Corporate Directors on the Firing Line

The board of directors, which once seemed above the fray, is increasingly in the thick of it—fending off everything from bad publicity to nasty lawsuits.

By Philippa Maister - Corporate Counsel, July 9th 2012.

"The buck stops here."

It's a phrase immortalized by a sign on the desk of President Harry Truman, and it's often associated with the willingness of chief executives to accept responsibility for the performance of their companies. These days, however, the buck is often landing on the conference table where the board of directors sits. And the results aren't always pretty.

Consider recent events at Yahoo! Inc. In May the Sunnyvale, California–based Internet services company announced the resignation of CEO Scott Thompson, after just five months on the job. Third Point, a hedge fund that holds a substantial chunk of Yahoo's stock, had notified the board 10 days earlier that Thompson had misstated his academic credentials. He held a bachelor's degree in accounting, but had not completed a second in computer science, as he'd claimed—and as a simple Google search would have revealed, the fund's letter stated. Beyond the false credentials, Third Point said in a letter filed with the Securities and Exchange Commission that "shareholders must also question how the board of directors, specifically the search committee chaired by Ms. Patti Hart, could permit the company to hire a CEO with this discrepancy in the public record."

Third Point then turned its attention to Hart herself. The director, who chaired Yahoo's nominating and corporate governance committee, and was a member of its audit and finance committee, claimed to hold a degree in marketing and economics. Yet, Third Point noted, her degree was actually in business administration.

The hedge fund, which had been engaged in a no-holds-barred proxy fight to nominate its own slate of directors to Yahoo's board, won a complete coup. After Thompson left, Yahoo and Third Point agreed to a settlement. The company appointed three Third Point nominees to its board, while five Yahoo directors resigned immediately.

One of them was Hart. She said that her decision to resign was made at the request of the board of International Game Technology, where she is CEO. Embarrassingly, IGT's chairman, Philip Satre, was forced to issue a statement that his board "unanimously stands behind Patti as our CEO," and had found "no material inconsistencies in Patti Hart's academic credentials." (Hart did not respond to a request for comment.)

And all this occurred just a few months after Carol Bartz, Thompson's predecessor, told Fortune magazine, after she was fired, that Yahoo's directors were "doofuses."

Doofuses? Once upon a time, directors lived in a kinder, gentler world. They got paid for meeting a few times a year with their friends and listening to the company's officers tell them what to do. It was all very chummy and exclusive, and they didn't have to worry about nasty comments in the press—at least not about them. Or so it seemed.

These days, in a time of economic uncertainty and fraying public confidence in the integrity of business leaders, directors face challenges from myriad sources. Boards are expected to question management, play an active role in overseeing corporate strategy, have a role in risk oversight, and ensure that executive pay matches performance. The role of lead director has been created to provide leadership to other independent directors and counterbalance the weight of the CEO.
Increasingly, directors find themselves in the firing line. Activist shareholders have a greater voice in corporate decisions. Litigation seems to be a constant threat: Class action lawyers launch investigations into big mergers even before a plaintiff shows up. Regulators are stepping up enforcement. And generous incentives for whistle-blowers under Dodd-Frank are bringing tales of hidden misconduct to light.

In this environment, there's a risk that directors may be tempted to shirk tough decisions because they're looking over their shoulders at the potential fallout. Or they'll simply bail out.

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