That’s not hyperbole. Consider this observation by Mr. Millstein and Professor MacAvoy: “There has been growing boardroom interest in assuming a more active role in the strategic process. If the board is to determine the merits of management’s strategic and business plans, including the likelihood of realizing the intended results, then it should determine for itself the capacity of specific operations to generate the returns expected to be in keeping with the strategy.”
How might a board do this? Imagine that management presents the board with a bold plan for spinning off or acquiring strategic assets worldwide. The logic is consistent; the plan makes sense; the numbers look good; and management honorably answers every hard question put to it by skeptical outside directors. But is that really enough? At the very least, shouldn’t the board get an opinion from an independent advisor or consultant to “audit” the strategic assumptions made by management and its own consultants? After all, independent outside directors have hardly had the equivalent time and resources to review the merits of such strategic plans.
A decent case could be made that independent directors who feel compelled to retain outside experts to review corporate strategy have lost confidence in the CEO and should simply fire him or her. Conversely, one could argue that hiring outside experts is the most cost-effective way for independent directors to prove their independence and positively challenge, rather than undermine, top management. So which is it?
A more active role for the board might well guarantee new fiduciary-driven infrastructures for managerial second-guessing. In the same way finances are audited by outsiders, strategies and operations would be too. In the same way there are board audit committees and compensation committees, there would now logically be board committees for strategy and operations.
To the extent, however, that the board actively collaborates and cooperates with management in the design and development of new strategies and business operations, the board inherently is not performing oversight. Why? Because active collaboration with management means the board is overseeing and reviewing itself. It’s almost impossible to see how a group of independent directors intimately collaborating with the CEO, the CFO, and the key business unit heads on a proposed strategic acquisition can honestly be objective about a deal they helped facilitate.
Similarly, we can — and do — look askance at a judge who is a little too helpful to and supportive of a plaintiff’s or defendant’s attorney. Courts would think twice before allowing members of the jury to conduct cross-examinations to clarify concerns they might have. There are rules, there are roles, and we need to think very carefully about the consequences of expanding the purview of company boards just as we would a judge’s discretion or a jury’s curiosity in the courtroom.
Yet, as Mr. Millstein and Professor MacAvoy point out, longtime legal principles of corporate governance such as “good faith” continue to expand the boundaries of perceived directorial duty. Indeed, the authors quote Delaware’s chief justice as saying good faith is likely to emerge as a central issue of the directors’ standard of conduct. “Traditionally,” they note, “the duty of good faith has been closely related to that of loyalty, which prohibits self-dealing, self-interest or serving any interest except that of the corporation and its stockholders. [The Chief Justice] has noted, however, that in some cases, ‘it may be accurate to consider the duty of good faith as an additional duty beyond the duty of loyalty.’”
In other words, “good faith” may mean adhering to both the letter and the spirit of regulatory compliance. However, it may also mean having the board retain its own outside advisors to scrutinize a strategic initiative recommended by management’s outside advisors. Indeed, the securities plaintiff’s bar will be eager to conduct discoveries that would examine the differences between the consultants hired by management and those hired by the board to review them. Better yet, if some boards retain outside advisors to review strategic operations and others don’t, are the ones that don’t in breach of their “good faith” fiduciary obligations, because they didn’t subject management to this added level of strategic quality control?