Over the past year and a half, a perfect storm of economic conditions has triggered an extraordinary downward spiral: the subprime meltdown, liquidity crises, extreme market volatility, controversial government bailouts, consolidations of major banking institutions and widespread economic turmoil both domestically and abroad. Many corporations now find themselves in uncharted territory, with a new paradigm of unpredictability trumping formerly reasonable expectations. In the coming year, boards of directors will need to respond to the challenges and pressures of this new environment. This may include reassessing their agendas, committee structures, time commitments and director recruiting, as well as their role in monitoring performance, compliance and risk management. At the same time, boards need to maintain the collegiality and culture of a common enterprise with the CEO and senior management. In short, the task for boards is not simply to go into crisis mode in order to deal with current issues, but rather to take a more holistic, long-term approach to reassessing their proper role and functioning.
In reviewing their monitoring and oversight roles, boards should be mindful of the shifting legal and regulatory landscape. Although the standard for director liability established in Delaware by the Caremark case accords directors considerable deference in fulfilling their oversight duties, there is a distinct possibility that this level of deference could end up being modified in light of the current economic crisis. The spate of litigation generated by the market turmoil will intensify the scrutiny of some boards and will provide courts with repeated occasions to consider second-guessing board decisions. Various regulators have been focused on risk management policies, some of which have found their way into new federal legislation, and numerous new guidelines and “best practices” purport to raise the bar. As financial losses accumulate, shareholders and the public at large will seek to hold boards and management accountable, and there will be tremendous pressure on corporations to demonstrate that they are responding to the current challenges.
While it is clear that there will be a regulatory response to the economic crisis, the contours and extent of the reforms are still evolving. To the extent that boards can be proactive in addressing new challenges and mitigating risks, there may be some window of opportunity for them to help shape the regulatory response, and steer it toward pragmatic measures that will promote rather than impede the creation of long-term shareholder value.
This memorandum, which I have prepared with my colleagues Steven A. Rosenblum and Karessa L. Cain, sets forth some of the significant issues that boards of directors face in the coming year, as well as some practical considerations to bear in mind. In order to avoid an overemphasis on process and at the same time effectively discharge the board’s duties to appropriately monitor and supervise the business of the corporation, it is necessary to identify the matters meriting the board’s focus and create a reasonable program to deal with them. Some are perennial themes that remain relevant and deserve to be reemphasized from year to year, whereas others have come into particular focus in recent years. It is important to note, however, that “one size does not fit all.” The board of each corporation can and should focus on its own particular issues and tailor procedures to its own circumstances.
The memorandum is available here.