Introduction of Concept

                       Managing Boardroom Decision Making

                 The Transformation of Fiduciary Performance

 

Introduction

Fiduciary Guaranty Corporation of America (FIG) addresses a fiduciary liability niche overlooked or under-addressed by the director and officer liability insurance market.  A new fiduciary risk management service for the boardroom, denoted as the Fiduciary Guaranty ad hoc Decision AuditTM, represents the first bona fide loss-control mechanism ever introduced into the boardroom decision making and fiduciary liability marketplace. Fiduciary Guaranty (FIG) works from the premise that the predicate act of fiduciary performance is always a decision. The currency of fiduciary performance is decision making – especially, complex decision making under conditions of risk and uncertainty. The white elephant in the underwriter’s lounge of D & O liability insurance providers has, for decades, been their collective failure to create an objective, meaningful approach for directly measuring and evaluating the quality of fiduciary decision making in the boardroom.  Fiduciary Guaranty (FIG) has aggregated the tools to slay the white elephant.

 

Fiduciary Guaranty (FIG) presents a remediation methodology for boardroom decision making that elicits a threshold of fiduciary decision making performance that is difficult for aggrieved stakeholders, including dissident shareholders or politically motivated regulators, to challenge. This means that – aside from the occasional manifestation of Murphy’s Law - the directors, officers and other corporate fiduciaries participating in the decision making process will never lose a fiduciary lawsuit brought against them for alleged violation of their fiduciary duty of care. This is achieved by establishing a refereed decision environment in which the decision making process is monitored and groomed in real time - inside the boardroom - by independent, third party experts.

 

The product performance indemnification provided by FIG is contingent upon the target decision making process having been properly “scrubbed and sanitized” by the evaluative and remediative metrics of the FIG ad hoc Decision AuditTM.

 

It’s like examining a residential property after the hurricane has hit – and then underwriting … with complete knowledge of the extent of the damage. (Remember – with fiduciary performance – the liability is about proximal damage, viz., the decision making process and terminal decision-product – not about the distal damage, e.g., the financial loss or erosion in share-price or compromise of competitive advantage.) By using a “heads-up” approach that indemnifies only pre-sanitized, no-risk events – FIG distinguishes itself from legacy D & O underwriting as a new genre of risk management protection for directors, officers and other implicated corporate fiduciaries.

 

The Achilles Heel of traditional D & O liability insurance has been the “catch-all” characteristic of the traditional D & O policy, viz., the unconscionably dangerous condition that any action or event that occurs - which appears to be the fault of the directors and officers (the fiduciaries) - gets marked as a violation of either the fiduciary duty of care or the duty loyalty.   In a claims-made policy with the   “catch-all” characteristic – loss-ratios are virtually uncontrollable – regardless of the experience of the underwriter.

 

The product performance indemnification available to CLIENTs contingent upon their compliance with the FIG ad hoc Decision AuditTM eliminates all of those troublesome liability elements that adhere to D & O liability insurance products.

 

PRODUCT INDEMNIFICATION LOSS-CONTROL FEATURES:

 

  Indemnification is based on an interlocking system of loss control mechanisms.

 

  The decision making standard invoked by the Decision Audit engagement makes it virtually impossible for a plaintiff to challenge the care, loyalty or independence of the fiduciaries’ judgemental process or its resulting decision-product.Not only did this corpus of decision makers hire an outside team of experts in complex decision making to referee and grade their important decisions – they also complied with the exacting process that required their time, energy and focused attention. In the course of exhibiting these vigilant behaviors – they held management accountable to higher standards relative to their sourcing of information, their analyses and interpretations of that information and the inferences and conclusions based on that information. A written record of how assiduously the board dogged management to ‘get it right’ before endorsing the targeted plan of action … was recorded and maintained by the team of outside, independent experts.” The point is – the client-fiduciaries are driven to the highest standard of fiduciary performance and are not likely to be found deficient in the discharge of their fiduciary duty.

 

  Indemnification only extends to decisions that have been formally refereed and certified by the ad hoc Decision Audit. The first important implication is that loose cannon actions by a careless or maverick officer or director will never inflict damage (on the Insured or on the Carrier) because no coverage will apply. Take the example of the CEO who, in a conference call for analysts under Reg FD – gets a little giddy and makes forward looking statements about earnings performance that are expressed as though they can be relied upon. “Manna-from-heaven” for the plaintiff’s bar. This loose cannon action does not even register under the FIG ad hoc Decision AuditTM-based product performance indemnification program – because there is no indemnification in place – hence, no exposure.  So, the allocation of indemnification solely to refereed and certified events … sidesteps many, if not most, of the noisy and careless actions that most frequently elicit litigation.

 

  The FIG product performance indemnification is contingent upon – among other factors – a court-adjudicated decision. It is understandable why all parties to the litigation often posture for and subsequently adopt a negotiated out-of-court settlement. None of them – neither the defendants, nor the plaintiffs nor the carriers - understand what comprises the elements of risk or what might be effective in attenuating or negating that risk. None of them have ever bothered to directly identify or measure the underlying risk components. Loose and primitive correlational relationships are the most that any of these players have offered.  So, all parties routinely agree to sidestep the ultimate punishment – viz., losing a court-adjudicated outcome – with its potentially disastrous consequences vis a vis a middlin’ settlement price. As we all know – the plaintiffs’ bar has made a not-so-small cottage industry out of this unfortunate reality. By tying the insurance cover to a jurisprudential outcome – the client-defendant is forced to call the plaintiff’s bluff. And the plaintiff is forced to reexamine its hand to see if it warrants the likely legal expenses of going to trial.

 

  A further control mechanism for limiting indemnification claim-loss experience is specific to our directly managing the attorneys rather than permitting the defendant-Indemnifieds to hire and manage them – which means that we have to hire and pay for the lawyers and the legal costs. We choose to do that for two reasons, first: we have a specific litigation strategy and we do not want attorneys freewheeling and doing it their way.    That litigation strategy is informed by a number of factors, e.g.,                                                         

 

         Prior to the conduct of the Decision Audit in the Boardroom we investigate the contemplated type of decision event and examine the history of its litigation and adjudication in the specific jurisdiction of the client. If the Bench in that jurisdiction has included some atypical factor in writing its opinion – we want to know that before we intervene with the board. We want to be able to account for any obtuse judicial considerations by having some hints ahead of time.

 

         We look at the composition of ownership – how it’s distributed – how many large institutional investors with historically quick trigger fingers? What is likely to be their appetite for court-adjudicated litigation against this type of decision? Will they frame it as a care regime case or invoke the newer and more frightening loyalty regime violation?

 

         We especially want to direct the specific activity of the attorneys in the pre-trial Discovery phase – the Depositions and the Interrogatories. This is where the fiduciary liability litigation is won or lost – and if the lawyering is done properly at this stage – the case never goes to trial. Following completion of the Discovery stage, during the Pre-Trial Conference with the Judge - the judge or judiciary panel will ask Defense Counsel to submit a Motion to Dismiss or a Motion for Summary Judgement… so that the case can be dismissed. 

 

         Also, much of the questioning of each director during Deposition is determined by the nature of the decision audit exercise and – almost literally – has been written-up before the lawsuit was ever filed.  Our preparation minimizes the billing hours of the lawyers – and thereby lowers the legal costs – which is our second reason for managing them directly.

 

  In refereeing  a decision making process and approving a resulting decision product -  we further authenticate our facilitative work with the FIG imprimatur - an attest statement or opinion letter – just like a CPA firm issues after it completes an outside financial audit of a firm’s financial statements and internal control practices. As experts in the human judgement that informs complex decision making we attest to and certify that this corpus of fiduciaries has complied with the highest standards of decision making practice in rendering this decision. Like accountants – our opinion may be unqualified, qualified or adverse.

 

As Dr. Peter Drucker often observed, “If you can’t measure it … you can’t management it.” The FIG ad hoc Decision AuditTM empowers the Client-Board to measure and manage its most critical decision making tasks.