D&O Tug of War
Deposit insurance stepped in to cover clients of Silicon Valley Bank and Signature Bank after regulators closed those two organizations, but shareholders were still wiped out.
“There’s no penalty attached to bad behavior. And it does really, really affect the system when people lose confidence in banks,” Berkshire Hathaway CEO Warren Buffett told CNBC.
If bank boards and executives don’t have something to lose themselves, the famed investor went on to say, they will continue to make poor decisions and leave shareholders holding the bag.
The recent large bank failures, it seems, have put officer liabilities back in the spotlight.
Last summer, Delaware General Corporation Law was amended to allow companies incorporated there to adopt officer exculpation provisions in their certificates of incorporation. Put simply, this would limit or eliminate certain officers’ personal monetary liability related to exercising their duty of care, which legally obligates executives and board members to act in good faith when making business decisions.
For Delaware corporations, these provisions were previously only allowed for directors. Now, when adopted, shareholders essentially waive their right to file a lawsuit against officers or directors of these companies. Around 138 publicly traded firms have added officer exculpation provisions to their proxies, says Brianna Castro, a senior director with Glass Lewis. On March 7, the proxy advisory firm stated that it generally advises shareholders to vote against such proposals, unless the company presents an especially compelling rationale to do so.
Some boards might argue that officer exculpation is necessary to attract and retain executive talent or to keep D&O insurance premiums down, although it’s not clear at this point that insurance carriers will give companies credit for this on their premiums.
Just days after Glass Lewis published its opinion on the Delaware law, deposit runs brought down California’s Silicon Valley Bank and Signature Bank in New York. Shareholder lawsuits targeting former executives aren’t uncommon after a bank fails, and these institutions were no different.
In early April, Bloomberg Law reported that some insurers already reduced D&O coverage limits for banks, as well as venture capital and private equity firms.
In today’s environment, Castro says proposals that protect officers from adverse outcomes may prove a hard sell for a company’s owners. “I do expect that shareholders may think more carefully about giving up this right in light of the bank failures, since they were sudden and seemingly unpredicted.”
• Laura Alix, director of research for Bank Director