Dust Off That D&O Policy
November 28, 2007 | Filed Under Litigation, Governance
Whenever the business press writes about D&O insurance, I could always count on getting a call from a covered person. Or one who thought they were.
An example is this article from the Globe & Mail in Canada. While the focus is on lawsuits brought by the former Nortel Networks CEO and CFO, who are seeking coverage for defense from civil enforcement actions, there is also mention of lower-level officers who are struggling against mounting legal bills.
Consider former Nortel assistant controller MaryAnne Poland, who had her defense cost coverage terminated 10 months after leaving Nortel in 2005:
According to a motion filed by Ms. Poland in a New York district court earlier this month, Nortel was allegedly urged by its U.S. adviser to cut off legal payments to its ousted officials as a gesture of co-operation with the Washington-based staff of the SEC. Weeks after Ms. Poland dismissed her lawyer, her motion says, she and her three children and husband were detained by U.S. customs officials for an hour and a half before boarding a flight for a Florida holiday.
More officers are going to read these stories closely and start asking questions. While nearly all company bylaws require the purchase of D&O insurance to cover officers and directors against defined legal costs and liability, the reality of growing pressure from regulators pursuing enforcement actions makes it expedient for the “new regime” at the company to turn off the faucet before a determination of liability outside the scope of coverage.
One result? Individual D&O policies, according to Barry Reiter, a partner with Bennett Jones LLP:
As a result of the uncertainty, a growing number of executives are demanding individual D&O insurance contracts with their employers. Mr. Reiter estimates that today about 50 per cent of public company officials are protected by individual contracts.
A prudent practice for the public-company GC would involve seeking counsel on D&O coverage issues from experts other than the policy broker. They are sometimes known for explaining coverage broadly before policy inception or renewal.
But when the government knocks on the door, the same broker is not always so good about returning calls.
Sarbanes-Oxley, Three Years On
November 26, 2007 | Filed Under Compliance
The Financial Times reports the results of a Compliance Week study on Sarbanes-Oxley results.
The study finds that the number of “material weaknesses” in these companies – identified shortcomings in accounting controls – fell to 5.9 per cent from November 2006 to May this year, compared with 16.7 per cent in the 12 months to November 2005.
There’s also the hint of costs coming down:
When Sarbox was passed in 2002, it was estimated that it would cost the US economy about $1.6bn (£776m, €1.1bn). By 2004, estimates of compliance costs rose to $4m per listed company – or about $35bn.
However, costs have come down significantly at the largest companies which have developed systems for complying. Costs are expected to fall further after US regulators made it much easier to implement Section 404, the most contentious part of Sarbox that deals with internal controls over financial reporting.
That probably comes as news to most GCs and CFOs. While larger companies may have the systems and staff resources to realize efficiencies going forward, smaller companies may still be weighing the costs when they decide whether to go public. And where to go public.
An Honorable Lawyer-CEO?
November 8, 2007 | Filed Under GC as CEO Springboard, In the News
Much was made of the rise of lawyers as CEOs when Pfizer and Home Depot joined Citigroup (and others) in naming former GCs as CEO.
Now the other shoe drops; when you’ve arrived your departure clock starts ticking.
Last Sunday Citigroup CEO Charles Prince resigned. Large financial services companies do nothing small. When they make money, they make it by the truckload. And when they lose it, stand back, call the Fed, and get ready for numbers starting with a “B.”
What caught my eye, however, was Mr. Prince’s memo to staff (as reprinted by the New York Times). Particularly this paragraph:
I am responsible for the conduct of our businesses. It is my judgment that the size of these charges makes stepping down the only honorable course for me to take as Chief Executive Officer. This is what I advised the Board.
It is rare for a CEO, particularly one who is stepping down, to (a) state the obvious, (b) take responsibility, and (c) do so in three short sentences.
Must be that legal writing training.
Here’s hoping that other GCs have the opportunity to be CEO. The marketers, financial types and engineers have been running up losses for years.
Draft Resignation Letter, Place in Top Drawer Overnight
November 2, 2007 | Filed Under Governance
Two current reminders of the power (and danger) of the printed word. Particularly when delivered in haste.
First up is former HP director Tom Perkins, who tells CBS News on this Sunday’s 60 minutes that he shouldn’t have bailed out as quickly.
Referring to the meeting at which he resigned in a huff, Perkins says, “I was angry. There’s no question. It was 90 minutes of very intense debate. I would say I was emotional more than angry, although that’s maybe the same thing.”
Then today we hear about the goings on at Affiliated Computer Services, which had a private equity buy-out falter, and resulted in a bruising conflict between 5 outside directors and CEO Darwin Deason. As the New York Times reports:
Five directors resigned in protest of the chairman’s efforts to take over the company, writing a heated letter that accused him of trying “to subvert the process in order to prevent superior alternatives to your proposal from being consummated.”
The Wall Street Journal has copies of the CEO letter and the board letter. (And now, as I am writing this; the board lawsuit; plus exhibits).
Not so great for the companies involved; good for the lawyers, though. Check out those exhibits; you wonder if some of them should have been held in draft for a day or two.
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