Governance Expert Urges Board-Shareholder Talks

NEW YORK–Directors and officers insurers will see lower levels of claims payouts if they get behind the idea of having boards of directors talk directly to shareholders about questions before them, an expert suggested here.

Ira Millstein, senior associate dean for corporate governance at the Yale School of Management and a senior partner for Weil, Gotshal & Manges, made his plea on Tuesday during a luncheon address at the 2007 Standard & Poor's Insurance Conference.

“If shareholders are given a chance to voice objections in early, nonbinding communications, they're going to be less likely to sue” the companies that D&O carriers insure, he said, noting that while corporate boards could not possibly talk to all their shareholders, they would call in the major institutional investors for these discussions on key issues.

Mr. Millstein gave an example of a positive outcome of such an approach in the United Kingdom.

There, he said, a law that required a shareholder advisory vote on compensation practices consequently compelled discussion between a company and its shareholders for the first time.

“It turned out that the shareholders were not as interested in amounts of compensation as they were in seeing to it that compensation had some relationship to performance,” he said.

As a result of the specific conversations about performance-oriented compensation, companies will likely polish up their practices to everyone's satisfaction, he said. He added that in this particular instance, the discussions didn't result in anyone getting paid less.

“Who's going to sue you if you expand the notion to things other than compensation and talk to shareholders about a variety of things that are on their minds?” he asked.

In addition, if there are suits down the road, companies would have good arguments for dismissal, he said. Defendant companies that listen to their shareholders will be in better positions to defend themselves on the business judgment rule–a governing rule in state court securities cases.

Mr. Millstein said he recognizes there are problems to be overcome–”Who do you talk to? How much can you talk about it? How do you go about setting it up?” In light of that, he invited responses to his proposal on the Yale chat board, where he posted his idea at http://millstein.som.yale.edu/forums/showthread.php?t=10.

Mr. Millstein began his talk focusing on the impact of litigation on U.S. capital markets, rather than on the incidence of D&O claims, even though he said that D&O insurers were a likely group to get behind his cause. He contended that litigation, not overburdensome financial regulation (as many reports have suggested), impedes entry to the U.S. markets as well as overall competitiveness and performance of many U.S. companies.

While he noted that private litigation reached a 10-year low in 2006, and that SEC enforcement activity has been down since 2002, he warned that declines may be cyclical. “The courts are still there,” he said.

He also suggested that politics could easily change the dynamics of litigation. If Democrats get back in power and appoint different judges, for example, those judges may not dismiss cases so easily, he said.