FEW Features Board Management Strategies

Focusing on the bottom line and hiring good managment are only a few of the duties and obligations of a board of directors.
By David A. Crass and Anna J. Wildeman | July 15, 2010
The latest strategies for managing margins, managing idled and distressed plants, and maximizing RINS were discussed by panelists and attendees during the Management/Business track sessions at the 26th Annual Fuel Ethanol Workshop and Expo held in St. Louis in June.

In a session titled "Boardroom Leadership and Plant Strategies," attendees heard industry experts describe the latest strategies on managing staff, commodities and financial risk to prevent balance sheet erosion, and received advice and guidance on how members of the board of directors can utilize these tools to discharge their obligations. The panelists' presentations were excellent and the audience was engaged during the Q&A session. Most of the questions focused on the structure, workings and obligations of the board of directors.

In the ethanol industry, now more than ever, each producer must strive to be the lowest cost/most efficient, employ strategies to protect margins, build favorable cash flow and protect balance sheets. Given price volatility of both corn-based ethanol's feedstock and products, there is incredible competitive pressure to maximize operational efficiency with feedstock, energy use, coproducts, personnel, market partners and financial planning. Operations that win will be those that minimize the cost of turnover, protect their balance sheets by actively deploying all the tools available for risk management (commodity risk and financial risk), stay abreast of evolving technologies and the opportunities that these technologies present, and take appropriate management and legal steps to minimize liabilities.

Given these industry challenges and opportunities, a brief summary of the board of directors' duties is in order. The board's purpose is to oversee the management of the company by:
>Reviewing and monitoring the company's financial and operating performance
>Setting its vision and developing policies and strategies to attain that vision
>Hiring, setting goals for and evaluating the company's chief executive officer
>Overseeing risk management and financial management strategies
>Developing and implementing succession plans for both management and the board itself.

The division of power between the board and the management team will be defined in a company's governing documents—articles of incorporation and bylaws. Regardless of the governance structure of a corporation, effective communication between the board and the management team is essential to effectively manage legal and operational risk and evaluate the financial and operational position of the company.

As a general matter, each board member has the following legal obligations:
Duty of Care or Diligence Directors must discharge their duties in good faith, with care that an ordinary prudent person in a like position would exercise under similar circumstances, and in a manner reasonably believed to be in the best interests of the corporation.

Duty of Loyalty Directors must refrain from engaging in personal activities in such a manner as to injure, take advantage of or conflict with the company. Many companies develop and implement an internal conflict of interest policy to help define the scope of this duty.

Duty of Compliance Directors must discharge their duties in compliance with the law and the articles of incorporation and bylaws. To discharge this obligation, a board must fully understand what law applies to its actions. The law governing a board's actions should be identified in the company's articles of incorporation or bylaws, or will otherwise be defined by state law.

Duty of Disclosure Directors must disclose to other directors and shareholders material facts within their knowledge. This disclosure should be carefully coordinated with the management team and with legal counsel.

Fiduciary Duty In addition to all of the above, directors have a general fiduciary duty, which requires them to act in the best interests of the company. This duty requires directors to act in good faith on all occasions and give conscientious care and best business judgment to their tasks. A director's special skills, background or expertise may affect the expected performance and degree of fiduciary duty of that particular director. For example, a director who is also an attorney or an accountant—even though they do not provide professional services for the company—would likely be expected to identify potential legal issues or accounting concerns that arise during the course of discharging their duties as a director.

Director Liability
As crude oil continues to spew from the bottom of the Gulf of Mexico and prosecutors begin to talk of criminal charges against corporate officials, members of boards of directors are reminded to take their role seriously. The scope of board member liability can be defined by state law, as well as the company's articles of incorporation and bylaws. Typically, director liability will arise from breaches of any of the duties noted above, authorization of unlawful dividends or distributions, or failure to comply with applicable federal and state laws, including Securities and Exchange Commission disclosure requirements.
When liability concerns arise, actions of the board as a whole are generally analyzed. However, a director's special knowledge may require liability to be determined on an individual basis. For example, a director who is also a securities analyst and investment portfolio manager should have a better understanding of a company's intrinsic value than most other directors. With such special knowledge, that director may be expected to review a proposed takeover price with greater scrutiny and counsel the board if the proposed price appears inadequate.

Although directors can be held personally liable for damages that result from breaches of their duty of care and loyalty, they can also be protected by the "business judgment rule," which serves to reduce liability exposure of directors to claims for mismanagement and breach of their fiduciary duty of care. The business judgment rule creates a presumption that in making a business decision, the directors of a company acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company. Courts generally do not review the quality of a board's business decisions, only that required procedures were followed in reaching those decisions and that the board undertook a good-faith effort to inform itself and rely on facts, information and opinions generated during a reasonable business inquiry. Courts are more inclined to find personal liability when directors engage in gross negligence or obviously demonstrate a prolonged failure to participate diligently or to exercise oversight and supervision.

Additional liability protections may exist for directors, including state law limits on liability, indemnification and insurance. A majority of states allow articles of incorporation to expressly limit director liability in some circumstances. These limits typically apply only to monetary liabilities to the corporation and its shareholders, and not to injunctive relief or monetary liability to third parties. A majority of states also specify the circumstances when a company will be required, or permitted, to indemnify directors against liability. Mandatory indemnification typically arises when a director is wholly successful in defending its actions in court; permissive indemnification can arise if a director acted in good faith and with reasonable belief the actions were in the best interest of the corporation. Director and officer insurance policies are intended to cover a company for certain indemnification payments required by law or by articles of incorporation.

Despite the potential limits on director liability, no protection is fool proof and directors must remain vigilant. The increased attention from the public on corporate activities and the increase of shareholder lawsuits against failing investments during this economic downturn makes it more important now than ever for directors to ensure they are diligently discharging their obligations, seeking out and obtaining the type of information and advice necessary to make decisions and are otherwise actively involved in developing the strategies that the management team can pursue to discharge the vision and mission of the company. EP

David A. Crass is chair of Michael Best & Friedrich's Agribusiness, Food Processing and Distribution Group and a leader in the firm's renewable energy practice. Reach him at (608) 257-3501 or dacrass@michaelbest.com. Anna J. Wildeman is a member of the Land and Resources Practice Group where she assists both buyers and sellers in assessing environmental issues. Reach her at (608) 283-0109 or ajwildeman@michaelbest.com