Archive for August, 2008

Technological Change and Software for Boards of Directors

Saturday, August 30th, 2008

What is amazing about technological change is how quick it is in today’s world.  It seems as if the rate of change in human history can be compared to a snowball that grows bigger and bigger and rolls faster and faster down a hill as time marches on.

Only 25 years ago, printed material permeated our lives.  Today, electronic data has largely complemented or supplanted the print medium for many routine processes.  New software applications seek out niches to exploit like water seeping through the earth to fill all the cracks in a rock.

One niche in which electronic means are taking hold is in software for Boards of Directors.  New software for corporate governance allows for worldwide, instantaneous, 24/7 access via easy-to-use interfaces.  It means that printed materials don’t have to be dragged around or distributed.  Confidentiality and security are enhanced.

State corporate law statutes regarding Board meetings have evolved to reflect this technological change by allowing for meetings by remote communication and remote participation (See, e.g., Massachusetts Bus. Corp. Law ch. 156D, § 8.20).

Companies that offer software or online applications for Boards of Directors include BoardVantage (Director Suite) and Diligent (Boardbooks).  Collaborative content management software, such as that produced by EMC (Documentum, also could be used, although it is not specifically designed for corporate governance.

Practical Advice About Confidentiality Carve-Outs

Thursday, August 21st, 2008

Many different types of agreements include confidentiality provisions.  These provisions define the information that is deemed to be confidential.  I recently reviewed a consulting agreement and it had a flaw common to provisions that discuss confidential information:  the lack of any specificity regarding when information might not be considered confidential.

Broad, generic drafting creates potential flash points.  Instead of protecting both parties by clarifying the details, its broadness makes a potential dispute more likely.  I don’t argue the point that, in some cases, one party purposely will leave a clarifying section (AKA a carve-out) out of the agreement because it is advantageous to do so. But often, it’s just sloppy drafting without carefully crafting what is appropriate in the circumstance.

Here are some carve-outs that I suggested be added to the consulting agreement:

1. Information that, at the time of disclosure, is generally known in the pertinent field or is in the public domain;

2. Information that, after disclosure, becomes generally known in the pertinent field or becomes part of the public domain without breach of the provisions of this Agreement by either party;

3. Information that either party can show it possessed at the time of disclosure and did not acquire, directly or indirectly, from the disclosing party;

4. Information that either party can show it independently developed after disclosure without reference to the other party’s Confidential Information;

5. Information that Contractor can show it received from a third party which did not acquire it, directly or indirectly, from Company under an obligation of confidentiality and which did not require Contractor to hold it in confidence;

6. Information that Company can show it received from a third party which did not acquire it, directly or indirectly, from Contractor under an obligation of confidentiality and which did not require Company to hold it in confidence;

7. Information that is required to be disclosed by applicable law, by rule or regulation of a court or government agency of competent jurisdiction, or pursuant to legal process; provided, however, that the party required to make such disclosure shall (a) use its best efforts to limit such disclosure, (b) use its best efforts to promptly provide the other party with advance notice of any such request for disclosure so that said other party may seek a protective order or such other appropriate remedy as said other party deems necessary, and (c) make such disclosure only to the extent so required.

Number 7 is an interesting provision, in that, without it, a party could be stuck between being in violation of the law or breaching the contract.  Let’s say Company is sued by a third party and confidential information, as defined by the Company-Contractor Agreement, is or becomes an issue in the lawsuit.  If the third party’s lawyer deposes Contractor, but the Company-Contractor Agreement doesn’t include # 7, then if Contractor testifies in the deposition, he is in breach of the Agreement – and could then be subject to suit by Company.  Yet if he does not testify, he is in violation of the law.  Clearly, it is in Contractor’s interest to include this provision in the Agreement.

Capital Ratios of Financial Institutions

Thursday, August 14th, 2008

With the stocks of banks and investment banks imploding in 2008, there’s been much talk of capital ratios.  Regulators require banks to maintain minimum capital requirements.  The reason is to prevent them from failing due to overzealous lending during economic expansions that could result in financial setbacks when the economy turns down.  So just what are capital ratios?

In the United States, there are two primary capital ratios:  Tier 1 and Tier 2.  The Tier 1 capital ratio is the most important one, and that’s what I’ll focus on here.

The Tier 1 capital ratio consists of the ratios of the bank’s stockholders’ equity, preferred stock and retained earnings to its total risk-weighted assets.  Risk-weighted assets are calculated by putting each of the bank’s assets and off-balance sheet items into a basket and assigning a risk category to that basket.  Risk categories range from 0% to 100%.  If the overall risk is lower, then the bank is considered more stable for depositors and more conservative for investors.

The problem today is in determining both the valuation of and the risk relative to the assets.  Some, as I noted in my earlier posting on auction rate securities, are hard to value, but are less likely to default.  Others, such are a letter of credit, may be considerably riskier.  So actually determining the Tier 1 capital ratio involves art as well as science. Thus, bank stocks, which have fallen considerably this year, may still be overvalued.

Regulators use the Tier 1 capital ratio to segregate banks into five categories ranging from well-capitalized  to critically undercapitalized.

The Tier 2 capital ratio includes undisclosed reserves, general loss reserves, subordinated term debt, hybrid instruments, among other items.

Title 12 of the Code of Federal Regulations includes the regulations regarding minimum capital ratios.  A much more detailed compendium of what is included in bank capital ratios is available in Appendix A to Part 3.

The (Not Exact) Characteristics of a Successful Leader

Thursday, August 7th, 2008

Once upon a time, a CEO I worked with critiqued the difference between our leadership styles.  He told me, “You’re like a coconut.  You’re hard on the outside, but soft on the inside.  People think you’re tough until they get to know you.  Then they realize you care about them.”

He then said something shocking.  He said, “I’m just the opposite.  Everybody likes me instantly.”  “But I’m hard on the inside,” he continued, waving his arm at a group of people working for his company.  “I could care less if any of them walked outside and got hit by a car.”

What was shocking to me was not his statement, but that he admitted it.  He was not a very nice person, but he was so confident that he could admit it and not care what people thought about him.

This CEO started with a few people and built a publicly-traded company.  As could be expected, he’s not good at maintaining long-term relationships with most of his employees.  Once they figure him out, they move on.  He can’t be trusted; I’ve seen him break contracts that he signed, but later decided not to honor.  Plus, every few months, the company had a new strategy.

Nonetheless, he’s been successful if judged only in terms of building a company and creating wealth.  He has the smarts, he’s crafty and he has tremendous confidence.

That caused me to think about what the characteristics of a successful leader are.  There are thousands of books on the topic.  If you google “what makes a good leader,” in a fraction of a second, you get more than 1.5 million entries.

Having been an attorney who’s worked with hundreds of companies and in leadership roles myself, what I’ve learned is that there is no one type of leader.  No one combination of characteristics exists that leads to the corner office at the top of the skyscraper.

Vision is overrated.  It’s important, but once you have the vision, you need to be able to act on it.  This requires a certain amount of organization – the ability to get things done.  You need ambition, so that you actually do act on it.  And you have to make people believe in you; that’s where the confidence comes in.  Plus, there are a few other traits that the books mention, such as keeping cool under pressure and making tough decisions on time, among others.

Yet good leaders come in a myriad of combinations.  What works in one organization or situation may utterly fail in another.  So to say that there’s any one, two, five or ten characteristics that define a leader is wrong because the mix of traits or lack of any one trait depends on the company, the circumstances and the individuals involved in the endeavor.

A difference exists, though, between leaders and those that stand out as great leaders.  The great ones I’ve met have the ability to listen, and let people feel like they’ve been listened to.

And I do think integrity is critical.  The CEO I mention above was successful, but was constantly losing good people.  Had he kept them, his company would have been much larger and much more profitable.

General Colin Powell offers some good thoughts in this leadership primer.