Michael D. Moberly February 7, 2012
In Stone v. Ritter (but also, In Re Caremark and In Re Disney) the Delaware court drew, among other things, attention to board/director oversight (management, stewardship) of compliance programs and company assets. In part, the court’s decision read…
’…ensuring the board is kept apprised of and receives accurate information in a timely manner that’s sufficient to allow it and senior management to reach informed judgments about the company’s business performance and compliance with the laws…’
More specifically, directors, officers (boards) now have a fiduciary responsibility to be kept apprised of and know what’s going on inside a company!
Yes, these are Delaware cases, and yes, they are 2006 and 1996 decisions respectively, but they present timely and relevant issues, which in my view, warrant the attention presented here, because they go to the very heart of the rising number of intangible-IP asset driven (knowledge-based) businesses.
Rebecca Walker suggests in her paper ’Board Oversight of a Compliance Program: The implications of Stone v. Ritter’ the decision will come to be viewed (applied) less for its focus on board oversight of compliance programs per se, and more for bringing clarity to what actually constitutes ‘board oversight’ of a company’s assets, and by extension, its intangible assets which of course includes intellectual property.
And, when 65+% of most company’s value, sources of revenue, and building blocks for growth and sustainability evolve directly from intangible assets, any declaration that this increasingly valuable asset class carries fiduciary responsibilities at a board level is certainly significant!
Meeting the spirit and intent of Stone v Ritter can be readily achieved by expanding the type, quality, and timeliness of information that boards (D&O’s) receive by:
- scheduling presentations from relevant management team members for the purpose of:
- determining how the company’s (internal, external) reporting processes – procedures are structured and if they reflect the requisites of ‘timeliness and sufficiency’…
- assessing the company’s policies and practices relative to investigating suspected incidents of (internal, external) misconduct that could adversely impact a company’s business performance and compliance with relevant laws…
- surveying the perceptions held by employees regarding a company’s reporting, compliance, and audit programs, and the sufficiency of employee training in these areas…
- structuring the company’s reporting (compliance) programs to include adequate resources and authority for (their) effective execution.
- examining how the company:
- conducts risk assessments
- prioritizes its risks, and
- addresses (prevents, mitigates) those risks.
In addition, numerous legal experts suggest embedded in Stone v Ritter is a fairly strong advisory to boards and directors that there is a good faith duty, even perhaps a duty of loyalty, to ensure asset monitoring, reporting, and compliance mechanisms are not merely in place (on paper), but they’re fully operational. That is, they are functioning in a manner to consistently apprise – provide boards and D&O’s…
- with timely and accurate information, that is sufficient to allow them (within their respective scope) to
- reach informed judgments concerning a company’s compliance with law, and business performance.
In other words, absent specific efforts (by boards and directors) to ensure each of the above occurs on a consistent basis, they may well be failing to satisfy their duty to be reasonably informed and could conceivably be held personally liable for risks that materialize and cause adverse effects.
While acknowledging attempts to hold boards and directors (personally) liable for the misconduct of (company) employees for example, may be one of the more difficult aspects of corporation law for plaintiffs to prevail, it prompts some to consider if Stone and its implications will influence management teams, boards, and D&O’s to become more risk averse.
Whether or not one accepts the implications of Stone v Ritter as espoused here, what remains essential in today’s increasingly aggressive, competitive, predatorial, and ‘winner-take-all’ (global) business transaction environment, is that boards, directors, and management teams alike are obliged to assume a more ‘hands on’ state regarding the stewardship, oversight, and management of a company’s assets, particularly, its intangible assets.
Why?, because in cases such as Stone v. Ritter, In re Caremark, and In re Disney, important and necessary information failed to reach the board because of ineffective internal (company) controls and regular monitoring of those controls.
Another underlying, but seldom commented on implication of Stone v Ritter in my view, is its relevance to enterprise risk management (ERM). Simply defined, ERM encompasses doing what’s necessary, i.e., executing procedures, policies, and practices, to render a company ’proactively defensive’ to (business) risks. If this particular implication is substantiated, which I suspect it will, company management teams and boards alike would be well-served to acquire much more than a mere familiarity with Stone v. Ritter, rather a forward looking operational understanding for its implications.
All told, integral to – underlying each of the aforementioned fiduciary responsibilities is the absolute necessity that company’s put forth comparable efforts to sustain (protect, preserve) control, use, ownership, and monitor the value and materiality of its (intangible) assets. If this does not occur, or fails, little else matters, because asset value will likely and quickly go to zero!
(This piece was inspired by Rebecca Walker’s paper titled ’Board Oversight of a Compliance Program: The implications of Stone v. Ritter’ of Kaplan & Walker law firm.)