Board of Directors: represent shareholders

1
Board of Directors represent shareholders
Shareholders
Board of Directors
Theory mgt serves the board. Reality?
Legally responsible for the firm, but mgt has
time, expertise, infrastructure
Management
Complex Operations
2
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
Board Committees

• Audit
• Nominating (sometimes corporate governance)
• Compensation
• Executive
• Insiders only?
• Includes CEO / senior executives?
• Human resources

4
Boards of DirectorsDuties and Functions

• Select, evaluate, replace senior management.
• Oversee Strategies, management of corporate
  resources.
• Review, approve major plans and actions.
• Other functions prescribed by law.

5
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
Director Liability

• Adverse events causing losses to shareholders
  where directors failed to inform themselves and
  failed to assure that there was an adequate
  information and reporting system in place ( lack
  of good faith).

7
Concealing Information from Directors

• Case of RJR Nabisco and smokeless cigarette.
  CEO bought off directors with elaborate
  perquisites.
• Tambrands CEO concealed information rewarded
  friendly consulting firm.

8
Boards Must Command Information

• Management sets agenda discusses matters it 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 provides briefing,
  directors must demand other information.

9
New Laws and RegulationsSarbanes-Oxley and NYSE
CG Rules

• Board must have majority of independents
• Audit committee must be totally independent with
  one 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
Defining Director IndependenceSEC and SROs

• A dependent director would be
• An employee of the company or affiliate in past
  three years
• A material business relationship with the company
  in past 3 years
• An executive in another corporation where
  companys executives serve on that firms
  compensation committee or being a family member
  of firm or affiliates in past 3 years
• Financial literacy and / or accounting experience

11
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 to
  shareholders
• Proponents Better strategic visioning, goal
  consistency, objectives and strategies, clear-cut
  leadership and mgt responsibility.

12
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
Selecting the Right Directors

• Skills, expertise, personality
• Diverse skills and knowledge more important
  than insider-outsider balance
• Portfolio of knowledge, business acumen,
  technical know-how.
• Support debate, dissent, active engagement,
  rigorous discussion, charm, toughness
• Willing to challenge management
• Policing and exposing conflicts of interest

14
Anti-Takeover Defenses

• Conflict in resisting takeovers Interests of
  management, directors and shareholders
• Managers and directors may try to protect their
  own interests to detriment of shareholders.

15
Trans Union case

• CEO gave buyer Pritzker a price of 55 without
  advice of board.
• Board discussed it but CEO did not tell that he
  made the price nor how it was determined
• Board approved, subject to getting a better price
  during a market test period.
• CEO signed the deal same night, cancelling test
  period. Director and CEO had not read the
  agreement.

16
Trans Union case cont.

• Board approved but one shareholder sued
• Court upheld suit, found directors grossly
  negligent
• Issue was not a wrong price
• Issue was the faulty process
• Board gave in too easily, failed in their
  fiduciary duty

17
Unocal vs. Revlon

• Revlon adopted poison pill in reaction to Pantry
  Prides offer of 45 per share.
• PP raised offer to 53.
• Directors found white knight who would offer
  54 and sold.
• Court found board played favorites with white
  knight should have opened to free bidding and
  found best price.

18
Greenmail

• Example Raider takes large stake in company,
  express interest in takeover
• Management resists, offers to buy him out at
  large premium over market price.
• Raider gets huge profits without even bidding for
  firm. Managers keep jobs.
• Shareholders get drpo in market price of their
  stock.

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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.

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Poison Pills

• Usually rights or warrants issued to
  shareholders that are worthless unless triggered
  by a hostile acquisition.
• Gives effective veto power to the target board
  over takeover attempts.

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Poison Pills cont.

• Flip-in Pill Shareholders get right to buy or
  sell shares in target company at a great price
• Flip-over Pill Shareholders get right to buy
  or sell shares from acquirer company at great
  price (e.g. 50 discount). Creates huge dilution
  of acquirers company.
• Chewable Pill

22
Other Anti-Takeover Tools

• White Knight Friendly third party who agrees
  to buy large block of shares to keep it out of
  acquirers hands. Sometimes a leveraged knight
  who buys stock with larger voting power.
• Crown Jewel Target company sells or
  locks-up its most valuable assets.
• Pac-Man Target makes bid for acquirer Ill
  eat you before you eat me