At lunch today, I attended a meeting of the National Association of Corporate Directors, a group in which I am a member. I've been attending the local meetings since the chapter was organized a few years ago. This was the best meeting ever.
The speakers addressed the risks--and methods to manage those risks--of serving as officers and directors of public companies. One of the most surprising things I learned today are the range of exposures that can't be insured, especially including fines.
Traditionally, at least I'd always believed, that if the amount of a settlement fell within the range of the D&O coverage, the insurance would pay for it. If not, I believed, the company would pay for it under the standard indemnification.
Following Enron and Worldcom, apparently, a new class of plaintiff has arisen to make things more difficult on the Directors and Officers. First, the new plaintiffs are large pension funds whose claim for losses, unlike an individual investor's claims, are large all by themselves. Secondly, they insist that some portion of the settlements be paid by the Directors and Officers personally, with no help from insurance or the company. A scary prospect for outside directors with limited ability to direct the actions of the company.
The panel of presenters at the event today comprised defense attorney Gary F. Bendinger of Howry, Spencer Hoole of Diversified Insurance Brokers and Andy Raguskus, CEO of Sonic Innovations, Inc. (Nasdaq: SNCI).
The real highlight of the program was Mr. Raguskus taking us through his experience with "successfully settling" in 2005 a shareholder lawsuit filed in 2000, shortly after the IPO.
As he related the experience, the audience could really feel the pain associated with this experience. He points out that everyone involved in the system, including the process for adjudicating the outcomes, wins. That is, everyone gets paid--except the corporate officers and directors whose names are besmirched and whose time is burdened with this process.
In the case of Sonic Innovations, at least, there appears to be good evidence that the lawsuit was baseless to begin with--simply triggered by a drop in the stock price due to no fault of the company or its officers.
Ultimately, the recovery was was tiny relative to the alleged damages and most shareholders neglected to claim their share, with the unclaimed remainder going to a charity selected mutually by the plaintiffs and defendants as part of the settlement. The attorneys, of course, collected their fees.
What an unbelievable process!
Comment Preview