April 25, 2019

Chief Justice Strine: Maybe Inside Directors Aren’t Such a Bad Thing?

I know that Delaware’s Chief Justice Leo Strine is the kind of guy who could make his breakfast order sound provocative, but you’ve really got to check out his recent interview with “Directors & Boards.” The Chief Justice has all sorts of interesting things to say about the role of independent directors – including suggesting that perhaps we’d be better off with a few less of them. Here’s an excerpt:

We have a lot of unrealistic expectations for independent directors, and I think it would be better to rebalance boards a little bit. We need folks who are genuinely independent directors, but we also need directors with expertise, and we need directors who were active in business and who understand the industry. And some of the rules and incentives can get so tight that we actually discourage people with the right kind of qualities from serving on boards.

It doesn’t really matter if you’re independent if you don’t have expertise. But can you be independent and also have the expertise and the knowledge? I’m sure you can. We just independent director-ized the world. We went from having a bare majority of them to having a supermajority of them. We don’t actually empower them. We take away their ability to think long term because we put in place Say on Pay. We don’t do Say on Pay every four years or five years, where you would really have a long-term pay plan, we do it every year as a vote on generalized outrage.

Corporate management and employees are the most important thing to corporate success, especially employees — who, frankly, boards of directors, managers and institutional investors have undervalued for 30 years — which is part of why there are the tensions we have in society right now.

It’s refreshing to hear somebody with influence in the corporate governance debate finally say something like this. As I’ve blogged previously, my guess is that in 50 years people may really wonder why we thought it was a good idea to demand that the boards of the world’s largest corporations be comprised overwhelmingly of people with no ties to or experience with the company. Who knows? Maybe Chief Justice Strine’s remarks are a signal that we won’t have to wait 50 years for people to start asking that question.

Insider Trading: Another Lawyer in the Cross-Hairs

Earlier this year, I blogged about the SEC’s insider trading enforcement action against a former Apple lawyer who exploited his access to the company’s draft earnings releases.  The SEC recently brought another proceeding against an in-house lawyer for SeaWorld who allegedly engaged in similar conduct.  Here’s an excerpt from the SEC’s press release announcing the action:

The SEC alleges that Paul B. Powers had early access to key revenue information as the company’s associate general counsel and assistant secretary, and he purchased 18,000 shares of SeaWorld stock the day after he received a confidential draft of the 2018 second quarter earnings release that detailed a strong financial performance by the company after a lengthy period of decline. According to the SEC’s complaint, Powers immediately sold his SeaWorld shares for approximately $65,000 in illicit profits after the company announced its positive earnings and the company’s stock price increased by 17 percent.

“As alleged in our complaint, Powers blatantly exploited his access to nonpublic information by misusing SeaWorld’s confidential revenue data to enrich himself,” said Kurt Gottschall, Director of the SEC’s Denver Regional Office. “Investors should feel confident in the integrity of corporate officers, particularly attorneys. The SEC is committed to swiftly pursuing insiders who breach their duties to investors.”

According to the SEC, the defendant consented to a permanent injunction and disgorgement in an amount to be determined by the court. As seems to be almost standard operating procedure in these cases, parallel criminal proceedings were also filed. Sigh. Don’t insider trade.

Insider trading cases involving corporate officials who trade ahead of good or bad news are like shooting fish in a barrel for the SEC. Whenever I read about one, I’m reminded of the story of a buddy of mine, who while he was in college at Georgetown got good & liquored up one night and decided to jump into the Tidal Basin with a few equally inebriated cohorts. Upon pulling himself out of the water, he found himself at the feet of a very large & completely unamused member of the National Park Police. The officer looked down at my friend, shook his head, and inquired – “How stupid can you be?”

Tesla Tweets: Will The D&O Carriers Ultimately Rein in Elon Musk?

This recent article from MarketWatch’s Francine McKenna tries to answer the question: “how do you handle a problem like Elon?” Several notables weighed in with their views, but the response that I found most intriguing came from Betsy Atkins, a Wynn Resorts director:

Atkins believes that market forces will cause the correction needed before any regulatory sanction, even a bigger fine for Musk, does. “If I were on that board, I would be very concerned and want the company to buy additional liability insurance for directors,” Atkins told MarketWatch. “Plaintiffs attorneys are already circling and at some point the current directors and officers insurance carrier may become fatigued and potentially unwilling to immunize the board from the public and private litigation.”

It’s a truism that there’s always somebody out there who will provide some kind of D&O insurance if you’re willing to pay enough for it – but whether that price is something that an increasingly independent Tesla board would be willing to stomach in order to allow Elon Musk to keep on tweeting is another issue.

John Jenkins