Outside Director Lessons #10: Directors Set Direction

In Livedoor’s case, before I joined the board it seemed clear to me that eventually, the company would most likely have to be liquidated. It had acquired a lot of companies in addition to operating its portal web site, but there were no synergies between them, and there was very little oversight of subsidiaries. It had no strategy, and its brand name had been destroyed. If anything, being affiliated with the Livedoor name actually reduced the value of its businesses and subsidiaries to some extent, in terms of their ability to get business.

Moreover, because it had been delisted, all the shareholders had left with shares that they could not sell at any price, and were very angry. It was highly likely that the company would plead guilty in the criminal case being prosecuted against it. This would make it even easier than otherwise for many individual and institutional shareholders to assert civil claims under Article 21-2 of the securities law, which already made it very easy and low-cost for plaintiffs to sue. After only eight months or so, the total claims already added up to about 100 Billion Yen… and the statute of limitations still had close to a year and half to run (or more in the case of tort law claims). Many more claims would likely be lodged in the near future. If the company were to settle with any group of claimants, that would cause other shareholders to sue, so as to get the same payout, in a vicious circle. All of the unsettled claims, and the yet-to-be-lodged claims, were “latent liabilities” of Livedoor, – i.e. off-balance-sheet liabilities.

The company would need a lot of cash to pay the damages claims in these lawsuits, or hopefully settle at lower amounts. However, as far as I had heard, the prior board had never articulated a clear policy or plan for how it would liquidate Livedoor’s various holdings and businesses so as to generate all that cash. Not a small number of the individual shareholders were still fans of Livedoor, and were very naively clinging to the unrealistic hope that the company might be re-listed on the stock exchange in the future. Internally, there was emotional attachment to the portal web site. Perhaps this influenced certain directors who were on the board just after the delisting.

At the same time, even though the hedge funds had nominated “independent directors” to maximize the value of the company, in fact behind the scenes there seemed to be a number of agreements, or “expectations”, regarding who would buy certain holdings or assets, or who would not buy them, and that sort of thing.

Therefore, at the first full-length board meeting after the AGM, I distributed Powerpoint materials describing the challenges that we faced (as much as I understood them so far). While there might be some businesses that in theory some might consider “core”, that would only be a meaningful concept if the company had a clear path be becoming a “going concern” once again.

Moreover, we had no time to get bogged down in arguments about what holdings were “core” and what were “non-core”. I proposed that for the time being: (a) we had to accept the reality that we were a company entering a long-term liquidation process wherein it was likely that all assets and holdings would be sold in the end; (b) this sell-down process should be done in a very orderly process involving careful oversight, full transparency, no conflicts of interest, and requiring competitive auctions for all assets/holdings having significant value; (c) externally, we would not disclose that this was our general policy, because after all, who knows what might happen in the end. Instead, we would just say we will be seeking to “maximize the value of the company”; and (d) however, internally, on a “need-to-know” basis, we would of course have to involve certain executives to some extent, including at the subsidiaries.

Because I had already shared these materials with two of the other directors, this was adopted as the “strategy” of the company after only a short discussion.

“Directing” is different from “managing”. Your job is to show the way ahead, and set the overall direction but not the granular details. Sometimes you have to set the direction more than once… to re-assert it. You can only do that if you have set a good base to do that at the outset.

Nicholas Benes
(writing in his personal capacity and not representing any organization).

Note: I can write about what happened on Livedoor’s board only because the company no longer exists. Normally as a director, one owes a “duty of confidentiality” to the company, and this duty continues until one dies. But since Livedoor no longer exists, there is no longer any corporation to which I owe a duty.