Public company board directors dream of takingtheir company private to escape onerous regulation,the high cost of compliance, and the sometimesconflicting demands of different shareholdergroups.
Our recent Directorship Boardroom Roundtable,“Private Companies: Compliance and Liabilities,”convened a group of leading directors andexecutives to look into this issue and answer suchquestions as whether private companies would bewell served to remain private, especially in the currentenvironment. In the absence of shareholderlawsuits, what are the real liabilities for privatecompanies? What are the best practices public andprivate companies can learn from each other, andwhat types of issues should directors and advisersbe attuned to?
Leading the discussion was Brian Inselberg, whoserves as president of AIG Executive Liability’s CorporateAccounts and Private & Non-Profit divisions.He quickly listed the primary reasons forbecoming a publicly traded company: access tocapital, new forms of compensation for employees,a potentially higher profile and wider following, thediversification of personal holdings, among others.Inselberg noted that liability exposure remains afunction of size and structure and that being privatedoesn’t translate to reduced compliance risk.
While the risks are typically smaller for privatecompanies, he noted there are potential areas ofcompliance risk that private-company managementand board directors would be well advised to payparticular attention: data breach and data privacy;transparency and independence of board; regulatoryissues; and the Foreign Corrupt Practices Act(FCPA), which makes it unlawful for a U.S. personand certain foreign issuers of securities to bribe aforeign official for the purpose of attracting orretaining business. (For more information on theFCPA, go to www.usdoj.gov/criminal/fraud/fcpa.)
The Public/Private Debate
The decision to go public or stay private (or go privatevia a private-equity firm) comes with a set ofpros and cons. Robert La Blanc, a former partnerat Salomon Brothers, and now an active directoron multiple boards of public and private companies,was asked how going public changed theonce venerable Wall Street investment bank. “Themanagement committee at the time only had partnershipmoney and they were looking at the modelof a Citigroup which had a larger base ofclients…The desire to go public was access to capitalso that we could play among these big players.”Indeed, access to capital is usually first on the listof benefits to going public.
Georges Ugeux, chairman and CEO of GalileoGlobal Advisors and former head of the internationaldivision of the New York Stock Exchange,countered that going public doesn’t always have apositive effect. He said going public “completelychanged” the culture of Salomon, which was laterbought by Smith Barney, and eventually becamepart of the corporate structure its former managementhad aspired to emulate: Citigroup. “It changedfrom a culture where people worked for the good ofthe company to one where people worked for whatwas good for the individual. Within six months, itwas a totally different firm,” Ugeux asserted.
And companies that go private or stay private toavoid compliance and regulation headaches mightbe engaging in a bit of wishful thinking. “You arestill going to have regulatory exposure and you stillhave the need for a compliance program,” notedDirectorship Publisher Christopher Clark. Forexample, he said that any company that has $5million or more in government contracts needs tohave a compliance program. And in certain industries,he said, class actions and antitrust issues canbe as significant for private companies as they arefor public companies.
“What you’re saying then,” said Jeffrey M. Cunningham,chairman and CEO of NewsMarkets, theparent company of Directorship magazine andGlobal Proxy Watch, “is that there isn’t a huge differencein liability, but as a private-equity investor whatI need to carefully assess is the risk-control environmentfor private companies.”
Some Roundtable participants pointed out thatprivate companies and especially non-profits andfamily-owned businesses are often guilty of lessvigorousor even sloppy financial controls and bookkeeping,raising the specter of liability and risk.Joseph Fichera, the founder and CEO of Saber Partners,offered the contrasting view that from a riskstandpoint, private companies backed by venturecapital might actually be in a better position thanpublic companies.
“When they [the venture capitalists] interact withthe CEO and management, they’re armed withbetter information than the board…whereas publicboard members may lack the resources as well as theindependent judgment to view company data,”Fichera said. “We should ask, ‘Are you doing yourown analysis and, if not, are you getting all of yourinformation from management?’”
Murphy’s Law
“That’s a valid point,” Inselberg said. “You want tohave a process in place, as all risk-managementoriented companies should have, that assumes thatanything that could go wrong, will go wrong. Whenthe inevitable happens, your organization needs tobe able to limit its exposure.”
Some directors said they would not serve on a privateboard that did not offer directors’ and officers’(D&O) insurance. Even serving on the board of alocal nonprofit, whether a small charity or a largehospital, has risks that should not be underestimated.Case in point: A lawsuit brought against alocal hospital and its board raised questions abouthow profitable the nonprofit was, according to oneRoundtable participant, and left him feeling vulnerable,even though serving on the board seemed likean act of social mindedness.
One important instructional note: All companies,whether public, private, or nonprofit, should agreeto indemnify their executives and officers under apolicy of “mandatory advancement” (of legal fees)prior to the benefit of knowledge of guilt or innocence.The rationale for this is that the board willnot likely be able to assess guilt or innocence in anycase, but particularly not at the time the decision onwhether to cover legal costs needs to be made.
The further implication is that assuring adequatecoverage for directors and officers is of paramountimportance, as it is possible for one so-called “badactor” receiving legal fees to use up all the coverage.The bottom line: board directorships carryrisks, to be sure, but if properly understood and adequatelycovered, they should not stand in the wayof directors doing their job both independently andappropriately.