As the FBI and Congress open inquiries into Hewlett-Packard’s investigative “spy” work aimed at boardroom press leaks, lawyers are buzzing about the corporate crisis that forced the resignations of H-P’s General Counsel Ann Baskins and its senior counsel in charge of ethics, Kevin Hunsaker, as well as chairwoman Patricia Dunn.
Although it’s hard to pinpoint what precipitated the decision to investigate board members, employees and reporters, it appears much of the boardroom trouble dates back to the controversial Compaq acquisition of 2001.
Published reports to date indicate Baskins and Hunsaker were acting at the behest of Dunn, and the in-house lawyers may have left surreptitious investigations in the hands of Silicon Valley super-lawyer Larry Sonsini with a kind of “Do what’s necessary” command.
While company lawyers rarely find themselves at the center of such front-page imbroglios, they are often caught in the cross fire of executive factionalism.
With that in mind, In-House went to a panel of experts in corporate governance, board room counseling and investigations to get their thoughts on lessons learned from the H-P scandal, and how to steer clear of ethical, legal and political traps associated with executive dissent.
The panel emphasized the importance of focusing on the legal roles and duties of counsel, board members and management.
For precariously positioned in-house lawyers, the panel also offered suggestions on counseling boardroom participants, facilitating resolution of executive disputes, and handling sensitive investigations.
Advice to the board
Topic: Counseling board directors and chairpersons on optimal job performance and discharge of their legal duties.
David D. Joswick, corporate/securities and compliance specialist with Michigan-based Miller Canfield: “I’ve given advice to boards [in conflict] that all deliberations are legally confidential and remain so, at least until all disputes are resolved and an agreement is reached on what should be made public. If you [as chairman] don’t feel you can trust the whole board, you also might consider going into smaller executive sessions for certain discussions [which may reveal whether you have excluded the leakers].”
Thomas A. Litz, co-chair of the corporate finance and securities group of Missouri-based Thompson Coburn: “This kind of split [within the company] happens more than people think. Directors are human and they have to be reminded of the ramifications for the company’s reputation and the distraction from the company’s mission that results from infighting.”
Steven R. London of the Boston office of Brown Rudnick, who handles corporate finance/securities, and acts as general counsel to various clients: “I always remind the board that a major part of their obligation is to do what is best for the company, and that includes their behavior. Even notes left on a desk and careless e-mails can do serious harm if revealed to the public, and press leaks are out of the question. They can be the basis for removal by the shareholders – or even a lawsuit if there is any kind of non-disclosure agreement.”
John T. Lynch of Boston’s Davis Malm & D’Agostine with a general corporate and transactional practice while serving as outside general counsel to some companies: “Directors must be very careful about what their agents are doing on their behalf. The chairman [in particular] has a duty of care to stay informed on what hired parties are doing on the company’s behalf.”
Nicholas C. Theodorou of Massachusetts-based Foley Hoag, a former federal prosecutor who chairs the firm’s business crimes and government investigations practice group: “The H-P situation shows that boards need to be advised or reminded of their fiduciary duties and duties of loyalty. It is absolutely a breach of those duties to be leaking confidential deliberations to the media. The board has to understand their conflicts can’t degenerate into media fights.”
The importance of broad consent
Topic: Commenting on the split decision to acquire Compaq, lawyers suggested unanimous or broad consent should be the executive goal on major company decisions.
Joswick: “Acquisitions have certain glamour for the CEO – but studies have shown that a majority of high-profile acquisitions were economic failures. If you focus on things you agree upon, you will always get more done. You have to ask whether it is worth it to win approval for an acquisition without really solid backing.”
Litz: “It is rare for a company to proceed with a major initiative having a split board. Typically, you can persuade others if the matter is fully aired out and many decisions become unanimous even if opinions differ. But you have to ask with a split result whether all opinions were really heard and considered in good faith by others.”
London: “I would agree that after vigorous debate you need to reach a compromise and support that compromise as a group. The inability to make and accept decisions as a group and the failure to stand behind those decisions will be fatal.”
Lynch: “Legally, a majority rules, but you have to ask the question, ‘What does a narrow decision do to the corporation?’ Such a win for the CEO is often a Pyrrhic victory.”
Lawyers at board meetings
Topic: The panel generally agreed it is now more important than ever for boards to look to their counsel to take an active role in meetings as a facilitator and adviser. The experts also shared their thoughts on being an effective counselor to the board.
Litz: “Having a lawyer at board meetings is incredibly helpful, but the lawyer needs the right background, experience and understanding of the business to play a key role.”
London: “I recently represented the board of a small public company where the CEO and founder had lost the confidence of the directors. The CEO launched a proxy fight to regain control while remaining on the board, and my job was to find a settlement while maintaining the lifeblood of the company. It was an 18-month challenge to maintain civility among the parties, but we were successful in resolving the situation because we focused on the best interests of the company rather than its factions. There was also a sense of trust [we developed] among the factions. Lawyers are trained to bring objectivity and rationality to difficult situations, and we can use that to keep things from spiraling out of control.”
Lynch: “Counsel should make sure all board members speak out in a meeting. You want them to affirm they are ‘fully informed’ and sound them out so that they feel heard. You can’t let tensions smolder beneath the surface, and you have to tell directors their remedy in a dispute is their right to vote ‘no.’ Lawyers add the most value to a company when they play an active role on the board. They help the board to confront issues, memorialize votes and deliberations, keep meetings on track and remind board members they supported a transaction or failed to speak. Even some very large companies still don’t have lawyers at their board meetings. That’s a mistake.”
Roles of directors, management and lawyers
Topic: Experts said much trouble can be avoided by keeping in mind the relative roles and legal duties of management, the board and counsel.
Joswick: “Management has to remember they don’t have a lot of real control over the directors because the board works for the shareholders and gives management its marching orders. Counsel needs to ask management who wants to investigate the board, ‘Why are we doing this?’ Since shareholders elect the board, only they can dismiss a director anyway.”
London: “It is critical for in-house counsel to remember they represent the company, not management. That means they represent the board as a whole and not any faction. Counsel has to identify when the board or management is headed in a bad direction and do something to keep it from getting worse.”
Lynch: “The shareholders can fire the board, the board can fire the CEO, and the CEO can fire the general counsel. But you have to look past that as a lawyer. You represent the company. It is best to view yourself as a facilitator for all sides who can help them to reach a working understanding.”
Theodorou: “Sometimes, the most important job a lawyer has is to say ‘no’ and to advise a client of the downsides to an action. I was at a board meeting a few weeks ago and had to advise of risks to a certain contemplated action. [My advice] was not well-received. They asked if I had any ‘good news’ about what they wanted to do, and I told them it’s not my job to give good news, but it is my job to keep them out of trouble. Clients generally respect that.”
The role of outside counsel
Topic: Panel members noted in-house lawyers often use outside counsel effectively to intervene in politically problematic situations or to bring neutral objectivity to a conflict.
Joswick: “There’s a big issue in the H-P case involving the use of in-house and outside counsel. If you’re the general counsel dealing with internal conflicts, the best thing you can do is get this out of your hands. Investigating the board or management puts you in a ‘no-win’ position. In this situation, you should tell your president it’s best for a third party to advise them on and manage any investigation.”
Litz: “In-house lawyers bring different kinds of expertise to their position. This situation points out that if you are not into governance issues, then you better find experienced help or sound advice.”
Theodorou: “I am asked to handle a lot of investigations, and I know it’s a relief to in-house counsel because they have to interact with people every day who are often in one faction or another. The last thing they want is to be in the middle.”
On handling investigations
Topic: While there is no “one-size-fits-all” approach to handling investigations, the panel indicated a number of tips to keep in mind in light of the H-P debacle.
Joswick: “It’s best to have counsel with no ties to the company for an investigation like this. You want someone less invested in the outcome … someone who can stand up to the president or chairman, if necessary, and ask, ‘Why are you doing this?’ A high visibility company should never be searching phone records, tailing people, and investigating reporters. And you never want to offend people with the greatest power over you. For a public company, that is the press.”
Theodorou: “It appears the H-P investigation was handled in a very unorthodox manner. Gumshoe tactics just go beyond the pale, and reliable counsel experienced in sensitive investigations would just never engage in such tactics. If there was a need for serious investigation, I [as outside investigator] would first advise the board on their fiduciary duties and the expectation of their cooperation. I would also advise them I represent the company and not the individual directors. They must also be advised that what they tell me is not subject to attorney-client privilege in the way it would be if I were their own counsel. This not only protects the company and the lawyer, but makes clear to the directors how serious the situation is.”
The future after SOX
Topic: The panel indicated Sarbanes-Oxley rules would likely affect the future of boardroom conduct and the future of related investigations. The rules should also present some opportunities for lawyers to play a bigger executive role.
Litz: “Audit and comp committees [and their directors] now need the ability to hire their own counsel, and we see situations more and more where independent counsel wind up hiring their own attorneys because of divergent interests and conflicts. There are some tricky issues regarding attorney-client privilege, and directors need to know that some government agencies will even require waiver of privilege in their investigations, possibly pitting independent directors against the company. This will put more pressure on directors to discuss their differences and resolve them in the board room.”
London: “Companies are encouraged to have independent outside directors now, so the personal financial interests will not be as significant in boardroom wars. The fiduciary duty to all will be more of a factor. In fact, I predict that Sarbanes will reduce factionalism, in part, because fewer directors will be from ‘old-boy’ networks, such as the CEO’s college buddies or club friends.”
Lynch: “Today, post-Sarbanes directors are more at ease with a lawyer at the boardroom table. They want confidence that things are being done correctly. They want to know if management is doing it right, and they like the comfort of having a lawyer walk them through the procedural steps [sometimes prescribed by Sarbanes-Oxley]. This is a good time for lawyers to play a bigger role in keeping their clients on the right track.”