Wednesday, February 25, 2009

Just the Facts

Fortune reporter Shawn Tully did a good job dissecting how the Bank of America/Merrill Lynch deal, and the attendant Ken Lewis/John Thain relationship, went careening off the rails in an article titled "Divorce — Bank of America Style." Here is a key observation that Tully makes: 

"There's no doubt that Thain bears a lot of the responsibility for Merrill's recent woes... But Lewis, too, must shoulder a share of the blame... He failed to recognize how perilous [Merrill's legacy trading] positions were, and placed far too much confidence in Thain's assurances when the numbers told a different, dangerous story" [emphasis mine].

Readers of Directors & Boards will know what Tully is talking about — and where Lewis allegedly went wrong. In the First Quarter 2009 edition, author Jonathan Tuttle, a partner of Debevoise & Plimpton, examines the intricacies of internal investigations in his article, "The First 48 Hours: No Board Missteps." The first critical question to be addressed, Tuttle advises, is whether to conduct an internal investigation at all. Here is his advice:

"A single question can be an important starting point for making that judgment: Is the board receiving assurances or facts? Mere assurances of compliance programs working or accounting entries being properly recorded will wilt in the glare of hindsight, particularly if offered by those who may later turn out to be culpable in some form. Facts, on the other hand, may be more difficult to harness initially, but provide a much more concrete basis on which to determine the best path forward" [emphasis Jon Tuttle's].

If we needed a third opinion to seal the deal for facts vs. assurances, we would of course turn to "Dragnet" star Jack Webb (pictured), whose character Sgt. Joe Friday became famous for his investigative line, "All we want are the facts, ma'am." (Apparently, he never actually said "Just the facts, ma'am," as is widely thought — and which would have made for a catchier title for this blogpost.)

Boards have a big job helping their companies crawl out of this recession crater. To do this with agility and as proper fiduciaries, they are going to need to anchor themselves with facts, not assurances.