In this issue of The Practice, we explore the subject of lawyers on corporate boards—how lawyers come to sit on boards and the roles they serve as board directors. We also delve into some of the work that boards do and what they are—and are not—looking for in prospective board directors. In this iteration of “From the Classrooms,” we examine more closely the general counsel’s relationship with the board, as well as other dynamics and relationships in the boardroom. In Karina Shaw, Nathan Cisneros, and John Coates’s Harvard Law School case study, “A Difficult Decision with the Board,” we follow Manny Vargas, general counsel for the publicly traded Fortune 1,000 aerospace firm Calero Corporation, as he tries to carry out a challenging assignment from the company’s new CEO, Lars Neilson.
What is a case study?
A case study is an educational tool that allows students to analyze a factual situation confronting an individual or organization. Case studies, which are historically accurate, address topics such as the evolution of an organization’s business model, cooperation within teams, a corporate lawyer navigating his turbulent career, or a difficult merger between two law firms. Cases are not meant to provide definitive answers but instead to show multiple points of view and highlight the complexities and ambiguities of particular situations.
Following a decade of tremendous growth, Calero had recently been rocked by the global financial crisis and its aftermath, the emergence of new competitors, and a reduction in once-reliable revenue streams. The company’s woes were compounded when the previous CEO—believing government spending on the types of contracts that once quadrupled Calero’s revenue would rebound—rejected a generous buyout offer from a larger electronics company interested in Calero’s patents for consumer use. As the next few years proceeded to disprove the strategy’s core assumptions, shareholders began to demand a leadership change and, as they grew impatient, turned their attention to Calero’s board. Soon after, the CEO stepped down and the board went on to appoint Neilson, an outsider with a reputation for vision and a knack for keeping sinking ships afloat.
One of Neilson’s first priorities as CEO: shake his board out of complacency and push them to “demonstrate a renewed commitment to increasing shareholder value.” As part of that overarching goal, Neilson saw a refresh on the board’s self-evaluation process as a critical component to regaining the trust of shareholders and other potential investors. Neilson delegated the job of implementing this new approach to assessing board performance and work to his general counsel, Manny Vargas.
The general counsel and the board
By the time Neilson was hired as CEO, Vargas had been with Calero for two decades. He worked his way up the chain in the company’s legal department under the wing of the company’s previous general counsel—who then became an early casualty of Neilson’s efforts to clean house of old managers and other top people. After entertaining the possibility of an outside hire for the new general counsel, Neilson chose to promote Vargas to the top job instead.
Imagine you are Manny Vargas and your CEO has turned to you to create this new board-assessment framework and implement it with the board. What do you do?
Vargas was relatively new to the regular board interaction required of the general counsel, but he took to it well and made a few allies among the newer directors. One thing that jumped out at him early on, however, was a tension between the new CEO and some of the more tenured board members—including the board chair and lead director. The former was an outsider, a reformer, who did not shy away from his “mandate to turn the company around.” The latter were more conservative in their approaches and might chafe at suggestions for rapid change.
The challenge
Vargas knew that he had to find a way to reconcile board tensions if he was going to be successful in implementing the new self-evaluation process. The goal was to increase accountability and transparency, but Vargas had his doubts that the board would eagerly accept any major departure from the established system, “which was essentially an annual questionnaire.” After some thought, he reached out to a consultant familiar with the board for options. The consultant provided the following possibilities, noting they are neither exhaustive nor mutually exclusive:
- Assess the board as a whole (as most public companies traditionally do) through a questionnaire-based board assessment, similar to the current model but with a more robust system put in place for analyzing and distributing results.
- Assess the board as a whole through a questionnaire/interview hybrid assessment, which would combine a questionnaire with individual interviews with board members to help inform the results.
- Assess the board as a whole through in-depth interviews relying on one or a combination of possible interviewers, such as the lead director, corporate governance committee, a rotating director, an outside professional, or a rotation between inside and outside people.
- An annual review of each director by each director
- Open-ended review of each director by the whole board
- Open-ended review by a limited group, such as the chairman and lead director
- Open-ended review by the whole board with the addition of scheduled “deep dives” on a small portion of directors
- Or, somewhat outside the box, introduce limitations to board service that might accompany and help frame assessments.Annually assess individuals, rather than the board as a whole:
Imagine you are Manny Vargas and your CEO has turned to you to create this new board-assessment framework and implement it with the board. What do you do?
