RMSC: Corporate Governance
The final large session of the afternoon covered a broad range of Corporate Governance topics. The panel consisted of John Olsen, Partner, Gibson, Dunn & Crutcher; Cathy Krendl, Partner, Krendl, Krendl, Sachnoff & Way; Josiah Hatch, Partner, Ducker, Montgomery, Lewis & Bess; and Richard Mattera, Senior Deputy General Counsel, United Health Care. The discussion covered many topics, including relevant issues affecting this proxy season, the impact of the duty of loyalty on the business judgment rule, the implications of the Foreign Corrupt Practice Act, and United Health Care’s approach to Risk Management.
John Olsen began the symposium with an overview of some of the issues applicable to the current proxy season. He noted there have been many shareholder proposals for declassification of board structure and a large number of companies are either negotiating over these proposals or adopting them outright. Mr. Olsen also discussed the prevalence of shareholder initiatives aimed at separating the positions of Chairman of the Board and CEO where they are combined. Finally, Mr. Olsen commented on the increase of shareholder demands for disclosure of CEO succession plans in the wake of Steve Jobs’s passing.
Cathy Krendl followed Mr. Olsen with a discussion on the impact of the duty of loyalty on the business judgment rule. Ms. Krendl emphasized that Colorado, like Delaware, has not codified the business judgment rule, but instead allows for exculpatory clauses, and that such clauses do not provide for automatic dismissal in actions involving the duty of loyalty. While noting the great importance of appointing a committee of independent directors to review all potentially conflicted transactions, Ms. Krendl cautioned that, in Colorado, establishing the independence of a director is not a simple task. Ms. Krendl concluded her presentation with the recommendation that to enjoy the protection of the business judgment rule, a board of directors must ensure that the majority of the minority shareholders approves of any potential conflict.
The next panelist, Josiah Hatch, addressed the impact of the Foreign Corrupt Practices Act (“FCPA”) on the actions of US corporations. Mr. Hatch noted that the FCPA tends to “terrify” boards and management due to the broadness of its scope. He emphasized the importance of codes of conduct and third party certifications, but cautioned that even the most observant of corporations are still at risk under the FCPA. Mr. Hatch finished his presentation by highlighting the inherent difficulty facing corporations that do business internationally: These companies are generally forced to operate through third parties who are not under the direct control of the corporation, but whose acts are still its responsibility.
Finally, the afternoon culminated in a presentation by Richard Mattera, who discussed risk management at the director level. Mr. Mattera posited that, at United Health Care and other large public companies, systemic risk is the number one focus of the board’s risk management efforts, while most other risk management foci are handled at the individual business unit level. He also urged practitioners to refrain from relying solely on stress test models.
As support for this advice, Mr. Mattera discussed the failure of risk management models to allow for “black swan” type outliers at the executive level, using Tony Hayward’s inability to speak to the press after the Deepwater Horizon disaster as a perfect example.