In today’s turbulent times, boards of directors and organizational leaders must be prepared to make difficult decisions on an informed and objective basis and then live with the consequences of their actions or inactions.
At the governance level, when an 18 wheel truck sized problem or challenge is coming at you at 75 mph, you must lead the company to a path to the right or a path to the left or very bad things will happen if you remain stagnant, freeze up in your steps, are blinded by the light or suffer through paralysis by analysis. Be decisive. Do not allow the fear of the consequences of the decision you reach to prevent you from making any decision at all. Companies blinded by fears or over-deliberation have leaders who suffer from a severe case of DITH syndrome.
Colin Powell has been often quoted to observe that in the heat of battle, if you have less than 40% of the information you need to make a decision, it is probably too soon to decide, and if you have more than 70%, it is probably too late. Embrace this now famous “70/40 rule” as long as it meets the legal standards of care that board leaders assume as fiduciaries to the shareholders of the company. The true enemies of governance are complacency, apathy and procrastination.
What is this standard of care from a legal, management and ethical perspective?
Decision-making at the leadership or board level should be fully-informed, with leaders properly briefed by those who report to them, with time to review all materials that have been prepared, be given opportunities to ask critical and analytical questions and time for healthy debate among board members. These are the standards and protocols that corporate law requires to reach a well-reasoned decision that may have significant financial consequences to thousands and even millions of shareholders and other stakeholders in the company. Extreme volatility in the capital markets and the rapid pace of today’s technology may mean that these decisions must be made on an expedited basis, but the decisions still must be reached on a fully informed basis and DITH syndrome must be avoided at all costs.
Balancing the legal standards which apply to decision-making with Colin Powell’s sage advice in his “70/40” Rule is not an easy task. But neither is being a genuine and respected leader. Indecision over the fear of consequences of a decision or decisional paralysis due to the need to have an over abundance of political “buy-in” is not leadership at all. True leaders make tough decisions with a clear understanding of the risks and consequences and then manage and mitigate those risks and consequences as best that they can. When leaders act in good faith based on experience and instinct, guided by integrity, empathy and objectivity, the people affected by the consequences of their decisions are more likely to respect the process and be more accepting of the impact of the decisions on them, even if it is negative.
The standard of care from a legal perspective that is most relevant to decision-making at the board and executive level is known as the “business judgment rule.” In a nutshell, this rule recognizes that humans are not perfect and mistakes will be made on the decision-making process. Boards cannot be held accountable for every wrong decision that they make, unless those decisions were negligent, premature, uninformed, riddled with self-interest, or a reflective of a breakdown in the fiduciary duties owed to shareholders. In its own way, the rule recognizes that in times of turbulences and “field of battle” circumstances, hard decisions need to be made, but encourages leaders to make them properly without the fear or risk of being sued.
The business judgment rule at its core is a legal principle that makes officers, directors, managers, and other agents of a corporation immune from liability to the corporation for loss incurred in corporate transactions that are within their authority and power to make when sufficient evidence demonstrates that the transactions were made in good faith on a fully informed basis.
To help directors and officers meet these challenges without fear of liability, courts have given substantial deference to the decisions the directors and officers must make. Under the business judgment rule, the officers and directors of a corporation are immune from liability to the corporation for losses incurred in corporate transactions within their authority, so long as the transactions are made in good faith and with reasonable skill and prudence.
Courts have further held that the business judgment rule will cover the actions of directors only when the directors are disinterested and independent with respect to the action that is at issue. A director is independent when she or he is “in a position to base [her or his]decision on the merits of the issue rather than being governed by extraneous considerations or influences”; conversely, a director is considered to be interested if she or he appears to be on both sides of a transaction or expects to derive personal financial benefit from it, as opposed to a benefit to be realized by the corporation or all shareholders generally.
To make an informed decision and have the confidence to act decisively, leaders must be ready to listen. Really listen. Do not surround yourself with managers who will tell you what you want to hear, rather reward people who are willing to tell you what you need to hear, without a hidden agenda or self-interest as their impetus.
Opportunity and productivity require an appetite and tolerance for risk. When we become timid as leaders, opportunity rots on the vine or collects dust, somewhat akin to the dormancy of the estimated $2.5 trillion that is sitting in the treasuries of the Fortune 1000 companies as of today. Resources must be deployed to drive shareholder value or we’ll continue to have to settle for subpar GDP growth rates in a rudderless economy lead by spineless boards and policy-makers.
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ABOUT THE AUTHOR
Andrew J. Sherman is a Partner in the Washington, D.C. office of Jones Day, with over 2,500 attorneys worldwide. Mr. Sherman is a recognized international authority on the legal and strategic issues affecting small and growing companies. Mr. Sherman is an Adjunct Professor in the Masters of Business Administration (MBA) program at the University of Maryland and Georgetown University where he has taught courses on business growth, capital formation and entrepreneurship for over twenty-three (23) years. Mr. Sherman is the author of twenty-three (23) books on the legal and strategic aspects of business growth and capital formation. His twenty-third (23rd) book, Harvesting Intangible Assets, Uncover Hidden Revenue in Your Company’s Intellectual Property, (AMACOM) is due out in the Fall of 2011. Mr. Sherman can be reached at 202-879-3686 or e-mail ajsherman@jonesday.com.