Article by: Michael W. Peregrine

The challenges associated with board oversight duties in “crisis situations,” and related expectations regarding director attentiveness, are highlighted in a recent Wall Street Journal article concerning Theranos. It serves as a reminder of the valuable role that general counsel can play in supporting the ability of directors to satisfy these duties and expectations.

Two former Theranos directors were criticized in the article, which ran on May 30. They were taken to task for their lax oversight of corporate operations. Based on a review of depositions given by the directors, the article suggested that they had failed to follow up on public allegations that the company was using standard technology in its blood testing operations, rather than its touted proprietary technology. The inference (fairly or unfairly) was that these allegations were a significant warning sign of the company’s emerging financial, regulatory and reputational problems.

The article included specific excerpts from the directors’ respective depositions in which they seemingly acknowledge that, the public allegations notwithstanding, they made no separate inquiry of the CEO as to whether the proprietary technology was working as planned. One of the directors was quoted as testifying that he “didn’t probe into” that issue: “It didn’t occur to me.” He was further quoted as adding, “Since I didn’t know, I didn’t have anything to look into.”

The clear theme of the article was that the two directors were deficient in the exercise of their oversight obligations, and that the public allegations were “red flags” of corporate or executive misconduct that they missed, to the detriment of the company and its investors. To buttress this theme, the article included criticism from a law professor who noted that it is “a board’s fiduciary duty to find out what was going on.”

Media stories questioning whether directors have satisfied their fiduciary obligations are nothing new, especially in highly public corporate controversies. And it’s never fair to draw conclusions of director culpability from media reports – there are always two sides. But what is unusual about this matter – what could make many directors pause for a deep breath – is that these allegations implicated directors of exceptional national prominence and credibility. These are two individuals who by their life’s work could be expected to be the most competent of fiduciaries (and may well have been in this case, the article notwithstanding).

One is former U.S. Secretary of State George Shultz, an enormously respected adviser who has dedicated much of his life to Cabinet-level public service. The other is the former chief of naval operations, Adm. Gary Roughead. These are serious people who have dedicated their lives to public service.

When such credible and capable individuals can be publicly criticized for lack of attentiveness, it’s reasonable to expect a ripple effect in the boardroom. The typical director can be excused for having some concerns about his or her liability exposure. “If this kind of guy can’t do the job,” a director may think, “how can I be expected to do it?”

And that’s a concern that should not go unaddressed, for the sake of both board effectiveness and director retention. The Theranos story could serve as a useful teaching moment that an attentive general counsel can use to bridge the “confusion gap” and give the board an understanding of what might reasonably constitute a red flag that requires some form of response.

Step one is for the general counsel to review the basics: namely, that the oversight obligation requires the board to have a thorough knowledge of corporate affairs. The board is not expected to ferret out corporate wrongdoing or risk, absent a particular warning sign that a cause for suspicion exists. Board action is not required until it is presented with extraordinary facts or circumstances. But when it is, that’s the point at which the board has a known duty to act, and must do so proactively.

But here’s the rub: There’s no one-size-fits-all legally binding definition of “red flag” that a director can keep in his or her pocket and periodically refer to in times of controversy. So the general counsel who aims to guide directors might start with a hypothetical involving something that, on its own, is innocuous, but when combined with other information of which the board is already aware, would require an immediate board response. In other words, a red flag is more than just bad news. It’s the kind of thing that would make a director want to raise his or her hand high, and hold it there until an adequate answer is provided.

If this is not clear enough, the general counsel can then offer examples of what courts – including those outside of Delaware – have found to constitute red flags. And those fall within a wide range of circumstances, including but not limited to financial discrepancies, governmental inquiries, credible whistleblower reports, serious conflicts of interest, sudden executive departures, notable swings in operational results and unusual executive conduct. And it can include omissions as well as commissions, such as the continuing failure to recruit top talent; persistent director absences at board meetings; notable departures from traditional quality of management reporting; excessive qualifications in legal or accounting opinions; etc.

The general counsel could also offer examples of what courts have found to be proper board responses to red flags. The GC’s goal is not to deliver an all-inclusive list of red flags to which directors can refer in times of trouble. It’s to provide value by sketching, in practical and understandable terms, the contours of a warning sign. You want them to be comfortable that they’ll know it when they see it. And that can’t help but contribute to the effectiveness of a director’s oversight duties, even if the director isn’t a former Cabinet officer or a renowned military leader.

Michael W. Peregrine, a partner in McDermott Will & Emery, advises corporations, officers and directors on matters relating to corporate governance, fiduciary duties and officer/director liability issues. His views do not necessarily reflect those of his firm or its clients. He can be reached at mperegrine@mwe.com.

Interview with Frank A. Segall and Scott H. Moskol /Burns & Levinson 

 

Frank A. Segall and Scott H. Moskol co-chair the cannabis business advisory group at Burns & Levinson, where they have built an unusual practice helping individuals and companies involved in the marijuana industry navigate the complex and rapidly changing legal and business environment. MCC talked to them about the growth and opportunities in this new area of the law. The interview was edited for style and length.

Continue Reading Growing Their Own: How one firm is working to bring the cannabis business into the mainstream

Metropolitan Corporate Counsel invites you to participate in a Complimentary Webinar on Tuesday, May 23rd at 11:00am EST to learn about 10 Key Considerations When Selecting an e-Billing and Matter Management Solution.

Today more than ever, corporate legal departments are looking to do more with less. Managing invoices manually, tracking matters in spreadsheets, or using disparate point solutions that each solve a single problem, will no longer be sustainable practices.

CLICK HERE TO REGISTER!

This webinar, led by Kevin Caulfield and Lisa Weremeichik of Wolters Kluwer, will help those involved in corporate legal software and vendor selection better understand the benefits of e-Billing and Matter Management technology, and identify and explore the key considerations when choosing a system for your business.

By attending this webinar, you’ll come away with:

  • Insight on the value of an integrated e-Billing and Matter Management system
  • Best practices on getting started with your investment
  • Key product and vendor considerations when choosing a system
  • Those who register will also receive a link for on-demand viewing in case you are unable to attend the live event.

We welcome you to forward this invitation to any of your colleagues who may find it to be of interest.

Webinar Details

Title: 10 Key Considerations When Selecting an e-Billing and Matter Management Solution.

Date: Tuesday, May 23, 2017

Time: 11:00 AM Eastern Daylight Time

CLICK HERE TO REGISTER!

 

Interview with Laura King / Clifford Chance

Laura King has been a lawyer at Clifford Chance for more than 20 years, initially based in Canada. She later moved to London, where she practiced capital markets law and was promoted to partner in 2001. A few years later, however, her career took an unexpected turn. The firm adopted a centralized approach to HR and asked King to lead the effort as a member of its global management team. And that’s why she recently found herself working on a book showcasing some of the firm’s top women lawyers. MCC interviewed her by telephone and email. These communications have been edited for length and style. Continue Reading Diversity by the Book: Why one firm decided to dabble in publishing to demonstrate its support of women

Interview with M. Melissa Glassman / McGuireWoods, LLP 

 

Not every woman starts law school shortly after she starts a family. And of those who do, not all of them decide to go to work at a large firm as a litigator – and somehow survive to tell the tale. But M. Melissa Glassman is not every woman. And Glassman, now a deputy managing partner at McGuireWoods LLP, did a lot more than survive. But she insists she never aspired to be Superwoman. The interview has been edited for style and length. Continue Reading Finding a Way to Make It All Work: A law firm leader and litigator looks back on her long career

By Trisha Anderson, Inventus LLC

According to the U.S. Census, there are over 83 million millennials. They make up over a quarter of the nation’s population. The growth of this demographic has had an inevitable impact on the demographics of the workforce. By the year 2020, millennials will account for 46 percent of all employees.

Continue Reading Millennials Are Leading—Is Your Company Following?: A new generation of employees is setting the pace for modern communication

By Rees Morrison, Altman Weil, Inc.

The Roman god Janus looked both ways at once. That’s an apt metaphor for the divergence in how lawyers look at the use of data in management decisions. Some lawyers look askance at data being used to augment decisions; others look with favor on it. The more clearly that lawyers understand the conflicting bases for their own views and those of their colleagues, the more adroitly they will deal with data in decisions.

Continue Reading A Metrics Conundrum: What Would Janus Do?: Lawyers are sometimes torn when considering how much to rely on data

By Stephanie Mullette, Robert E. Bostrom, National Association of Corporate Directors (NACD), Abercrombie & Fitch

Introduction: As the role of general counsel has evolved, they are increasingly called upon to provide corporate boards with advice on company strategy and business operations. This has led the National Association of Corporate Directors (NACD) to launch a new initiative, the Strategic-Asset GC, designed to help boards fulfill their mission of creating long-term corporate value. Stephanie Mullette, NACD’s Director of Corporate Solutions, and Robert E. Bostrom, previously a lawyer at the Federal Reserve of New York who became a partner at Winston & Strawn, SNR Denton and Greenberg Traurig, and general counsel of NatWest Bancorp, Freddie Mac and, currently, Abercrombie & Fitch, discuss below the initiative and what it takes to be a Strategic-Asset GC. Their remarks have been edited for length and style.

Continue Reading GC Outlook: Clear and Stormy: In a crisis, it’s easy to contribute. The challenge is when it’s calm.

By Shamir Colloff, FRONTEO

When you are looking for a needle in a haystack, the addition of more hay does not alter your objective, only your approach. The same is true when searching for relevant information. Although we live in an era of exponentially increasing data volumes, the reality is that the material that matters most remains constant. This was true 10 years ago, when the FRCP changed to include electronically stored information as a codified information source, and it’s true today: Just because you have more documents doesn’t mean you have more relevant documents. Those with the tools to sort, compile, analyze and apply the details they gather, rather than simply review them, have a valuable competitive advantage.

Continue Reading Distinguishing Data That Matters Most: Survey says: Users want easily accessible metrics

By Metropolitan Corporate Counsel

Median compensation for general counsel increased slightly between 2014 and 2015 at companies ranging from under $1 billion in revenue to more than $15 billion, according to “General Counsel Pay Trends 2016,” a new survey from Equilar, which collects information on 150,000 executives and board members of public companies. The healthcare sector delivered the highest median total direct compensation for GCs at $3 million, as compared to an average of $1.2 million for the S&P 500 as a whole.
Continue Reading Backstory: GC Comp: Doing More with . . . a Little More