Published by:  Bricker & Eckler LLP  



Dec 09, 2013

Bricker & Eckler Launches New Business Litigation Blog

Members of Bricker & Eckler's Litigation group recently launched a new blog,, featuring the latest on issues pertaining to a wide array of business disputes. Follow the blog to learn more about issues that your business has likely faced or may face in the future, including alternative dispute resolution, business contracts, business insurance, business torts, complex commercial litigation, general business litigation and intellectual property.

Posted by J. Beavers in  Uncategorized   |  Permalink


Nov 21, 2013

Directors May Take Greater Risk in Relying upon Committees that Do Not Consist Solely of Directors

The Securities and Exchange Commission (SEC) rarely takes judicial or even administrative action against boards of directors.  However, on December 10, 2012, the SEC instituted public administrative and cease-and-desist proceedings under the Investment Company Act of 1940 (1940 Act) against eight outside directors of mutual funds sponsored by Morgan Keegan & Company, Inc. (Morgan Keegan).  On June 13, 2013, the eight directors settled the proceedings by consenting to the cease-and-desist order.


The SEC’s allegations were that the eight directors delegated to a committee composed of the funds’ officers and accounting employees, the directors’ responsibility for assuring that the funds’ investments were valued at fair value as required by the 1940 Act without:

  • providing any meaningful substantive guidance on how those determinations should be made;
  • learning how fair values were actually being determined;
  • receiving more than limited information on the factors considered in making fair value determinations and almost no information explaining why fair values were assigned to specific portfolio securities;
  • providing any other guidance – either written or oral – on how to determine fair value; and
  • knowing or inquiring what methodology was used by the committee. 

Under most states’ corporation laws, including Ohio’s, a director may rely and may be protected when relying upon committees, but the standard of care required of a director is greater if the committee is not composed solely of directors.  For example, under both Ohio’s for-profit and non-profit corporation laws, a director may rely upon a committee composed solely of directors as to matters within the committee’s designated authority as long as the director reasonably believes the committee merits confidence.  This is not a difficult standard to meet because it requires the director (i) to know the committee’s authority, which the director can know by reviewing the committee’s charter, and (ii) to reasonably believe the committee merits confidence, about which the director can have some confidence because each member of the committee has the director’s fiduciary duties of care and loyalty when serving on the committee.  Those duties are to act in good faith, in a manner the director reasonably believes to be in or not opposed to the best interests of the corporation, and with the care that an ordinarily prudent person in a like position would use under similar circumstances.


On the other hand, if the committee is composed of non-directors, a director may only rely upon the committee for matters about which the director reasonably believes the committee members are reliable and competent.  Because non-directors do not have the same fiduciary duties of care and loyalty as a director, courts have held that a director must ask questions of a non-director committee in order to have such a reasonable belief.  Reliability requires inquiring about the truth and veracity, and freedom from conflicts of interest, of each committee member.  Competence requires inquiring about the care the members of the committee have taken in discharging their responsibilities, including the key question, “What happens if things don’t go as planned?”


Even though the SEC allowed the eight outside directors of the Morgan Keegan funds to consent to the cease-and-desist order without admitting or denying the SEC’s findings, they have suffered both economic loss in terms of legal fees and expenses, and reputational loss because of publicity.  Although the cease-and-desist order does not by itself result in a Morgan Keegan director being subject to the new “bad actor” disqualification of section 506(d) of SEC Regulation D, it is a disclosure item in the “management” section of registration statements, prospectuses and proxies subject to Regulation S-K.

Posted by J. Beavers in  Director & Officer Insurance, Indemnification, and Other Protections   |  Permalink


Oct 03, 2013

PwC's Center for Board Governance Addresses Risk Management and the Regulatory Environment in their 2013 Annual Corporate Directors Survey

PricewaterhouseCoopers LLC's (PwC) Center for Board Governance released the final installment of its Annual Corporate Directors Survey, titled "Boards confront an evolving landscape." Topics addressed in the final installments are strategy and risk management oversight, as well as the regulatory and governance environment.
While the study includes responses from directors of public companies (70 percent of which have more than a billion dollars in annual revenue), it does provide good insight for companies of all sizes, public and private, mutual companies and tax exempt entities on governance trends and how boards are reacting to changes in the regulatory environment. 

Some interesting findings of this year’s study include:

  • 35 percent of directors now say someone on their board should be replaced (up 4 percent from 2012) with the top reasons being: age, lack of required expertise, poor preparation for meetings and overstepping boundaries of the director’s role.
  • 48 percent of directors cited impediments to removing a director, with the top constraint being that board leadership is uncomfortable with addressing the issue.
  • 94 percent of directors say they receive information on competitor initiatives and strategy, but nearly a quarter wish it were better.
  • 75 percent of directors said their boards took actions to oversee fraud risk.
  • The most desirable attributes for board candidates are: industry experience, followed by financial expertise and operational expertise.
  • 60 percent of directors believe annual training should be required for directors.
  • 59 percent of directors indicated that their time commitments for strategic planning increased over the past 12 months (which was the highest category) and over 40 percent of directors indicated that they spent more time doing work related to succession planning, risk management and IT risks.
  • 60 percent of directors of the largest companies believe they have a thorough understanding of the company’s risk appetite, whereas only 36 percent of directors of the smallest companies feel that way.

Posted by K. Kinross in  Uncategorized   |  Permalink


Sep 24, 2013

The Costs of the Penn State Scandal

The website of Lehigh Valley’s The Morning Call contains an article by Mike Dawson, of The Centre Daily Times, dated September 14, 2013, reporting that:

The Jerry Sandusky sex scandal has now cost Penn State $49.4 million for legal and consulting services, the university said Friday.

The latest tally represents work by more than three dozen firms that invoiced Penn State between November 2011 and June 30 of this year. When factoring in the dollar value of the total settlement offers with Sandusky claimants and the full NCAA fine, the potential cost skyrockets to more than $157 million.

Acredula has posted two blogs on the Penn State scandal:  “A chronology showing the Penn State Board of Trustees acted appropriately,” dated November 29, 2011; and “Penn State’s Special Investigative Counsel’s Report Is Instructive to Boards,” dated July 31, 2012.

We have also conducted, with audiences of board members, simulations of the five significant days of conversations and meetings of the Penn State board in which the audience considers and votes upon the same issues considered and voted upon by the Penn State board.  Although the audiences have not agreed with every decision made by the Penn State board, at the end of the simulation, every audience has greater sympathy for and understanding of the difficult issues faced by the Penn State board during those five key days.

Our largest simulation included a panel of professionals experienced in counseling — or being part of — boards:

  • Sandra W. Harbrecht, who counsels boards as president of the public relations firm, Paul Werth Associates, and serves on several boards, including having been chairperson of a state university’s board, advised that “a director may not know what he or she does not know” because information may be filtered by the president.  Penn State’s Special Investigative Counsel’s Report found this was true with Penn State’s former president, Graham Spanier.
  • Kevin M. Kinross, who counsels boards as a lawyer at Bricker & Eckler LLP and as a frequent lecturer for boards of members of the National Association of Mutual Insurance Companies (NAMIC), advised that directors of any organization have a duty of care to ask questions before they can rely upon officers or employees of the organization.  The nature of the questions is, at the least, to verify whether the officers and employees are reliable and competent in the reports and other information that they give to the board.
  • Nicolette Dioguardi, who counsels Ohio University’s board as its director of legal affairs, advised that the board of any organization should require that the organization’s chief compliance officer report directly to the board.  This facilitates the board’s ability to understand what it may not know and to ask questions.

The foregoing advice of these three professionals reflects the key recommendations of Penn State’s Special Investigative Counsel’s Report:

  • “Appoint a University ethics officer to provide advice and counsel to the President and the Board of Trustees on ethics issues and adherence to the Penn State Principles.”
  • Evaluate “the span of control of [the senior University officials] and make adjustments as necessary to ensure [their] duties are realistic and capable of [the officials’] oversight and control.”
  • “Develop a mission statement for the [University’s office of General Counsel] that clearly defines the General Counsel’s responsibilities and reporting obligations to the University and the Board.”
  • “Review . . . the structure, composition, eligibility requirements and term limits of the Board [and] the need to include more members who are not associated with the University.”
  • “Review, develop and adopt an ethics/conflict of interest policy for the Board that includes guidelines for conflict management and a commitment to transparency regarding significant issues.”
  • “Increase and improve the channels of communication . . . [to] ensure that the University President, General Counsel and relevant members of senior staff thoroughly and forthrightly brief the Board of Trustees at each meeting on significant issues facing the University.”
  • “Increase and publicize the ways in which individuals can convey messages and concerns to Board members [including to provide] Board members with individual University email addresses and make them known to the public [and use] common social media tools to communicate with the public on various Board matters.”
  • “Establish and select an individual for a position of ‘Chief Compliance Officer’ [to] head an independent office equivalent to the Office of Internal Audit [and] have similar access to, and a reporting relationship with the Board.”

There is yet no happy conclusion to the Penn State scandal.  It has been expensive not only in terms of the potential $157 million of expenses, settlements and fines, but also in terms of damage to its reputation.  However, the Penn State community appears to be confronting “transforming the culture that permitted Sandusky’s behavior and which directly contributed to the failure of Penn State’s most powerful leaders to adequately report and respond to the actions of a serial sexual predator,” as recommended by the Special Investigative Counsel’s Report.

Posted by J. Beavers in  Government/Internal Investigations  Non Profit Governance   |  Permalink


Sep 11, 2013

The Role of the Non-Executive Board Chair or Lead Director

Traditionally, the chairpersons of boards of charitable organizations have been those who are not executives or officers of the organization, while the chairpersons of for-profit organizations have been their CEOs. The reason charitable organizations have had non-executive chairpersons is to avoid intermediate sanctions under federal tax laws, which create a rebuttable presumption (or safe harbor) for decisions made by directors free of conflicts of interest of an officer or employee.

Although institutional investors, including the Council of Institutional Investors, advocate that the chairperson of the board of a publicly held company should be an independent director, a September 2011 survey by Institutional Shareholder Services found that 73 percent of publicly held companies and their directors disagree and have opted to designate an independent or outside director as a lead or presiding director, leaving the CEO as chairperson.


Although titles are not as important as the authority and responsibilities of the position, generally the titles and their corresponding authority and responsibilities are:

  • Executive chairperson: Typically, the authority and responsibilities of the board’s chairperson are set forth in the organization’s bylaws or regulations. When the chairperson is the CEO, whose authority and responsibilities are also set forth in the organization’s bylaws or regulations, the authority and responsibilities of both positions tend to be fused and, as a result, are greater than those of a non-executive chairperson, or a lead or presiding director.
  • Non-executive chairperson: Because the authority and responsibilities of the board’s chairperson, whether or not an executive or officer, are set forth in the organization’s bylaws or regulations, the authority and responsibilities of the non-executive chairperson are less than those of the executive chairperson because there is no fusion with the authority and responsibilities of an executive.
  • Lead director: Traditionally, a lead director is someone who is designated by the board to comply with the listing requirements of the New York Stock Exchange to identify publicly by name or position the director or directors who preside at meetings of non-management directors. Generally, lead directors are responsible for fostering communications between the board and management and other organizational constituents. Because the authority and responsibilities of a lead director are often not set forth in the organization’s bylaws or regulations, the authority and responsibilities of a lead director are generally considered less than those of an executive or non-executive chairperson.
  • Presiding director: Traditionally, a presiding director presides at meetings of non-management directors and may not have authority and responsibilities for fostering communications between the board and management and other organizational constituents. As a result, the authority and responsibilities of a presiding director are generally considered less than those of an executive or non-executive chairperson or lead director.


Because of the fusion of the authority and responsibilities of the chairperson and CEO, the executive chairperson’s role will generally be whatever he or she defines it to be. However, below are some considerations of the role of the non-executive chairperson, or the lead or presiding director.

  • Give input to management on the scheduling of, and the agenda for, any board or committee meeting before either the schedule or agenda is distributed, including having the authority to include matters on the agenda for the board’s or committee’s consideration at any meeting. Typically, management initiates the schedule and agenda, but management and the board may benefit from more collaboration on the planning for meetings.
  • Receive input from other board members for matters to be included on the schedule of, and agenda for, any board or committee meeting. Although each director should have the authority to request a matter be considered, collaboration with management through the non-executive chairperson or lead or presiding director may result in better meeting planning.
  • Oversee the flow of information to the board.
  • Call meetings of the board, including meetings of non-management directors, and preside at meetings of non-management directors. Typically, this is an express authority of the non-executive chairperson, but it should also be an authority of the lead or presiding director.
  • Cause, during any board or committee meeting, the board or committee to meet in executive session of the outside or independent members and with or without legal counsel or other advisors deemed appropriate by those members.
  • Cause recusal of any board or committee member from consideration by the board or committee of any matter in which the member has a perceived conflict of interest, including: excusing the member not only from speaking or being observed, but also from being able to hear or observe others, during consideration of the matter; waiving the member’s right to withhold approval of any statement in the minutes reflecting the consideration of the matter other than to reflect the member’s absence from the consideration and the member’s absence or abstention in any vote on the matter; and waiving the member’s right for reconsideration of the matter.
  • Act, where appropriate, as liaison between the board and the CEO.
  • Mentor, where appropriate, other directors on improving their effectiveness.

In any event, governance of any organization includes the culture of that organization. Accordingly, a best practice for one organization may not be a good practice for another. Changing a practice that changes culture generally requires two generations of directors: one to propose the change, and a successor to retain it.

Posted by J. Beavers in  Non Profit Governance  Policies Governing Management   |  Permalink


Jul 17, 2013

The Dodd-Frank Act Delivers New Rules for the Independence of Compensation Committees and Their Advisers

Will the new rules mandated by the Dodd-Frank Act for the independence of compensation committees and their advisers trickle down to the rest of corporate America like the audit committee rules of Sarbanes-Oxley did?


A summary of the new rules is as follows:


1.    Compensation committees must be composed entirely of independent directors using the independence rules for audit committees.  This generally means the directors cannot (i) be in a position of controlling, being controlled by or under common control with the organization or any of the organization’s affiliates; or (ii), subject to a few exceptions, receive compensation directly or indirectly from the organization other than directors’ fees.


2.    The compensation committee must be authorized to, in its sole discretion, retain or obtain the advice of a compensation consultant, independent legal counsel or other adviser.  This authority is required to be set forth in the compensation committee’s charter.


3.    Although compensation committees are not required to retain or obtain the advice of a compensation consultant, independent legal counsel or other adviser, if they retain or receive advice of such a consultant, legal counsel or other adviser, the compensation committee must first take into consideration the following six factors:


(i) The provision of other services to the issuer by the person that employs the compensation consultant, legal counsel or other adviser;


(ii) The amount of fees received from the issuer by the person that employs the compensation consultant, legal counsel or other adviser, as a percentage of the total revenue of the person that employs the compensation consultant, legal counsel or other adviser;


(iii) The policies and procedures of the person that employs the compensation consultant, legal counsel or other adviser that are designed to prevent conflicts of interest;


(iv)  Any business or personal relationship between the compensation consultant, legal counsel or other adviser and a member of the compensation committee;


(v) Any stock of the issuer owned by the compensation consultant, legal counsel or other adviser; and


(vi) Any business or personal relationship between the compensation consultant, legal counsel, other adviser or the person employing the adviser and an executive officer of the issuer.


4.   If the compensation committee retains any compensation consultant, independent legal counsel or other adviser, the compensation committee shall be directly responsible for the appointment, compensation and oversight of the work of such consultant, legal counsel or other adviser.


5.    Although the compensation committee may retain or obtain the advice of a compensation consultant, legal counsel or other adviser, it must continue to exercise its own judgment in fulfillment of the duties of the compensation committee. Accordingly, the committee is not required to implement or act consistently with the advice or recommendations of the compensation consultant, independent legal counsel or other adviser.


6.    Finally, the organization must provide for appropriate funding, as determined by the compensation committee in its capacity as a committee of the board of directors, for payment of reasonable compensation to a compensation consultant, independent legal counsel or any other adviser retained by the compensation committee.


Currently, these rules apply only to publicly traded companies, with respect to the independence of compensation consultants, independent legal counsel or any other advisers, effective July 1, 2013.  Similar rules are mandated for federal banks. These Dodd-Frank Act rules are likely to trickle down to tax-exempt organizations as well as regulated organizations, such as insurance companies, similar to the trickle down that occurred with Sarbanes-Oxley.


Posted by J. Beavers in  Advisory Boards  Non Profit Governance  Policies Governing Management  Regulatory Issues/Reform  Sarbanes-Oxley   |  Permalink






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