Author: governancedrafting (page 3 of 4)

     Herman Melville’s Bartleby, The Scrivener: A Story of Wall-Street (1856), a perennial element of Law & Literature courses, concerns a concatenation of confrontations between “one of those unambitious lawyers who . . . in the cool tranquility of a snug retreat, do a snug business among rich men’s bonds and mortgages and title-deeds” and a newly-hired copyist, portrayed as “pallidly neat, pitiably respectable, incurably forlorn!” 

     Bartleby—mysteriously, and infuriatingly—soon declines every work-related request by saying, “I would prefer not to.”  Despite the extensive accommodations (some, literal) made for him by his increasingly aggravated (and never-named) but not-unkind employer, the short story does not end happily for the scrivener.

    More than a century and half later, every junior lawyer, whether or not she is familiar with Bartleby’s tale, can well anticipate the professional perils of his passivity. 

    Yet, unlike Bartleby, who was asked only to hand-copy documents (and to help check the accuracy of those produced by his colleagues), a junior lawyer (Jane), whether outside or in-house counsel, might well find herself without sufficient facts, knowledge of the law, or the time necessary to obtain either, before having to advise a client.

     For instance, a shareholder, officer, or director (Charles) could insist on quick legal advice during a corporate crisis, although: crucial details might not be available, and/or could be quickly changing; the relevant legal issues might involve several different (and not always fully-developed) areas of practice; and the law firm partner, or the company’s general counsel (Paula), herself handling urgent matters, might instruct Jane to, “Give Charles the best answer you can, under the circumstances, but don’t expose us to malpractice liability, or to professional ethics charges.”

    The very first of the ABA’s Model Rules of Professional Conduct (MRPC) provides that “A lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.” 

    Comment 3 to MRPC Rule 1.1 clarifies that “In an emergency a lawyer may give advice or assistance in a matter in which the lawyer does not have the skill ordinarily required where referral to or consultation or association with another lawyer would be impractical. Even in an emergency, however, assistance should be limited to that reasonably necessary in the circumstances, for ill-considered action under emergency conditions can jeopardize the client’s interest.” 

    Strategies (not legal advice) for Jane in such a situation might include:

    First, establish who the client is: Charles personally, or the corporation that he might serve as a director or officer? 

    Anticipating that those interests might diverge, MRPC 1.13(f) provides that “In dealing with an organization’s directors, officers, employees, members, shareholders or other constituents, a lawyer shall explain the identity of the client when the lawyer knows or reasonably should know that the organization’s interests are adverse to those of the constituents with whom the lawyer is dealing.” 

    In fact, under MRPC 1.13(b), if Charles’ proposed course of action (or inaction) would violate the law and harm the corporate client, Jane should “refer the matter to higher authority in the organization,” and perhaps ultimately to the board or to the independent directors.

    Second, despite Charles’ requests for assistance “as soon as possible,” check for specific deadlines for answering him, and/or for his making a decision and/or otherwise taking action based on legal advice.  Does he have a “hard” deadline, or would an extension be possible?

    In its classic decision imposing personal liability on directors who, despite their experience, expertise, and sterling qualifications, had not assertively examined the basis for, or the sufficiency of, the $55-per-share buyout price in a cash-out merger proposal initiated by their company’s own chairman/CEO, Van Gorkom, the Delaware Supreme Court noted disapprovingly that “None of the directors [at a special Saturday-noon meeting of the board, called by Van Gorkom on one day’s notice, without a specified agenda] were investment bankers or financial analysts.  Yet the board did not consider recessing the meeting until a later hour that day (or requesting an extension of [the potential acquirer’s] Sunday evening deadline) to give it more time to elicit more information as to the sufficiency of the offer. . . .”  Smith v. Van Gorkom, 488 A.2d 858, 877 (Del. 1985).

    Third, to prevent any subsequent confusion about the basis for or validity of the advice, document in an e-mail to Charles (cc’d to Paula), the information that Charles provided, and his demand for an accelerated response.

    The Van Gorkom decision observed that “Without any documents before them concerning the proposed transaction, the members of the Board were required to rely entirely upon Van Gorkom’s 20-minute oral presentation of the proposal. No written summary of the terms of the merger was presented; the directors were given no documentation to support the adequacy of $55 price per share for sale of the Company; and the Board had before it nothing more than Van Gorkom’s statement of his understanding of the substance of an agreement which he admittedly had never read, nor which any member of the Board had ever seen.”  Id. at 874.

    Fourth, briefly summarize for Charles by e-mail (along with the deeper analysis) at least the first principles of the relevant area of law (for instance, a director’s fiduciary duties of care and loyalty), and the aspects of those duties most applicable to the current situation.

     Fifth, summarize in that e-mail at least the most relevant options (including Charles’ taking no immediate action) and their relative advantages, disadvantages, and risks; and recommend, from a legal point of view, one of those options.

     Jane might generally be wary of making—or of helping Charles, or the corporation that Charles serves as a director or officer, to make—a predominantly “business decision,” as opposed to offering the client her legal advice or perspective on a business situation. 

     According to Comment 3 to MPRC 1.13 (and bearing in mind, as discussed above, the lawyer’s duty to report illegal conduct), “When constituents of the organization make decisions for it, the decisions ordinarily must be accepted by the lawyer even if their utility or prudence is doubtful. Decisions concerning policy and operations, including ones entailing serious risk, are not as such in the lawyer’s province.”

     However, MRPC 2.1 does allow a lawyer, “[i]n rendering advice, [to] refer not only to law but to other considerations such as moral, economic, social and political factors, that may be relevant to the client’s situation.”  Comment 2 to this Rule adds, “In rendering advice, a lawyer may refer not only to law but to other considerations such as moral, economic, social and political factors, that may be relevant to the client’s situation.”

     Jane might also consider adapting to this context a Navy SEAL’s advice concerning emergency decision-making in “life-threatening situations”:

     “Come up with three—and only three—possible options or courses of action.  Look at the pros and cons of each option.  Honestly weigh factors like risk, your ability to accomplish each option, and whether your plan is realistic. . . Then, without debating and rethinking each of your options, make the call and choose the one your gut tells you is the best. . .  [M]ost importantly, be confident in your decision and proceed.”

     Sixth, indicate to Charles what information (possibly in priority order) would be most useful for him or one of his colleagues to supply (or for you to gather independently, if given the necessary time).

     Seventh, propose to Charles a regular schedule (rather than simply, “as soon as possible” or, “if anything new happens”) to receive updates from him (and/or one or more of his colleagues), or to provide him with an updated analysis. Make sure that you and Charles have complete contact information for each other (such as personal cell phone numbers and/or video conferencing links and passwords).

     Eighth, ask Charles if you have his authorization to contact, and to request information from, his colleagues or other third parties, and whether he needs to indicate that to them in advsnce.  If Charles cannot grant such access, who can, and when, and how?

    Ninth, clarify, preferably by e-mail, what you have the authority to do, especially without further consultation with or authorization from Charles, on behalf of the client (whether that is Charles personally, or the corporation he serves).  If you need additional authorization, how can it be obtained?

     Tenth, check with Paula if necessary for her approval to involve other members of the law firm (or department), or outside counsel or other advisors.  Consultation with your colleagues or outside counsel might not be so “impractical,” under Comment 3 to Rule 1.1, as it might first appear. (Under MRPC 5.1(b) and (c), as a supervisory partner, Paula should be making “reasonable efforts” to ensure your compliance with the Rules, and might be personally implicated by your violations of them.)

     Eleventh, if Charles is not already familiar with them, provide him with the names and contact information of those colleagues or third parties, and alert them to the situation.

     Twelfth, remember that under MRPC 5.2(a), your acting under Paula’s direction will not excuse your own violation of the Rules. 

     However, under 5.2(b), you are safe if you acted “in accordance with [Paula’s] reasonable resolution of an arguable question of professional duty.”  (The questions of how you are to determine whether Paula’s resolution is “reasonable,” and when an issue of professional duty is “arguable,” remain unaddressed.)

     [Bonus question in Law & Literature: if a novel is really a thinly-disguised version of the author’s experiences at a law firm, might it be called a romanette a clef?]

     On its Web site, the venerable authority Merriam-Webster distinguishes two sometimes-simultaneous circumstances of special concern to boards: a “crisis” signifies “a critical or crucial time or state of affairs,” but an “emergency” is “a sudden unforeseen situation requiring prompt action to avoid disaster.”

     Although boards might not be able to foresee all the particulars of an emergency, Section 110 of the Delaware General Corporation Law authorizes them to adopt, before or during such an event, “emergency bylaws,” which “may make any provision that may be practical and necessary for the circumstances of the emergency.”

     In particular, boards should prepare bylaw provisions to govern situations in which they might not be able to contact, or determine the location of, or even the survival of, a significant number of their directors.  (Perhaps the mildest of such disturbing possibilities would be a sudden collapse, locally and/or nationally, of telephone and Internet service.)

     Under Section 110, which was added to the DGCL in 1967, emergencies include “an attack on the United States or on a locality in which the corporation conducts its business or customarily holds meetings of its board of directors or its stockholders, [a] nuclear or atomic disaster, [and a] catastrophe.” 

     In July 2020, the Delaware Legislature revised Section 110 (with effect retroactive to January 1, 2020) to specify that catastrophic situations include, but are not limited to, “an epidemic or pandemic, and a declaration of a national emergency by the United States government.”  

    Among other modifications to the corporation’s normal governance, Subsection 110(a) envisions changes to the process for calling a board or committee meeting, and the recharacterization of a quorum as “[t]he director or directors in attendance at [a board or committee] meeting, or any greater number fixed by the emergency bylaws.”

     Although this Subsection provides that, before an emergency, the board can designate specific officers “or other persons” who could, in emergency conditions, be deemed directors “to the extent required to provide a quorum at any meeting of the board,”  Subsection 110(g) creates a default rule that, once an emergency arises, “To the extent required to constitute a quorum at any meeting of the board. . . , the officers of the corporation who are present shall. . . be deemed, in order of ranks and within the same rank in order of seniority, directors for such meeting.”

     Moreover, before or during an emergency, Subsections 110(b) and (c), respectively, enable  the board to provide for lines of succession in case of the incapacity of specific “officers or agents of the corporation,” and to “change the head office or designate several alternative head offices or regional offices, or authorize the officers to do so.”

     A number of major corporations have already included in their bylaws emergency provisions, or varying lengths and detail. To date, there appears to be no caselaw construing such provisions. 

     Boards adopting, updating, or revising emergency bylaw provisions might consider:

     First, how will these define an “emergency”?  Some companies simply characterize it (non)operationally, as any emergency condition or catastrophic event as a result of which a quorum of the Board or one of its standing committees cannot readily be convened.

    Others combine the failure to assemble a quorum with a reference to Subsection 110(a), or language tracking its broader conditions (in the fourth and fifth paragraphs above): for example, noting that their emergency bylaws will be activated “In the event of any emergency, disaster or catastrophe, as referred to in Section 110 of the DGCL, or other similar emergency condition, as a result of which a quorum of the Board of Directors or a standing committee of the Board of Directors cannot readily be convened for action.”

      However, the 2020 amendments to Section 110 allow an emergency to exist “irrespective of whether a quorum of the board of directors or a standing committee thereof can readily be convened for action.”  Thus, the board could adopt a definition that would activate its emergency bylaws even if a catastrophe had occurred far from any personnel, facilities, or activities of the company and its board.

     Second, does an event identified in Subsection 110(a)—for instance, “a declaration of national emergency by the United States government”—automatically activate the board’s emergency bylaws, or can the board decide not to apply them, or even to remove these provisions from the bylaws?  Would the company ever have valid reasons to resist the activation of its emergency bylaws?

     Third, if there is any question about the existence of an “emergency” under the board’s definition, who would make the determination?  (If these are not all the same person,) the chair, the CEO, or the president?  A majority of the directors attending a board or committee meeting to address the question?  A majority of the members of a committee of the board?  One or more particular directors or officers designated by the board? The most senior director(s) or officer(s) present?

     Fourth, is the board required, or even expected, to formally declare that it has determined that an emergency (by its bylaws’ definition) exists, and that its emergency bylaws have been activated?  If so, which external parties would be entitled to, or should otherwise expect, such notice, and how is notice to be given (or, at least, attempted)? 

     Would it be wise for a creditor, or potential creditor, to require in its contractual arrangement with a corporation that once the board has made such a determination, the creditor is entitled, within a specific time period (or, as soon as possible) not only to (attempted) notice (through a specified method or methods), but also to a copy of the board’s current bylaws, including any emergency bylaws?

    Would a provision allowing a creditor to terminate a contract upon the corporation’s declaration of an emergency be enforceable?  By contrast, Sections 541(c)(1) and 365(e)(1) of the Bankruptcy Code (Title 11 of the United States Code) generally render unenforceable so-called “ipso facto” clauses, which purport to allow a party to terminate an agreement when the other party has entered bankruptcy proceedings.  Should a corporation attempt to include in the contract a provision explicitly precluding the existence of an emergency as grounds for termination?

     More generally, could a contractual provision legitimately include (or explicitly exclude) a corporation’s declaration of emergency as an event of default?

     Fifth, should the board develop specific plans to identify to external parties (perhaps through some form of direct notification; and/or, if and when Internet access is available, through a Web page) the new designations and authorities of officers who have succeeded others, and/or the new location(s) of the company’s head office? 

     That might be preferable to, or at least a backup for, the somewhat circular certification system set our in the bylaws of one major company: “In the event of a national emergency or disaster which directly and severely affects the operations of the Corporation, . . .  anyone dealing with this Corporation shall accept a certification by the Corporate Secretary or any three officers that a specified individual is acting as Chairman of the Board, Chief Executive Officer, President, Corporate Secretary, or Treasurer, in accordance with these Bylaws.”

     Sixth, to prevent any confusion, should the officers themselves, before any emergency, privately and regularly be provided with an ordered list of the individuals in line to succeed current officers during an emergency?

In 1981, in the immediate aftermath of an attack on President Ronald Reagan, Secretary of State Alexander Haig erroneously told reporters at the White House, “Constitutionally, . . . [a]s for now, I’m in control here.”  (Twenty years later, he clarified to 60 Minutes that “I wasn’t talking about transition.  I was talking about the executive branch, who is running the government.”)

     Seventh, because Section 110(g) envisions the completion of a quorum during an emergency by the elevation of (nondirector) officers to the status of director, “in order of ranks and within the same rank in order of seniority,” should each director and officer regularly be provided with a list of the rank and seniority order of corporate executives, to avoid any (further) confusion under emergency conditions?

    Both the preparation of such a list and the drafting of emergency bylaws might clarify the corporation’s own definition of seniority. 

One Fortune 500 company’s bylaws specify that, if no directors are available, “the emergency committee shall consist of the three most senior officers of the Corporation who are available to serve, and if and to the extent that officers are not available, the most senior employees of the Corporation.  Seniority shall be determined in accordance with any designation of seniority in the minutes of the proceedings of the Board, and in the absence of such designation, shall be determined by rate of remuneration.” Other boards might designate seniority by, at least in part, the length of the individual’s service (in a given position, or perhaps in total) to the company.

     Eighth, should the emergency bylaws, or (probably preferably, for security reasons) emergency procedures distributed to individual directors and officers, establish the procedures for their attempting to establish contact with each other in emergency conditions? 

For instance, if, as a number of emergency bylaws provide, a meeting of the board can be called by any director, and a single director can constitute a quorum, it might be possible for two entirely separate subsets of the board to hold meetings independently, each without knowledge of the other, if none of the directors in each group is able to establish contact with any of the directors in the other.  (In that situation, which group’s actions would take precedence if there is a conflict?  The group that includes the most senior member of both groups?)

    Ninth, to what degree should the emergency bylaws (or separate documents) set out special processes for attempting to establish contact with shareholders, during and/or immediately after an emergency, whether for purposes of electing (replacement) directors or otherwise?

     Subsection 110(i)(i) [not a misprint] enables the board, during an emergency, to “take any action that it determines to be practical and necessary” with respect to shareholder meetings, including postponing such meetings.  Moreover, “No person shall be liable, and no meeting of stockholders shall be postponed or voided, for the failure to make a stocklist available [to stockholders] if it was not practicable to allow inspection during any such emergency condition.”

    Tenth, which individual or group determines, and how, that a particular emergency, however the board has defined it, has ended? 

    In addition to any emergency bylaw provisions that they have added or are adding to their existing bylaws, board might pre-draft sets of alternate provisions to be adopted during specific emergency circumstances, when, as permitted by the 2020 revisions to Section 110, “if a quorum cannot be readily convened for a meeting, . . . a majority of the directors present” could do so.

    Boards and their counsel might also prepare different provisions and protocols for prospective local and/or firm-specific emergencies, such as the sudden incapacitation, in a traffic collision or airplane crash, of several of their directors, which would not necessarily qualify as an emergency under Section 110.

    Among these grim ponderings, plans, and prospects, Subsection 110(d) provides personal protection: “No officer, director or employee acting in accordance with any emergency bylaws shall be liable except for willful misconduct.” 

     In that context, if not always in life, doing one’s honest best will be good enough.

[With thanks to Adeen Postar, Director of the Pence Law Library of the American University Washington College of Law, for clarifying the legislative history.]

     According to an ancient scripture, the Buddha once refused to answer a monk’s metaphysical questions, and instead compared him to a man who, having been wounded—possibly fatally—by a poisoned arrow, refused to have it extracted unless and until he could be told the particulars of the archer, the bow, and the arrow. 

     Certainly, many students and practitioners of Buddhism would agree on the practical primacy, particularly in situations of personal peril, of the Buddha’s foundational Four Noble Truths, the first of which has been loosely translated as, “Life is suffering”; and the others of which briefly identify the cause of, and paths to relief from, that suffering. 

     Although each of those four abbreviated statements can be usefully explored in great depth, more esoteric philosophical doctrines would probably serve little immediate purpose, and might not even ever be verifiable through personal experience.

     Yet under some circumstances, boards might well consider relying for “actionable” advice on systems, models, practices, and/or experts whose results, conclusions, and recommendations have not been—and maybe cannot be—explained, in any detail, to or by the directors themselves.

     Section 141(e) of the Delaware General Corporation Law provides that directors will, in performing their duties,“be fully protected” from personal liability if they rely “in good faith” upon corporate records or upon “information, opinions, reports or statements presented to the corporation” by any of its officers, employees, board committees, or by “any other person as to matters the member reasonably believes are within such other person’s professional or expert competence and who has been selected with reasonable care by or on behalf of the corporation.”

     For instance, in rejecting breach of fiduciary duty claims against the directors of The Walt Disney Company, who had granted incoming president Michael Ovitz a compensation package that entitled him to a severance amount of more than $130 million after fourteen months in office, the Delaware Supreme Court noted that the board, and its compensation committee, had been entitled to rely on the expertise of compensation consultant Graef Crystal.  Brehm v. Eisner, 746 A.2d 244, 261 (Del. 2000).

     In such circumstances, for a shareholder’s derivative lawsuit to overcome the business judgment rule’s presumption that the directors had decided loyally, carefully, and in good faith—and for her complaint to survive the company’s motion to dismiss it—she “must allege particularized facts (not conclusions) that, if proved, would show, for example, that: (a) the directors did not in fact rely on the expert; (b) their reliance was not in good faith; (c) they did not reasonably believe that the expert’s advice was within the expert’s professional competence; (d) the expert was not selected with reasonable care by or on behalf of the corporation; (e) the subject matter. . . that was material and reasonably available was so obvious that the board’s failure to consider it was grossly negligent regardless of the expert’s advice or lack of advice; or (f) that the decision of the Board was so unconscionable as to constitute waste or fraud.”  Id. at 262.

     The appropriateness and good faith of the board’s reliance was not affected by “[w]hat Crystal now believes in hindsight that he and the board should have done” in approving the contract, id. at 261; or, by the fact that the compensation committee “chose not to follow Crystal’s recommendations to the letter.  The role of experts under s141(e) is to assist the board’s decisionmaking—not supplant it.”  In re The Walt Disney Company Derivative Litigation, 907 A.2d 693, 770 n.550 (Del. Ch. 2005).   

     However complex a compensation arrangement might become, it certainly involves mathematics more simple and less opaque than those employed by quantitative traders, or “quants,” to value, buy, and sell stocks, bonds, and commodities.   

     In his account, The Quants, Scott Patterson explains that these traders “couldn’t care less about a company’s ‘fundamentals,’ amorphous qualities such as the morale of its employees or the cut of its chief executive’s jib. . . . [They] devot[ed] themselves instead to predicting whether a company’s stock would move up or down based on a dizzying array of numerical variables such as how cheap it was relative to the rest of the market, how quickly the stock had risen or declines, or a combination of the two—and much more.” 

     Gregory Zuckerman’s profile of James Simons, The Man Who Solved the Market, and his pioneering quant firm, Renaissance Technologies, similarly observed that in his early research, “Simons and his colleagues used mathematics to determine the set of states best fitting the observed pricing data: their model then made its bets accordingly.  The why’s didn’t matter, [they] seemed to suggest, just the strategies to take advantage of the inferred states.”  

    In fact, “Simons and his colleagues generally avoid predicting pure stock moves.  It’s not clear any expert or system can reliably predict individual stocks, at least over the long term, or even the direction of financial markets.  What Renaissance does is try to anticipate stock moves relative to other stocks, to an index, to a factor model, and to an industry.” 

    More concerned with correlations than corroborations, some quants “let the data point them to the anomalies signaling opportunity.  They. . . didn’t think it made sense to worry about why these phenomena existed.  All that mattered was that they happened frequently enough to include in their updated trading system, and that they could be tested to ensure they weren’t statistical flukes.”  

     At one point, Simons observed, “I don’t know why planets orbit the sun. . . That doesn’t mean I can’t predict them.”  (Possibly for the a related reason, one of the quant firms that Simons dealt with had been named Kepler Financial Management,)

    Yet Simons complained, of an early trading program, “I can’t get comfortable with what this is telling me. . . I don’t understand why [the program is saying to buy and not sell]. . . . It’s a black box!”  Indeed, “By 1997, more than half of the trading signals Simons’s team was discovering were nonintuitive, or those they couldn’t fully understand. . . . They only steered clear of the most preposterous ideas. . . Over time, they frequently discovered reasonable explanations. . . .” 

     Renaissance’s programs could automatically direct more funds to strategies that had been successful.  However, when things went wrong, “because so many of the system’s trading signals had developed on their own through a form of machine learning, it was hard to pinpoint the exact cause of the problems or when they might ebb; the machines seemed out of control.” 

     As Clifford Asness, another leading quant, noted, “When you’re following a model that makes thousands of decisions, judgmentally overriding . . . any one or a handful of decisions is highly unlikely to matter, and overriding many is impossible.   And to the extent it matters, we quants worry very much that we’ll undo what our models are trying to do.” 

     When the stock market dropped dramatically in August 2007, “Some rank-and-file senior scientists [at Renaissance] were upset—not so much by the [firm’s] losses, but because Simons had interfered with the trading system and reduced positions.  Some took the decision as a personal affront, a sign of ideological weakness and a lack of conviction in their labor. . . ‘You believe in the system, or you don’t,’ [one] scientist said, with some disgust.”

    Asness also insisted that quants do not “use ‘black boxes.’ . . . The box is about as translucent as it comes. . . . [Q]uants may not know everything they own, but once they try, they can tell you precisely why they own it!  I think black box is a Luddite slur that is rarely accurate or fair.”

    Ultimately, though, however opaque and self-directed a trading system might be, its justification and validation lies in its consistently attaining “alpha,” or, investment returns measurably better than those of the market generally.  An industry focused on the numerical bottom line will likely grant little leeway to such spinning as that gamely offered, after second-quarter (Q2) 2020’s disappointing financial results, by comedian Alexis Gay’s fictional manager: “The numbers tell one story—I’d like to tell you another!”

    On the other side of the decision-making spectrum from “hard [as in, both difficult and definite] mathematics,” a formerly-obscure group of government agents purportedly produced practical results, probably otherwise unattainable, through an initiative whose principles, physics, and metaphysics would prove even more mind-boggling than those of the quants.

     For decades, the U.S. intelligence and defense communities employed and deployed (mentally, if not physically) “remote viewers,” who exercised, in the words of an original “psychic spy,” Joseph McMoneagle, “a human ability to produce information about a targeted object, person, place, or event, while being completely shielded from the target by space, time, and other forms of shielding [under] a very specific scientific protocol. . . developed at Stanford Research Institute in the early 1970s [which] has become more rigorous and specific since then.”   

     Just as quant (and physics Ph.D.) Emanuel Derman concluded that, “The more I look at the conflict between markets and theories, the more that limitations of models in the financial and human world become apparent to me,” McMoneagle, who received the Army’s Legion of Merit award, introduced his account by admitting that it was “not about dissecting the secrets of how remote viewing works.  To date, 100 years of research has failed to crack the code, so I feel that probably isn’t going to happen very soon.” 

     His unit, which was created by the CIA in the late 1960s (apparently largely because of concerns that the Soviet Union was already engaged in such efforts), worked under various names, including Project STARGATE.  At different times, it also operated under the auspices of the U.S. Army Intelligence and Security Command (INSCOM) and of the Defense Intelligence Agency (DIA).  In 1995, the CIA publicly acknowledged its existence, and formally disbanded it; in 2017, the Agency declassified, and made publicly available, a number of documents related to remote viewing efforts.

     If the quants, in order to test and hone their theories, went to great (figurative and literal) lengths and expense to collect, compile, and computerize historical data of stock and commodity trading prices, remote viewers generated their own data, from minimal cues, usually while lying down or sitting in a quiet room. 

     If quants recognized that much of their value lay in defining a client’s question and then designing and refining the process for answering it (according to one, “Usually the hardest part. . . is framing the problem in the first place”), remote viewers were provided with only a string of numerical “coordinates” (not necessarily corresponding to geographical longitude and latitude), or even less information (perhaps a photo sealed in an envelope).  

     A key part of their protocol was that the viewer, as well as the “monitor” who prompted and helped record the viewer’s answers, were not to be “front-loaded” with any information about the target.  Viewers, who worked in separate rooms, were generally discouraged from discussing their impressions with each other.  As some crises became breaking news, they might be ordered not to listen to their car radios while driving to work.

     In some circumstances, their reported activities might have made even these constraints academic. For instance, McMoneagle claims to have, for demonstration purposes (for the skeptical head of a government agency; for a psychology professor; and for a television program) identified the target even before his questioners had selected it.  The publicly-available literature contains recurring references to and reflections on the degree to which remote viewers might be able reliably to “see the future.”

     Yet by 1978, “Some of our reports were being passed around areas of the Pentagon and were being viewed with great interest.  Our accuracy against many of these targets was even more astounding since only the people in the Pentagon who identified the targets. . . knew what was actually located in those positions.  Some of the targets were even deliberately skewed to see what would happen.”

    For instance, McMoneagle claims to have described in detail, in 1978, a prototype of the Army’s Abrams XM-1 tank (which, to further test his ability, had been moved into an aircraft hangar that itself was surrounded by airplanes); and, in 1981, the giant Typhoon submarine being constructed by the Soviet Union in a secret Baltic facility.

    Among their other missions, STARGATE viewers were requested to locate: hostages in the Iran hostage crisis (1979-1980) (McMoneagle claims that they also perceived preparations for, and the fatal helicopter collision that ended, Operation Eagle Claw’s failed rescue effort); Brigadier General James L. Dozier, kidnapped in Verona by Marxist terrorists (1981); and the location of a downed Soviet aircraft, believed to be carrying nuclear weapons, in the Congo (1995).

    According to McMoneagle, the individual viewers’ “material would be summed up in a report and passed back to the office requesting support.  Since they were the only ones who knew or suspected what was going on [at the target site], it would then be compared to other information they possessed and deemed either supportive or non-supportive.  In any event, it would be used to generate newly formed leads for more traditional methods of collection, but it was never used as material that stood alone.  . . .”

    Participants’ published accounts of the program indicate that the protocols for remote viewing were being developed and (often incrementally) refined and calibrated as their work progressed—and that a uniform process was generally emphasized, although viewers conducted their own individual experiments with variations.  McMoneagle wrote that, after a certain point, “I didn’t even need a monitor. . . I had spent the better part of my career as a remote viewer teaching myself to do remote viewing under any circumstances.”

     This literature suggests that practicing and perfecting remote viewing, like developing and operating mathematical models and software programs for trading, might be considered both a science and an art.  Remote viewers might be likely to agree with Derman’s declaration that, “The truth is that models are rarely an unambiguous source of profits.  What counts as much or more is the trading system and the discipline it imposes, the operational errors it disallows and the intuition that traders gain from being able to experiment with a model.”  Three of quant Thomas C. Wilson’s five “Lessons Learned” specifically involve intuition (“Build your intuition before building your model”; “Trust your intuition”; and “Challenge your intuition”).

    Like quants, remote viewers devoted much energy to developing not only a system, but methods of training others to apply that system.  Derman reported that, “Whenever I have a new problem to work on—in physics or options theory—the first major struggle is to gain some intuition about how to proceed; the second struggle is to transform this intuition into something more formulaic, a set of rules anyone can follow, rules that no longer require the original insight itself.  In this way, one person’s breakthrough becomes everybody’s possession.”  He also recognized that “What traders need is standardized systems that contain the models, systems that force them to use the models in disciplined ways.”

     Similarly, remote viewer Lyn Buchanan recalled that some agencies originally wanted his unit to “develop a standardized teaching method. . . . that could be taught to anyone. . . in five minutes, so he could tell his commander what was over the hill and where to point the guns.” 

     However, although quants, individually and collectively, ultimately overturned their image, among traders and some others, as being ineffectual intellectuals, remote viewers and their unit (funded on a year-to-year basis) never overcame sponsors’ sensitivity to the “giggle factor.”  

     Buchanan noted, “The very nature of a unit of ‘psychic spies’ was an anathema to the military.  It was also suspected to be an anathema to the American public.  The politicians who funded the project were always fearful that they might be found out and have to explain their actions to their constituents.”  

      McMoneagle, also, noticed, among “a lot of people who owed their positions, promotions, and livelihood to politics, . . . plain old-fashioned fear—that if someone caught them supporting something they themselves would naturally ridicule, then by association they would be ridiculed as well.  Simply put, they didn’t have the stomach or the courage for it.”

     (Concerns about fiduciaries who embraced less than fully-terrestrial perspectives surfaced in Silicon Valley three years after the public announcement of Project STARGATE’s termination.  The CEO and co-founder of one firm stepped down shortly after publicly espousing UFO-related theories, and discussing a mystical experience of his own; he ultimately rejoined the reorganized company as its chairman.  These developments might have helped inspire the November 8, 1994 episode, The Candidate, of the television show, Frasier, in which a mayoral candidate whom the psychiatrist title character had been preparing to publicly endorse, privately disclosed to him, at the last minute, a UFO experience.)

     (Accounts of the quants’ careers often contrast their acceptance and appreciation, by and of, the academic and the applied-finance atmospheres that they traversed (or, sometimes, straddled).  A comfortingly prosaic feature of the otherwise extraordinary, and often-unsettling, memoirs of remote viewers is the constant influence of inter- and intra-office and -agency politics.  To Buchanan, “Political and financial problems and all the other aspects of the modern workplace were just as much a part of our daily lives as any other worker in any other office.”  This theme is strikingly present in another participant’s book, which presents what might be the single most detailed history of, as well as speculation on the principles behind, the unit’s operations, while concluding that “the basic principle is still mysterious.”)

     So where does this leave directors who are considering applying “black box” methods?

     First, although boards are certainly not legally required to follow (or to confine themselves to) the practices of other boards, they would want to be able to establish both the legitimacy of the field of inquiry and their reasonableness is selecting the quant(s), remote viewer(s), or other system-builders in question, as qualified in their fields. 

     It would certainly be useful, in both contexts, to document, to the degree possible, the reliance of other boards (preferably but not necessarily in the same industry), and/or the military and intelligence communities, on practices and practitioners of this type, and any reports, or even rumors, of their successes or failures.

     Second, to the degree that the technique or process can be demystified and/or demonstrated, particularly through documentation, the board should inform itself as well and as reasonably as the circumstances allow, including (in the case of quant programs) when and how their automated operations might be overriden.

     Third, if time permits, boards might initiate a limited, trial-basis involvement with the method, and evaluate the results and their implications, before committing more resources, and risk, to the program.

     Fourth, boards should be able to show that they provided, or otherwise did what they could to enable, access by the expert to, as much relevant, and correct, data as possible. (For remote viewers, this concern would seem to be “out of place.”)

     Fifth, boards should document their efforts to compare the results of a “black box” method with those of more traditional methods that they had employed, and be able to explain how they reconciled any conflicts between the two, and/or how they found the newer method’s results corroborated by or consistent with those of more familiar methods. 

      Sixth, boards should record the degree to which conventional methods have been unable to produce “actionable” information, and the degree to which the company can be considered to be in “crisis mode”— factors that have been cited in support of the official use of remote viewers in the nation’s interest (and, sometimes, of local police departments’ use of “psychics”).

     Finally, it might help to keep in mind a (quite possibly apocryphal) story about Nobel Prize-winning physicist and Manhattan Project participant Niels Bohr (1885-1962). 

     Supposedly, a visitor to Bohr’s office was startled to see a horseshoe hanging on a wall.

     When asked whether he, a world-class champion of rationality and logic, actually thought that this practice would bring him good luck, Bohr (entirely unlike the Renaissance quant who had declared, “You believe in the [trading] system, or you don’t”), reportedly answered, “Personally, I don’t really believe that—but I understand that it works whether you believe in it or not.”

     [This blog post is dedicated to the memory of my friend and law school classmate Steve Price—the very first person to speak in our very first class, but only after everyone else wouldn’t—and who was, then and afterwards, never at a loss for words both fitting and (often) funny. 

     [Steve was not only a mensch, but also a shadchan (matchmaker), both of people and of ideas.  He was, seemingly effortlessly, the most-connected and most-networked person I knew, in the best and highest senses of both of those terms.  He truly and selflessly took delight in making introductions and catalyzing connections. 

    [Although Steve may well have been the smartest person in many rooms we were in, he never went out of his way to prove it.  He often fostered conversations, but never had to be their subject or their center.

    [Once classes return to campus, Steve, whenever I see law students laughing with each other, I will remember you.  Just something I’ve been thinking about. 

    [Rest in peace, my friend.]

Among the most frequently-quoted lines of T.S. Eliot’s poetry are (from 1934’s The Rock: A Pageant Play), “Where is the Life we have lost in living?/ Where is the wisdom we have lost in knowledge?/ Where is the knowledge we have lost in information?”

     The last two queries are certainly prime concerns of boards of directors. 

     For instance, the Corporate Governance Principles and Practices of Prudential Financial specify that, “The board should receive information important to understanding presentations, discussions and issues covered at each meeting, in writing and sufficiently in advance of the meeting to permit appropriate review.  Longer and more complex documents should contain executive summaries.  The focus of materials should be on analysis rather than data.”

     Perhaps the ultimate examples of the effective distillation and presentation of information are those discussed in The President’s Book of Secrets: The Untold Story of Intelligence Briefings to America’s Presidents (2016).  Former CIA analyst David Priess provides an instructive chronicle of the origins, evolutions, and applications of the “President’s Daily Brief” (PDB), which was prepared by the Agency beginning in late 1964; and, which, since 2005, has been produced by the Office of the Director of National Intelligence (DNI).

     That document summarizes for the Chief Executive “all relevant information from anywhere in the US government, presents an analytic message clearly and concisely, offers major alternative explanations, and highlights implications for US interests.” In fact, “No major foreign policy decisions are made without it.”

     In light of the massive amount of sources and resources, including management and analyst time, involved in its preparation, the PDB has been described by a former Agency official as “the most expensive periodical in the world.”

     Priess, who personally briefed administration officials on the PDB’s contents, interviewed “[e]ach living former president and vice president [and] almost every living former CIA director and deputy director for intelligence and the vast majority of other living former recipients of the book.”

     Their recollections and reflections offer at least fourteen practical lessons to lawyers, law students, and executives.

     First, a counselor or advisor must present data and analysis that is “actionable,” not in the lawyer’s sense (as in, constituting grounds for a lawsuit) but in the intelligence community’s meaning: capable of directly driving decisions by the principal, customer, or client. 

     Vice President Al Gore’s national security advisor, criticizing a PDB entry that discussed Chinese politics generally, objected to his briefers, “You guys just don’t get it.  You think what’s important is what’s going on in China.  It’s not.  What’s important is what this means for the United States.”  Around that time, the CIA instituted a “First Customer Initiative” that refocused the PDB “from ’What is going on in a particular situation overseas?’ to ‘What does the president need to know about this situation?’”

    One of the PDB briefers for President George W. Bush “challenged analysts to be able to compellingly finish the simple sentence: ‘Mr. President, this piece is important because—.‘ If you can’t fill in that answer, you don’t have  a piece.  If you can answer it, you do—then you structure the piece to make that point clear, and quickly.”

    In his own book, Philip Mudd recalls presenting a PDB item: “After I briefed the details of the threat, clearly and cleanly, I was satisfied. . . . Just as quickly as I’d spoken, though, a painful realization swept over me.  I knew the briefing was wrong when [Bush] asked his first question.  “What do we do about this?’ . . . I should have put the threat into context for him. . . .”

     Yet Admiral Dennis Blair, a Director of National Intelligence under President Barack Obama, added that, beyond supporting immediate decision-making, the PDB should “give more on warning: it should spark the kinds of policy discussions that the president ought to be thinking about and help him see around the corner.” (As would, in March 2021, the DNI’s publicly-released analysis of Global Trends 2040.)

     Second, brevity is crucial.  The PDB is variously described as a “core six-to-ten page” document, supplemented by other material; containing “six to eight short analytic articles and additional items”; and usually including “two or three longer pieces, half a dozen intermediate-size ones, and then some quick little updates.  I don’t think it ever went more than ten pages long.”   

     One analyst recalled being asked to trim his PDB contribution to thirty-two words: his supervisor then “took it, sat down, and rewrote every single word. . . . He got it to 32 again, but they were totally different words.”   

      Or, as Mudd put it, “The ugly secret for proud analysts is that. . . 90 percent of what they know (the data) might be useful at some other time, but it isn’t today.  A good analyst has to have the humility to accept that.”

     Similarly, Frank Watanabe’s unclassified How to Succeed in the [CIA’s Directorate of Intelligence]: Fifteen Axioms for Intelligence Analysts (1995)—which originally appeared in the Agency’s periodical, Studies in Intelligence—advised, “The consumer does not care how much you know, just tell him what is important.”

     Third, the document should clearly distinguish facts from analysis. Robert Gates, CIA Director under President George H.W. Bush (and Secretary of Defense under Presidents George W. Bush and Barack Obama), instituted this policy in 1982, and one year later concluded to his analysts that “No other single change we have made has elicited as many favorable comments from consumers as this.”  

     In fact, such an approach had briefly been adopted during President Richard Nixon’s administration, in response to Attorney General John Mitchell’s advice that “The President is a lawyer, . . . and a lawyer wants facts.”

     Fourth, say what you don’t know.  President Bill Clinton told Priess, “When [briefers] would just ‘fess up and say, ‘We don’t know this or that or the other thing—we can’t find that out yet,’ we’d ask them to try.  The Agency was always really great working with us on that and giving us more information.  It proved that the people who did the PDB were being honest.”

      Similarly, Colin Powell, former Secretary of State and Chairman of the Joint Chiefs of Staff, has stated, “[O]ver time I developed for my intelligence staffs a set of four rules. . .  I’m told they hang in offices around the intelligence world: Tell me what you know.  Tell me what you don’t know.  Then tell me what you think.  Always distinguish which from which.”

     Fifth, meeting these goals requires certain stylistic standards, as well as scrupulous editing. Watanabe reassured analysts, “Do not take the editing process too seriously.  If editorial changes do not alter the meaning of what you are trying to say, accept them graciously[, but otherwise] do not be afraid to speak up and contest the changes.”

     Gates recalled that a “cigar-chomping editor handed me back my first piece [as an analyst] for the PDB, and it looked like a bloody chicken had walked across it.  That’s where I learned to be succinct and put things together in a coherent way.”

     In an undated (but, clearly, dated) anecdote, an anonymous analyst admitted that:

      “My lessons in clear writing came when I had slaved away on a piece down on my black-key Royal typewriter. . . .

     “I’m standing in line, about three back, reading my piece.  And the editor in front—smoking a cigarette, sleeves rolled up, about as old school as you could get—has some poor wretch up there, whose piece is in front of the guy.  And he’s editing it with a ballpoint pen.

     “Suddenly he looks up, to nobody in particular and everybody, and barks, ‘There’s not one f—–g active verb in this whole f—–g piece!’  I look down at my draft, and it’s full of passive voice.  So I slipped out of there, went back down to my office, and retyped it.”

     A senior CIA officer “at one point even outlawed adverbs from the PDB, finding that analysts would then use the word ‘because’ more often and, as result, explain more clearly the reasons behind their judgments.”

     Sixth, formatting is also well worthy of attention.  For each president, the CIA customized not just the PDB’s content and style (Jimmy Carter favored “longer backgrounders on issues such as Middle East peace negotiations, . . . and more material on foreign leaders”; Ronald Reagan, “’a straightforward presentation without too many parentheses and/or footnotes,’” and information on the “’human dimension’” of foreign leaders, such as their families and interests), but also its physical format (for Carter, “more white space than text on each page, allowing plenty of room for him to write notes”; for Obama, in 2012, the transition to a digital version, on an iPad). 

    However, the “First Customer” is not T.S. Eliot’s J. Alfred Prufrock, who had “time yet for a hundred indecisions, / And for a hundred visions and revisions, / Before the taking of a toast and tea.”  Watanabe warned, “Form is never more important than substance. . . [T]he consumer wants to know what the intelligence says, and he wants to know it when he needs to know it.” 

    Seventh, visual elements can also be crucial components of the presentation. Under Carter, the CIA, “’trying to make it a little more attractive and easier to read,’” added “’a few more graphics. . . , charts and maps and photos and things that were a little more helpful.’”  To aid the digitization of Obama’s PDB, the Agency involved not only an “information technology expert,” but also a “graphic designer.”  

     In this context, counsel and others briefing clients might consider reviewing the classic works of Dr. Edward Tufte, such as The Visual Display of Quantitative Information (2^nd ed. 2001), Visual Explanations (1997), and Envisioning Information (1990), as well as Stephen Few’s Show Me the Numbers: Designing Tables and Graphs to Enlighten (2d ed. 2012). 

     For their own part, recipients of visual briefings could consult Alberto Cairo’s examination of How Charts Lie: Getting Smarter About Visual Information (2019).

     Eighth, analysts and their editors should also take into account how recipients read, whether from paper or from a screen. The PDB prepared for Clinton was carefully calibrated: “Editors rigidly broke their text into rectangular paragraphs and bullets, based on a study. . .  about how different formats affected how readers moved their eyes across the page and retained information.  ‘We usually had a 3-2 cadence in the PDB: three sentences in each paragraph, followed by two bullets.  It could be 3-1, or 2-1, but there would always be some bullets.’”  

     Ninth, just like lawyers and executives, analysts should make special efforts to be aware of, and insulate themselves, from possible cognitive traps and biases. An enlightening collection of “articles written during 1978-86 for internal use within the CIA Directorate of Intelligence,” concerning “how people process information to make judgments on incomplete and ambiguous information,” appears in Psychology of Intelligence Analysis (1999), by former CIA senior analyst Richards J. Heuer. 

That book can well be read in conjunction with Thinking, Fast and Slow (2011) (previously discussed), Nobel Prize-winning economist Daniel Kahneman’s overview of his decades of research on these issues.

     Tenth, as a former Deputy Director of Intelligence told Priess, “The conceptual breakthrough for me was that [the PDB] was an event, not a document.”

     That “event,” and its process, both fostered and reflected many levels of relationships. 

      For example, the PDB has been shaped by decades of feedback, and follow-up requests, from presidents and their senior officials to CIA briefers, particularly after, upon taking office as Vice President, George H.W. Bush— himself a former director of the CIA (January 1976 to January 1977)— requested daily personal briefings as he reviewed the document.  That practice became standard for (or at least offered to) many, if not all, of the PDB’s recipients.

      Moreover, although the PDB seems to be the premier product among many that have been generated by elements of the intelligence community, it has been increasingly described as a joint effort of various agencies under the auspices of the DNI.  As early as 1995, Watanabe advised analysts, “Know your [Intelligence] Community counterparts and talk to them. . . several times a month, not just when you need something,” to foster “better collection, better products, less duplication, and less conflict over coordination.”

      On another level of relationships, the document’s distribution list (varying by administration, from very short in Nixon’s, to much longer in Clinton’s) included some recipients who at least in part were interested in being on the same page, so to speak, as the others. 

     A deputy secretary of defense under Clinton “spent his car ride into the office each morning on the PDB because he wanted to know what his boss and counterparts would be worried about that day.”  Similarly, a deputy national security advisor to President Lyndon Johnson told Priess that even though on some topics the document “had little incremental value over what was in the newspapers and in Embassy cables. . . . I liked getting [it] because it was a very efficient way to see what the President was seeing on worldwide topics.”   

     Eleventh, the immediately preceding comment, and several others quoted by Priess, suggest that for their own personal and professional purposes, executives and their counsel should monitor, even if they might question the accuracy of, recent reports in “open source,” or publicly-available, publications (whether in hard copy or online).  (As Mark Twain actually did not say, “If you don’t read the paper, you’re uninformed.  If you do, you’re misinformed.”)

     Twelfth, it is not only corporations like Prudential that consider it “important that line and support unit managers make presentations to the board from time to time, to permit the board to have exposure to officers at various levels.” As CIA Director under Carter, Admiral Stansfield Turner followed this practice in some PDB briefings: “I felt it was, number one, good for the president to hear from somebody else. . . . [H]e would have a give-and-take with them.  I don’t remember him ever complaining that we shouldn’t have brought somebody in.  Also, it was great for the analyst.  If you’re a low-level analyst out there, you almost never get to see the director—let alone the president of the United States.  It really pumped up their morale.”

     In fact, under Director William Webster, to demonstrate the effectiveness of the CIA’s disguises, the chief of that unit attended a PDB briefing session with her gender and ethnicity concealed, and during the meeting revealed her true appearance to the startled participants (although, Priess notes, President George H.W. Bush had caught on early). (Eliot wrote, “There will be time, there will be time/ To prepare a face to meet the faces that you meet.”)

     Thirteenth, both the client and the advisor should be mindful of the degree to which written reports can be protected from disclosure— whether by attorney-client privilege, or, in the specific context of the PDB (and of inquiries by the 9/11 Commission), executive privilege. 

     In 2002, Vice President Dick Cheney predicted to Fox News that making these closely-held documents available to Congress “will have a chilling effect on the people who prepare the PDB.  They’ll spend more time worried about how the report’s going to look on the front page of the Washington Post or on Fox News than they will making their best judgment and taking risk and giving us the best advice they can, in terms of what they think’s going on.”   

     (About thirteen years later, the CIA declassified and publicly released some PDBs prepared for President Johnson, and similar documents from the Kennedy administration; in 2016, the Agency released some PDBs from the Nixon and Ford administrations.)

     Fourteenth, and perhaps most important, is maintaining both the actual, and the perceived, independence of analysts and advisors.

     Most of Watanabe’s fifteen axioms urge the analyst to assertively prepare and promote her own assessments (including: “Believe in your own professional judgments”; “Be aggressive, and do not fear being wrong”; “When everyone agrees on an issue, something probably is wrong”; and, “Being an intelligence analyst is not a popularity contest”).

     Priess portrays the authors, editors, and personal presenters of the PDB as objective and nonpartisan walkers between worlds, bridging the realms of tradecraft and statecraft, catalyzing a dynamic interplay that at its best informs and enhances both. 

     Such is also, surely, the role played by many lawyers—for instance, as intermediaries among the developers of, users of, and investors in, such emerging technologies as blockchain and cryptocurrency.

     Not just contributors to the PDB, and not only lawyers, but anyone advising decision-makers, might strive to write a document in which, in T.S. Eliot’s words,

     every phrase

     And sentence. . . is right (where every word is at home,

     Taking its place to support the others,

     The word neither diffident nor ostentatious,

     An easy commerce of the old and the new,

     The common word exact without vulgarity,

     The formal word precise but not pedantic,

     The complete consort dancing together) [and]

     Every phrase and every sentence is an end and a beginning. . . .

[This blog post is dedicated, with congratulations, best wishes, and much respect, to the American University Washington College of Law‘s Class of 2021, each member of which I consider to be a hero.]

     Many major companies prohibit managers from engaging in personal relationships with subordinates, even if those involvements are entirely consensual. 

     Such strictures certainly reduce the possibilities that a company will face, and be found liable on, claims for sexual harassment and/or creating a hostile work environment.  They also protect workplace morale, by preventing some perceptions of unprofessional and preferential treatment. 

     Should boards bar romantic relationships among their own directors?

     Beyond any considerations of morality, or concerns about the destabilizing effect of a (possibly extramarital) relationship, there are at least ten problems that a company could avoid by adopting such a policy—even if the board believed that sexual harassment would be unlikely among its directors, and even if the “inside” directors, who also serve the company as officers, were already prohibited from such relationships by a policy governing employees.

     First, a romantic relationship among directors could well complicate, and compromise, the board’s ability to identify, as required by the NYSE’s and NASDAQ’s listing rules, the directors that it deems independent. 

     Both exchanges require that a majority of the board, and all members of its audit and compensation committees, be independent.  NASDAQ Listing Rule 5605 specifically disqualifies from this status anyone “having a relationship which, in the opinion of the Company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.”  (Some companies’ governance guidelines instruct directors to disclose material personal relationships with “senior management,” but these documents usually don’t address specifically a director’s involvement with other directors.)

     Second, even if a director (D1) qualified generally as independent, she might not be considered disinterested for purposes of voting on a transaction involving: another director (D2) with whom she is or was romantically involved; a person close to D2; and/or a company at least partially owned or managed by D2, or someone close to D2.

     The traditional concern in such situations is that D1 would be inappropriately inclined to favor, to the company’s detriment, a transaction directly or indirectly benefiting D2; or, in the separate context of derivative lawsuits, that D1 would be inappropriately inclined to protect D2 by denying a well-founded shareholder demand for a company-initiated suit against, or approving a motion to dismiss a valid shareholder derivative lawsuit against, D2. 

      However, a romantically disappointed and/or dumped D1 might vindictively vote against a transaction that could benefit not only D2 (or a person or company linked to D2) but also the company; or D1 might vote to approve an unjustified lawsuit against D2.  

     Some former lovers could concur with William Faulkner’s Requiem for a Nun (1951) that “The past is never dead.  It’s not even past.”  So, in some circumstances, might the Delaware Court of Chancery, which has held that, “[a]lthough mere recitation of the fact of past business or personal relationships will not make the Court automatically question the independence of a challenged director, it may be possible to plead additional facts concerning the length, nature or extent of those previous relationships that would put in issue that director’s ability to objectively consider the challenged transaction.”  Orman v. Cullman, 794 A.2d 5, 27 n.55 (Del. Ch. 2002).

     Third, although many companies’ corporate governance guidelines require directors to disclose any business or personal relationships that could create even the appearance of a conflict of interest (and nominating committees might be well advised to ask board candidates about connections of any sort to current directors, and also to other candidates), in the absence of a strict ban on “in-boardroom” romantic relationships, directors delightedly dating each other might not perceive a potential problem.

     Fourth, directors would be understandably reluctant to invite the rest of the board, and corporate counsel, to assess the relative strengths of their loyalties to each other and to the company. 

     They might even, to forestall speculation or rumors, decide not to recuse themselves from voting on, and possibly from participating in the board’s discussions of, transactions that could constitute conflicts for their partners in a relationship. 

     After such a tainted approval, to insulate the transaction from attack (or to justify not pursuing the conflicted directors) the board might have to shoulder the serious burden of demonstrating the “entire fairness” of the underlying transaction: that is, the fairness of both the process (how the deal was “initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained”) and of the substance (for a proposed merger, “the economic and financial considerations. . . including all relevant factors: assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or inherent value of a company’s stock.”).  Weinberger v. UOP, Inc., 457 A.2d 701, 711 (Del. 1983).

     Fifth, directors might legitimately not know (and might in good faith disagree on) the point in their blossoming relationship (the first kiss?) at which disclosure would be appropriate; and when might they be expected, or obligated, to update the board on their passions’ progress.

     Sixth, having learned of such a relationship (possibly through a tip from a third director, D3—which could further complicate intraboard “conflicts”), the board would have the extremely delicate responsibility of assessing whether either or both of the dating directors still qualified as independent in general and/or with regard to particular transactions. 

     Seventh, those fact-sensitive determinations have not been easy even for courts.

“Allegations of mere personal friendship or a mere outside business relationship, standing alone, are insufficient to raise a reasonable doubt about a director’s independence.” Beam v. Stewart, 845 A.2d 1040, 1050 (Del. 2004). 

     But “[a] director can be controlled by another if in fact he is dominated by that other party, . . . through close personal. . . relationship. . .  A director can also be controlled by another if the challenged director is beholden to the allegedly controlling entity [for] a benefit, financial or otherwise, upon which the challenged director is so dependent or is of such subjective material importance to him that the threatened loss of that benefit might create a reason to question whether the controlled director is able to consider the corporate merits of the challenged transaction objectively.” Orman, 794 A.2d at 25 n.50 (emphasis added).

     For example, the Delaware Supreme Court found that a director “would not be able to act impartially when deciding whether to move forward with a suit implicating a very close friend [and the company’s former chair, CEO, and controlling stockholder] with whom she and her husband co-own a private plane,“ because such a connection “involves a partnership in a personal asset that is not only very expensive, but that also requires close cooperation in use, which is suggestive of detailed planning indicative of a continuing, close personal friendship.”  Sandys v. Pincus, 152 A.3d 124, 130-131 (Del. 2016).

     To the Delaware Court of Chancery, an allegation that the relationship between Uber director Arianna Huffington and company founder and CEO Travis Kalanick was “’so close that Huffington visited Kalanick’s family members in the hospital and made him omelettes’ . . .  approach[es], if not cross[es], a line of director independence.” McElrath v. Kalanick, 2019 WL 1430210 (Del. Ch.), at *20. 

     But the following year, the Court of Chancery concluded that, standing alone, the allegation that a company’s chair and CEO controlled another director “because of their long-standing 15–year professional and personal relationship. . . fails to raise a reasonable doubt that [the director] could not exercise his independent business judgment in approving the transaction [at issue].” Crescent/Mach I Partners, L.P. v. Turner, 846 A.2d 963, 980-981 (Del. Ch. 2000).

    Eighth, in making this inquiry, what evidence would or should the board consider, request, or (try to) compel the production of? 

     Should the board take at face value the directors’ denials of a disqualifying effect (D1 and D2, separately, to the board: “We simply enjoy long talks with each other.”; or, on the other end of the spectrum, “Our involvement is purely physical.”)? 

     Should the board review personal e-mails (and possible attachments) that had been exchanged by dating directors unwise enough to use their company-issued accounts and/or devices?  Could they ask for copies of other communications?  Hear from witnesses?  Take into account “evidence” that a court would dismiss as hearsay?  Engage a private detective to surveil suspected sweethearts?

      Ninth, there might be further fallout for the relationship—and for board’s stability and efficiency— if the directors’ statements to the board diverged on their respective levels of commitment, illustrating the popular wisdom that in relationships, “one person always loves the other more.”

     For instance, what if D1, regardless of the “independence”-related consequences, told the board, “D2 is the love of my life,” but D2, separately (whether to protect D1, or just to limit D2’s own potential liability), advised them that “We both consider our relationship to be just a harmless fling”? What if D1 then found out what D2 had said?

     Tenth, the discovery of any violations of this policy (just as several major public corporations have, in recent years, learned that their leaders broke company rules against relationships with subordinates) might provide a useful opportunity for the board to reexamine the soundness of those directors’ previous judgments and priorities generally, and to reassess their relationship to the company itself.

     Indeed, the simplicity of the restriction; its obvious benefits to the company; and the ability of (at least an outside director) simply to leave the board if he wished to pursue a promising relationship with a remaining director, would make noncompliance very difficult to defend (except, possibly, by claiming honest ambiguity about when initial interactions were considered as, or became, romantic).

     Companies adopting a rule prohibiting directors from dating each other should not only make that known to candidates for the board, but also require all directors annually to indicate their own compliance, and to acknowledge their obligation to report any violations of which they become aware.

A cautionary tale:

     In Danois v. I3 Archive Inc., 2013 WL 3556083 (E.D. Pa), two directors, one of whom was also the chief operating officer (and later became the CEO), and the other of whom became a vice president, were romantically involved from around the time the latter joined the board, and did not inform the board about their marriage to each other five years later. 

     In their respective positions, each was involved in making, and in influencing, decisions about the other’s compensation and tenure.  About eighteen months after the marriage, the board discovered the relationship, and removed them both, sparking litigation and counter-litigation between the couple and the firm.

     The court denied the company’s motion for summary judgment on its claim that that the couple had breached their fiduciary duty of loyalty, “[b]ecause we find that there is a genuine issue of material fact as to whether [the couple] disclosed their romantic relationship before they were married, and because we find that there is a genuine issue as to the material fact of whether the transactions governing their compensation after they were married were fair,” id. at *6, under Weinberger’s “entire fairness” standard.

     But the court rejected, for two reasons, the couple’s argument that, before they were married, they had not been self-interested when voting on each other’s compensation:

     “First, the definition of ‘interest’ is broader than the[y] suggest. . . . [I]nterest does not depend on a categorical analysis. Instead, a director is ‘interested’ if there are ‘factors weighing upon his exercise of judgment with respect to that decision which conflict or are inconsistent with the concept of a single, uncompromised loyalty to the corporate interest’ [treatise citation omitted]. Second, even if [each of the pair] did not each have a personal stake in the other’s compensation—a proposition we do not concede—their romantic relationship could lead each to be controlled by the other such that each would lack the requisite independence for disinterest.”  Id. at *10 n.4.

     Thus, although at first blush it might seem intrusive and inappropriate for a board to bar consenting adults—who had satisfied the board’s own standards for nomination, and who had then been elected by the shareholders—from engaging in romantic relationships with each other, such a blanket policy might productively preclude even more intrusive investigations and inquiries by the board.

    At the least, when taking a position and casting a vote on a critical issue, each director might be able to insist, much more credibly than did The Godfather’s (1972) Michael Corleone (Al Pacino) to his skeptical brother (James Caan), who had just mockingly echoed the advice of their lawyer, Tom Hagen (Robert Duvall): “It’s not personal, Sonny. It’s strictly business.”

     Many, and maybe most, memories of Gordon Gekko’s (Best Actor Academy Award-winner Michael Douglas’) classic speech in the 1987 movie, Wall Street, are mistaken.

      The corporate raider, prowling the aisles of a hotel ballroom, did not declare, “Greed is good,” but rather, “Greed—for lack of a better word—is good.”  (Would it have made a difference, then or today, if he’d instead championed “profit-maximization”?)

      He delivered that diatribe at the annual shareholders meeting of the fictional Teldar Paper company, whose management, seated in ranks at the front of the room, Gekko skewered as bloated, wasteful, and self-serving.

     Corporate counsel and CEOs certainly shivered not only at Gekko’s complete command of his (and the movie’s) audience, but at the fecklessness of Teldar executive and meeting chair Mr. Cromwell’s (Richard Dysart’s) off-screen outburst, “This is an outrage!  You’re out of line, Gekko!”

     Perhaps they then focused more attention on the rules governing agendas of, participation in, and the maintaining of order at, their own shareholder meetings.

     Such rules are not addressed by the Delaware General Corporation Law (DGCL), although Subsections (b) and (c) of Model Business Corporation Act (MBCA) Section 7.08 (Conduct of Meeting), respectively, authorize the meeting chair “to establish rules for the conduct of the meeting,” so long as those rules are “fair to shareholders.” 

     Companies often include such rules, or incorporate them by reference, in bylaws. See Abbey Properties Co. v. Presidential Ins. Co., 119 So.2d 74, 77 (District Court of Appeal of Florida, Second District 1960) (rejecting the argument that Robert’s Rules of Order applied by default to every company’s shareholder meetings). 

     Those provisions typically indicate broadly that the chair of an annual or special meeting of shareholders (possibly the board chair, the president, or a director designated by the board) is entitled to adopt rules and regulations for “the conduct of the meeting.”  Some specify further that, “Unless and to the extent determined by the board of directors of the chair of the meeting, meetings of stockholders shall not be required to be held in accordance with rules of parliamentary procedure.” 

     Few bylaws even mention the most popular set of parliamentary rules, and at least one (Comcast’s) does so only to indicate that “The conduct of a meeting need not follow Robert’s Rules of Order or any other published rules for the conduct of a meeting.”

     Although in 1996 the ABA’s Corporate Laws Committee added to its Official Comment to Section 7.08, “Complicated parliamentary rules (such as Robert’s Rules of Order) ordinarily are not appropriate for shareholder meetings,” that sentence quietly vanished sometime after the publication of the 2013-2014 edition of the model statute.

     If referring to Robert’s Rules is questionable in directors’ meetings, why is it even less appropriate for shareholder meetings?

     First, according to that manual itself (at Section 45:2), shareholder meetings do not constitute parliamentary proceedings, a “fundamental principle [of which is] that each person who is a member of a deliberative assembly is entitled to one—and only one—vote on a question.”  By contrast, shareholders are generally entitled to one vote (or more, in the case of super-voting shares) for each share that they own that carries a voting right with regard to the issue at hand.

    Second, many boards have installed in their bylaws advance notice provisions that preclude shareholders from engaging in spontaneous and/or surprising “motion practice” at the meeting.

    The DGCL does not explicitly mention such bylaws, but the Official Comment to MBCA Section 7.05 (Notice of Meeting) states that:

     “Although the corporation is not required to give notice of the purpose or purposes of an annual meeting unless the Act or the articles of incorporation so provide, a shareholder, in order to raise a matter at an annual meeting (for example, to nominate an individual for election as a director or to propose a resolution for adoption), may have to comply with any advance notice provisions in the corporation’s articles of incorporation or bylaws.  Such provisions might include requirements that shareholder nominations for election to the board of directors or resolutions intended to be voted on at the annual meeting be submitted in writing and received by the corporation a prescribed number of days in advance of the meeting.”

     Advance notice bylaws, among others, were addressed by the Delaware Court of Chancery in In Re Ebix, Inc. Stockholder Litigation, 2016 WL 208402, at *7, after shareholders claimed that the bylaws had been inappropriately revised by directors seeking primarily to maintain their own positions:

     “The ‘Advance Notice Bylaws’ impose certain conditions on a stockholder’s ability to make a proposal or nominate a director.

     “Two features of these bylaws are noteworthy: timing requirements and information requirements.

     “First, the Advance Notice Bylaws create, in certain circumstances, a 30–day window during which stockholders must give notice of proposals and nominations. That is, if the annual meeting is called to occur on a date within 25 days of the 1–year anniversary of the previous annual meeting, a stockholder’s notice of a proposal or director nomination ‘must be received not fewer than 90 days nor more than 120 days prior to that anniversary.’ Ebix may then postpone or adjourn the meeting. 

     “Second, a stockholder seeking to make a proposal or nomination must disclose certain information about whether and the extent to which that stockholder, its nominee, and/or certain affiliated parties have (i) entered into any transaction, such as an option or short interest, ‘with respect to’ Ebix stock, or (ii) any other arrangement, such as a short position, made to manage risk or increase or decrease voting power or economic interest. Further, stockholders providing such notice must update and supplement information they provide. The chairman of the meeting may decide to bar presentation of a stockholder proposal or nominee, as well as decide whether the bylaws are satisfied.”

    The Court had previously “noted that: ‘Advance notice requirements are “commonplace” and “are often construed and frequently upheld by Delaware courts.”’ Such bylaws are said to be ‘useful in permitting orderly shareholder meetings, but if notice requirements “unduly restrict the stockholder franchise or are applied inequitably, they will be struck down.”’ AB Value Partners, LP v. Kreisler Mfg. Corp., 2014 WL 7150465, at *3, quoting Goggin v. Vermillion, Inc., 2011 WL 2347704, at *4 (Del. Ch.) (itself quoting, in turn, Openwave Sys. Inc. v. Harbinger Capital P’rs Master Fund I, Ltd., 924 A.2d 228, 238–39 (Del. Ch. 2007))  See also JANA Master Fund, Ltd. v. CNET Networks, Inc., 954 A.2d 335, 344 (Del. Ch. 2008) (rejecting the application to self-funded shareholder proposals of an advance notice bylaw that the court construed to apply “only to proposals that shareholders seek to have included in the company’s proxy materials”), aff’d sub nom. CNet Networks, Inc. v. Jana Master Fund, Ltd., 947 A.2d 1120 (Del.2008).

    In Ebix, the Court held that under the circumstances, “heightened scrutiny requires Ebix’s board members to show. . . that their adoption of the Bylaw Amendments was ‘within the range of reasonableness,’” a test that the board failed to satisfy: “Although many of the complained-of features. . .  only give rise to inconvenience [for shareholders], the reasonableness of a defensive response whose munitions include the ability to foreclose the use of special meetings to hold elections requires an explanation not evident on the face of [the directors’] pleadings.”  Thus, the Court denied the board’s motion to dismiss these elements of the shareholders’ complaint.

     A final reason for the irrelevance of Robert’s Rules is that, by the time that the meeting is formally called to order, many—and perhaps a decisive number– of the shares will already have been voted, making many motions moot.    

    Even if Robert’s Rules won’t apply to a shareholder meeting, neither, necessarily, will every set of advance notice provisions.  In this context, directors and their counsel can hardly hope to echo Gordon Gekko’s hubris when he smirked to his increasingly-disillusioned dupe, Bud Fox (Charlie Sheen), “We make the rules, pal.”

In John Cheever’s short story, “The Bus to St. James’s” (1956), “Mr. Bruce was called out of a stockholders’ meeting to take a telephone call. . . [W]hen he returned, the meeting itself had fallen into the hands of an old man who had brought with him Robert’s Rules of Order.  Business that should have been handled directly and simply dragged, and the meeting ended in a tedious and heated argument.”

     Yet the introduction to Robert’s Rules promises that, “The application of parliamentary law [from the French parler, to speak] is the best method yet devised to enable assemblies of any size, with due regard for every member’s opinion, to arrive at the general will on the maximum number of questions of varying complexity in a minimum amount of time and under all kinds of internal climate ranging from total harmony to hardened or impassioned division of opinion.”

     Should Robert’s Rules be adopted by corporate boards (and board committees) to increase the efficiency and effectiveness of their meetings?  Or would doing so only foster “tedious and heated argument[s]”?

     A board (or committee) meeting would qualify as a “deliberative assembly” under the Rules’ Section 1:1—that is, as a “simultaneous aural communication” in which the participants: have equal votes; “are ordinarily free to act within the assembly according to their own judgment”; can, assuming that the meeting has been properly called and that a quorum is present, “act for the entire membership”; and are not considered to have withdrawn from the group just because they have disagreed with one or more of its collective decisions.

    Sections 2:7 and 2:12 acknowledge, respectively, the governance precedence of a corporation’s articles of incorporation, and, secondarily, of its bylaws.

     Those documents, in connection with the state of incorporation’s corporate caselaw (which mentions Robert’s Rules only sparingly) and statutes, and supplemented by the company’s non-binding governance guidelines, resolve many procedural issues—such as the definition of a quorum, and the requisite number or proportion of votes to approve a proposal. 

     But questions might well remain about a meeting’s “rules of order,” defined by Section 2:14 as the “written rules of parliamentary procedure formally adopted [to promote] the orderly transaction of business in meetings and to the duties of officers in that connection.” 

    Under Section 2:15, “[t]he usual and preferable method by which an [organization] provides itself with suitable rules of order is. . . to place in its bylaws a provision prescribing that the current edition of a specified and generally accepted manual of parliamentary law shall be the organization’s parliamentary authority, and then to adopt only such special rules of order as it finds needed to supplement  or modify rules contained in that manual.”  (A loose analogy might be to a table of card-players’ agreeing to play “according to Hoyle,” or possibly, “according to Scarne,” perhaps with some specified variations or additional “house rules.”)

     Even a lawyer might shudder when flipping through the only “generally accepted manual of parliamentary law” that comes readily to mind: the (large-)hand-sized, 712-page, 20-chapter Robert’s Rules of Order, Newly Revised, 12^th edition (2020) itself.  

     But, whether or not she first resorts to the publisher’s more user-friendly Robert’s Rules of Order, Newly Revised, in Brief (2020) (213 pages) (“In Brief”)—which breezily acknowledges (at page 101) that the full manual’s “volume and detail may make reading the entire book seem daunting to many people”— a board or committee leader shouldn’t be intimidated by this chunky checklist for chairpeople.

     To begin with, boards can easily dispense with many of the Rules’ “customs of formality,” such as (under Section 3:11) addressing the presiding officer by title (“Mr./Ms. Chair”), rather than as “you,” or by name.

     Indeed, the Rules themselves discourage unnecessary (and, sometimes, literal) standing on ceremony.  Although normally, under Rule 3.31, “[t]o claim the floor, a member rises at his place, faces the chair, and says, ‘Mr. President,’ or ‘Mr. Chairman,’” that Rule concedes that “If only one person is seeking the floor in a small meeting where all present know and can clearly see one another, the chair can recognize the member merely by nodding to him.”

    Moreover, under Rule 49:21, “Procedure in Small Boards,” in board meetings “when there are not more than about a dozen members present,” various formalities can be abandoned in the name of efficiency: motions don’t have to be seconded; proposals that are “perfectly clear to all present” don’t have to be introduced as motions before being voted on; there are no limits on “the number of times a member can speak to a debatable question”; and “[i]nformal discussion of a motion is permitted while no motion is pending.”

     Finally, Section 25:1 enables the board to suspend one or more or the rules, unless doing so would conflict with “a fundamental principle of parliamentary law” (e.g., under Section 25:11, if it would deny, other than as the result of a disciplinary proceeding, a member’s “right to attend meetings, make motions or nominations, speak in debate, give previous notice, or vote”).

     In fact, for board members and their counsel, the core of Robert’s Rules appears to be a relatively-manageable 220 pages:

     Chapter III (Sections 5-7), “Description of Motions in All Classifications”;

     Chapter V (Section 10), “The Main Motion”;

     Chapter VI (Sections 11-17), “Subsidiary Motions” (including, in Section 16, the often-misunderstood procedure to “call the question,” or, in more technical terms, “move the previous question”);

     Chapter VII (Sections 18-22), “Privileged Motions”;

     Chapter VIII (Sections 23-33), “Incidental Motions” (including the dreaded “point of order,” defined by Section 23:1 as a member’s asking the chair for a ruling on an alleged violation of the rules of order); and

     Section 48’s discussion of the preparation, wording, and approval of minutes.

    Even more comfortingly, In Brief reassures readers (at page 6) that “At least 80 percent of the content of [the manual] will be needed less than 20 percent of the time.”

     Nonetheless, to prevent a particularly punctilious and/or pernicious participant from preempting their proceedings, boards might consider amending their bylaws and governance guidelines to:

     First, specify what rules of order—if any—govern board and committee meetings generally;

     Second, identify (and perhaps attach copies of) any home-brewed rules of order, by which the board might omit, and/or explicitly depart from or supplant, the treatment of various issues by the general rules of order;

     Third, establish the board’s principles for activating Robert’s Rules, and any variations or alternatives.  For instance, a relatively congenial and collaborative board might decide to “go full Robert’s” only if a certain number or percentage of the participating directors voted to do so at some point (or after a specified amount of time) during particular deliberations. 

     In addition, or instead, boards might invoke—by the chair’s unilateral decision, by majority (or other) vote, or by default—their own rules of order for discussions of issues that they anticipate to be, or that have unexpectedly become, especially contentious or sensitive; and

     Fourth, designate (or set out the process for designating), for every meeting, a “parliamentarian” (armed with her own copies of the board’s own rules, if any, as well as both In Brief and the complete manual), to act, in the words of Section 47:46, in “purely an advisory and consultative [role]—since parliamentary law gives to the [meeting’s] chair alone the power to rule on questions or order or to answer parliamentary inquiries.”

     Separately, even if a company decides to forego Robert’s Rules completely, the board’s chair, the chair of the governance committee, or the company’s (in-house or outside) counsel might provide the In Brief book to every director, as useful and possibly thought-provoking material for discussions about enhancing the board’s procedures.  A copy could also be furnished (with a tab marking its Chapter 16, “Secretary”) to any non-director charged with preparing the minutes of a  board or committee meeting.

     On pages 142-143, the smaller book advises any leader of a meeting to “make every effort to know more about parliamentary procedures than other members.” 

     A company’s counsel and each of its directors might take this advice to heart, not only to improve their own board’s meetings but also to participate more powerfully in any outside meetings, whose chairs might have adopted Robert’s Rules by custom, by default, and/or from a (probably unfounded) sense of their simplicity.

     In such a setting, especially after having raised a surprising and stunning “point of order,” someone (at least comparatively) well-versed in parliamentary processes can, like the meeting, “stand at ease” (as per Section 8:2(4): enjoy a pause, and perhaps some “[q]uiet conversation among neighboring members,” without the meeting’s having been officially declared to be in recess), while watching the chair and the parliamentarian wriggle. 

     Or, she could sit at ease, as the case might be.

     The concept of an “executive session,” like that of an “independent” director, can be surprisingly slippery.

     According to Section 9:24 of the current (12^th) edition of Robert’s Rules of Order, “An executive session in general parliamentary usage has come to mean any meeting of a deliberative assembly, or a portion of a meeting, at which the proceedings are secret.  This term originally referred to the consideration of executive business—that is, presidential nominations to appointive offices, and treaties—behind closed doors in the United States Senate.”

   The term appears nowhere in the Delaware General Corporation Law or the Model Business Corporation Act.

   But in 2003, the NYSE and NASDAQ amended their listing standards to require regular “executive sessions,” encouraging more (and more-candid) discussions among the directors who do not also serve as a company as its officers (i.e., that company’s “outside directors”).  Ironically, such an “executive session” actually excludes executive officers.

    Section 303A.03 of the NYSE’s Listing Standards provides that, “To empower non-management directors to serve as a more effective check on management, the non-management directors of each listed company must meet at regularly scheduled executive sessions without management.”   

    The NYSE clarifies that a “non-management” director is any director who is not an executive officer of the company, even if she is “not independent by virtue of a material relationship, former status or family membership, or for any other reason.” 

     Under this exchange’s listing standards, unless the board chooses to limit its regularly-scheduled executive sessions to its independent directors (as allowed by a 2010 amendment), it must hold at least annually an executive session of only the independent directors.

     By contrast, the “executive sessions” of NASDAQ Rule 5605-2 are “[r]egularly scheduled meetings at which only Independent Directors are present.” Such sessions should “occur at least twice a year, and perhaps more frequently, in conjunction with regularly scheduled board meetings.

     Perhaps the most notable “executive session” of recent years was featured in a decision introduced as “outlin[ing] carefully the relevant facts and law, in a detailed manner. . . in part, because of the possibility that the Opinion may serve as guidance for future officers and directors. . . of other Delaware corporations” in the exercise of their fiduciary duties.  In re The Walt Disney Company Derivative Litigation, 907 A.2d 693, 697-698 (Del. Ch. 2005).

     The gathering in question immediately followed the November 25, 1996 meeting of Disney’s board— although, under the listing standards’ current definition, it would not qualify as an executive session, because of the presence of (if not also its being convened and conducted by) Michael Eisner, who was then not only the chair of Disney’s board but also its CEO.

     The Court noted that “Eisner himself testified that this was not an official executive session, but instead he gathered the non-management directors in a room to discuss [Disney President Michael] Ovitz,” id. at 730 n.277; see also 906 A.2d 27, 61 (Del. 2006) (referring to “the September 26, 1995 executive session, which was attended by Eisner and all non-executive directors”).  According to the Wall Street Journal, Eisner testified that he had not convened a formal executive session because “it would be so difficult to get Michael Ovitz out of the room.”

     In one of several Delaware decisions finding Disney’s directors not personally liable for having approved an employment agreement that had allowed Ovitz to leave office after only fourteen months with a severance package valued at approximately $130 million— or for having discharged him through a Non-Fault Termination (“NFT”) instead of terminating him for cause, which would have contractually deprived him of that payment—the Court of Chancery summarized the trial testimony about this gathering:

     “Although there was no mention of Ovitz’s impending termination at the board meeting, it is apparent, despite the lack of a written record, that directly following the board meeting, there was some discussion concerning Ovitz at the executive session which was held at Disney Imagineering in a glass-walled room. . .  One of the more striking images of this trial is that apparently Ovitz was directly outside the glass walls—looking in at this meeting—while his fate at Disney was being discussed. There are no minutes to show who attended the executive session, but I am reasonably certain that at least Eisner [and four other directors] were in attendance.  In the absence of further evidence, I must conclude that no other directors attended this session. It is also clear that Eisner notified the directors in attendance at the executive session that it was his intention to fire Ovitz by year’s end. . . .

     “Beyond Ovitz’s impending doom. . . there is some controversy as to whether any details of the NFT and the cause question were discussed at this meeting. . .

     “Because of . . . numerous discrepancies, I cannot conclude that [one director] questioned Eisner during this meeting regarding cause, nor can I conclude that the conversation that took place between [that director and another] occurred after the executive session in the presence of those who were in attendance.”  Id. at 730-732.

     In another now-outmoded application of the term, the Court observed that after a compensation committee meeting on September 26, 1995, “In executive session, the board was informed of the reporting structure that Eisner and Ovitz agreed to. . .  Eisner led the discussion regarding Ovitz. . . . Upon resuming the regular session, the board deliberated further, then voted unanimously to elect Ovitz as President.” Id. at 710.

      Five years later, the Court suggested that another company’s independent directors should have convened in executive session to address whether the company’s founder and current board chair posed a “threat” to the company’s plans, rather than (in a “strange interlude”) considering that issue “in his presence.”  The Court noted that “it was a less than adroit way to have an important discussion—a discussion that should have occurred in an executive session with [that director and certain other directors] absent.”  Yucaipa American Alliance Fund II, L.P. v. Riggio, 1 A.3d 310, 326-327 (Del. Ch. 2010).

     There is otherwise little discussion in caselaw of executive sessions, which are generally referred to only in passing. See, e.g., In re Toys “R” Us, Inc. Shareholder Litigation, 877 A.2d 975, 986 and 995 (Del. Ch. 2005) (mentioning executive sessions of independent directors in connection with the board’s determination of the disposition of the company’s store-operating division, and of a merger of the entire company); In re Lear Corp. Shareholder Litigation, 926 A.2d 94, 104 (Del. Ch. 2007) (merger discussion); In re Massey Energy Co. Derivative and Class Action Litigation, 2011 WL 2176479 (Del. Ch.), at *12 (considering merger or being acquired); Klaassen v. Allegro Development Corporation, 2013 WL 5739680 (Del. Ch.), at *7 (discussing the performance of the CEO); id. at *11 (discussing the termination of the CEO); Cinotto v. Levine, 2014 WL 4604750 (Cal.App. 2 Dist.), at *4 (merger discussions); Air Products & Chemicals, Inc. v. AirGas, Inc. 16 A.3d 48, 73 n.134 (Del. Ch. 2011) (executive session of non-management directors held to discuss a proxy contest).

     Among the “executive session” issues that board might wish to address explicitly in their governance guidelines are:

     First, who can convene—and who can end—a non-regularly-scheduled executive session?  Any one of, or a specified percentage (or just a simple majority of), the eligible participants (non-management directors; or, as defined by relevant listing standards, independent directors)?  Can someone who is not herself eligible to attend an executive session convene one, or at least suggest that one be held? 

     Does it make a difference if the session is to take place immediately before or after a previously scheduled meeting of the board? 

     How can a meeting already in progress be brought into—or out of– executive session?  Although not all boards have explicitly adopted them to resolve procedural issues, under Robert’s Rules, “A meeting [already in progress] enters into executive session only when required by rule or established custom, or upon the adoption of a motion to do so.  A motion to go into (or out of) executive session is a question of privilege, and is adopted by a majority vote.”

     What if the session would occur at a much different day or time than a regularly scheduled board meeting?

     Second, who presides at such a meeting?  The lead director, if there is one?  The participant who has served the longest as a director of the company?  The chair of a specific committee (or of one of several designated committees) of the board?

     Third, who sets the agenda?  Neither of the listing standards defines, or gives examples of, the topics that could be addressed, but those issues might well include the performance and compensation of, and succession plans for, the “inside directors” (particularly the CEO), as well as consideration of proposed transactions such as mergers that might ultimately result in the involuntary departure of inside directors.

      Fourth, can directors meeting in executive session allow the presence of (presumably after impressing upon them the confidentiality of the proceedings) what Robert’s Rules (Section 9:25) designates as “special invitees, and such employees or staff members as the body or its rules may determine to be necessary”?  Some governance guidelines refer to these as “semi-executive sessions.”

     Fifth, because the purpose of an executive session is to foster the open sharing of ideas and opinions, to what degree should any of the proceedings be memorialized?  Should formal minutes be taken, and if so, by whom?  Even if minutes are not prepared, should a record be kept at least of the identities of the participants, of (some or all of) the specific issues discussed, and possibly of the time spent on (some or all of) those topics? 

     Sixth, if minutes or other formal records of an executive session are created, should they be maintained separately from the minutes of the board’s regular meetings—and should they be under the control of, and readable by, the corporate secretary?

     Seventh, can directors meeting in executive session take binding action?  Even if the directors in attendance constitute a quorum for the purpose in question, should they not at least discuss their conclusions with the remainder of the directors before calling for a formal (or, possibly, for the formality of a) vote by the whole board? 

     Eighth, should the board ever delegate to the directors meeting in executive session the power to take action on a certain issue?  Would that necessitate formally creating a committee of those directors?

     Ninth, are any the board’s normal operating procedures (whether Robert’s Rules, or some alternative) automatically modified in some way(s), or specially subject to change, during an executive session?

     Tenth, is a director who was eligible to attend the executive session but who could not be present entitled to be “brought up to speed,” in full detail, on what happened?

     Eleventh, how much of the deliberations that occurred during an executive session should be conveyed, and by whom, to directors who were not eligible to participate— and who were possibly the topics of some of the discussions?  Just the decisions that were made?  The degree of support (unanimous?  overwhelming?  a bare majority?) that those decisions commanded?  The issues that emerged during the decision-making process?  (Presumably not the statements, positions, or votes of individual participants.)  For discussions that did not conclude in a vote, the “sense of the group”?  Is it considered a breach of a participant’s fiduciary duty to disclose information about the discussion to a non-participant without explicit authorization?  And who could give such authorization?

     Twelfth, can a board committee (or subcommittee) that—unlike the compensation, audit, and nominating committees—is not required by the current listing standards to be composed entirely of independent directors, conduct its own “executive sessions,” restricted to independent members of the committee, and possibly with different procedural rules than the normal committee?

    Boards should address these concerns in their governance guidelines, and perhaps also in general or specific rules of operation for these meetings (“In Case of Executive Session, Break Glass”), leaving room for flexibility and also for some creativity.

    On that last factor– much of the memoir, Who Is Michael Ovitz? (2018), is devoted to the author’s pre-Disney co-founding and leadership of an extremely successful firm for talent management.  Page 215 offers what might be not only a prime example of “Ovitz’s salesmanship or, in other words, his ‘agenting,’” 907 A.2d at 720, but also a clear indication that at his Creative Arts Agency, the first word of the title modified the third, as well as the second:

      “[W]e told our clients the truth.  That didn’t mean we told everyone else the truth.  I often had to offer more than I could deliver in order to be able eventually to deliver what I had offered.  If the truth was bad for us, we had to change the reality, and then deliver it as what we’d said it was all along.  In the meantime, well, you’d get creative.”

  In the movie, The Fugitive (1993), the hard-bitten Senior Deputy U.S. Marshal Sam Gerard (Tommy Lee Jones) ordered his subordinates not to say, “hinky”: “I don’t want you guys using words around me that got no meaning!”

    In The Princess Bride (1987), Vizzini’s (Wallace Shawn’s) inappropriate interjections of “Inconceivable!”, finally led Inigo Montoya (Mandy Patinkin) to observe, “You keep using that word.  I do not think it means what you think it means.”

    But in the governance context, it’s neither humorous nor meme-worthy for a word both common and crucial—like “independent”—to have several legitimate but possibly-conflicting definitions.

    After corporate meltdowns such as those of Enron and WorldCom, but even before the passage of the Sarbanes-Oxley Act of 2002, the SEC’s Commissioner Harvey Pitt proposed that the NYSE and NASDAQ revise their “listing requirements” for the trading of shares in publicly-held corporations.

     Both exchanges now insist that a majority of a company’s board, and all of the members of its audit and compensation committees, qualify as independent; and both obligate the board to determine whether individual directors are independent.

    Yet independence is deceptively simple-sounding concept.

    First, in its most colloquial (and loosest) meaning, an “independent director” of a corporation  is a synonym for an “outside director”: that is, someone who does not also serve that company as an officer. 

     At least in theory, such a director would be more likely than an “inside director” not only to bring to the boardroom a perspective separate from management’s, but also (because she would not be jeopardizing her employment with the company) to raise questions or arguments, or to dissent, in directorial discussions.

     A second, and multi-faceted, test for independence is imposed by the NYSE and NASDAQ themselves.  An outside director is not considered independent if she, directly or through persons or companies with which she is affiliated, can be said to have a “material relationship” with the company—whether “commercial, industrial, banking, consulting, legal, accounting, charitable, [or] familial”—under NYSE Listed Company Manual §303A.02(a)(i), and its official Commentary, respectively.  The first line of that section (which is titled, “Independence Tests”) announces that the section is designed “to tighten the definition of ‘independent director’ for purposes of these standards.” 

     Similarly, NASDAQ Listing Rule 5605 broadly disqualifies anyone “having a relationship which, in the opinion of the Company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.”

     Both exchanges exclude from the category of a company’s independent directors anyone employed by the company during the last three years; and anyone who is a close family member of, or (except for domestic employees) lives in the home of, anyone who was employed by the company as a senior officer at any time during the previous three years.

     Also considered non-independent are, under some circumstances, people whose family members have been employed by the company or its auditors; and people who (or who have relatives who) are employed by, or have a partnership or controlling interest in, the company’s major trading partners.

    Under a third and still more restrictive definition, outside directors who meet these standards might not be seen as independent (technically, as “disinterested”) with regard to specific corporate activities from which they, or someone close to them, stand to benefit—either (a) directly as; (b) as a manager of; or (c) as a holder of a significant ownership interest in, the other party to the “self-dealing” transaction. 

     Such transactions are known as “related party” transactions under the SEC’s Regulation S-K, and as “director’s conflicting interest transactions” in Section 8.60 of the ABA’s Model Business Corporation Act, but have no specific name in Section 144 of the Delaware General Corporation Law. 

     NYSE Manual Section 303A.10 and NASDAQ’s analogous Rule 5610 require listing companies to, in the words of the former, “adopt and disclose a code of business conduct and ethics for directors, officers and employees” that should set out procedures for identifying, disclosing, and determining whether and how to engage in particular transactions of this type.

     On a fourth and final level, even an outside director who satisfies the listing requirements of independence and is herself disinterested with regard to a specific transaction might not qualify as independent—with regard to board’s consideration of that transaction—if her connections to another director for whom the transaction does present such a personal conflict of interest could reasonably be seen as likely to compromise her own judgment.  

     The Supreme Court of Delaware has rejected the argument that “structural bias”—a general sense of solidarity among directors—automatically eliminates a director’s independence in determining the merits of allegations brought against a fellow member of her board.  See, e.g., Beam v. Stewart, 845 A.2d 1040, 1050-1051 (Del. 2004), citing Aronson v. Lewis, 473 A.2d 805, 815 n.8 (Del. 1984).

     But independence may well be forfeit when a director “is dominated by [an]other party, whether through close personal or familial relationship or through force of will,” or if she is “beholden to the allegedly controlling entity” for “a benefit, financial or otherwise, upon which [she] is so dependent or [that] is of such subjective material importance” to her that she might be considered biased.  Orman v. Cullman, 794 A.2d 5, 25 n.50 (Del. Ch. 2007).

     In some situations, the third (disinterestedness) and fourth (interpersonal independence) levels of this analysis may overlap: “Confusion over whether specific facts raise a question of interest or independence arises from the reality that similar factual circumstances may implicate both interest and independence, one but not the other, or neither.”  Id.  See also Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 362 (Del. 1993) (holding that “a director who receives a substantial benefit from supporting a transaction cannot be objectively viewed as disinterested or independent.”)

     The Delaware Court of Chancery, addressing in a separate decision “the independence standards established by stock exchanges and the requirements of Delaware law,” noted that “a finding of independence (or its absence) under one source of authority is not determinative for purposes of the other,” although “the two sources of authority are mutually reinforcing and seek to advance similar goals.”  In re EZCORP Consulting Agreement Derivative Litigation, 2016 WL 301245 (Del. Ch.), at *36.

     And in 2003, after reflecting on “the recent reforms enacted by Congress and by the stock exchanges,” the Court acknowledged that “even the best minds have yet to devise across-the-board definitions that capture all the circumstances in which the independence of directors might reasonably be questioned. By taking into account all circumstances, the Delaware approach undoubtedly results in some level of indeterminacy, but with the compensating benefit that independence determinations are tailored to the precise situation at issue.” In re Oracle Corp. Derivative Litigation, 824 A.2d 917, 941 & n.62.

     There’s certainly nothing hinky about that.

Near the end of his best-selling 1974 novel, Zen and the Art of Motorcycle Maintenance, Robert Pirsig addressed the avoidance of “gumption traps” that drain one’s enthusiasm for, and attunement with, the process of accomplishing something—in his extended example (and analogy), of tuning and repairing a motorcycle.

     Warning that “[t]he field is enormous and only a beginning sketch can be attempted here,” he recommended such practices as maintaining “a notebook in which I write down the order of disassembly and note anything unusual that might give trouble in reassembly later on”; keeping “newspapers opened out on the floor of the garage in which all the parts are laid left-to-right and top-to-bottom in the order in which you read a page,” to aid in efficient and complete reassembly; becoming familiar with suppliers of parts; and, in some cases, machining one’s own parts.  

     Pirsig also provided remedies for “internal gumption traps,” such as “an inability to revalue what one sees because of commitment to previous values” (“slow down deliberately and go over ground that you’ve been over before”); ego (“fake the attitude of modesty anyway”); anxiety (read deeply on the subject; and make to-do lists); boredom (turn routine tasks “into a kind of ritual”); and impatience (“best handled by allowing an indefinite time for the job, particularly new jobs that require unfamiliar techniques; by doubling the allotted time when circumstances force time planning; and by scaling down the scope of what you want to do”). 

     Finally, he suggested that to overcome “psychomotor traps,” workers use good-quality tools, and arrange for comfortable lighting, temperature, and props. (“A small stool on either side of the cycle will increase your patience greatly.”)

     In focusing on undistracted immersion in activity, Pirsig prefigured, in some ways, Mihaly Csikszentmihalyi’s 1991 examination of Flow: The Psychology of Optimal Experience, and of attaining “Zen-like” states while off the zafu (meditation cushion).

     But for corporate directors, officers, and their counsel, an even more relevant elaboration of Pirsig’s meditations is Daniel Kahneman’s Thinking, Fast and Slow (2011), which not only distills, but also waters (back) down for a popular audience, solutions from his and Amos Tversky’s decades of pioneering investigations in “behavioral economics” (also known as “neuroeconomics”), especially with regard to “cognitive biases.”

      Chapter 2.02(E) of my book on governance commended Kahneman’s intensely practical work to the attention (so to speak) of every director and officer, because an executive’s “essential function is to make decisions, often under time and emotional pressure and with imprecise and incomplete information.  Her fiduciary duties of care and loyalty thus require her to understand and minimize the ways in which her own mental tools and techniques might be flawed or compromised.”  (Almost half a century ago, in a different context, The Main Ingredient both cautioned and consoled, “Everybody plays the fool sometime. . . . They never tell you so in school.”)

       Moreover, “such a cognitive curriculum would. . . help to immunize executives against aggressive attempts by their competitors, creditors, and customers to exploit the dozens of vulnerabilities” detailed in Kahneman’s classic and its numerous successors.  Lawyers “could. . .  apply this information to enhance their own adversarial and cooperative efforts, as well as the ways in which they offer recommendations to clients.”

      Despite all of his experiments and expertise (and his Nobel Prize in economics), Kahneman acknowledged that, in his own decision-making, “I have improved only in my ability to recognize situations in which errors are likely.” 

     However, he observed that, “Organizations are better than individuals when it comes to avoiding errors, because they naturally think more slowly and have the power to impose orderly procedures.  Organizations can institute and enforce the application of useful checklists, as well as more elaborate exercises.”

     In addition to describing more than three dozen such vulnerabilities, my book identifies a variety of protective processes that boards and their counsel could adopt. 

     Special concerns include: preventing collaborations from amplifying and compounding the errors of constituents (as in “groupthink”); anticipating whether records generated by such techniques could be later be used in legal actions against executives; accepting the “unnatural” and unintuitive approaches of some of these procedures; and determining when, where, and by how much to depart from relying on (one’s own, the group’s, outsiders’, and the market’s) “rationality” when predicting a decision’s possible results and assessing their relative probabilities and utilities.

     Directors, officers, and their counsel might incorporate variations of these methods into their personal pursuits and perspectives.

     Pirsig reflected, “What I’m trying to come up with on these gumption traps, I guess, is shortcuts to living right”—and, famously, concluded, “The real cycle you’re working on is a cycle called yourself.”