NEAL J. CURTIN
Independent directors needed

Corporate executives and state legislators are continuously in a position of heightened sensitivity as a result of the recent occurrences of corporate scandals, and lawyers are meticulously advising their clients to monitor management decisions.

With copies of the Sarbanes-Oxley Act of 2002 in every top executive’s desk drawer, there has been a “back to basics” movement in management training and money and corporate governance in an effort to avoid lawsuits brought by shareholders.

At the crux of money and management are the banks, and the bottom line in effective bank management today is: Don’t leave home without your lawyer.

“When people think about corporate governance issues, they are generally thinking of non-banks, but banks are different,” said David Hannon, a shareholder of Craig and Macauley Professional Corp. in Boston and head of the firm’s Business and Banking Law Department. “Banks are the most highly regulated business in the [United States] because of the deposits they enjoy and therefore there is regulatory oversight, which is very important.”

But what is important to understand, according to lawyers specializing in bank practices, is why shareholders sue banks and what bank executives should know about the risks and regulations involved with questionable corporate governing.

While various situations can create shareholder incentive to sue a bank, recently shareholder lawsuits have promulgated the notion that the actions of management have not been consistent with the views of the shareholder.

In one case, Credit Suisse First Boston Corp. was the focus of a complaint brought on behalf of a shareholder by Massachusetts Secretary of State William Galvin on Oct. 21 charging the firm with analyst misconduct, alleging that analysts with CSFB-issued reports publicly touted shares of Agilent Technologies of Palo Alto, Calif., while privately warning prized clients away from the company’s securities.

The suit was filed in U.S. District Court in Boston on behalf of a single shareholder, Patricia Maillet, who owned “a couple of hundred shares,” according to her attorney, Thomas G. Shapiro of Boston-based Shapiro Haber & Urmy. The stock allegedly was made attractive to investors by misleading analyst research that eventually was exposed as bogus, according to Shapiro.

Other cases have included an unexpected drop in stock price, which typically provokes the question about whether the information was made publicly available and if the investors had adequate information for investment purposes.

Stephen J. Coukos, a partner at Edwards & Angell in Boston and an attorney representing both public and private companies in banking and financial services, said banks should make investment analysis on an ongoing basis instead of “waiting for something to happen. As a board, members should have a sense of [the bank’s] strategic plan available at any given time.”

According to Coukos, the question is not always about the bank’s decisions, but why the shareholders did not know of the losses to start with.

“The question is why aren’t the shareholders satisfied,” said Coukos. “Maybe they look at the institution financially and decide that the best course of action to maximize shareholder value is to sell the bank, but generally speaking the management perspective may feel that long-term you are going to be better off pursuing a course of independence that will enhance the value of your stockholders.”

The bottom line, said Coukos, is the difference in long-term thinking of management vs. short-term thinking of shareholders, and Coukos said the important thing in any case is to look at both perspectives – that of the bank and the investor.

“From a professional investor’s point of view … they are in the business of managing money and there is pressure to maximize returns on a short-term basis,” said Coukos. “That’s the clash between an institution’s long-term time outlook, and a short-term time horizon viewpoint of a professional investor.”

And somewhere in the middle is a common understanding guided by the influence of educating management on corporate governance.

‘Dangerous Times’

Board committees of banks – especially executive committees and audit committees – have not only increased their watchdog role over bank management, but shareholders in turn are watching them more closely.

In an effort to avoid lawsuits from shareholders, attorneys are advising banks to take a close look at their board and assess the members sitting on committees.

Focusing attention on the critical role of the board committees now can help avoid litigation in the future, said Neal J. Curtin, a partner in Bingham McCutchen’s business practice in Boston, who said good board practices with audit and executive committees involve a committee dominated by people who are independent and have financial expertise.

“Good corporate governance means not having an executive-dominated board,” said Curtin. “It’s important to have independent directors who will validate the decisions of the board.”

According to Coukos, a typical public company will have a staggered board of directors where one-third of the board comes up for re-election every year and public companies, including public banks, will have an array of anti-takeover provisions in their bylaws that specifically addresses board members and election guidelines.

And industry officials agree, based on the recent outcome of corporate scandals, that banks should make certain such provisions are strictly followed.

“The law is very primitive when the pendulum swings – at this moment the pendulum has swung in the direction of abuses in the market,” said Curtin.

Corporate “abuses” have caused an intrusion by the Legislature and, according to Curtin, “from the corporate point of view, [corporations] are in dangerous times, but it’s also all about being in a position to do those things you were always supposed to do … work with shareholders to do the best for the company.”

Curtin said management acts as the fiduciaries to the shareholder and management’s job is to conduct business in the best interest of the shareholder.

But when investors were being taken advantage of the laws were changed to broaden the focus of management responsibilities and the Sarbanes-Oxley Act was born.

“In theory, the corporation is where every buck stops and it’s the ultimate charge, politically, to run the corporation,” said Curtin. “Sarbanes-Oxley pushes us to look at how our board is run and evaluate the situation.”

While the Sarbanes-Oxley Act details the rights and consequences of accounting boards and executive management of corporations, Hannon says it is the management alone, and not the government, that should successfully run the bank.

“The most important thing to remember is that banks are different – if banks are attuned, they are most likely attuned to the regulatory requirements as well as the security flaws and there should not be a lack of clarity about corporate governance reforms,” said Hannon.

With banks being the hub of deposits and money management, industry experts agree that while there will always be a different opinion, it is important for banks to work alongside their community, clients and board in an effort to avoid the risks of lawsuits.

“Banking takes into consideration needs of customers, the community and the board,” said Coukos. “In an ideal world, the lines are aligned and sometimes there are competing interests, but we work with them.”

Generally speaking, Coukos said, Massachusetts’ banks have been in a quiet period in terms of seeing sales of banking institutions in the midst of litigation and lawsuits, but warns that around New England, the lawsuit trend seems to be picking up.

Experts: Shareholder Suits Remain Threat

by Banker & Tradesman time to read: 5 min
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