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News < Back Sarbanes Oxley : Law : Thought Leader How Corporate Directors Expose Their Personal Fortunes ?Privilege? of Serving as Top Company Watchdogs
The panel, led by law firm Morrison & Foerster, explored how directors can cope with their new, weightier responsibilities in an age when everyone from Wall Street to the SEC to plaintiffs? lawyers expects boards to work miracles of corporate oversight with little time and less than modest compensation ? or pay the piper with personal liability. While a board meeting might once have resembled Lifestyles of the Rich and Famous, it now takes on the tone of Fear Factor, as directors furrow their brows over WorldCom, Global Crossing, Enron and other horror stories of corporate wrongdoing being laid in the laps of the directors, who are increasingly being expected to act the role of fraud police and who are exposed to greater personal risk in ensuing litigation. The Executive Forum panel set out to answer that question. Jack C. Auspitz, a securities litigation partner at Morrison & Foerster, moderated the panel. The forum, ?Corporate Board Member Liability: How your personal assets could be at risk in the event of personal litigation,? has been presented recently in Palo Alto and Newport Beach, CA, with upcoming sessions slated for Denver (May 11) and Northern Virginia (June 14). ?We are living in a different world,? explained Mr. Auspitz. ?Today?s board has been put in the position of investigating the company instead of supporting and helping the company. This has spilled over into the way lawyers relate to corporate clients, which heightens the ?watchdog? feeling in the boardroom. In the days before Sarbanes Oxley, it was a lawyer?s job to defend a client before the SEC and other agencies. Now, the SEC instructs the company?s lawyers: ?Waive attorney-client privilege, do an internal investigation, and then talk to us.? We?ve gone from defenders of our clients to prosecutors.? ?Part of the hysteria may be unwarranted,? commented William Sherman, a panelist and corporate partner at Morrison & Foerster in Palo Alto, who sits on the board of a public company and regularly attends board meetings of a number of public companies as an advisor. ?Although high-profile cases have generated a lot of press on directors? personal liability, historically less than 1% of securities class action settlement dollars were actually paid from personal assets of directors,? Mr. Sherman added. ?At the same time, it is worth noting that some plaintiffs? lawyers have been able to negotiate a bonus on top of their contingency fees when they obtain a settlement where at least part of it comes directly from a director?s pocket.? Nonetheless, with more than half of settlement dollars historically being paid by insurers, the insurance industry is examining the complex issues surrounding D&O quite carefully --just as directors are considering their insurance product options. Gone are the days when directors blithely assumed that ?standard? D&O policies would suffice. Insurance industry analysts are also weighing whether the personal-asset settlements made by the WorldCom and Enron directors might have turned out differently under alternative insurance scenarios such as providing director-only coverage, non-rescindable coverage or providing better coverage in the event of a restatement. This hothouse atmosphere has left many directors wondering what they should and should not do in order to stay on the right side of the law. Morrison & Foerster?s Mr. Sherman suggests thinking outside the box in terms of actions that can be taken inside and outside of the boardroom: Inside the boardroom, think beyond the ?business judgment rule?: • Don?t join an accident waiting to happen (do your due diligence before as well as during your tenure) • Demand corporate governance and legal/regulatory best practices and compliance • Pay attention to what executives get paid ? compensation has become a governance lightning rod • Scrutinize related-party transactions ? shareholders and plaintiffs? lawyers certainly do • Give better tools to your audit and compensation committees and pay them better • Know thyself: assess your strengths and weaknesses and those of other directors • Attend all meetings, keep a record in your day journal of what you read to prepare for the meeting and how many hours the meeting lasted; take minimal notes. • Encourage meetings that are of adequate length to fully address issues. Outside the boardroom, minimize your personal exposure: • Explore insurance options including personal umbrella insurance, director-only non-rescindable insurance, ?exploding? company D&O coverage, and potential mutual insurance entity coverage. • Investigate protecting personal assets through intra-family gifts, homesteads, asset protection trusts, and moving assets to favorable jurisdictions. • Lobby for legislative initiatives to better protect the overworked and underpaid director on both the federal and state levels. Also participating on the panel were: Matthew M. D?Amore, a partner at Morrison & Foerster, Ariana J. Tadler, a partner at Milber Weiss Bershad & Shulman LLP, Roger Raber, the President and CEO of the National Association of Corporate Directors and Paul A. Rauner, Vice President and General Counsel of NASDAQ Insurance Agency. Morrison & Foerster is a full service law firm with over 1,000 lawyers in 19 offices internationally. The firm is distinguished by its work in finance and financial services, life sciences, and technology; its legendary litigation skills; and, an unrivaled presence in Asia. 
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