Brian Resnick Speaks On Independent Directors

My experience with independent directors generally has shown them to be hard-working, serious and diligent individuals who seek to enhance the value of debtors’ estates or minimize value degradation that would stem from the pursuit of wasteful litigation. While there are unquestionably instances of legitimate criticism of independent directors, including for having material and not always disclosed current and former ties with case participants, we need to ensure that the cure is not worse than the problem.  First of all, in some cases sponsor investigation is not a key task for independents—who are instead tasked with negotiating deals and helping boards with little or no bankruptcy experience.  Second, the authors of the Ellias article focus heavily on the role of unsecured creditors’ committees as value-maximizing participants in the bankruptcy process—but their role is not to maximize value for all stakeholders (a task left in debtors’ hands) but to “ensure adequate representation” of unsecured creditors—even where they may be wholly out of the money.  While committees sometimes play a role in ensuring that investigations are appropriately conducted, in other cases costly investigation of marginal claims and “hold-up” positions inappropriately deplete scarce estate resources – and a more neutral (even if sometimes flawed) arbiter of the decision to pursue such claims is appropriate.  Third, the recommendation that independent director selection be voted on by creditor constituencies would likely both be litigated and value destructive.  Finally, the authors imply that experienced bankruptcy judges are unable or unwilling to recognize or address impropriety.  I have seen examples of judges challenging directors in a way that heightens the awareness of reputational risk for all independent directors, leading to better processes in general.  Moreover, substantial disclosure by directors with respect to their independence and facts relevant thereto might be a far better solution.