A memo to jittery boards: Take your time

Martin Lipton has often found himself at the intersection of law and capitalism
during a long career representing the nation’s largest corporations.

Meetings have become too compressed and too brief, writes authority on
corporate governance.

By Beth Healy, Globe Staff, 7/21/2002

He was special counsel to the city of New York when it faced financial collapse in
1978 and later advised the US government during the energy crisis. But he and the
New York firm he cofounded, Wachtell, Lipton, Rosen & Katz, are best known for
handling high-profile mergers and acquisitions and, in the firm’s words, counseling
companies and their boards of directors ”with respect to the most difficult and sensitive
corporate disclosure, governance and policy issues.”

So it’s no surprise that Lipton is weighing in on the business crisis of the moment,
focusing on how boards can improve their performance and prevent the kinds of
corporate abuses that have left investors reeling.

Lipton’s advice, contained in a one-page memorandum he prepared for clients last
month, is surprisingly basic. Titled ”A Post-Enron Paradigm for Board Meetings,” the
memo urges, among other things, that directors eat meals together, spend more time
talking, and put off plane flights home a few extra hours to get additional face time with
each other.

It may sound simple, Lipton said in an interview, but, ”I wrote the memorandum to have
a model that people could follow.”

In the past 30 years, Lipton writes, boards have become less locally based, with
far-flung members often traveling long distances to attend meetings. As a result, the
time directors actually sit together around a table has shrunk.

Board meetings, held from six to 12 times a year, have in some cases been
condensed to a span of four or five hours. Directors on audit, compensation, and
governance committees might meet in the morning over coffee, then rush into a
meeting of the full board immediately afterward. At noon, many directors skip the buffet
lunch and race off to the airport.

”Post-Enron, this will not do,” Lipton writes.

This brisk, lunch-is-for-wimps format may have flown in the boom years, when
everyone was trying to work at Internet speed. Each idle moment in an executive’s life
seemed like a lost dollar. Successful people didn’t have time to sleep, never mind eat
a tuna sandwich with the fellow from the nominating committee.

But Lipton and other corporate governance experts say time is critical to a board’s
ability to act on behalf of shareholders. Directors need time to talk with each other
casually, to fully consider nagging issues, and to muster the courage to challenge a
CEO on sensitive matters. An airtight schedule, with little or no breakout time, is not
conducive to good governance.

”These agendas and duties make it difficult, if not impossible, to properly discharge the
directors’ obligations in the four- to five-hour time frame that has become customary at
many companies,” Lipton writes.

He advises that directors set aside about 26 hours for major board meetings. In
particular, the members of key panels, such as the audit committee, should convene
the day before the main board meeting. Committees should kick off in the early
afternoon and work into the evening if necessary. The full board should meet early the
next morning and adjourn mid-afternoon, Lipton suggests.

Jay Lorsch, a professor of human relations at Harvard Business School, has served on
several corporate boards. He says he, too, has been thinking lately that boards must
reconsider how much time they need to do their job effectively – and not simply stick to
old traditions. Adding even an hour or two to the eight- or nine-hour commitment he’s
often seen would help, he says.

”We may need to have more or longer board meetings,” Lorsch says. ”You might get
some more useful, in-depth work done. It’s the kind of thing we ought to be thinking
about.”

The average corporate director already devotes about 100 hours a year to a single
board, Lorsch says, including on average a half dozen meetings a year, plus
committee meetings, and preparation time for those gatherings. In addition, there are
phone calls from individual directors and occasional requests for advice from CEOs. In
the wake of corporate scandals at Enron, WorldCom, Tyco, and elsewhere, directors
are almost surely going to have to give more of their time in order to perform the more
alert watchdog role they are being asked to play.

Marshall Carter, the retired chairman and chief executive of State Street Corp., a
Boston-based financial services firm, says large companies must both seek top-notch
governance and respect the schedules of high-powered CEOs and other professionals
on their boards.

”You’ve got to be very jealous of their time and make sure their time is very well used,”
says Carter, who also has served as a director at Honeywell International Inc. since
1999. ”You’re not talking about martini lunches.”

In addition to normally scheduled board meetings, State Street regularly invites its
directors to town for two dinner events each year. One is held at the company’s dining
room on the 33d floor of its Franklin Street headquarters building. The other is held off
site in the spring, and spouses are invited. It’s been held at a historic house in
Cambridge, at the Museum of Transportation in Brookline, and most recently at the
Ritz.

Some lawyers say there is a risk in directors becoming too comfortable with company
executives at such events. But there is a growing sense that the more chances
directors have to speak casually with each other and with managers of the company,
the more likely they are to learn of any lurking problems.

Lipton goes further and suggests that boards consider an annual retreat that lasts two
or three days, at which senior executives conduct a full review of the company’s
financial statements, disclosure policies, strategy, and long-range plans, as well as
developments in corporate governance. The retreat should be held not on a Maui golf
course but near one of the company’s large operations, so directors get to see the
facilities.

”During the retreat, meals and social activities should be arranged in a manner that
encourages the directors on a one-to-one basis to get to know the senior executives,”
Lipton writes.

If Lipton’s first goal is to make boards more effective and to protect the legal interests
of the companies that hire him, he also appeals to the self-interest of directors. His
”paradigm,” he argues, will ”ensure that the directors cannot be faulted by regulators or
in litigation as to the manner in which they performed their duties.”

Beth Healy can be reached at [email protected].

This story ran on page E1 of the Boston Globe on 7/21/2002.
© Copyright 2002 Globe Newspaper Company.

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