Contributors: Paul Danos former professor and Dean, Tuck School of Business at Dartmouth; Stuart Cable, Goodwin Procter LLP; Prof. Xiaozu Wang, School of Management, Fudan University
In the United States, laws and norms have been developed for how to handle a wide range of crises. In China, while the written laws are often quite similar to those in the US, the norms for board behaviour and action are new and still evolving
In the U.S., boards respond to crises based on law and lore
A number of laws passed in 1933 guide the responsibilities of directors, and understanding these laws is critical, as “the buck stops in the boardroom.” For a corporation, any crisis is the responsibility of the board. A few rules are critical as boards make decisions during a crisis. These are:
- Fiduciary duty: This concept has two key principles:
- Duty of care: this means that in exercising judgment, the board of directors must be careful and deliberate
- Duty of loyalty: this means that board members must be loyal to the company, with no self-dealing.
- Business judgment: this rule says that directors are free and flexible to make decisions in the best interests of the company as long as a director makes a decision with due care. If due care is used, a director will not be held personally responsible.
In China, laws about board behaviour are relatively new, and behaviours are still evolving
China has adopted many of the corporate laws from the U.S. regarding board governance, as well as rules from Europe – particularly Germany – about having a separate supervisory board. However, even though the written laws are similar, they are recent and norms are still being developed. As Prof. Xiaozu Wang explains, “We are still learning how to behave in a boardroom – it takes time.”
To best illustrate the different responses of U.S. and Chinese boards, we can cite three examples of board crises:
Example 1: A director receives an unsolicited letter from a party to acquire 100% of the firm.
In China, a board would never receive such a letter because Chinese firms have one controlling stockholder. In the U.S., such a letter would be shared with the rest of the board, and it would cause the board to establish a process for deciding how to respond. This process would usually involve lawyers and investment bankers. If the board decided not to sell the company at this time, this decision would be protected by the business judgment rule. If the board decided to sell, it has the fiduciary duty to get the best price for shareholders.
Example 2: A CEO is accused of sexual misconduct.
In China, the board would convene and decide how to respond to minimize damage and protect the company’s reputation. The most likely action would be an investigation and the board chairman, who usually represents the largest shareholder and is more powerful than the other directors, would likely make the final decision. In the U.S., the response of the board would be very similar to that in China, though norms would require an independent investigation. Ultimately, the investigation would yield a report and the board would have to exercise judgment in making a decision.
Example 3: A board receives notice from the SEC (Securities and Exchange Commission) about a potential for a material misstatement.
In China, the board may not react with urgency, as they may not see this as a crisis. However, because penalties for fraud are severe, any perceived hint of fraud would prompt an immediate board reaction. In the U.S., a board will quickly disclose that the company has been contacted by the SEC and will authorize an independent committee to investigate. Based on the investigation’s results, the board will decide how to proceed. The challenge is one of uncertainty, as investigations and actions by the SEC can take time.
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