Jim Millar Speaks On Independent Directors
The fundamental issue here revolves around a breakdown in trust—that is, trust in the process. Some stakeholders in the restructuring process have reached the point where they simply don’t accept that independent directors are doing their job fairly and diligently. While people can debate whether in a given case the independent director did—or didn’t—properly discharge their duty, a critical mass (including professionals and judges) have expressed concern.
With that in mind, we must think about how to address the issue. I don’t want a “fix” that simply teaches independent directors how to get better at papering their file and testifying in court. The cynic might say that the so-called good “independent” directors are those that are deft at covering their tracks—they might say and do all the “right things,” but at the end of the day they get to the result that they were hired to reach. We don’t want to encourage more of that as a purported solution, as it would only be window dressing.
Rather than deploy any one mechanism, I think we need to develop a menu of options to figure out what works. Some might work better in some circumstances; others might call for a different solution. Here are a few ideas:
Some foreign jurisdictions have a court-appointed person oversee the company and its directors—but they don’t displace the board or management. That person is a company representative—that is, they don’t function like a creditors’ committee—but they don’t owe their job to the powers-that-be. This approach has similarities to that proposed by Jared Ellias and Kobi Kastiel (requiring support of overwhelming majority of creditors for independent director appointments), and also has elements of the appointment of an examiner. It’s admittedly a big step, but some cases will warrant it.
Under Bankruptcy Rule 2019, a committee of creditors must make certain disclosures so that all parties in interest and the court can understand exactly where they sit. Perhaps an automatic, fulsome and timely disclosure by independent directors in bankruptcy would help creditors ferret out misplaced allegiances. They should disclose such things as: (i) who have they worked for? (ii) what were they paid? (iii) how did they get this job? (iv) what’s the relationship of debtor’s counsel to all of this?
Courts should deploy a more exacting standard in reviewing decisions of independents. While some courts have said it is not necessarily a deferential “business judgment” standard, we nevertheless need more developed legal criteria that exposes the misbehaving director as well as the empty suit.
These are just a few ideas for broader consideration but the bottom line is that everyone needs to understand that this a problem in search of a solution. Hopefully, these proposed solutions can find their way into mainstream practice and get exposed to some pressure testing.