Category: Family Offices

Corporate Governance and Change

Corporate Governance and Change

A Quick Review Of Basics

By: Saul Winsten,General Counsel
The Winsten Group.Trusted Counsel LLC.
A national Legal, Business, and Corporate Affairs firm
thewinstengroup.com

What is “Governance”?

Governance has been defined in different ways. For our purposes, corporate governance may be understood to mean the system, processes and relationships by which a corporation is controlled and directed. Boards of Directors are responsible ultimately for governance, the control and direction of the corporation they serve.
For brevity our discussion will focus on this topic as applied to closely-held and family-owned business corporations.

What has changed?

With ever increasing market competition, and pace and magnitude of technological change, the challenges encountered by closely-held and family-owned businesses and their Boards have grown. The traditional or legacy structures for governance, or legacy leadership may no longer be appropriate. New governance structure, processes, and leaders may be called for.

Questions concerning governance often include questions concerning the role and responsibilities of the Board, and how governance may be evolving in response to change. Below is a quick review of basic principles, and of some increasingly common business adaptations to change.

Basic Principles:

The Role and Responsibilities of Boards

Board responsibilities are separate from those of management. Boards are not to manage the business; executive management has that responsibility. The Board’s role and its responsibilities include:

1.To advise and consult with management on corporate strategy, operational performance & effectiveness, key performance metrics, executive performance and compensation, risk management, and growth and change matters
2.To provide oversight of and approve corporate strategy and strategic plans, major
acquisitions and divestitures, management and business performance, strategic matters,
company resource planning and needs, legal compliance, protection of assets, budget and
significant financing, mergers, and corporate reorganizations
3.To plan for executive and Board succession, select new executives, and
recommend new Board members

Board Requirements

Boards and Board members must act solely in and for the interest of the corporation. Board members should be qualified to carry out Board responsibilities, be informed and knowledgeable of matters that may come before the Board, exercise prudent business judgement, and act free from conflicts of interest that compromise such action and judgement.

Fiduciary Duties

Boards of Directors and individual Board Members have “Fiduciary Duties”, to act prudently, in and for the interest of the business and shareholders, with care, honesty, prudence, and in good faith.

The primary fiduciary duties have been referred to as “Duty of Care”, and “Duty of Loyalty”. Some courts and securities regulation also refer to a “Duty of Candor” or “Duty of Disclosure”. Various courts have identified and discussed specific aspects of these duties.

The “Duty of Care” requires Board members act with knowledge of the pertinent facts and circumstances, with care, after due consideration of all relevant information.

The “Duty of Loyalty” requires Board members act in the best interests of the corporation and shareholders, and to ensure that actions are taken in good faith.

“Good Faith” has been defined by Black’s Law Dictionary as requiring Board members act with “(1) honesty in belief or purpose, (2) faithfulness to one’s duty or obligation, (3) observance of reasonable commercial standards of fair dealing in a given trade or business, (4) absence of intent to defraud or to seek unconscionable advantage”.

Liability for Breach of Fiduciary Duties

Boards and individual Directors have been found liable for breach of their fiduciary duties.

Defense to Claim of Breach of Fiduciary Duties

A defense to an action against a Board for Board action is sometimes called “the business judgement rule”. Under that rule, a court generally will not “second guess” a Board decision if the Board: (i) followed a reasonable and informed process; (ii) took into account all relevant facts and circumstances; and (iii) made its decision” in good faith”.

Adaptations to Change
These include but are not limited to:

Enhanced Board “on-boarding” and education

To properly prepare new Board members for joining the Board and carrying out Board responsibilities, businesses and organizations are paying increasing attention to proper orientation, introduction and education of Board members. The need for such action increases with the size of the organization, complexity of the organization and its activities, demands of shareholders and stakeholders, and the nature and complexity of risks to which the organization is subject.

Use of Board Committees:

As the quantity and complexity of matters that Boards are to act upon have increased, the use of committees and the need for enhanced committee and Board expertise has increased.

Some matters, particularly complex matters requiring special expertise, are increasingly delegated to committees of the Board, which in turn make recommendations for Board deliberation and action. Committees such as Compensation, Audit, Governance, and Nominating, among others, are common.
Many Boards have an Executive Committee of corporate officers, who are tasked with developing recommendations on policy and other matters for Board action.

Matters requiring special expertise may be delegated to a committee which includes members with that special expertise.

An example of a committee tasked with matters requiring special expertise is the Audit Committee. This committee is charged with developing recommendations concerning matters concerning accounting policies, financial reporting, and other audit related matters. It is responsible for oversight of the independent auditor, internal financial control policies, financial risk management policies, and the performance of the internal audit function.

Another example is the Nominating and/or Governance Committee where identification of desired qualified candidates for Board service, selection of nominees for Board positions, governance standards and processes, Board and CEO evaluation may be discussed and recommendations made.

Other committees requiring specialized knowledge may be used by a business’ Board. These include Cybersecurity, Technology, Legal, Finance, Strategic Planning, M&A, HR, Ethics/Corporate Responsibility, and Environmental Committees, for example.

Addition of Independent and Specially Qualified Directors:

Another response increasingly used by Boards of closely held businesses, including family-owned or managed businesses, is the addition “Independent Directors” to their Boards. These Independent Directors assist the Board in carrying out its responsibilities by bringing independent thought, needed specialized expertise, and special perspective to those Boards. Examples of the knowledge and expertise sought and retained for Independent Directors include proven industry and outside business leadership, legal, finance, technology, cybersecurity, and other specialized expertise.
Some courts, notably Delaware, have addressed the issue of what makes a Board member “independent”.

Use of Board Counsel

Some larger businesses and organizations have retained special Board Counsel to provide independent advice and guidance on Board and governance matters of special concern. Board Counsel have been found especially useful where perspective, guidance, and advice independent of Board or executive leadership relationships, is desired.

Conclusion

Governance changes are driven by a number of factors. Growth, market competition, disruptive technology, regulatory requirements, and succession generated dynamics for example, may compel a company to change the way it does business, manages risk, and the way it is governed.
Businesses and organizations that will succeed are those prepared for change.

Improving Family Owned Business Boards And Governance With Addition of Specially Qualified Independent Directors

This article originally appeared in The Family Business Boardroom quarterly newsletter.

Seven Steps to Recruiting Value Add Independent Directors
director_recruiting_final
© The Family Business Consulting Group
By Anne Hargrave

The Addition Of Specially Qualified Independent Directors To Family Owned Business Boards and Improved Governance Processes Is Increasingly Common, and Of Interest To Successful Family Owned Businesses.

Incorporating independent directors into a family firm’s board is considered one of the standards for family business success. The prospect of finding independent directors who can both challenge business leaders and represent ownership interests can be daunting. Following these seven steps will help identify directors who will add value to the family business enterprise.

1. Establish a Nominating Committee
Identify three to four people to manage the director search process and recommend candidates to the board, which is responsible for electing a new director. The nominating (or governance) committee can facilitate an inclusive process, incorporating stakeholder perspectives to identify candidates who will support the needs of the business and the shareholders.

2. Collect Stakeholder Opinions
Soliciting stakeholder opinions on the characteristics of a new director gives participants an opportunity to express their point of view and will make it easier to accept the ultimate conclusion of the board. It is helpful to:

Review strategic challenges and board member expertise – Consider how your industry is evolving and the degree to which the business is prepared. What parts of the strategic plan are new territories for management? What skills might a new director have to support management in executing the plan?
Assess the board’s culture and function – Clarify what you would like to maintain and what you would like to change. Consider the impact of near term retirements on the board’s culture and whether you are seeking a director who might become the chair in the future. What director characteristics are important to enhance the board’s functioning?
Consider family and shareholder dynamics – Independent directors who build relationships with shareholders, spouses and future shareholders can be valuable in creating alignment between the board and shareholders. What characteristics will be important for a new director to relate well with shareholders?
Explore potential added value for management – Ask management to identify specific skills in a new director that will be helpful to them. Taking into consideration the board’s view of management’s opportunities for growth, what attributes might a new director have to mentor to management?
3. Create a Board Prospectus
As a tool for recruiting new directors, the prospectus outlines important factors about the business and the expertise desired, including:

A summary of the business’ history, products, markets served, strategic focus and size
Rationale for seeking a new director
Board structure, including number of independents, committees, meeting frequency and board fees
Board responsibilities
Desired director experience, attributes and education
4. Solicit and Review Candidate Pool
The nominating committee manages a process of circulating the prospectus to colleagues, advisors and personal contacts requesting candidate referrals. They collect and review candidate resumes to establish a pool of candidates whose background aligns with the prospectus, at least on paper. Using a firm experienced in searching for family business directors can be helpful in expanding the candidate pool.

5. Conduct Interviews
The nominating committee then narrows the candidate field incrementally until a qualified director has been identified. It is helpful to break the interviewing process into the stages noted below to compare candidates and share thinking about the right fit for the board.

a) Provide candidates with the prospectus and confirm their interest.
b) Interview each candidate via telephone.
c) Review the interview outcomes and identify a small group of candidates for in-person interviews.
d) Invite candidates to meet in person with nominating committee members.
e) Review the in-person interview outcomes, determining whether you have the right candidates to choose amongst. If so, move forward.
f) Consider the value of additional interviews or a chemistry fit social gathering with key stakeholders for the final candidates.

6. Decide
When you have identified a board candidate whom you believe has the right skills, values and cultural fit, extend an invitation. At that time determine whether or not the candidate is interested in accepting, contingent upon reference checks.

7. Conduct Reference Checks
Conduct reference checks and any additional vetting to confirm the candidate’s value add to other boards, their level of expertise, and, if they have had family business experience, the manner in which they were helpful to the family and business system.

Boards Of Directors in 2017: 5 Trends To Be Aware Of.

Previously posted in Private Company Director Magazine

The Responsibilities Of Boards Continue To Increase, Demanding Increased Director Awareness and Understanding Of Developments Likely To Impact That Business.

2017 Board of Directors Predictions: 5 Trends to Watch
By Brian Stafford

“For board members and directors tasked with guiding their companies through these changes and the complexities that could arise in the aftermath of 2016, change is needed in the boardroom as well. From expanding skillsets to greater accountability for brand reputation and issues management, here are five of the top trends that will make the biggest impact on boards in 2017”.

2016 was a year marked by significant changes—stunning political upheavals via Brexit and our own controversial new President-elect; a growing number of big-ticket, multi billion dollar M&A deals amid massive enterprise court battles, particularly in the technology sector; evolving regulations and proposed governance standards; as well as persistent and increasingly destructive cyber security attacks, threatening everything from the outcome of the U.S. election to the sale of Yahoo to Verizon for $4.8 billion.

For board members and directors tasked with guiding their companies through these changes and the complexities that could arise in the aftermath of 2016, change is needed in the boardroom as well. From expanding skillsets to greater accountability for brand reputation and issues management, here are five of the top trends that will make the biggest impact on boards in 2017.

Prediction 1: Individual Accountability Becomes a Focus

Board members will be measured by more than just collective financial performance, but also for their personal effectiveness, diligence, ethical quotient (EQ) and contribution to the corporate brand. Thus, it will be imperative for board members to evaluate the security of their confidential digital communications (both personal and professional), and adopt modern best practices designed to protect the integrity of sensitive information, and ultimately, the brand’s reputation.

Prediction 2: Diverse Board Members Wanted (& Needed)

Boards have often been criticized for lacking the diversity and modern skillsets needed to compete in today’s fast-paced and technology-driven business world. However, in order to both solve complex challenges facing businesses today, as well as capitalize on market opportunity globally, more diverse views, experiences and skill-sets in the boardroom are needed.

This evolution will revolve around three key areas:

1. More women as directors
2. Board members with varied skill sets (such as technology and security)
3. Unwavering commitment to technological adoption in the boardroom, and across the enterprise.

Prediction 3: Greater Accountability Calls for Improved Collaboration

In 2017, board members must also have more transparency, authority and collaboration to advise and make key decisions in tandem with company decision makers.

As the level of accountability grows, there will need to be a redistributed line between the board and executive management. This new redistribution will also guide how the board interacts with activist investors, shareholders and each other.

Prediction 4: Cyber Security Becomes a Board Problem

In 2017, boards will need to strongly consider adding individuals with CIO/CISO experience. Cyber security is perhaps the single biggest risk to enterprises today, with breaches impacting corporations around the world daily, and many are not ready for battle.

To help better prepare, boards will need to make it a priority to enhance public-private partnerships and utilize third party providers to leverage the cumulative cyber-knowledge of its whole network. This will help solve fundamental problems like a lax security culture, knowing where data is located and how regulations will impact the company.

Prediction 5: Political Changes Enter the Boardroom

President-elect Donald Trump promises to bring about a variety of changes to foreign policy, domestic practices and corporate governance. With Trump in office, board members will need to keep an even closer eye on how corporate governance is set to change, including new requirements for board oversight as well as the evolving role of the corporate secretary. In fact, there’s already talk of potential changes to key legislations such as dismantling Dodd-Frank and swift immigration and labor changes.

2017 will undoubtedly be a transformative year for many enterprises and the boards that govern them. While time will tell how each of these trends will impact boards, I am willing to bet that those that continue to evolve and adhere to industry best practices will outperform those that stick with the status quo.
Brian Stafford is Chief Executive Officer of Diligent Corporation. Brian is responsible for all day-to-day operations, with a focus on accelerating global growth and incorporating scale into the business in order to seamlessly manage the growth. Brian previously served as a Partner at McKinsey & Company, where he founded and led their Software-as-a-Service Practice. Prior to his tenure at McKinsey, Brian was the Founder, President and CEO of CarOrder, a division of Trilogy Software based in Austin, Texas. Brian is also an active seed stage investor and start up advisor. His other passion lies in the arts, supporting the NYC community in his role as a BAM board member.

How Some Family Offices Are Changing Their Investment Strategies

Previously posted on LinkedIn.

Food For Thought On Some Family Offices’Changing Strategies for Investment, and For Direct Investment In Particular.

Balancing what can, therefore, be a rather imprecise notion of ESG performance or “impact” and the asset’s financial performance within the decision-making and constitutional framework of a family office may not be without its complications and some will take to this approach more readily than others.

Family Office Insights
Sustainable and Impact Investing: An Increasing Focus for Family Offices
As highlighted in our previous “Family Office Insights” piece, the last few years have witnessed a growing number of family o ces undertaking direct investments and developing their human and technical resources as enablers for such investments. While not without its challenges, such a strategy can deliver economic benefits by way of reduced fund management fees while giving investors a greater level of engagement and in uence within the underlying businesses.
At the same time, we are seeing mounting evidence to suggest that more and more family o ces are turning their focus and capital allocations toward businesses and assets that satisfy certain environmental, social and corporate governance (ESG) criteria and/ or that seek to achieve positive social or environmental “returns” or “impact” alongside nancial performance.
This is, of course, not a trend that is exclusive to family offices and should not come as a surprise. We live in a world of increasing interest in the environmental and social consequences of business and trade, where the behavior of corporations is scrutinized more and more rigorously, and so the impetus for making investments in and supporting organizations that have a positive impact on society will surely continue to strengthen. As social awareness and pressure increases, it seems inevitable that the whole gamut of investors, across the private and public sectors, will look to increase their exposure to, or use of, products or assets that satisfy certain ESG, “green” or “impact” criteria in one way or another.
Nor is this a recent phenomenon; the idea of investing to align with ethical standards or to incentivize or disincentivize certain types of environmental or social behavior is long established.
What has perhaps been a catalyst for the more recent trend, however, is a realization by many investors that companies (and the instruments deriving from them) operating ESG-sensitive business practices are capable of matching, if not outperforming, their peers and comparable investments from a nancial perspective.
Converging Trends
There could be said, to be some degree, of correlation between the growing trend of direct investments by family o ces and the increase in capital being allocated by family offices to businesses or investments that operate with ESG considerations at their core, especially those that can truly be said to be “impact investments.”
The Millennial generation is undoubtedly more influenced by and
in tune with ESG concerns than their forebears, and with a large number of 30-40-year olds now starting to assume greater decision- making responsibility within their own family organizations,
greater proportions of the capital at their disposal is now being aimed in this direction. The emergence of a new cohort of global entrepreneurs with strong social and ecological consciences and loud social media-enabled voices no doubt adds further support to the momentum of a generation who want to put their money to work in a socially productive and bene cial way, while still generating acceptable investment returns.
More particularly, while liquid assets in this space such as ESG- oriented equity funds become increasingly prevalent and investable and will continue to attract a meaningful share of available capital, alternative assets such as direct investments can o er a much more “hands-on” approach to ESG investing, by removing intermediaries and often giving investors a role in the operation or governance of a business, enabling them to make an “impact.” Reputational benefits by association may also accrue to families that are seen to be actively involved with ESG businesses and investments, which can add to the appeal for some family organizations. For the right asset and assuming nancial performance targets are achievable, there can then be a compelling investment rationale at the con uence of these developing trends.
What Are the Challenges?
In the case of direct investments, identifying and gaining access to the right investment opportunities and then executing them will present the sort of challenges with which family offices are increasingly familiar.
As well as the typical hurdles of sourcing deal flow and identifying investment opportunities, there is the more fundamental question
of how to measure performance as far as ESG or “impact” is concerned. This is essentially an emerging asset class that is still in its infancy; there is no such thing as standardized criteria with which to measure “impact” against, and while corporate governance (the “G” of ESG) has received considerable attention and is some way toward more global or regional standardization, the other limbs of this commonly used acronym remain di cult to quantify or verify. In the US and in other jurisdictions, including the UK, the development of the “bene t corporation” model, aimed at addressing ESG concerns and social investing more generally, does, however, show signs of providing one form of veritable framework in which to join a for-profit enterprise with a social investment goal.
While the general trend seems, therefore, to be one of ever-increasing development, transparency and disclosure (other examples of which include the “comply or explain” regimes for public companies, requirements for regulated funds and the proliferation of ESG-oriented indices in the public equity and debt markets), which will help with the evolution of best practice and benchmarks for many investors, an assessment of performance from an ESG or “impact” perspective will often be to a large extent subjective.
Balancing what can, therefore, be a rather imprecise notion of ESG performance or “impact” and the asset’s financial performance within the decision-making and constitutional framework of a family office may not be without its complications and some will take to this approach more readily than others.
How Advisers Can Help
There will be a range of areas in which external advisers can help, depending on the asset in question and what the investment aims and objectives are.
A thorough understanding of the business model and particularly the supply and distribution chains will be critical and, accordingly, a more bespoke and possibly more intrusive approach to due diligence might be necessary. Likewise, a familiarity with the markets the business operates in and the local public policy landscape may be more valuable than it might otherwise be. Negotiating and obtaining appropriate governance and information rights, giving an ability to direct or monitor specific aspects of its investment, can also become a crucial aspect of the deal terms and may go beyond what is typically sought by a minority investor. Where direct investments are made in real estate, analyzing and agreeing to the terms and conditions applicable to tenants and potential service providers can also be a means of shaping the performance and credentials of the asset. In the case of funds and listed entities, where the opportunity for direct “impact” will be more limited, investors may wish to consider how they can influence performance or behavior by way of shareholder activism or softer, more diplomatic means such as raising concerns with directors and fund managers directly. With such a variety of approaches and considerations, there will, therefore, be numerous ways in which advisors should be able to add value to the process throughout the life cycle of the investment.

Contacts
Robert J. Shakespeare
Of Counsel, Singapore
T +65 6922 8674
E robert.shakespeare@squirepb.com
Daniel G. Berick
Partner, Cleveland
T +1 216 479 8374
E daniel.berick@squirepb.com
The contents of this update are not intended to serve as legal advice related to individual situations or as legal opinions concerning such situations nor should they be considered a substitute for taking legal advice.