As I've grown older, and hopefully wiser, I've often wondered about the impetus behind the genius who actually took the time to sit down and come up with the axiom, "What you don't know can't hurt you."
Throughout my adult life, I've never seen any merit or proof of this postulate. I mean, can you imagine letting a strange mass grow somewhere on your body, and not bothering to discern what it is? Or applying this absurd catch phrase toward preparation for the CPA exam?
I think I've made my point.
Apparently, a judge in a Delaware Chancery Court sort of agrees with my assessment - only the magistrate's application pertains to corporate directors. In June, a judge from the first state of the original 13 ruled that officers and directors of companies who possess a "specialized expertise or knowledge," can, well, take a harder fall if things go sour and a sudden case of massive corporate fraud breaks out.
Since the contagion of corporate scandals several years back, many of the nation's corporate boards, particularly those at companies that've had, ahem, "accounting issues," have come under more pressure than a losing college football coach from an alumni association.
Subsequently, companies have been more than encouraged to include board members who are knowledgeable and, shall we say, somewhat more independent than the golfing partners of the C-level executives.
In fact, in several high-profile shareholder lawsuits, plaintiffs have charged that the board members should bear the brunt of accountability, since any sudden profit warnings, restatements or outright fraud happened on their watches.
The Delaware ruling stems from such a suit against a Virgin Islands-based communications provider, which alleged that both the board and the majority shareholder deliberately undervalued the company when it was taken private some six years ago.
The judge ruled for the shareholders, and that several of the directors were "jointly and severally liable," and therefore liable for payment. In all, two board members, a securities analyst and a lawyer for the majority shareholder all were found liable. The lawyer for the majority shareholder and the analyst, who was judged to have "experience in the telecommunications industry," were beholden in the amount of $75 million, while the company and the majority shareholder were staring at a $200 million invoice.
Now, it wasn't until I began to cover the corporate world that I realized just how many companies are incorporated in Delaware, so it would stand to reason that any legal ruling emanating from the state would wield more than a slight influence on the rest of the country. But, according to reports, the acid test on director liability may come when the board at Walt Disney Co. gets put under the microscope for somehow agreeing to an insane $140 million severance payment to former Disney president Michael Ovitz.
Now, if I were on the jury, I couldn't find any of these directors liable of having knowledge of any kind, because only an idiot would okay a compensation package to a person whose accomplishments at the Magic Kingdom could be measured by the sound of one hand clapping.
But the question I have is, in the event of litigation, how do you decide whether a board member is asleep at the wheel because of cronyism, or complicit because of specialized knowledge?
Sometimes it's what you do know that can really hurt.
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