Business Brief: Survival of the Fattest
It wasn’t a great week for Darren Sukonick, the Toronto securities lawyer whose taped deposition has lately been the main event at the Black trial. He was beat up pretty soundly by the defence lawyers and reporters for refusing to testify in person in Chicago, among a litany of other things. I know Sukonick because he did a securities deal for a company of which I am chairman. The press descriptions of him are pretty much accurate: he is smart, hard-working, intense and ambitious. Having worked with him, I can’t help but feel considerable sympathy for him.
While Sukonick undoubtedly has learned a number of lessons he will never forget, I have my doubts the governance theorists will learn anything from his behaviour and deposition about the fragility of governance systems, of which securities lawyers are one critical piece.
If you step back and look at his testimony, you can’t help but see a legal adviser more seized by the question “How can I help my client accomplish his goal?” than with “Is the client’s goal a good idea in the first place?” Sure he checked whether non-compete payments were legal and what had to be disclosed about them in what venues. But there didn’t seem to be much consideration of whether $80 million was really a sensible amount.
At some level, the focus on helping the client figure out how to do what he wants to do is not a big surprise. When I’ve consulted for law firms in the past, and in doing customer research, one thing that always ranked high on customers’ lists of important attributes was whether their lawyer had a “can-do attitude.” They didn’t want a lawyer who would tell them why they couldn’t, or shouldn’t, accomplish their goal, but rather one who would tell them—within the law, of course—how best to accomplish it.
My bet is that it is going to be shown that every legal arrangement surrounding the non-compete payments was done properly. However, that doesn’t mean that Sukonick shouldn’t have said at some point in the process, “Guys, should you really be showing this level of naked greed? We can do this, and I can tell you all the filings you have to make, but I would advise you to step back and ask whether this is really fair to the shareholders.” It’s possible Sukonick did make such overtures and was told to shut up and get back to work.
But I suspect that if he had pressed the point, he wouldn’t have been the lawyer on the Southam sale transaction that generated the non-compete payments in question. Somebody else with a “can-do attitude” would have been drafting the documents.
And that gets us back to the fundamental problem with corporate governance: the executives who shareholders need to have served by a “can’t-do-because-it-isn’t-morally-sound” lawyer will consistently equip themselves with “can-do” lawyers who will help their clients figure out how to legally extract maximum value out of the hide of shareholders. Conversely, in situations where the executive is so morally upstanding that he or she will smack the “can-do” lawyer over the head if the lawyer dares to suggest something out of line, the shareholders barely even need a lawyer at all.
So the tragic irony, as illustrated by the Sukonick testimony, is that at precisely the times when the shareholders need a “can’t-do” lawyer, they are least likely to get one. And the same goes for can- vs. can’t-do auditors and can- vs. can’t-do board members. That’s what the governance theorists have to build into their models. In the academic business, when features of the environment in question cause the inadvertent selection of exactly what you don’t want, it’s called “adverse selection.” Corporations that downsize by way of offering a generous severance package experience adverse selection. The package feels really generous to the employees who are so talented they can get a great job immediately—so the great employees take the package and leave. The package feels parsimonious to the crummy employees who couldn’t get another job if their life depended on it—so the worst employees, especially the young, dreadful ones, don’t take the package. As a result, the average quality of the workforce in question drops dramatically.
That’s why the most important thing for shareholders to know is the moral character of the executive team and in particular the CEO. A CEO of strong moral fibre will cause a ripple effect of positive selection through the board, auditors and legal counsel, while a CEO without will cause a tidal wave of adverse selection through the entire governance structure—a structure that, as I explained in a previous post, won’t protect the shareholder to any extent.