“Dear Stan,
I’m Chairman of the Board of a large private company. I was recruited for the specific purpose of ensuring that proper governance was applied to the decisions regarding the strategic future of the organization. There are strong-willed shareholders who were having disproportionate influence on the company’s management and there was no independence on the board. I agreed to the role on the stipulation that the company, its board and all shareholders would ‘play it by the book’.
One of the shareholders is a trust, formed by the company founder on behalf of beneficiaries named in his will and enacted upon his passing. The co-trustees of this trust are a bank and a relative of the founder. The relative has recently engaged in private and unsanctioned discussions with an outside party regarding the potential sale of the company. The bank knew of the discussions in advance and has allowed the dialogue to occur. Neither the Board nor management was apprised of the discussions before the fact. Recently, rumors are spreading among the employees that the company will be sold to this third party and morale is dropping. Beyond damage control, I am concerned that these actions demonstrate a lack of commitment to follow sound governance practices in such matters. When confronted by the issue, the bank has essentially said, ‘We don’t have a problem with it. It’s a family-owned business.’
The fact is that the family members own less than a third of the company. The trust owns eighty percent, and the beneficiary of the trust is not a family member. I am concerned about my liability exposure if I continue to serve on this board, but I don’t want to leave without acting in accordance with my fiduciary responsibilities. I feel I owe the employees and the full set of shareholders that much. What would you advise?
Signed,
Reluctant Rubber Stamp”
Dear Rubber,
Unfortunately you have encountered a common dynamic in the world of corporate governance. There are many parties who have personal objectives for their involvement in a company, and they don’t always consider each other’s needs or desires when pursuing their own agendas. A successful operating company, particularly a large one, is a lot like the proverbial milk cow. Everybody wants a hand on a teat, directed towards their own mouth. That’s the danger, obviously. Perhaps there are people involved who do not simply see the company as their own personal cash cow, but as you describe it, it appears that the trustees are acting in conflict of interest. This can mean one or more things.
The trustees could have lost their confidence in you and the board. If so, they are working around you rather than replacing you. This could be because they don’t want to go through the time and effort to find other board members at this time. The trustees could also consider the board to be a necessary window dressing to fulfill the need for a semblance of governing propriety and regulatory compliance. In this scenario, you are indeed presumed to be the proverbial rubber stamp, paid for agreement rather than your judgment. And the trustees could also simply believe that there’s nothing wrong with conducting such critical discussions without the board’s knowledge or involvement. If that’s true, the trustees are clearly inexperienced in matters of appropriate governance and you have a massive educational challenge ahead of you.
But while the potential motives or perspectives of the trustees are important to ascertain, the ultimate action you must take is the same: you must go on record in board minutes and in written communication to the trustees and to corporate counsel that you are opposed to such actions by the trustees because as a director, you are accountable to the shareholders, creditors, customers, vendors and employees for the actions of the company. If you do not have primary responsibility for directing such merger or divestiture discussions, you cannot fulfill your fiduciary role. By allowing the actions of the trustees to go unchallenged, you would be implicitly in agreement with them, and any liabilities resulting from their actions would be yours. For example, the rumors circulating among employees will obviously cause anxiety and diminishment of focused effort on the business. That will translate to worsening operating performance, potential turnover and increased time spent on quelling the rumors. If customers hear the same rumor, they will worry about price changes after the consolidation, potential disruption of supply and quality problems that often occur during an ownership change. New customers may wait to place an order until the dust settles. And if the management team is finding out about the potential divestiture along with other employees through the rumor mill, they will immediately be more concerned about their own futures, taking their eye off the ball of daily business challenges.
And if your protestations to the trustees fall on deaf ears, you have no choice but to resign, else accept the responsibility for the damage done to the company and to its constituents. To protest and then to remain is the same as approval.
The only way to avoid becoming a rubber stamp is to leave the rubber plantation.