doubt that all of those were run by the board of directors, though it is possible.  The board may also weigh in from time to time, based on the behavior of the people they sponsor.  Nike famously terminated contracts with Oscar Pistorius and Ray Rice in September 2014. Are these all board decisions? Maybe. Or maybe they have a protocol for dealing with such issues. Regardless, how they deal with this seems plainly within the BJR.  

Now, I also would agree that there comes a time when the board would need to do more with regard to their advertising and sponsorships, if they were on notice of a problem with their sponsored athletes, not unlike a Caremark duty or its predecessor. In discussing the applicability of the business judgment rule, an older, but classic, Delaware case stated, “it appears that directors are entitled to rely on the honesty and integrity of their subordinates until something occurs to put them on suspicion that something is wrong. If such occurs and goes unheeded, [only] then liability of the directors might well follow . . . “ Graham v. Allis-Chalmers Mfg. Co., 41 Del. Ch. 78, 85, 188 A.2d 125, 130 (1963). 

When I started to write this, I did not know if Nike's board of directors saw this ad before it went out (more on that below). I expect they did (or at least knew about it), but I'm not sure.  Even it if the ad were raised with the board for informational purposes, trusting the judgment and recommendation of your marketing executives seems imminently reasonable to me. It seems to me that how the board chooses to work with their marketing people fall plainly under the business judgment rule (BJR) unless shareholders can rebut the presumption that the BJR applies.  It's not like marketing mistakes are not common. Most years there are recap articles about the works gaffes in marketing for the year. This one from 2017 is a particularly good example, and I don't think any of them would be likely to lead to director liability.  

The scope and power of board delegation of such duties would be a good topic for further research. I certainly concede that there are times when such decisions look more like board decisions that require an appropriate process and perhaps some demonstration of due care.  Maybe that goes to a need to review ads with certain risk factors, but you'd still have to delegate the decision about what needs to come to the board to someone.  And do you need such a process absent notice that your ad folks are taking enormous risks?  Is this a Caremark/Allis-Chalmers issue? Or could negligent hiring be the failure, if the ad folks are insane? 

Support for my assumptions, and for the idea that Nike, at least, views this as a delegation question, arrived in this breaking news from CNBC, which appeared as I was writing this blog post:  

Nike director Beth Comstock said Tuesday that the sports apparel giant's management and CEO Mark Parker informed the board about the controversial Colin Kaepernick ad before it was released.

But Comstock, also a former vice chair of General Electric, said Parker didn't need the board's permission before running a "Just Do It" campaign featuring the former San Francisco 49ers quarterback.

"Parker runs the company really well," Comstock said on CNBC's "Squawk on the Street," while also commenting about the new China tariffs. Parker "certainly doesn't need board approval to figure out where to run an ad," she added.

In the end, we know marketing decisions can harm stock prices, but we also know risky marketing decisions can improve stock prices.  That very fact, I maintain, puts this decision squarely in the BJR zone.  

http://lawprofessors.typepad.com/business_law/2018/09/delegation-of-board-authority-nikes-kaepernick-ad-remains-the-most-business-judgmenty-thing-ever.html

Corporations, Current Affairs, Joshua P. Fershee, Management, Marketing | Permalink

Comments

Assuming the board delegated the decision to the CEO, and the CEO delegated the decision to a marketing agency (but ultimately signed off on the ad) -- then perhaps the strongest argument for overcoming the business judgment rule presumption would be that the “obviously” controversial nature of the decision should constitute a type of red flag requiring the CEO to do some further information gathering beyond the initial screening that led to the hiring of the marketing firm. (All of which doesn’t even address the question of whether the CEO, as an officer, even gets the protection of the business judgment rule.) Put another way, assuming that the calculation of potential backlash losses is reasonably available material information, proper delegation would arguably need to include some basis for relying on the marketing firm to have gathered and assessed that information.

Posted by: Stefan Padfield | Sep 19, 2018 2:18:13 PM

I think we’re coming at this from different spots, so I apologize if I am going down a different path. My initial reaction is that I disagree with this: “[A]ssuming that the calculation of potential backlash losses is reasonably available material information, proper delegation would arguably need to include some basis for relying on the marketing firm to have gathered and assessed that information.”

To question the board’s delegation to the marketing firm, I think you must rebut the BJR in the first place and show you have a reason to believe the board did not properly gather and assess information about the firm, and I think you need more information than simply, “this is controversial.”

I agree there is a question about whether the BJR extends to the CEO, but whether it does or not, the board’s delegation to the CEO to me clearly has BJR protection (again, absent some evidence I have not seen). In hiring the CEO, the board is presumed to have done its due diligence and I also think it should be assumed that they acted properly in determining that the CEO would be in charge of advertising, even when it is controversial. My view is that when they hired the CEO, the board likely made the determination that they were hiring someone bold and that they made their decision to take such chances. This, too, I think is solid BJR territory.

Shareholders could make such a stink that a board in similar cases might decide to fire the CEO rather than face the shareholders’ wrath. I do not, however, think that would be the case with Nike on this one.

Posted by: Joshua Fershee | Sep 19, 2018 3:11:36 PM

Yes, we are likely coming at this from two different angles. To me, the first question is what is required to satisfy the duty of care to become informed of all material information reasonably available. Whether liability will attach for any related failure is obviously a different question. As the Caremark court notes, the duty of oversight requires implementation of a reasonable information gathering and reporting system, but only an utter failure to do so will result in liability. I think it’s fair to say that I have been focusing on the duty question, and you on the liability question. The overlap arguably comes when courts view the business judgment rule as a standard of review rather than an abstention doctrine, take evidence on the process, and publicly shame fiduciaries for failing to act in accordance with best practices even though ultimately finding no liability. Perhaps another way of saying this is that fiduciaries can be negligent in carrying out their duties, but since the business judgment rule as standard of review raises the bar to gross negligence, a failure to act in accordance with one’s duties does not always lead to liability. I think it’s fair to say that both inquiries – (1) What constitutes becoming informed of all material information reasonably available in this context? and (2) What is the likelihood of liability? – are worthwhile.

Posted by: Stefan Padfield | Sep 19, 2018 3:52:30 PM

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