Let’s Debate: Independent Directors Part I
Let’s Debate is our new interactive feature where our Contributors delve deeper into timely financial and restructuring topics. We’re joined by Jeffrey Cohen of Lowenstein Sandler, David Feldman of Gibson Dunn, Jim Millar of Faegre Drinker, Paul Silverstein of Hunton Andrews Kurth, and Evan Lederman former Co-Head of Credit & Restructuring at Fir Tree.
We want to use this forum to delve deeper into the controversy surrounding independent directors. While we have lots of questions, please don’t hesitate to jump right in. So, Let’s Debate.
Jeff, what’s the controversy?
– Jeffrey Cohen:
I approach this discussion from the creditors committee perspective, and I think what’s made it controversial is that it’s being used as a weapon, not in defense. What I mean by that is the company is retaining independent directors of their choosing. And they’re often retaining the same directors that they retained in other bankruptcy cases. And they’re retaining them for a specific purpose. And the specific purpose is to render a conclusion favorable to whomever they’re trying to protect, be it private equity, directors and officers or anybody that might be the target of an investigation by a committee or any party in interest. That’s what’s making it controversial.
– David Feldman:
I would say those trying to stack the deck in front of the case. When debtor’s counsel hires an independent director in advance of a filing with outside counsel to tee-up in advance of the filing of the case, a memo with an analysis which says to the creditors there’s nothing to see here; there’s no fiduciary duty issues and then seeks to jam that down everyone’s throat on day one of the case, that’s a problem.
– Paul Silverstein:
I don’t think you can have this conversation meaningfully without understanding what an independent director is outside of the bankruptcy context. The New York Stock Exchange says “no director qualifies as independent unless the board of directors affirmatively determines that the director has no material relationship” with the listed company. You know as well as I do that most of the directors of public companies qualify as independent directors. So when you segue into bankruptcy, “independence” of a director — it’s sort of a phony standard in the bankruptcy context — it takes on an entirely different meaning.
Let’s talk about the Neiman Marcus case, the guy [the independent director] the judge didn’t think was any good. He was appointed pre-petition and he qualified as “independent”. So, the Court is told he is the independent person that the debtor put in as the person who was in charge of settlement. So, the rule of qualification as “independent” never even comes into play.
To be really cynical, you know, some people, and of course I’d never be cynical, but some people have viewed independent directors as shills for debtor’s counsel to give the company some legitimacy to avoid a trustee to keep control. There’s another side of the same coin where in the old days an asset-based lenderwould want a so called CRO, which it wasn’t called way back when, to basically be on the lookout for their own self-interest. So, it sort of cuts both ways, but basically it’s a device to keep control.
– Jim Millar:
Paul has made the point and it’s the right point that independent directors, as they are understood outside of bankruptcy are independent as per some other standard, but we have none within bankruptcy. And maybe we need to start giving them a different name because independent director, as it exists outside of bankruptcy has come to be viewed as something very different inside of bankruptcy. They’ve taken on, this God-like status that they’re not entitled to.
And, I guess what I would say here is that independent directors still work for the company. And when they are analyzing something, settling something, investigating something, they still work for the company. So when we import independent directors into other arenas like bankruptcy it’s important to keep in mind they’re supposed to be an advocate for the company, they’re not an advocate for anybody else.
What about the criticism some have leveled against repeat board members, Paul?
– Paul Silverstein:
If someone’s been on say 14 boards where [Law Firm Y] is debtor’s counsel that’s a real issue. It basically means it’s [Law Firm Y’s] board member. And he has a goal. Is that director “independent”? OK. That’s a sarcastic question with an obvious unstated answer.
– Evan Lederman
People who have specialized experience with distressed companies from a capital structure and an operational perspective can really add value in those situations. So, if done right, independent directors have the ability to be pro-active and to make necessary changes. But, when you’re running into a burning fire, you can’t be on 10 boards, 15 boards, 20 other boards. It’s impossible to do a credible job being on that many boards. And I think a lot of repeat board members are very well qualified and have great experience, but I can tell you from experience serving on boards, there’s no way you can be on that many boards and be effective.
Jim, what’s the court’s role in this process?
– Jim Millar:
Well, first what I want to say is here is that courts have contributed to the problem. And in, in part by, by using independent directors as a vehicle to get to an easy result, even if it means running over a bunch of creditors and other stakeholders without giving them their due. What I think courts need to do is to start enforcing some more exacting standards, and I’m not here to tell you exactly what those necessarily are. I think they have to be developed over time, but when parties raise concerns, I think that they need to be listened to. I think courts need to frankly be a little tougher on independent directors and what they’re willing to accept from them. Courts need to be active and involved and thoughtful on what those concerns are that are raised and how to alleviate them.
– Evan Lederman:
Look, at the end of the day, decisions boards make during an in-court process are subject to judicial review and often approval, so courts still serve as the ultimate guardrail. Now, whether courts in some jurisdictions have become too debtor-friendly and rubber stamps themselves is a question for another day….
Jim, I see you want to get into the action.
– Jim Millar:
I think the courts do bear some responsibility for this as well. When companies file for bankruptcy, courts give these independent directors this magic wand, right? We have presumed that they are independent in all these other manners that they’re not. One of the things that we need to think about is if we’re really going to give them this magic wand and let them direct the process as if they are someone who has the epitome of fairness baked into their very constitution, then they do need to be subject to some additional rigor….