In the News: Recent Developments

Feb/Mar 2008

Non-Public Firms Also Face Exposure

Vol. 34. no. 1, pp. 44-45

Non-Public Firms Also Face Exposure

Private Companies: Compliance and Liabilities Roundtable

Public company board directors dream of taking their company private to escape onerous regulation, the high cost of compliance, and the sometimes conflicting demands of different shareholder groups.

Our recent Directorship Boardroom Roundtable, “Private Companies: Compliance and Liabilities,” convened a group of leading directors and executives to look into this issue and answer such questions as whether private companies would be well served to remain private, especially in the current environment. In the absence of shareholder lawsuits, what are the real liabilities for private companies? What are the best practices public and private companies can learn from each other, and what types of issues should directors and advisers be attuned to?

Leading the discussion was Brian Inselberg, who serves as president of AIG Executive Liability’s Corporate Accounts and Private & Non-Profit divisions. He quickly listed the primary reasons for becoming a publicly traded company: access to capital, new forms of compensation for employees, a potentially higher profile and wider following, the diversification of personal holdings, among others. Inselberg noted that liability exposure remains a function of size and structure and that being private doesn’t translate to reduced compliance risk.

While the risks are typically smaller for private companies, he noted there are potential areas of compliance risk that private-company management and board directors would be well advised to pay particular attention: data breach and data privacy; transparency and independence of board; regulatory issues; and the Foreign Corrupt Practices Act (FCPA), which makes it unlawful for a U.S. person and certain foreign issuers of securities to bribe a foreign official for the purpose of attracting or retaining business. (For more information on the FCPA, go to

The Public/Private Debate

The decision to go public or stay private (or go private via a private-equity firm) comes with a set of pros and cons. Robert La Blanc, a former partner at Salomon Brothers, and now an active director on multiple boards of public and private companies, was asked how going public changed the once venerable Wall Street investment bank.
“The management committee at the time only had partnership money and they were looking at the model of a Citigroup which had a larger base of clients.. .The desire to go public was access to capital so that we could play among these big players.” Indeed, access to capital is usually first on the list of benefits to going public.

Georges Ugeux, chairman and CEO of Galileo Global Advisors and former head of the international division of the New York Stock Exchange, countered that going public doesn’t always have a positive effect. He said going public “completely changed” the culture of Salomon, which was later bought by Smith Barney, and eventually became part of the corporate structure its former management had aspired to emulate: Citigroup. “It changed from a culture where people worked for the good of the company to one where people worked for what was good for the individual. Within six months, it was a totally different finn,” Ugeux asserted.

And companies that go private or stay private to avoid compliance and regulation headaches might be engaging in a bit of wishful thinking. “You are still going to have regulatory exposure and you still have the need for a compliance program,” noted Directorship Publisher Christopher Clark. For example, he said that any company that has $5 million or more in government contracts needs to have a compliance program. And in certain industries, he said, class actions and antitrust issues can be as significant for private companies as they are for public companies.

“What you’re saying then,” said Jeffrey M. Cunningham, chairman and CEO of NewsMarkets, the parent company of Directorship magazine and Global Proxy Watch, “is that there isn’t a huge difference in liability, but as a private-equity investor what I need to carefully assess is the risk-control environment for private companies.”

Some Roundtable participant pointed out that private companies and especially non-profits and family-owned businesses are often guilty of less vigorous or even sloppy financial controls and bookkeeping, raising the specter of liability and risk. Joseph Fichera, the founder and CEO of Saber Partners, offered the contrasting view that from a risk standpoint, private companies backed by venture capital might actually be in a better position than public companies.

“When they [the venture capitalists] interact with the CEO and management, they’re armed with better information than the board…whereas public board members may lack the resources as well as the independent judgment to view company data,” Fichera said. “We should ask, ‘Are you doing your own analysis and, if not, are you getting all of your information from management?'”

Murphy’s Law

“That’s a valid point,” Inselberg said. “You want to have a process in place, as all risk-management oriented companies should have, that assumes that anything that could go wrong, will go wrong. When the inevitable happens, your organization needs to be able to limit its exposure.”

Some directors said they would not serve on a private board that did not offer directors’ and officers’ (D&O) insurance. Even serving on the board of a local nonprofit, whether a small charity or a large hospital, has risks that should not be underestimated case in point: A lawsuit brought against a local hospital and its board raised questions about how profitable the nonprofit was, according to one Roundtable participant, and left him feeling vulnerable, even though serving on the board seemed like an act of social mindedness.

One important instructional note: All companies, whether public, private, or nonprofit, should agree to indemnify their executives and officers under a policy of “mandatory advancement” (of legal fees) prior to the benefit of knowledge of guilt or innocence. The rationale for this is that the board will not likely be able to assess guilt or innocence in any case, but particularly not at the time the decision on whether to cover legal costs needs to be made.

The further implication is that assuring adequate coverage for directors and officers is of paramount importance, as it is possible for one so-called “bad actor” receiving legal fees to use up all the coverage. The bottom line: board directorships carry risks, to be sure, but if properly understood and adequately covered, they should not stand in the way of directors doing their job both independently and appropriately.

Who’s Who

Jonathan M. Bergman VP, CIO
Palisades Hudson Financial Group
Jay Cohen Global Compliance Leader Dun & Bradstreet
Jeffrey M. Cunningham Chairman and CEO NewsMarkets Chairman, Sapient Director, Countrywide Financial,
Joseph Fichera Founder, CEO Saber Partners
Allan Grafman President All MediaVentures Chairman, Director Majesco Entertainment
Brian Inselberg President AIG Executive Liability’s Corporate Accounts, Private & Non-Profit Divisions
Mina Knoll President
Baker Knoll Consultants Retired Senior Partner Deloitte & Touche
Robert La Blanc President
Robert E. La Blanc Associates Director CA, FiberNet Telecom Group
Joanne Landau President
Kurtsam Realty Director Hudson Holding Corp.
Pamela Packard President, CEO Strategie Enterprises Director BJI Holdings, Planitax
Tonia Pankopf Director Technology Investment Capital
William Roskin Senior Adviser, Viacom Director 1ON Media Networks, Ritz Interactive
Nawal K. Roy Vice President Moody’s Investor Service
Georges Ugeux Chairman, CEO Galileo Global Advisors
Robert Wright President
Robert F. Wright Associates Director
Universal American, The Navigators Group

Copyright NewsMarkets LLC Feb/Mar 2008
Provided by ProQuest LLC. All Rights Reserved.

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