Saturday, March 15, 2008
The Corporate Law Center at the University of Cincinnati College of Law presented its 21st Annual Corporate Law Symposium on March 14 on "The Dysfunctional Board: Causes and Cures," before a packed audience consisting of students, practitioners, and academics. The panelists were of uniformly high quality, and the audience's enthusiastic participation in the Q&A sessions made for lively discussions. The webcast of the program will be shortly posted on the CLC site, and the papers will appear in a forthcoming issue of the University of Cincinnati Law Review. Here is a synopsis of the Program:
Panel I: The Underlying Causes of Dysfunctionality
Franklin A. Gevurtz, McGeorge (The Function of Dysfunctional Boards) started us off with the hard question: what is the board's function? After arguing that none of the models (managing, monitoring, mediating) works, he reviewed the origins of the modern corporate board in English trading companies and medieval councils. From this he argued that the board's purpose is to be a representive body; thus, it is dysfunctional only when it is not an elected body. If a board is divided because the shareholders are divided, it has fulfilled its function.
Jayne W. Barnard, William & Mary (Narcissism, Over-Optimism, Fear, Anger and Depression: The Interior Life of Corporate Leaders) examined common CEO pathologies and how they can lead to recurring behavior, such as overcommitment to previous decisions, overestimation of ability to execute takeovers, overpayment in tender offers, and preoccupation with perquisites and personal myth making. She also proposed some solutions, including the board's awareness of these characteristics in succession planning and expanding the board's monitoring role to take into account these issues.
John S. Stith (Porter Wright & Morris) focused on the Ohio corporation statute, particularly its constituency statute, and noted that the law expects that the board will perform a variety of roles, including mediation.
Panel II: Competing Expectations for Board Performance
Lissa Lamkin Broome and Kimberly D. Krawiec, both from UNC (The Road to Board Diversity: A Case Study from North Carolina) described their empirical study on diversity on public boards, consisting of a series of confidential, semi-structured interviews with corporate directors. For this Symposium, they limited their discussion to an analysis of the rationale for board diversity, in particular, the signaling function. They noted that through board diversity corporations may seek to signal workplace equality, attention to women and minorities in the development in products and services, and, more generally, that they are law-abiding and forward-looking. They could not conclude, however, that board diversity is a stable signal in all cases, since board diversity may not be too costly to fake a signal.
Lawrence A. Cunningham, GW (Rediscovering Board Expertise: Legal Implications of the Empirical Literature) began by noting that despite the fascination with board independence, there is little evidence that it has improved board performance. Accounting expertise, however, has been shown to improve the quality of financial statements, although the SEC's definition of "accounting expertise" is too broad for this purpose. Thus, audit committee members add real value, but may not get greater benefits and may have greater liabilities, than other directors. He argued that the incentives for expertise need to change.
Tamr Frankel, BU (Corporate Boards of Directors: Advisors or Supervisors?) emphasized the importance of culture in the two components of board service: advisory and supervisory. She noted that boards need to strike the appropriate balance between micromanagement and window-dressing. Boards must create a culture where extremes are not allowed. She emphasized the importance of the board's "muddling through" -- to try and if it fails, then try something else.
Gary P. Kreider (Keating, Muething & Klekamp) noted that for shareholders corporate financial performance is what matters. He also predicted that shareholders' access to the corporate ballot for purposes of nominating directors is likely to come soon.
Panel III: The Board as Compliance Officer
Peter J. Henning, Wayne State (Board Dysfunction: Dealing with the Threat of Corporate Criminal Liability) focused on board decisions made in response to reports of alleged misconduct in the context of four recent examples: Enron, Chiquita, United HealthCare and Staples. He recommended the creation of a Zapata committee consisting of directors that are not tainted by the alleged corporate misconduct with the authority to effect real change.
Miriam H. Baer, NYU (Corporate Policing and Corporate Governance: What Can We Learn from Hewlett-Packard's Pretexting Scandal?) first examined Hewlett-Packard's pretexting scandal. She then explained and examined the contradictions between corporate governance principles and corporate policing practices. The government insists on effective corporate compliance programs, and given boards' lack of expertise and limited tools, we should not be surprised if we see more clashes between corporate governance and compliance.
Clifford A. Roe, Jr. (Dinsmore & Shohl) concluded by identifing common themes that had emerged in the course of the day's discussion: the uncertainty about the board's function, the competing expectations for board performance, and the difficulties these present to board members.