Santa Clara University


Business Ethics in the News

A discussion on the week's top business ethics stories by Professor Kirk O. Hanson, Executive Director of the Markkula Center for Applied Ethics, and Patrick Coutermarsh, Fellow in Applied Ethics and recent graduate of Santa Clara University.

The following postings have been filtered by category Board of Directors. clear filter
  •  PAYING BOARD NOMINEES TWICE: Hedge Funds Set to Offer Bonuses to Preferred Candidates

    Tuesday, Dec. 3, 2013

    As more and more hedge funds are getting their preferred candidates on the board of directors, a new trend has emerged: some hedge funds are offering their candidates a bonus in addition to the traditional compensation offered by the company. While there has yet to be a director who has taken up one of these offers, corporate governance commentators are already up in arms over the potential pitfalls. Detractors are calling the practice a "golden leash" that will inevitably lead to a conflict of interest, leaving it up in the air who the director is really working for. The hedge funds have responded that because the bonus will be tied to company performance it suits everyone's best interest, and that the additional incentive will help attract better, and more devoted, directors. Are hedge funds entitled to compensate preferred candidates? What is in the best interest of shareholders?

      Kirk: I believe this arrangement will create a conflict of interest, even with the bonus being tied to company performance. Board members owe their allegiance to all of the company’s shareholders, not just the hedge funds with money to throw their way. Where things get complicated is when a hedge fund employee is also serving on the board of a company that the fund has invested in. In this case, the hedge fund is free to compensate the employee, but only for the service and benefits attributed to the hedge fund. Hedge funds should not be compensating the board member on behalf of the company. If each party picks up their own tab, the conflict of interest concern is resolved.

      Patrick: My concern is with the economic incentive placed on the director to manage for the short term. “Maximizing shareholder value” leaves a lot of questions unanswered: Which shareholders? Maximize shareholder value today, this year, or ten years from now? Activist hedge funds are notorious for going after short-term gains, regardless of the effect on the long-term health of the company. Such is their right, but these bonuses serve to align the director’s goals and time horizon with that of the hedge fund: get the stock price up in the near future and get your bonus. 

    A Debate Over Paying Board Nominees of Activist Funds (NY Times)

    A Framework for Thinking Ethically (Markkula Center for Applied Ethics) 



  •  HP: When to Step Down from the Board

    Friday, Apr. 5, 2013

    Thursday, Hewlett-Packard announced that board chairman Raymond Lane had stepped down as chair, but will continue to serve on the board, while two other directors resigned from the board entirely. Lane, along with other directors, have been key supporters of a series of mishaps that led to HP writing off $18 billion from failed acquisitions in the fiscal year of 2012 alone; most notably the $11.1 billion acquisition of Autonomy, considered to be among the worst acquisitions in history. Ranging from the Autonomy acquisition to the ill-fated appointment of former CEO Léo Apotheker, who was hired without meeting many of the board members, shareholders accused the board of serious shortcomings in its role of providing risk oversight. At the HP investor meetings last month, Lane received only 59 percent of the vote for reappointment to the board. While a majority vote is technically enough for reappointment, such a low percentage is indicative of very low shareholder confidence. Were HP’s board members duty bound to resign, despite obtaining the majority vote?

      Patrick: Yes, I think the board members were duty bound to resign, but not for the reason implied. In terms of shareholder support alone, majority vote is sufficient for accepting reappointment. The truth of the matter is that Lane and the other board members are obstacles to HP’s turnaround, and their presence alone was a detriment to the company—out of this concern alone were they duty bound to resign.

      Kirk: I think the HP directors were late in resigning and I think Lane should have resigned entirely from the board. We allow CEO’s to “bet the company” on giant acquisitions and reversals of strategy, subject only to the board’s evaluation of the risk involved. If directors fail miserably in that risk assessment, they should immediately apologize to shareholders and resign. We need a much stronger sense of accountability in all areas of American life, but particularly among corporate directors.

    H.P. Chairman Steps Down as 2 Resign From Board

    A Framework for Thinking Ethically