62893 v2 TOOLKIT 4 Resolving Corporate Governance Disputes VOLUME 2 : IMPLEMENTATION VOLUME 2 : IMPLEMENTATION MODULE 1 : What Should be the Role of the Board? 2.1 In looking after the company’s best interests, the board’s role includes ensuring that its company has dispute resolution systems and processes. At times, and particularly in cases involving corporate governance issues, the board should also be engaged in preventing and effectively resolving disputes that could harm the company’s reputation, operations, results, and share value, or that could disrupt the board’s own operations. Good governance and sound risk management call for boards to think ahead and develop proper policies and effective ways to address internal or external corporate governance disputes. Boards may face the potential danger that normal disagreements within the boardroom could remain unresolved, fester, and then ripen into disputes. While boardroom debate should be encouraged, it must proceed in an orderly and constructive manner, recognizing that a means of resolving disputes and arriving collaboratively at a unified conclusion is essential to conduct business. Incorporating alternative dispute resolution (ADR) techniques through unstructured and structured processes can help boards prevent and handle corporate governance disputes. THIS MODULE REVIEWS Anticipating and planning for corporate governance disputes Adopting dispute resolution policies Preventing boardroom disputes Applying ADR techniques in the boardroom MODULE 1 WHAT SHOULD BE THE ROLE OF THE BOARD? DEVELOPING A CORPORATE unlikely. The directors’ focus on business issues can GOVERNANCE DISPUTE RESOLUTION blind them to non-business matters, such as potential STRATEGY disputes among themselves. There may be the feeling that, if a problem should arise, it can be easily contained The board should be well prepared to handle internal or addressed without any harm to the company. Yet, and external disputes. Without adequate preparation, conflict and disputes do arise, and the cost to the a board’s responses to disputes will inevitably be ad company, its shareholders, and other stakeholders can hoc, increasing the risk that effective dispute resolution be huge and, in some cases, fatal. processes will not be employed. Just as boards have crisis management plans, so, too, should they have developed TO REVIEW THE IMPACT OF CORPORATE and adopted dispute resolution strategies, policies, and GOVERNANCE DISPUTES, SEE VOLUME 1 MODULE 2. processes. Planning Ahead For example, any discussion over a merger, an acquisition Planning ahead for potential governance disputes is a step or the launch of a new business activity has the potential so basic that it can easily be overlooked. Overconfidence to trigger disputes among board members, or between or excessive optimism may prompt leaders to think that the board and external stakeholders, including vocal disputes related to strategic governance decisions are dissident shareholders. Yet, common boardroom pressures, including a severe shortage of time, are likely to cause executive and non-executive directors to treat the possibility of conflict as a distraction until and unless QUOTE the escalating conflict has become overt enough that discussing it is unavoidable. Boards tend to overlook or The Need for Processes to ignore the potential for disputes because of the multitude Avoid Litigation of other priorities they face. This disinclination to raise the issue, however, constitutes a de facto decision to “Looking to the future, it is critical that boards accept whatever will happen. give greater attention to anticipating and responding to liability risks, which may emerge later down the line. Advancing technologies, Organizations, including corporations and their boards, environmental issues, and corporate governance generally tend to be myopic about conflict. They often are the three areas boards are most concerned either do not anticipate conflict, or have a general sense about… . Yet with the right culture and processes that some kind of conflict may emerge from a given in place, companies will be much more likely to initiative. Further, they may find it difficult to anticipate identify and address issues before they become the subject of litigation.” the conflict’s scope or seriousness. LORD LEVENE Some of those involved are wary of admitting that a CHAIRMAN, LLOYD’S conflict may be brewing, despite their suspicions. SOURCE: Lloyd’s and Economist Intelligence Unit. 2008. Directors in the Docks. Is Business Facing a Liability Crisis? Available at: http://www.lloyds.com. The strong, well-articulated viewpoint of a single powerful leader — such as a CEO or chairman — can MODULE 1 What Should Be the Role of the Board? VOLUME 2 1 so affect those around and under him or her that any “optimistic overconfidence” in individuals, namely the dissent is suppressed, creating a “march to folly.” Even tendency to overestimate one’s ability to control events though the leader may have only offered an early opinion, as desired. expecting to hear dissenting views, it is not unusual for others to simply agree with the leader’s initial, stated Boards and executives often overlook underlying position. This phenomenon is known as “groupthink.” structural problems, values, or interests that can generate conflict around actions or plans that initially Organizations tend to frame the prospect of conflict as appeared straightforward or reasonable. Some of these a public relations or political problem. This implicitly deeper concerns (e.g., about globalization or climate assumes that the conflict can be averted or suppressed. change) give the impression that they are “not our The underlying assumption seems to be that, if any problem to fix” because they are difficult to address opposition to a proposal or decision does appear, it and seldom the sole responsibility of any individual will be demonstrably wrong on the merits alone. This organization. Yet, these concerns can have a critical is the organizational equivalent to the phenomenon of impact on a practical business decision. Planning for a major event in a corporation’s life, such as a merger or hiring a new CEO, may focus on EXAMPLE optimistic outcomes without considering the potential for misunderstanding or conflicts that exist when there are new working relationships. Impact of Conflict Avoidance United Kingdom: Shell UK In most cases, an explanation for overlooking or ignoring By 1995, Shell UK had spent four years planning a conflict’s emergence can be traced to one or more for the deliberate sinking of the Brent Spar, of the reasons outlined above. But there are systemic an obsolete, 20-year-old, billion-dollar oil rig. reasons, too, for explaining a person’s typical reluctance But the plans went awry. Shell discovered that to anticipate conflict: extensive internal analysis of the safest disposal method, the company’s worldwide presence and influence, and even government-approved Human nature: “Ignore it and maybe it will go away.” disposal permits were not enough to forestall A common organizational reaction to any unpleasant a public debacle. Greenpeace’s opposition phenomenon, this may work occasionally, so it should campaign, which included occupying the rig, never be discounted entirely. found oil industry allies. European governments objected to the disposal plan. Shell personnel and gas stations were attacked, and the company’s Conservatism: “No one else is doing it.” Although profits suffered. risk management has progressively been integrated into organizational thinking and added to board COMMENT activities, corporate governance dispute resolution is The Brent Spar fiasco is a high-profile example of failure to plan for possible conflict and the still a new field that has yet to be integrated into risk- consequences. The rig was eventually dismantled, management thinking and the board’s work. with some of it scrapped on land, and other parts recycled for building new offshore installations. Lack of appropriate skills: “No one can help with The resolution was much more protracted and this.” The array of individuals and firms customarily costly than it should have been because the conflict was completely unanticipated. employed to handle conflict (e.g., management, in- house lawyers, outside counsel, risk-management SOURCE: Paul C. Nutt, Why Decisions Fail: Avoiding the professionals, public relations agencies, and crisis- Blunders and Traps that Lead to Debacles. San Francisco: Berrett-Koehler Publishers, 2002. pp. 63-68. management firms) includes many talented, vocal, and persuasive people. Yet, while each of these 2 VOLUME 2 What Should Be the Role of the Board? MODULE 1 specialties offers expertise in one aspect of conflict QUOTE prevention and resolution, none of them is properly knowledgeable or chartered to investigate, analyze, and help with governance disputes. Conflict Avoidance in Family Firms “Sometimes, the avoidance behavior even goes Individuals and groups tend to avoid the anticipation so far that one denies that any conflicts exist, of conflict and disputes — intentionally or not — in although often they have already been insidiously the boardroom as in other settings. Since the cost of weakening the family firm for a long time. inaction is likely to be high, the board should ensure Avoidance is only useful in order to interpose a that the company has a systematic, strategic approach cooling-off period, or when a discussion point is to address the potential for disputes related to business genuinely unimportant. In most cases, however, avoidance leads to frustration and negative matters within management and the board. feelings. This frequently has a pernicious impact on the family relations, because it causes In dealing with commercial, financial, and labor tensions to rise and a great deal of energy to be disputes, the board’s role should be limited to ensuring wasted. According to research, avoidance also that effective, appropriate policies are in place and that augments the rivalry between the players and the company has internal and/or external expertise for diminishes trust.” handling commercial disputes. The actual development JOZEF LIEVENS and implementation of such policies should be left to the PARTNER, EUBELIUS LAW FIRM company’s management. MEMBER, FORUM’S PRIVATE SECTOR ADVISORY GROUP In the case of corporate governance disputes, whether internal or external, the board needs to take a much more pro-active role due to the strategic nature of these SOURCE: Jozef Lievens, “Collaborative Conflict Resolution — disputes and their potential impact on the company, the ‘Harvard Approach’ Applied to Family Business.” 2002 Working paper provided by the author to the Forum. including the board. Precisely because the board is at the center of corporate governance disputes, it must be prepared to prevent those disputes and effectively handle them with minimum impact on the company and itself. QUOTE TO REVIEW INTERNAL AND EXTERNAL CORPORATE GOVERNANCE DISPUTES, SEE VOLUME 1 MODULE 1. The Board’s Role “It is part of the duty of care of the board to ensure disputes are resolved quickly in order to maintain There are several reasons why a pre-existing strategy relationships that business people, particularly is needed to properly address corporate governance management, spend their lives building.” disputes: MERVYN KING, SC PROFESSOR First, mutual trust is essential to a well-functioning FIRST VICE PRESIDENT, SOUTHERN AFRICAN INSTITUTE board. Yet if a dispute occurs, particularly within OF DIRECTORS the board, some erosion in mutual trust will occur MEMBER, FORUM’S PRIVATE SECTOR ADVISORY GROUP almost immediately. This makes it harder to develop constructive solutions quickly, creating the possibility of a downward spiral in trust that can have lasting consequences. MODULE 1 What Should Be the Role of the Board? VOLUME 2 3 FOCUS Dealing with Corporate Governance Disputes Recognizing that disputes will arise and preparing in advance for their resolution — these are important board responsibilities. Adopting a corporate governance dispute resolution strategy will help prevent disputes and handle unforeseen issues. This involves a proactive approach to decision-making that is far more efficient than the typical reactive, (ad hoc) approach, as illustrated by this corporate merger example: AD HOC APPROACH PREVENTIVE APPROACH Board dominant value: Harmony Board dominant value: Consensus Perception of dispute: Unlikely Perception of dispute: Likely 1. Board discusses possible merger 1. Board discusses possible merger 2. Opposing views are “auto-censored” or over-ridden 2. Internal and external views are actively considered 3. Decision is adopted 3. Decision is adopted 4. Later, a disagreement related to the decision arises and 4. Later, a disagreement related to the decision arises, but takes the board by surprise is rapidly narrowed based on initial discussions 5. Disagreement evolves into a dispute 5. Disagreement is addressed 6. Directors become defensive, and positions harden 6. Board applies techniques to resolve disputes and build consensus 7. Tension and resentment builds on the board 7. Consensus is reached Board does not present a united, confident front Board stands united Shareholders’ confidence weakens Shareholders’ confidence remains Investment analysts signal concerns Investment analysts are attentive but not worried 8. Dispute is “patched” 8. Disagreement is resolved 9. Situation repeated with another decision 9. Situation repeated with another decision 10. Board tensions escalate 10. Board dispute resolution skills improve Shareholders question company’s governance Shareholders engage constructively in strategic decision-making Proxy analysts downgrade company’s governance 1 Proxy analysts upgrade company’s governance rating 11. Negative resentment builds up 11. Positive reinforcement system develops 4 VOLUME 2 What Should Be the Role of the Board? MODULE 1 Furthermore, if a full-blown dispute is allowed to Did board directors interact directly with the develop within a board or with external stakeholders, it disputants, or was all interaction left to management? is likely to be much more difficult to reach an agreement than if the potential for disputes and mechanisms to How did other boards and companies, faced with deal with them had been addressed before parties to similar problems, handle them? the dispute and board members choose sides. Were the disputes covered by the media? Did the Last, but not least, planning ahead to prevent company’s communications department play a role? discussions and debate from turning into disputes will If so, what role? If not, why? Did this department potentially save the company and all its shareholders receive specific board guidelines on handling media both direct and indirect costs, while limiting the inquiries about the dispute? dispute’s negative impact. How were the disputes settled? Did the disputes lead Addressing the potential for disputes that affect corporate to litigation? Why? authority, and developing an adequate dispute resolution strategy with related policies requires planning. The board must allocate time to complete those initiatives. PRACTICE The timing for such an exercise must be well choreographed. It should be organized outside the board’s Key Steps in Developing a Corporate regular meetings, perhaps at a board retreat during a Governance Dispute Resolution Strategy relatively calm period. Ideally, the board committee whose jurisdiction covers governance matters should STEP 1: Plan ahead. include dispute resolution planning in its activities and STEP 2: Assess existing or past internal and present proposals to the full board. It is much easier to external corporate governance disputes. have a civil, highly productive discussion about conflicts when there are no major ongoing disputes. This can STEP 3: Anticipate potential internal and be done with or without the help of an external third external corporate governance disputes. party — possibly a dispute resolution consultant or STEP 4: Adopt a corporate governance governance expert. dispute resolution strategy. Assessing Internal and External Corporate STEP 5: Decide who will manage the corporate governance dispute resolution process. Governance Disputes Planning involves observing and assessing the current STEP 6: Identify the appropriate internal or situation and learning from the past. A board could external peacemaker. start by asking itself the following questions to better STEP 7: Incorporate corporate governance understand past or existing disputes with external dispute resolution policies into corporate stakeholders: documents. Has the company experienced any corporate governance STEP 8: Assess the effectiveness of the disputes with external stakeholders? What were those? corporate governance dispute resolution polices. Shareholders? Community activists? Others? STEP 9: Be prepared for litigation should How did the board react to and handle those disputes? ADR fail. Did the full board discuss the dispute? Was a specific committee or individual board member put in charge? MODULE 1 What Should Be the Role of the Board? VOLUME 2 5 Was the company’s legal department involved? If so, and strategy? Were these policies and procedures when? What was its role? Did its contribution help or applied? What could have been handled better? Could hinder resolution of the disputes? the disputes have been prevented? Were outside consultants to the board involved? Are there any lessons to be drawn from the manner in Should they have been? Why? Why not? which the company deals with other types of disputes, such as commercial or labor? Could existing policies What were the direct costs of these disputes? be adapted to corporate governance disputes? Settlement costs? Litigation costs? Communications costs? Similarly, the board needs to assess the conflicts and disputes that occur among its members. This exercise What were the indirect costs of these disputes? could be included as part of a board’s self-evaluation Corporate staff time? Disruption of board activity? process. Discussions could be based on the following Board tensions? Disruption of the company’s questions: operations? Lost opportunities? Has there been effective communication among board What was the impact of these disputes on the members? company? Did the company suffer reputational damage? Were major strategic decisions delayed? Did Have there been any tensions among board members? the company lose customers or clients? Were board Have these affected boardroom dynamics or the members pushed to resign? Was share value affected? board’s discussions and decision-making process? Does the board and the company have any policies Is there a sufficient level of trust among all board and/or procedures for handling shareholder or other directors? Do they all feel they are able to contribute stakeholder disputes over the company’s governance to the debate? Do any directors have the tendency to monopolize discussions? Has this created any frustrations or resentment? QUOTE Are communications between the CEO and the non- executive board members working well? If not, why? Dispute Resolution Governance Is there a solid level of trust between the CEO and the “When a dispute arises, what is in the company’s non-executive directors? If not, why? best interest? The answer is to resolve it effectively, expeditiously, and efficiently. It is What circumstances on the board provoke friction or thus an important governance issue for the board to ask: ’Do we have adequate mechanisms cause arguments to be left unresolved? to resolve disputes that may arise?’“ What is the most common topic of these arguments? MERVYN KING, SC Are these arguments related to board procedures or to PROFESSOR FIRST VICE PRESIDENT, SOUTHERN AFRICAN INSTITUTE material decisions? What specific issues lie at the heart OF DIRECTORS of these disagreements and disputes? Do some of these MEMBER, FORUM’S PRIVATE SECTOR disputes get emotional? Are some of these arguments ADVISORY GROUP and disputes recurrent? SOURCE: Runesson and Guy, op. cit. Are some board members more often involved in disagreements than others? Do some directors have 6 VOLUME 2 What Should Be the Role of the Board? MODULE 1 opposing views — no matter what the topic is? Do the appropriate board committee chairman, may invite disagreements happen mainly among non-executive an external expert to facilitate discussions. That expert directors or between directors and management? Are would typically: there any tensions between the chairman and the CEO? Organize one-on-one sessions with each director to allow those who are not comfortable with openly Are there external factors (e.g., meeting location, disclosing their views to express themselves acoustics, timing, etc.) that seem to contribute to an acrimonious atmosphere instead of one in which Facilitate discussion to bring into the open those issues resolution is more likely to happen? that have or could lead to disputes What has been the impact of these disagreements Help create protocols and procedures to prevent and and disputes? Did they paralyze or delay the board’s resolve disputes work? Were some strategic decisions stalled? Were the disputes contained in the boardroom? Did some of Anticipating Potential Internal and External these disputes leak to the press? How did shareholders Corporate Governance Disputes and the market react to these disputes? Did these Once the board has discussed and assessed past and disputes lead to the resignation of executive or non- current corporate governance disputes, the second step executive directors? Did they involve litigation? What is to review the potential for disputes and how these can were the direct and indirect costs of the disputes that be prevented. The board needs to foresee — as best as brewed in the boardroom? it can — what situations can lead to misunderstanding and disputes. For example, “what if ” directors disagree Is the chairman or lead director able to recognize about the basic strategic direction? “What if ” cash disputes and mediate among board members or flow is down, will there be disputes over which capital between the board and the CEO? investments the company should make? “What if ” dissident shareholders oppose a merger with one of How does the board deal with boardroom dissent? the company’s main competitors? “What if ” personal Does the chairman or the lead director play the animosities among directors make focusing objectively peacemaker role? on business issues difficult? The “what if ” list of circumstances that can erupt into disputes can be very Is voting on strategic issues sufficient and the most long. effective way of dealing with opposing positions? It would be impossible to list and then examine all Having an open discussion on what does and does not possible internal and external disputes that could work in the boardroom, as well as what are the underlying theoretically occur and affect a company. The point is factors that could trigger disputes, is a difficult exercise to consider different types of disputes and review the that can revive past tensions and resentments. Learning potential disputes that are most probable, given the how to improve board performance and minimize the company’s structure, size, ownership structure, business negative impact of disputes is, nevertheless, an important model, external economic and financial circumstances, initiative. and the board’s composition (knowing that the board can be a fertile field for unresolved arguments that The board may discuss dispute management strategies harden into disputes). in a closed setting under the guidance of the chairman or another director skilled in dispute resolution. Discussions dedicated to anticipating potential disputes Alternatively, as part of the annual board assessment, or should not only take place within the broader context in preparation for the annual strategy review retreat, or of developing a dispute resolution strategy, but should MODULE 1 What Should Be the Role of the Board? VOLUME 2 7 Employees, possibly represented by unions, who will QUOTE be affected Suppliers on which the company is dependent Anticipating Disputes “The parties to a business relationship, at the time State, provincial, or local governments in which the they enter into that relationship, should always company has operations address the subject of how they are going to handle any problems or disputes that may arise between them. At this point, they have a unique Creditors, especially if access to finance is limited opportunity to exercise rational control over any disagreements that may arise, by specifying that Consumer agencies any disagreements be processed in a way that is likely to avoid litigation, preferably by agreeing Environmentalists and other activist organizations on a dispute resolution ‘system’ that will first seek to prevent problems and disputes, and, next, establish a process for resolution of any disputes.” Analyzing governance dynamics is not a quick process. Part of the foresight and planning required involves JAMES GROTON visualizing and understanding how the corporation may ARBITRATOR, RETIRED PARTNER SUTHERLAND, ASBILL & BRENNAN LLP evolve from a simple organization into a complex one. How can a family-owned business become an enterprise HELENA HAAPIO in which the founding family ceases to own or control a ARBITRATOR, INTERNATIONAL CONTRACT COUNSEL LEXPERT LTD majority of the company’s shares? Reviewing scenarios such as these and their ramifications will help the board understand its potential vulnerabilities regarding SOURCE: James Groton and Helena Haapio, “From Reaction disputes with external stakeholders. Understanding to Proactive Action: Dispute Prevention Processes in Business Agreements.” 2009. Working paper provided by the authors these dynamics provides insights into how they can to the Forum. best be handled through corporate governance dispute resolution policies that can defuse the most sensitive situations and prevent the riskiest disputes. typically be held prior to any major strategic decision TO REVIEW HOW CORPORATE GOVERNANCE that may materially affect the company and its DISPUTES CAN AFFECT DIFFERENT TYPES OF constituencies. COMPANIES, SEE VOLUME 1 MODULE 1. TO REVIEW SITUATIONS IN WHICH CORPORATE Various strategic planning tools can be used to help GOVERNANCE DISPUTES MAY ARISE, SEE anticipate disputes and manage the risk of their VOLUME 1 MODULE 1. occurrence. Familiar to many directors, the SWOT analysis is an especially useful tool. Through this When looking into potential external disputes, board technique, directors can evaluate the Strengths, members should not focus solely on shareholders, but Weaknesses, Opportunities, and Threats of a given they should also review potential disagreements with situation and analyze the risk and impact of disputes that other stakeholders that may affect the company’s could arise in that context. The sequence of questions governance and either influence or limit its operations. begins with strengths. Within the context of previous These stakeholders could include: successes, the board can then consider weaknesses, identify new opportunities, and determine how to Customers whose view of the company’s products and manage threats inherent to governance disputes. As the services could be adversely affected directors discuss these details, they align themselves 8 VOLUME 2 What Should Be the Role of the Board? MODULE 1 with shared priorities. This exercise’s difficulty lies in disagreements and prevent constructive discussions and admitting rather than avoiding discussion of existing negotiations. In this case, the “what if ” brainstorming threats — even if they point to weaknesses in board approach can be a useful exercise. “What if ” meeting procedures or specific individuals. In surfacing issues, accommodations are uncomfortable? How will that this exercise should nevertheless not devolve into board impact the meeting’s tone and tenor? “What if ” the members pointing fingers at one another. hotel in which directors are lodged is uncomfortable, and people do not have a good night’s sleep? Will that Planning in the governance context should not be create an environment in which people are more prone limited to anticipating the nature and content of to dispute than to resolution? “What if ” there are not disputes. Seemingly small and unimportant matters enough seats for all shareholders at the annual meeting that affect human behavior also need to be considered venue? “What if ” a group of community activists and addressed. Insignificant logistical matters (e.g., is systematically turned away or made to wait for locations of board meetings, annual general meetings, months before a hearing with the board or executive or even public consultation meetings) can exacerbate management? EXAMPLE Potential Disagreement with Stakeholders: Investment in a New Food Processing Plant STAKEHOLDER PERCEPTIONS THAT MAY LEAD TO DISAGREEMENTS AND DISPUTES Local Cooperative “This new plant is going to create competition for local farmers. A demonstration should be organized against this project to protect the farmers.” Environmental Activist “This new plant is going to require the destruction of forests, may pollute the nearby river, and substantially raise carbon emissions. This plant should be built in a different location with green technologies! We must launch a campaign to block construction.” Shareholder A “This is a good investment for the company and will help it grow if the start-up costs are (Institutional investor) controlled and the product line remains competitive in global markets! We need more information and a meeting with the board.” Shareholder B “This is a good investment, but we want guarantees that this project will be carried out (Social action coalition) in a socially responsible manner. If not, we will lobby to prevent it from being built.” State or local “This project can help increase tax revenues and create new jobs. Our tax revenue government expectations are far higher than the board deems acceptable.” Local Community “This project has divided our community. Whom can we trust? We must demand clear answers.” COMMENT Considering stakeholders’ interests and taking time to discuss their respective perceptions and misperceptions, as well as to settle possible disagreements, requires a transparent approach, time, and effort. Yet, it is essential to do so to prevent or mitigate disputes that could stall, if not obstruct, an important investment or operational changes. MODULE 1 What Should Be the Role of the Board? VOLUME 2 9 Adopting a Corporate Governance Dispute each other? Do any of these steps pose a threat to the Resolution Strategy board’s operations or the board’s dynamic, rather than an This is another step that sounds simple, but is fraught opportunity to improve dynamics? What is the priority with complexity. The board’s approach to disputes that should be assigned to implementing these practices? should reflect both the company’s culture and more Similarly, how will the board respond to a third-party tactical considerations as to what works best in particular consultant facilitating its retreat? The SWOT analysis may circumstances. conclude that such a step will work well, or, alternatively, that certain board members may resent outsiders and, In the corporate governance arena, the question also therefore, require a different course of action. breaks down as to policies for internal versus external disputes. Does the same policy apply to both? While the TO REVIEW ALTERNATIVE DISPUTE RESOLUTION board may be involved in both categories of disputes, TECHNIQUES AND THEIR BENEFITS, SEE VOLUME 1 MODULE 3. it may determine that for business or tactical reasons, external disputes should be treated differently from internal ones. A SWOT analysis may yield different results for various types of companies. The board of a multi-national A SWOT analysis can also be a means of selecting the company with dispersed stock ownership may approach appropriate dispute prevention and resolution processes dispute resolution differently than does the board of a and techniques. How does each of these processes family-controlled or family-dominated business. The measure up in a SWOT analysis? What are their relative issues covered by the SWOT analysis likely will vary strengths and weaknesses, particularly in relation to considerably in these two situations. EXAMPLE Board Meeting with Dissident Shareholders United States: The New York Times Company In 2008, The New York Times Company faced criticism from two major dissident shareholders, who challenged the company’s investment decisions. Harbinger Capital Partners and Firebrand Partners had amassed just over 19 percent of the common shares, giving them sufficient leverage. The two investment funds did not want to eliminate the two-tier share structure that allows Arthur Sulzberger Jr., the chairman and publisher, and his family to control the company. But they did want to elect directors who had not been selected by the current management. The board’s nomination committee agreed to meet with the hedge funds’ four nominees for directors, raising the possibility of a negotiated deal rather than a proxy fight. COMMENT By agreeing to meet, the company and its dissident shareholders managed to resolve their dispute. The board agreed to the nomination of two of the four directors proposed by the dissident shareholders. Boards must plan for potential disputes with dissident shareholders. The board can make it part of its policies to hold regular discussions with all major shareholders and make an effort to find solutions before disputes escalate into proxy fights. SOURCE: “New Challenge to Times Board: Dissidents with Large Stakes.” The New York Times. March 10, 2008. Available at: http://isites. harvard.edu/fs/docs/icb.topic227581.files/Perez%20Pena%20031008.docx. 10 VOLUME 2 What Should Be the Role of the Board? MODULE 1 Planning for Corporate Governance Dispute Resolution SWOT Analysis of a Corporate Governance Dispute Resolution Policy: Review EXAMPLE STRENGTH: What are the positive attributes of the WEAKNESS: What are the barriers to implementing an board’s current approach to dispute resolution? effective dispute resolution policy? OPPORTUNITY: How can the board build on its existing THREAT: What could be the consequences of ignoring the policies and bylaws to strengthen its ability to deal with potential for a dispute? disputes? SWOT Analysis of a Dispute Resolution Technique: Third-party Expert STRENGTH: Third-party dispute resolution expert can WEAKNESS: Trust and confidentiality can be an issue facilitate board evaluation/retreat and help surface when discussing sensitive board matters unresolved tensions OPPORTUNITY: The board can resolve issues and improve THREAT: Some board members may oppose this its performance approach and refuse to collaborate SWOT Analysis of a Dispute Resolution Process: Dispute Resolution Clause STRENGTH: Improved management of shareholder WEAKNESS: Getting shareholders to sign off on new disputes agreements OPPORTUNITY: Incorporate a dispute resolution clause in THREAT: Opposition of dominant shareholders shareholder agreements SWOT Analysis of a Potential Internal Corporate Governance Dispute: Strategy STRENGTH: Main product line controls 65 percent of the WEAKNESS: Absence of debate on the board/groupthink market culture OPPORTUNITY: Expanding in a new line of business THREAT: Chairman (former CEO) and new CEO competing for leadership SWOT Analysis of a Potential External Corporate Governance Dispute: Merger STRENGTH: CEO nominated “business man of the year” WEAKNESS: Under-performing investor relations for turning around the business and avoiding bankruptcy department OPPORTUNITY: Strategic merger THREAT: Opposition from dissident shareholders SWOT Analysis of a Potential Family Firm Dispute: Expansion STRENGTH: Healthy growth prospects WEAKNESS: Absence of a succession plan OPPORTUNITY: Strategic investor interested in ownership THREAT: Founder resistant to change and ceding control share and expansion MODULE 1 What Should Be the Role of the Board? VOLUME 2 11 All of these possibilities, and others, will involve a Deciding Who Will Manage the Corporate financial analysis to ascertain feasibility. However, this Governance Dispute Resolution Process analysis is only part of the equation. The SWOT analysis Policies do not implement themselves. If the board’s should precede a detailed financial analysis. The SWOT policy regarding internal and external governance analysis will help prioritize possible steps and provide disputes favors dispute prevention and ADR approaches, additional factors that bear on the financial analysis and, the board must establish processes and procedures to ultimately, any decisions. make these policies a reality. PRACTICE Possible Processes to Incorporate in Dispute Resolution Policies Internal corporate governance dispute resolution policies can include: Planning for board and board committee executive sessions Recommending dispute resolution training for directors and senior executives Scheduling board retreats and committee self-assessment meetings Ensuring that all directors have the opportunity to speak freely at executive sessions and retreats Using a third-party facilitator for assessments, retreats, and other board matters Including ADR-type skills among the qualifications for board membership Identifying certain directors and corporate staff to play peacemaker roles Improving board procedures External corporate governance dispute resolution policies can include: Monitoring regularly external shareholders’ interests and activities to ensure that the board understands their priorities and concerns and can be alerted early about potential problems Improving community outreach and philanthropy programs, being proactive Expanding interactions with institutional shareholders to include shareholders’ governance and proxy voting specialists Determining policies regarding director meetings with stakeholders, including appropriate legal and staff support for directors Designating specific board members to hear complaints and meet with shareholders or other stakeholders as appropriate Appointing a standing dispute resolution expert/third party Increasing regular disclosure and communication of material information on sustainability and other corporate social responsibility issues Incorporating dispute resolution clauses in shareholder agreements Responding to shareholders’ and stakeholders’ questions and concerns as they arise 12 VOLUME 2 What Should Be the Role of the Board? MODULE 1 The board needs to ask: had already been selected or appointed before the dispute developed. Who should be in charge of managing and implement- ing dispute resolution strategy and policies? Corporate governance peacemakers can be selected from within the company and its board or sought from Should the entire board, a board committee, or an outside. There are benefits, limits, and implications to individual board member assume this responsibility? these approaches. Typically, internal corporate governance disputes are handled by the board, a board committee, Should corporate staff from the legal department or one or two board directors, or a trusted outside advisor. the investor relations department play a specific role? Governance disputes involving external stakeholders may be more effectively resolved with an outside expert’s help. Should external help and expertise be sought? Internal Peacemakers. From within the company, the A board member, the chairman, a board committee, persons who are in the best position to handle corporate the CEO, or possibly a senior executive could assume governance disputes are the board’s chairman and the this responsibility. In many situations, ensuring that a chairmen of board committees. Chairmen are naturally board member is encouraged to think ahead, articulate positioned to build consensus, prevent conflicts, and concerns, and press for early management attention will ensure proper resolution of disputes. In their capacity as enhance a board’s ability to detect a potential problem at chairmen, they are naturally expected to lead the group, a low-enough level of intensity and then resolve it before it becomes more severe. Alternatively, an external expert, consultant, lawyer, or mediator could assist the board in applying and implementing the company’s governance GLOSSARY dispute resolution strategy. Identifying the Appropriate Internal or External Peacemaker: One that makes peace, espe- ‘Peacemaker’ cially by settling disputes. After reviewing the types of governance disputes that SOURCE: www.Answers.com. may affect the company and how the company could best manage them, the board then must agree on who Synonyms for Peacemaker: intermediary, should be involved in preventing and resolving those conciliator, mediator, arbitrator. disputes before they are litigated in court or considered SOURCE: Dictionary.com website: http://dictionary. reference.com/browse/peacemaker. in an arbitration forum. The board would need to decide: Who should actually mediate or facilitate the Peacemaking: the process of resolving resolution of potential and existing internal and external disputes that could lead to conflict, primarily corporate governance disputes? Who on the board is best through diplomacy, mediation, negotiation, suited or willing to lead discussions or intervene among or other forms of peaceful settlement. contentious directors? Should that same person also deal SOURCE: National Defense and the Canadian Forces Available at: www.forces.gc.ca. with shareholder disputes? What if no one is willing to identify him/herself as the board’s “peacemaker” or COMMENT informal mediator? Should external help and expertise For this toolkit, the word “peacemaker” is be sought? If so, when, where, and for what purpose? used as a generic term to describe any individual, expert, or professional involved in the prevention and resolution of corporate Whether for internal or external disputes, the governance disputes. peacemaker’s role will be much more efficient and better accepted by the parties in dispute if that person MODULE 1 What Should Be the Role of the Board? VOLUME 2 13 develop organizational principles and procedures, and for meeting with external stakeholders (including apply discussion protocols. shareholders) often falls to this individual. The responsibilities of the nominating/governance Even though they may not hold leadership positions, committee chairman make that person particularly other board members who are recognized for their skills at well positioned to create dispute resolution structures, achieving consensus may also step into, or be thrust into, policies, and processes. For example, the responsibility the peacemaker or mediator role and, thereby, effectively PRACTICE Selecting the Right Corporate Governance Peacemaker To better prevent, manage, and resolve corporate governance disputes, companies and their boards should consider appointing peacemakers with the appropriate corporate governance and dispute resolution skills. The following options can be considered: Internal Peacemaker Independent board director Board committee chairman (e.g., Corporate Governance, Human Resources, or Nomination Committee.) Corporate secretary Corporate governance ombudsman External Peacemaker Standing neutral/expert/third-party (e.g., an institution, a firm, or a specific individual) Ad hoc expert/third-party (e.g., an institution, a firm, or a specific individual) Key to choosing between an internal or an external corporate governance peacemaker is determining who would provide the highest level of trust and comfort to all the parties involved in the dispute. Directors prefer handling their disputes behind closed doors while external stakeholders would rather work with a neutral or impartial external third party. TYPE OF DISPUTE PRIMARY CONCERNS PREFERRED PEACEMAKER Internal Dispute Confidentiality Internal Peacemaker Insider knowledge of issues (e.g., independent director) Authority Corporate governance expertise External Dispute Independence External Peacemaker Neutrality (e.g., mediator, negotiator, Dispute resolution skills arbitrator, etc.) Active listening 14 VOLUME 2 What Should Be the Role of the Board? MODULE 1 contribute to implementing the board’s corporate one key criterion for the peacemaker role is being perceived governance dispute resolution policies. In family firms, by all directors as neutral or impartial and objective about independent directors typically play an important role the disputed matters. This need to recognize and avoid in that regard and are often adept at getting owners and potential conflicts of interest can impair management’s their representatives to work together. ability to effectively mediate an issue. For example, if disputes involve matters of company strategy or questions Of the executive management group, the CEO may be about selling or merging the company, the CEO and the in the best position to serve as mediator or peacemaker. management group will potentially be at the heart of the The CEO, in his/her position as the moving force in the dispute, or will have vested interests in its outcome. In company, may assume the mediator role as he/she seeks such cases, management’s ability to be seen as neutral, or to create consensus around corporate strategies. However, impartial and objective, can be impaired. Moreover, the CEO will most likely not have sufficient time to dedicate to mediating disputes. EXAMPLE Although their hierarchical position within the company does not put them in an appropriate situation Managing Family Firm Disputes to mediate most disputes involving the board, senior Brazil: The Role of Independent Directors officers can also find themselves in the position of As long as the three founding brothers ran the mediator or peacemaker. The chief legal officer, the company, they settled disagreements among corporate secretary, the head of human resources, the themselves. As the second generation assumed control and the third generation began to join the company, conflicts became inevitable. EXAMPLE After attending a conference on family- controlled companies, three members of the second generation concluded that it was in the company’s best interest if all family members Managing Family Firm Disputes left their management positions, including Finland: The Role of Independent Directors themselves. “You cannot fire relatives,” said Within a large Finnish company, two family one. “Our family should govern the company, branches fought against each other based on not manage it.” Implementation required the historical conflicts between the families. These decisive support of the founding brothers and tensions affected the board. Several decades generated resentment among the heirs and in- ago, the chairman then decided to invite the first laws. non-executive independent director to the board. A professional management team was hired, As a strong-minded person, he insisted that the and two independent directors joined the board, board must not be the battleground for personal along with five family representatives. After two grievances. As a result, the family formed a years of success, the model was reviewed to “family council” for the owners to handle these allow third-generation family members to join the disputes while the board focused on running the company, but under well-structured, strict rules. company, without, more or less, personal issues being involved. COMMENT Independent directors in a family firm are often COMMENT relied on to play the role of internal peacemaker. This case illustrates how innovative solutions can To fulfill this role, they should receive adequate be found and implemented to help prevent and training. They must also be trusted by all parties handle disputes without interrupting the board’s engaged in the dispute. work. SOURCE: Leonardo Viegas, Director, Brazilian Institute of SOURCE: Olli Virtanen, Head, Finish Association of Professional Corporate Governance (IBGC); Member of the Forum’s Private Board Members; Member of the Forum’s Private Sector Sector Advisory Group. Advisory Group. MODULE 1 What Should Be the Role of the Board? VOLUME 2 15 head of internal audit, or the head of investor relations, the company than an outsider but still be perceived as a the chief public relations officer — all these persons may third-party external to the dispute. indirectly referee heated discussions. This underscores why one or more of these senior corporate staff members Ideally the ombudsman should be appointed by the should have the appropriate interpersonal skills, the board’s corporate governance or nomination committee. ability to understand circumstances that breed disputes, If the board doesn’t have such committees, the audit the skill to recognize the presence of emotionally committee could select the ombudsman. charged issues, and the experience to mediate among people whose status exceeds theirs or whose demands The ombudsman’s appointment can be especially may be difficult. efficient for privately held or family-owned companies that may have difficulties aligning the interests of Not all individuals are talented peacemakers, trained dominant shareholders, or for those who have had in dispute resolution skills or willing and interested in taking a leading role in the company’s dispute resolution management. The board should, therefore, ensure that GLOSSARY it includes among the board’s skill profile the right mix of expertise and capabilities to properly manage corporate governance disputes, including one or two Ombudsperson individuals who can eventually act as a dispute resolver An ombudsperson is a neutral empowered to if the need arises. Moreover, in considering the board’s receive and investigate complaints about any role in preventing and resolving corporate governance institution, or business, or to investigate problems between individuals within the institution or disputes, it is advisable for all directors to receive at business. Sometimes, the ombudsperson may least basic dispute resolution awareness training. In- produce a written report of his/her findings. depth conflict resolution training should be provided At other times, the ombudsperson is given the where needed, perhaps to the committee chairman or authority to facilitate solutions to problems or to individual board members whom the rest of the board make suggestions on how problems should be recognizes will assume the peacemaker role. solved. SOURCE: Adapted from Maryland Legal Assistance Network, updated by the Maryland State Law Library (MSLL). TO REVIEW A SAMPLE DISPUTE RESOLUTION COURSE FOR DIRECTORS, SEE VOLUME 3 MODULE 2. QUOTE An alternative option that boards may want to consider is the appointment of a corporate governance ombudsman Using Expert Help to deal with potential internal governance issues and “Conflict resolution professionals are uniquely facilitate external governance matters. qualified to serve corporate boards in the constructive management of boardroom conflict There are many ways of defining the ombudsman’s and to use the energy of conflict to improve, role, depending on the context and the organization in uplift, and advance the company as it seeks to which he/she operates. Within the corporate governance reach its maximum potential.” environment, the ombudsman should be limited to RICHARD REUBEN hearing claims, facilitating dispute resolution, and PROFESSOR OF LAW, UNIVERSITY OF MISSOURI — rendering non-binding opinions. COLUMBIA SCHOOL OF LAW SOURCE: Richard C. Reuben. Corporate Governance: A Practical Guide for Dispute Resolution. Washington, D.C.: Sitting within the company without being part of the American Bar Association, 2005. board, the ombudsman would be more familiar with 16 VOLUME 2 What Should Be the Role of the Board? MODULE 1 issues repeatedly with specific stakeholders, such as be viewed as “acceptable, if less than ideal,” compared community activists. to the perception of an internal peacemaker’s proposal, which will be viewed as totally unacceptable. Listed companies that have appointed a chief governance officer to ensure compliance with corporate governance To ensure the peacemaker’s independence, he/she should regulations, procedures, and best practices should consider neither have any conflicts of interests nor be related to combining this role with that of the ombudsman. directors, senior management, large shareholders, and stakeholders. To be effective in helping parties find a The ombudsman’s appointment should not, nevertheless, common, constructive solution to their dispute, the preclude companies from utilizing other dispute peacemaker needs the trust and respect of all parties and resolution forums. Dispute resolution processes should should not be considered biased. always remain flexible to settle disputes in the most adequate, appropriate, and effective manner. A variety of third parties may fill the role of an external peacemaker or mediator. Besides having the proper External Peacemakers. Even though they may have a dispute resolution skills, these third parties need to have strong peacemaker within their ranks, boards should a solid understanding of corporate governance matters also consider drawing on external professional dispute and how boards operate, so that they can be sensitive resolution expertise. to the issues involved and can quickly understand the parties’ positions in finding creative win-win solutions. Beyond helping the board design an effective dispute resolution strategy and related policies, independent An external peacemaker can be a specific individual or third parties or dispute resolution experts can help: a group of individuals. The role can be housed inside a private or public institution. Companies may seek third Prevent and/or dissipate disputes by facilitating board parties from the following sources: discussions and retreats outside of standard board Mediation and arbitration centers meetings Law firms Consulting firms Prevent and mediate disputes between the board and Universities external stakeholders Research centers Institutes of directors An external, neutral, or impartial dispute resolution Corporate governance centers expert can be especially desirable to mediate or help settle disputes between the board and external stakeholders. No matter how well-intentioned or objective a board TO REVIEW POTENTIAL CORPORATE GOVERNANCE DISPUTE RESOLUTION SERVICE PROVIDERS, SEE director may be, it is unlikely that external stakeholders VOLUME 2 MODULE 3. would fully trust him or her, precisely because he or she is a board member and possibly part of the problem. If a shareholder or any other stakeholder considers the board, Companies and boards need to feel comfortable with its chairman or its CEO to be an opponent, “reactive both the type of peacemaker they select and the way devaluation” naturally sets in. If the board or one of its they refer to this conflict resolution expert. Rather members makes a proposal to help bridge differences, than using a pro forma definition of the third party that that proposal will likely be seen as less reasonable than may be subject to controversy, the board must agree if a pre-selected expert or mediator had made the same first on the skills, role, function, and appointment of proposal. All proposals contain drawbacks, but the that external peacemaker. Then the board must clarify difference in perception can be wide enough to ensure this information in writing before disclosing it to the that a proposal made by an external peacemaker will company’s shareholders and stakeholders. MODULE 1 What Should Be the Role of the Board? VOLUME 2 17 PRACTICE TO REVIEW THE SKILLS REQUIRED OF A CORPORATE GOVERNANCE DISPUTE RESOLUTION EXPERT OR PEACEMAKER, SEE VOLUME 3 MODULE 1. Selecting the Right Terms to Designate Peacemakers Companies and their boards should not wait for disputes to erupt to appoint an external peacemaker. Policies and There are several designations for an external/ third-party corporate governance dispute processes should be in place to identify and perhaps resolution expert. Boards should use the term retain the appropriate expert, facilitator, or mediator they (and their constituencies) think is best to be available immediately whenever the need arises. suited to their cultural and legal environment. Doing so should be part of the board’s own plan to deal For example, a family firm in Panama may seek with emergencies or unforeseen circumstances that arise. the help of a facilitator or corporate governance advisor to sort out succession planning and related disputes. A large listed South African mining company may consider introducing a GLOSSARY corporate governance ombudsman to help manage disagreements and disputes among shareholders and other key stakeholders. Standing Neutral The following titles are options to consider: The standing neutral facilitates communication among parties, helps clarify positions, and Expert eventually (although rarely) renders an impartial Advisor nonbinding decision concerning the dispute’s subject matter. Either an individual or a panel, Standing neutral the standing neutral should be selected by all the parties involved early in the relationship. This ADR Third party process works effectively because the standing neutral is: involved from the beginning onward; Dispute resolution expert briefed on the relationships among the parties; Conflict resolution expert furnished with the basic documents describing the relationship; routinely receiving progress Dispute resolution consultant reports; and, occasionally invited to meet with the parties. He or she must be available at all Mediator times and have a good understanding of the problems when they arise to resolve disputes Facilitator quickly, fairly, and amicably among all parties Conciliator involved. Three critical elements are essential to the success of the standing neutral approach: Ombudsman/Ombudsperson Mutual selection and immediate confidence in Negotiator the neutral Peacemaker Continuous (though low-time) involvement by the neutral Discussion leader Prompt action on any submitted disputes Terms such as lawyer, arbitrator, or judge should be avoided. These are too formal and too SOURCE: Adapted from James Groton and Helena Haapio, reminiscent of litigation — even if the selected “From Reaction to Proactive Action: Dispute Prevention third-party or peacemaker is a lawyer or a Processes in Business Agreements.” 2009. Working paper former judge. provided by the authors to the Forum. 18 VOLUME 2 What Should Be the Role of the Board? MODULE 1 Without such prior arrangements, a company may find As with the corporate governance ombudsman, the it difficult to find the right expert quickly when a dispute standing neutral could be selected and retained by the suddenly arises. Moreover, parties already locked in a board’s Corporate Governance, Nomination, or Audit dispute may find it difficult to agree on who that third- Committees. This procedure could be adopted at the party should be. annual meeting. In some cases, shareholders could even approve the selected neutral. Introduced in the construction industry, where delays are often costly for all parties concerned, one of the most The use of a standing neutral could have particular innovative and promising developments in controlling applicability in a closely held or family-owned company. disputes among parties who are involved in any long- In such companies, share ownership can likely pass term relationship is the concept of the “pre-selected” or through inheritance or, as a matter of design, could “standing neutral.” have limited marketability to either the shareholders or the company itself. As a result of the uncertainties and A standing neutral is simply a trusted impartial limitations regarding share transfer and the resulting expert selected by the parties at the beginning of their ownership profile, disputes among shareholders in such contractual relationship to assist in the prompt resolution situations can easily be imagined. The standing neutral of any disputes. thus can become an effective mechanism for resolution of future disputes. To be immediately effective and operational, the standing neutral should be available at all times and kept abreast Even though some initial expenses are involved in of all major corporate developments. He or she should selecting, appointing, initially orienting, and periodically naturally be familiar with the company’s ownership keeping the neutral informed, these costs are relatively structure, bylaws, industry, and key stakeholders. minimal and could be covered by the board’s operational budget. Beyond a small retainer fee, the standing neutral will only be paid an hourly fee if she/he gets called in for a dispute. In the United States, that fee ranged from THE STANDING NEUTRAL WITHIN THE $150 to $400 in the construction industry during 2009. CORPORATE GOVERNANCE FRAMEWORK There are, nevertheless, significant risks in bringing external peacemakers and a formal mediation process into corporate governance processes. These risks need to be BOARD appropriately addressed. The main risks to consider are: Confidentiality. Corporate boards discuss many NT confidential matters, and the board’s full trust is rarely R MANAGEME SHA given to outsiders — no matter how qualified. Most, if not all, boards would most likely be uncomfortable R EHOLDERS STANDING NEUTRAL having an outsider present at board meetings for the purpose of mediating internal corporate governance disputes. To defuse this concern, clarify the role of the NIO external peacemaker and limit his/her intervention SE to specific board sessions outside of the boardroom. While confidentiality is a core feature of the ADR STA KEH OLDERS process, the board’s level of trust can be increased by having the selected third-party sign a confidentiality agreement. MODULE 1 What Should Be the Role of the Board? VOLUME 2 19 Authority. The board and its chairman may be met in this way, avoid the appearance or terminology concerned that its authority could be diminished associated with formal dispute resolution proceedings. by a third-party’s intervention. This concern can be mitigated by adopting standing rules and policies that Incorporating Dispute Resolution Policies into specify the external peacemaker’s role, functions, and Corporate Documents reporting lines, while reiterating the board’s duties and As with other organizational issues, rules and procedures accountability. Calling on an external expert would are much more effective if they are established in not be perceived as a sign of weakness but merely as advance because they prepare boards to react quickly applying existing procedures and policies. when disputes develop. Once the board has arrived at a consensus over how disputed matters will be handled Positioning. The parties in dispute may feel threatened and by whom, it should ensure that the company and, as a consequence, harden their positions. To memorializes these policies and communicates these to overcome this problem, it may work best to refer to external and internal stakeholders. the mediation process as a “discussion session,” “focus session,” or “town hall meeting.” The mediator/ The board must consider where to include its dispute peacemaker could then be called a “facilitator” or resolution policies and statements in its corporate “discussion leader.” While the same objectives can be governance documents. Should these provisions EXAMPLE Sample Corporate Dispute Resolution Pledge United States: Corporate Policy Statement on Alternatives to Litigation “We recognize that for many disputes there is a less expensive, more effective method of resolution than the traditional lawsuit. ADR procedures involve collaborative techniques, which can often spare businesses the high costs of litigation. “In recognition of the foregoing, we subscribe to the following statements of principle on behalf of our company and its domestic subsidiaries: “In the event of a business dispute between our company and another company, which has made or will then make a similar statement, we are prepared to explore with that other party resolution of the dispute through negotiation or ADR techniques before pursuing full-scale litigation. If either party believes that the dispute is not suitable for ADR techniques, or if such techniques do not produce results satisfactory to the disputants, either party may proceed with litigation.” COMMENT The ADR Pledge is a statement of policy aimed at encouraging greater use of flexible, creative, and constructive approaches for resolving business-related disputes. The Pledge is neither intended to impose judicially enforceable rights or obligations nor does it constitute a waiver of any substantive or procedural right or obligation. Its goal is to promote systematic, early resolution and to establish a flexible framework for helping to resolve complex, multi-party disputes. The Pledge sends the message that willingness to negotiate or mediate is not a sign of weakness, but a company policy. By conveying a message that a company will routinely consider negotiation and mediation where appropriate, the Pledge makes it clear that the exercise of such choices does not reflect a lack of confidence in the company’s bargaining position. While the Pledge is targeted at business disputes, similar language may be specifically adapted to corporate governance disputes between the company and its stakeholders. SOURCE: International Institute for Conflict Prevention and Resolution. Available at: http://www.cpradr.org/AboutCPR/TheCPRADRPledge/ AboutthePledge/tabid/161/Default.aspx. 20 VOLUME 2 What Should Be the Role of the Board? MODULE 1 be inserted in the articles of incorporation, bylaws, In considering whether to document publicly the statement of governance principles, ethics codes, and/ board’s policies on dispute resolution, there are many or board committee charters? The answer to these considerations. For example, provisions in the articles questions depends on the type of company, its particular of incorporation can be inserted, changed, or deleted circumstances, and both the viability and efficiency of only through shareholder action. For large, publicly held other dispute resolution institutions, such as the courts, companies, obtaining shareholder approval is a serious, in the jurisdiction in which the company operates. difficult task. Boards should be cautioned about the PRACTICE Incorporating Dispute Resolution Policies in Corporate Documents CORPORATE DOCUMENTS OPTIONS TO CONSIDER Articles of Incorporation Clause mentioning the board’s role in planning for Company Charter appropriate governance dispute resolution processes Bylaws Dispute resolution clause Corporate Governance Guideline General provisions on effective dispute resolution Code of Ethics Corporate Social Responsibility Guidelines Specific provisions on dispute resolution processes in shareholder and stakeholder sections/chapters Specific provisions on dispute resolution skills and training in board section/chapters Board Committee Charters Roles and responsibilities in implementing dispute Terms of Reference resolution policies The charters should state responsibilities generally, with specifics left to committee discretion and separate policy statement Board Protocol Internal governance dispute prevention and resolution processes Annual Reports Dispute resolution pledges and policy statements Press Releases Websites Emphasis on external governance disputes Shareholder Agreements Dispute resolution clause allowing/encouraging disputes to be settled through alternative dispute resolution mechanisms Clause may describe the dispute resolution process, including the selected third party/institution, the location, and the timeframe for each step MODULE 1 What Should Be the Role of the Board? VOLUME 2 21 EXAMPLE Dispute Resolution Clause in Corporate Bylaws Australia: APNIC Pty Ltd. 73. Any dispute arising between or among any Member(s), Executive Council member(s), subcommittee member(s), the Director General, or the corporation as to any matter arising under or out of or in connection with these by-laws, or any agreement entered into between any of the aforementioned parties, or the Memorandum and Articles of Association of the corporation, and whether in contract or tort, (“Dispute”) the parties to the Dispute must follow the dispute resolution procedures set out below before commencing legal proceedings (except for legal proceedings seeking interlocutory relief). 74. A party claiming that a Dispute has arisen must notify in writing each other party to the Dispute giving details of the Dispute. 75. Within 7 days after a notice is given under by-law 74 each party to the Dispute (“Disputant”) must nominate in writing a representative authorised to settle the Dispute on its behalf. 76. During the 20 day period after expiration of the 7 day period referred to in by-law 75 (or longer period agreed in writing by the Disputants) (“Initial Period”) each Disputant must in good faith use its best endeavours to resolve the Dispute. 77. If the Disputants are unable to resolve the Dispute within the Initial Period they must refer the Dispute to arbitration by one arbitrator agreed to by the parties or, if they cannot agree, by the chair of the Institute of Arbitrators Australia, or the nominee of the chairs, and the arbitration will be conducted in accordance with the UNCITRAL rules for the conduct of commercial arbitrations. 78. Any information or documents prepared for the arbitration and disclosed by a Disputant during the arbitration process: a. must be kept confidential; and b. must not be used except for the purpose of resolving the Dispute. 79. Each Disputant must bear its own costs regarding arbitration of a Dispute under these clauses, and the Disputants must bear equally the fees, and any other costs or charges, of any arbitrator engaged, unless a binding decision of the arbitrator states otherwise. 80. The place for any arbitration will be at a time and at an address in the City of the principal place of business of the corporation appointed by the arbitrator, unless otherwise agreed by the Disputants and the arbitrator. If, in relation to a Dispute, a Disputant breaches any of the provisions of by-laws 74 to 76, each other Disputant need not comply with these dispute resolution clauses in relation to that Dispute. COMMENT Corporate bylaws must have dispute resolution policies and procedures. Special attention should be given when drafting or amending the articles of incorporation because these cannot be changed except through shareholder action. Restrictive measures in these articles, therefore, should be very limited. SOURCE: APNIC. Available at: http://www.apnic.net/publications/media-library/corporate-documents/corporate/by-laws. 22 VOLUME 2 What Should Be the Role of the Board? MODULE 1 advisability of any policies that may change, depending in the event it is appropriate to change or amend such on circumstances and options available, and thus policies, they must give careful attention to explaining necessitate a change in these articles. to the larger public why any change is appropriate. Policy statements, such as governance principles, can Board committee charters offer the best venues for easily incorporate the board’s feelings about dispute articulating that a board committee has dispute resolution resolution, particularly with respect to external under its jurisdiction, thus signaling that the board takes stakeholders. However, boards should be warned that, dispute resolution matters seriously. The committee EXAMPLE Shareholder Dispute Resolution Provisions in Company Codes Colombia: Suramericana Article 4.4 MECHANISMS FOR LODGING FORMAL CLAIMS OF INCOMPLIANCE WITH REGARD TO THE CORPORATE GOVERNANCE CODE. The Company’s legal representative shall ensure compliance with the Company’s bylaws, legal provisions as well as decisions on the part of the General Shareholders’ Meeting and the Board of Directors. The Company’s shareholders and investors may request the Company, whenever they should believe that an infringement has been committed with regard to that provided in the Corporate Governance Code, and in these cases, Company Management through the Company Secretary shall respond in a clear and sufficient manner with the greatest diligence and timeliness. The Company’s shareholders and investors may also file any claims or complaints with the Company’s Statutory Auditor with regard to any infringement of that stipulated in the Corporate Governance Code. To this end, the Company shall provide a timely response to any requirements on the part of the Statutory Auditor with regard to the complaint thus lodged and shall implement all those observations that the Statutory Auditor should make if the infringement should exist. Article 4.5 MECHANISMS TO RESOLVE CONFLICTS BETWEEN THE SHAREHOLDERS AND THE COMPANY AND AMONGST THE SHAREHOLDERS. Any dispute arising at any time between Shareholders and the Company or amongst the shareholders, on the grounds of their status of shareholders, and shall be decided by an Arbitration Panel, who shall hear the matter in Medellin. The Arbitration Panel shall provide a legal finding and be made up of three Colombian citizens. The arbiters shall be appointed, pursuant to applicable legislation, which shall also apply to the hearing to be held by the Arbitration Panel, except when the case requires special rules and regulations; should the parties fail to agree on appointing the arbiters, either totally or partially, these shall be appointed by the Center of Conciliation and Arbitration attached to the Chamber of Commerce of Medellin, which shall select the arbiters from a minimum of ten (10) candidates mutually agreed upon by both parties. The Secretary to the Arbitration Panel shall be appointed by the arbiters, once the Panel has been set up. COMMENT As illustrated by this example, dispute resolution clauses can be inserted in company codes and made publicly available on the company’s website. This example highlights the role that the company’s statutory auditor may play in receiving claims and complaints from shareholders regarding the company’s compliance with its code. SOURCE: Suramericana Corporate Governance Code last updated June 2009. Available at: http://www.gruposuramericana.com/english/ GI%20Documents/Corporate_Governance_Code_2009.pdf. MODULE 1 What Should Be the Role of the Board? VOLUME 2 23 whose jurisdiction and responsibilities include dispute inserted in board protocols and procedures and in resolution may then choose to formalize procedures that board committee charters. External governance disputes can be disseminated to external stakeholders. The public involving shareholders could well be addressed through relations value of such steps can be significant, insofar as shareholders’ agreements. those stakeholders who feel themselves aggrieved have a clear course of action to pursue. Shareholders’ agreements are contracts between some or all of a non-listed company’s shareholders in which A commitment to effective dispute prevention and they agree to regulate the exercise of some of their rights resolution may involve different approaches in the as shareholders. These agreements are no longer needed corporate governance documents. For example, to once a company becomes listed and has to comply with avoid being locked into a single course of action, some securities regulations, which typically protect basic companies may find it more appropriate to refer to dispute shareholders’ rights. resolution policies in corporate governance guidelines or ethics codes rather than in the articles of incorporation. Shareholders’ agreements are particularly useful in Others may find the opposite to be true. corporate governance situations in smaller companies or family-owned companies where a company has no The board should ask itself whether external and internal majority shareholding, because of the correspondingly corporate governance disputes would best be addressed high potential for the company to be adversely affected together in the same document or tackled separately by shareholder disagreements. These agreements help in different documents. For example, preventing and prevent disputes by clarifying the roles, obligations, and dealing with internal governance disputes could be rights of the company and its shareholders. They can also help address the concerns of minority shareholders and include topics on which the company’s constitution GLOSSARY and other bylaws are typically silent. The agreement can specify the company’s management structure and include provisions regulating: Shareholders’ Agreement When acquiring a company’s stocks, major Shareholder exit strategies (including share valuation shareholders increasingly sign a shareholders’ mechanisms) agreement that describes the company’s corporate governance policies and procedures, including bylaws on the sale and purchase of shares and Shareholder warranties investment policies. Confidentiality agreements A well-drafted agreement will help the company run more effectively, play an important role in the organization’s continuity, and avoid Restraint of trade for directors and/or shareholders expensive, time-consuming legal wrangles. The agreement will provide details of shareholders’ Agreement specifying or limiting business activities of rights and duties. It should cover all aspects of the company the relationship and the mechanics by which the company is to be operated. The agreement should Shareholder rights to appoint directors and the number also protect the respective interests of the parties to the agreement and outline dispute resolution of directors provisions in the event of any disagreement between the parties. Shareholder rights to submit decisions on policies to a SOURCE: Clendons Barristers and Solicitors. Available at: vote by shareholders (proxy process) http://clendons.co.nz/newsite/index.php?page=benefits-of-a- shareholders-agreement. Board meeting procedures 24 VOLUME 2 What Should Be the Role of the Board? MODULE 1 Minimum financial and non-financial reporting EXAMPLE requirements Dividend distribution policy Sample Dispute Resolution Clause for a Shareholder Agreement Shareholders’ personal rights and obligations Australia: Access Business Lawyers Policies, management, and procedures Court and arbitration proceedings 1.1 A Shareholder must follow all the dispute Protection of minority shareholder interests resolution procedures set out in this clause before commencing Court or arbitration proceedings relating to a dispute, except ADR procedures for resolving disputes between where the Shareholder seeks urgent shareholders and the board interlocutory relief. Negotiation TO REVIEW ESSENTIALS OF A SHAREHOLDER AGREEMENT, SEE VOLUME 2 ANNEX 1. 1.2 (a) Any Shareholder seeking to resolve a dispute arising out of or relating to this Agreement must notify the other in writing, detailing the matters in dispute and their PRACTICE suggested means of resolution. (b) Within fourteen (14) days of the date the notice is given under sub-clause (a) the Drafting Dispute Resolution Clauses Shareholders must meet to attempt to resolve the dispute. That meeting must be arranged Elements to consider when recommending, by the Shareholder sending the Notice. drafting, and adopting a dispute resolution clause include: Mediation The clause may include all disputes that may 1.3 (a) If the parties are unable to resolve the arise, or only certain types. dispute by negotiation, as set out in the above sub-clause, they must endeavor to settle it It can specify only mediation and arbitration, by mediation administered by the Australian or include an escalation of various dispute Commercial Disputes Centre (“ACDC”) before resolution processes from unbinding having recourse to arbitration or litigation. negotiation to formal arbitration. (b) The mediation must be conducted in The dispute resolution clause should be accordance with ACDC Mediation Guidelines, approved and signed by as many potential which set out the procedures to be adopted, parties to the dispute as possible. the process of selection of the mediator and the costs involved. Timing, location, rules, and institutional setting for the dispute resolution should be COMMENT specified. All dispute resolution procedures must be followed before arbitration or litigation, except Based on standard dispute resolution when seeking a court injunction. Disputes are clauses, the parties should customize and to be mediated by an agreed-upon independent refine the basic procedures to meet their mediator. particular needs. SOURCE: Adapted from American Arbitration Association, SOURCE: Access Business Lawyers. Available at http://www. “Drafting Dispute Resolution Clauses: A Practical Guide”. accesslawyers.com.au/system/files/f2/o33/Sample%20 AAA: 2007. Available at: www.adr.org. Shareholder%20Agreement.pdf. MODULE 1 What Should Be the Role of the Board? VOLUME 2 25 A shareholders’ agreement should be reviewed and and resolving disputes. The types of external governance revised periodically to ensure that it is in line with the disputes can be varied, and many may be triggered by current business environment, but it should not be economic forces. For example, shareholder disputes revised so often that it causes instability and confusion. may increase in volume when the company’s share price New shareholders need to sign the agreement in order declines — even if that decline is attributable to changes for the dispute resolution clause to apply equally to all in the company’s fundamental value. shareholders. Determining whether dispute resolution goals have Dispute resolution clauses in shareholders’ agreements been met for internal disputes can be more challenging. could expressly apply to disagreements over company Metrics themselves may be meaningless. External financing, dividends, or the company’s management and governance disputes can be more easily identified and, direction. These provisions could provide a mechanism therefore, counted and categorized. Internal disputes, for more effectively resolving such disputes. however, can be more subtle and less susceptible to statistical determination. TO REVIEW SAMPLE DISPUTE RESOLUTION CLAUSES FROM AROUND THE WORLD, SEE Much of the success of internal dispute resolution and VOLUME 2 ANNEX 2. prevention involves qualitative assessments. Has debate been robust, but not intimidating? Have directors been Assessing the Effectiveness of the Dispute able to air their differences publicly? Are appropriate Resolution Strategy mechanisms in place to prevent disagreement from Goals set by the board’s dispute resolution strategy are ripening into a dispute? Do all parties to the dispute aspirational. How can one know whether they have perceive these mechanisms as effective and fair? To what been met and become a reality? In a business, setting extent is the internal or external peacemaker involved? goals should always be coupled with mechanisms for What is his/her effectiveness? determining whether, or how well, the goals have been met. The board needs, therefore, to establish criteria The answers to these questions are qualitative ones. for determining the success of their approach. In the Success in achieving dispute resolution goals is best dispute resolution context, these feedback mechanisms determined by getting candid opinions from each can be more complicated because the goals — and director. For internal disputes, the annual board or therefore success in meeting them — involve qualitative committee assessment, followed by a retreat, may be and quantitative factors. the best gauge for determining whether goals have been met. Success in dispute resolution is closely tied Where appropriate, and particularly in those situations to board effectiveness. In turn, determination of board where the disputes are with external stakeholders, metrics effectiveness varies from one board to another. can be created to assess progress toward achieving goals. External disputes lend themselves better than internal Being Prepared for Litigation if Alternative disputes to devising metrics that can serve as a guide Dispute Resolution Processes Fail to the company’s progress in dispute resolution. For Litigation is generally costly and severely disruptive of the example, statistics on the number of complaints filed relationship between the litigating parties. Yet, if ADR or received concerning governance matters can be processes have failed to result in a settlement between the developed, accompanied by additional statistics on such parties to a corporate governance dispute, a company may disputes’ resolution. feel obliged to invoke litigation or, alternatively, be drawn into it by the other party to the dispute. It is, therefore, However, as a cautionary note, while such metrics important that a board’s policy on resolving corporate can provide information about trends, they may not governance disputes, both external and internal, envisage accurately assess the company’s performance in preventing litigation as an option for dealing with these disputes. 26 VOLUME 2 What Should Be the Role of the Board? MODULE 1 While a company may have no choice when litigation proceedings are started against it, the board can set out a preference for ADR processes in its corporate governance dispute resolution policy and initiate litigation only as the last resort. However, a company’s preference for ADR methods must be couched in language that is not perceived as a sign of weakness, thus giving the other side to a dispute an advantage to use the threat of litigation to strike a settlement at the expense of the company’s legitimate interests. A company’s general counsel and his or her staff can be of assistance in liaising with potential litigators to represent the company in litigation proceedings. Once the litigation starts, the board and senior management should remain vigilant to avoid, or at least contain, if not defuse, negative publicity and public statements that can adversely affect the proceedings before a court. Where court procedures envisage initiating an ADR process at any stage of the trial subject to the disputants’ consent, the company should give clear instructions to its counsel regarding the terms on which it would be willing to consent to such resolution. Meetings can be arranged with the counsel to review periodically the litigation’s progress and discuss trial strategies. MODULE 1 What Should Be the Role of the Board? VOLUME 2 27 PREVENTING AND MANAGING processes that contribute to the board’s success. First BOARDROOM DISPUTES and foremost, keeping disputes from being destructive lies in applying good corporate governance practices and Beyond developing and ensuring the proper initiating steps to minimize the risk of disputes arising implementation of corporate governance dispute in the first place. resolution policies, the board must prevent and better manage its own disputes. At the onset, this involves Encouraging Collegiality and Civility acknowledging that disputes may occur. To prevent disputes, boards must develop a boardroom culture based on collegiality and civility. TO REVIEW SITUATIONS THAT MAY LEAD TO DISPUTES IN THE BOARDROOM, SEE VOLUME 1 Boards have a core democratic characteristic. A board MODULE 1. is a group of people, each of whom has an equal vote in the decision-making process. A democratic environment How does a board turn this goal into reality? The should prevail; no single individual should rule. The practices and procedures that allow boards to work environment should foster flexibility and collaborative efficiently represent conscious efforts to develop thinking crucial to forming consensus — and thus a winning majority. Collegiality also promotes respect for one another and for each member’s ability to express PRACTICE views, regardless of whether one embraces those views. It permits participants to be more open to new ideas, rather than defensive of their own conclusions. Key Steps in Preventing and Managing Boardroom Disputes A supportive atmosphere does not mean that there is no Boards should consider and adopt the following disagreement or strong feelings. It also does not mean steps, tailoring them to their particular that everyone must like one another or be social friends. circumstances: Particularly within a diverse, independent group, STEP 1: Encourage an effective board there will be disagreements, misunderstandings, and, culture. potentially, disputes. However, the collegial environment STEP 2: Clarify the roles of management is the key to overcoming these human frailties by and the board. permitting the group to hear different views, argue the merits, and ultimately arrive at a consensus. STEP 3: Establish orderly board processes. STEP 4: Ensure the proper flow of Civility complements collegiality. Civility involves information. adherence to certain manners and practices for the STEP 5: Allow for discussion, debate, and interaction among individuals. A civil environment deliberation. does not preclude animated behavior, deeply held STEP 6: Improve communication. convictions, emotional speech and action, or passionate feeling. It does, however, mean that personal attacks or STEP 1: Apply dispute resolution techniques. embarrassing another person should not be tolerated. STEP 1: Step out of the boardroom to gain A lack of civility can too easily trigger antipathy and new perspectives. anger, thus inhibiting free discussion and debate. Lack These steps are interlinked, so they should be of civility also can lead to destructive interpersonal applied jointly and not in sequence. relationships and, in the process, create an additional layer of emotional content, which must be addressed if disputes are to be resolved. 28 VOLUME 2 What Should Be the Role of the Board? MODULE 1 Civility is especially important as boards become Being overly preoccupied with civility, though, can more diverse. Diversity facilitates creative problem- create its own problems. To avoid confrontation or solving and provides exposure to a wide range of embarrassment, people, thinking they are civil, perspectives. It can foster innovative thinking and sometimes do not address matters directly, or they avoid remind individuals that differences of opinion are discussing certain issues. A preoccupation with civility likely, and this expectation increases the capacity can sometimes result in a lack of direct speech. To avoid to handle conflict.1 Yet diversity without civility can insulting or embarrassing someone, people often use produce misunderstandings and disagreements based indirection. For example, instead of saying “no,” they on cultural and other differences. may ask, “Should we think about it some more?” While PRACTICE EXAMPLE Factors to Consider for Director Board Diversity Nominations France: Sodexo To promote a collegial environment that During the assessment of Sodexo’s board facilitates the board’s work, boards, and operating procedures, which was led by one of its especially its nomination committee, should members in fiscal 2003-2004, several suggestions consider: were made. One called for the board to more accurately reflect the group’s international Encourage all directors to meet with potential scope and integrate new skills and expertise. directors before they are nominated and to In response, and in line with recommendations weigh in on the nomination process made by the board and its nominating committee, Perform thorough background investigations shareholders at the annual meeting on February 8, on potential directors and obtain as much 2005 approved the nomination of new directors. information as possible on how the potential As a result, the 14-member board included four directors have functioned in group decision- different nationalities (French, American, British, making settings and Canadian) and four women. COMMENT Avoid nominating people who argue for Diversifying the skills and background of directors argument’s sake is an important corporate governance goal to Avoid nominating people who, because help improve the scope and performance of they are fearful of making decisions, prolong companies. With multinational boards, the risk of debate and resist developing collaborative misunderstanding due to language and cultural solutions differences, nevertheless, increases substantially. In this context, civility and collegiality are even more Seek candidates who have a good balance important to defuse potential misunderstandings of skills, including conflict resolution skills and disputes in the boardroom. Include in the matrix of requisite skills in consensus-building, negotiation, and mediation Encourage all directors to take conflict and dispute resolution training Include in the criteria for board leadership positions the ability to work effectively with SOURCE: Sodexo — Chairman’s Message. 2005. Available at: http://www.sodexo.com/group_en/finance/chairman-message/ people and build consensus chairman-message.asp. MODULE 1 What Should Be the Role of the Board? VOLUME 2 29 the individual may think others understand that he measure in dispute prevention and resolution. The failure or she is saying “no,” those who hear the interchange to articulate and understand the respective roles of the may take the speaker literally. Thus, while civility board and management constitutes a fertile ground for breeds a collegial atmosphere, people could see it as an disputes and impairs the board’s effectiveness. impediment to being open and candid. It can also result in attaching different meanings to the same words and The director who does not understand his or her role phrases. While civil behavior helps create a collegial easily becomes an irritating presence, undermining atmosphere to reach consensus, sometimes it can also relationships among directors and between the board have the opposite effect. and management. Clarifying Management and Board Roles Especially detrimental is the situation in which boards, or Ensuring that directors have a clear understanding of board committees, extend their roles into management’s their roles and responsibilities is another important purview. For example, a central part of the audit FOCUS Board Responsibilities The board’s role and responsibilities typically include: Approving a corporate philosophy and mission Nominating directors for election to the board Establishing an audit committee composed entirely of independent directors Selecting, monitoring, advising, evaluating, compensation, and — if necessary — replacing the CEO and other senior executives while ensuring an orderly and proper management succession Reviewing and approving: Management’s strategic and business plans The company’s enterprise risk management (ERM) program The company’s financial plans, objectives, and actions, including distributions to shareholders, significant capital allocations, expenditures, and other material financial obligations Material transactions not in the ordinary course of business and making recommendations to shareholders when their approval of such transactions is necessary Monitoring corporate performance against strategic business plans Helping to ensure ethical behavior and compliance with laws and regulations, accounting and auditing principles, and the corporation’s own governing documents Assessing its own effectiveness in fulfilling board responsibilities Performing other functions prescribed by law or regulations, or assigned to the board in the company’s own governing documents SOURCE: The Conference Board, Corporate Governance Handbook 2007. 30 VOLUME 2 What Should Be the Role of the Board? MODULE 1 committee’s role is to satisfy itself after due inquiry positions. By making clear a joint board-management that management has prepared financial statements goal, competing issues are surfaced. Those that are not correctly, that the proper internal controls are in place, appropriate are rejected. and that the independent auditors have performed their jobs properly. When the audit committee goes further Establishing Orderly Board Processes and begins to redo the financial statements or conduct Effective board organization and processes is another basic its own audit, the situation becomes particularly component of dispute prevention and resolution. Boards troublesome, for the committee is overreaching and need a structure in which to work effectively. Board and meddling in management’s responsibilities. committee calendars, committee charters, articulation of authority not delegated to management, executive The board’s role does not include running the company. sessions at board and committee meetings, reports The board hires people for day-to-day management, from management, enterprise risk assessment, and pre- oversees and monitors management and corporate meeting information flows — these are some of the basic activities, reviews and approves (or disapproves) key features of good organization. Without a structure and strategies and policies, and acts on significant matters process, communications suffer. When communications after having fully informed itself. suffer, misunderstanding and disputes arise, and there is no effective forum for resolving disputes. Similarly, management must understand its role and that of the board. When management fails to comprehend the Orderly processes and procedures help create the board’s role and issues, information processes required environment that not only permits but encourages for decision-making and oversight can easily become discussion and debate. Unless board meetings are well deficient. Meeting times are often consumed by irrelevant organized, two things happen quickly: matters. In addition, gaps can develop — areas which the board believes are part of management’s responsibility, First, confusion will reign, and from that confusion but management assumes the board is handling. will spring misunderstanding and frustrations. What is the business at today’s meeting? In what order do For example, the board cannot permit ambiguity we consider things? Is there follow-up from the last to exist as to how much expenditure the CEO can meeting? A carefully constructed agenda — in fact, authorize without requesting board approval. Doing agendas for a full year — ensure a basic order to so would create room for constant friction between the meetings and that the board will accomplish its full board and the CEO. Similarly, if the board is not clear spectrum of functions. about the long-range strategies that it has approved, management can never be sure whether it has taken the Second, time will run short, discussion and debate will appropriate path for the company. In such a case, the be compromised, and some important matters will board will be disappointed because management has not be considered. Well-organized board meetings failed to execute the strategy that the board wants, but provide times on the agenda for director discussion. which it has not communicated. Management will also They permit all board members to have input into become frustrated because the board has not provided agenda and discussion matters. They are open-ended clear direction. in the sense that they do not cut off debate, and they do not end without all agenda items having been Clarifying the respective roles of the board and thoroughly considered. management — beyond simply stating that “the board governs the company while executives manage the Disorganized, chaotic meetings not only impede the company” — is crucial to preventing disputes. With substantive aspects of the board meeting, but also create greater clarity, everyone can identify the interests to be numerous irritants. Both the substantive failings and served, rather than only have a collection of individual the irritating quality of a disorganized meeting feed MODULE 1 What Should Be the Role of the Board? VOLUME 2 31 FOCUS Disputes Stemming from Deficiencies in Board Organization Without good organization, including processes and procedures designed to permit a board to do its job, frustrations and anger mount, and disputes emerge quickly. Sources of a dispute stemming from deficiencies in board organization include: Poorly defined delegations of authority to management Lack of consensus over the information that the board must have regularly to monitor the company’s results and areas of high risk Inadequate lead time for providing information prior to a board meeting to enable directors to read, digest, and consider the information Insufficient time at board or committee meetings for discussion Restrictions on directors’ ability to put items on the board agenda or to bring up matters for discussion Lack of principles of corporate governance that describe the board’s role No committee charters that define the committees’ jurisdictions and responsibilities Lack of a board calendar with meeting dates and predictable items for consideration Incomplete or inaccurate records of board and committee meetings Ineffective leadership of the non-management directors Unavailability of independent advisors for board and committee guidance PRACTICE Establishing Appropriate Board Processes To help prevent disputes and enhance performance, a board should: Establish a calendar of regular meetings and include recurring matters requiring board consideration Encourage order in meetings, but do not cut off relevant discussion or prevent all board members from speaking Initiate executive sessions of non-executive directors so that discussion without the CEO present can occur, or that the CEO cannot monopolize board deliberations Establish and observe protocols for conducting meetings, including procedural rules and behavior expectations Develop procedures for each director to add matters to the agenda or discussion period Encourage directors, particularly new directors, to get to know one another so that they will be able to discuss board matters more easily 32 VOLUME 2 What Should Be the Role of the Board? MODULE 1 frustration and anger. Anger boils over into arguments, Disruption of routines serves as a red flag to boards which, in turn, grow into disputes. The irony is that, that something may be amiss, or that some event has with solid organization and planning, these disputes occurred, which has prevented management from could have been avoided entirely. fulfilling its responsibility to inform the board. Part of board meeting organization must include a clear Dealing with a crisis, or making a major corporate protocol as to how meetings will be conducted and decision that has far-reaching consequences for a the discussion will occur. The prerequisite for such a company, is prone to opposition from certain quarters discussion protocol is that every director must have an and invariably results in a split board. The effectiveness opportunity to participate in discussions and debates. of board processes is typically challenged in these situations. Therefore, a board must learn from its past Some boards will establish their own protocols, laying practices in dealing with a split board, and improve its out the chairman’s role, procedures for calling on those processes. who wish to speak, debate protocols (rebuttal and counter-rebuttal), and clear rules about how a director Ensuring the Proper Flow of Information will be asked to end their remarks if he/she does not Directors have a fiduciary duty to make decisions after abide by the board’s rules. considering of all material information that is reasonably available. When the board lacks appropriate and timely Robert’s Rules of Order is one of the most commonly used information, its decision-making abilities can become meeting protocols. Published for the first time in 1876, compromised, which, in turn, may lead to arguments Henry Martyn Robert drafted these rules to assist an and disputes. assembly in accomplishing the work for which it was designed. QUOTE For boards that wish to avoid developing their own rules for discussion, Robert’s is one solution. Yet the decision- making process under these rules tends to be focused on Boardroom Communication the majority’s take on things and does not factor in the “If information is not presented crisply, directors instability created by unhappy minorities. To prevent can’t stay focused, and decision-making suffers. frustrations and, consequently, disputes from building, The chair should signal when everyone gets boards are increasingly considering more consensus- the point. based processes to decision-making. In this case, voting would be a last resort for decisions. Board members should keep remarks concise. Directors and officers should be candid. Good board organizational processes do more than create an environment for discussion. They also Directors should respond within 24 hours to communication from each other or the CEO. permit the board, first, to receive information easily and regularly, and, second, to establish an orderly, The CEO should distribute a brief monthly comprehensive system for overseeing and monitoring summary of key events in the company and management’s activities. the marketplace.” STUART R. LEVINE At a minimum, good board organization should include CHAIRMAN AND CEO, STUART LEVINE & ASSOCIATES creating routines for information flow both to and within LEAD DIRECTOR, GENTIVA HEALTH SERVICES the board, preparing materials in advance of meetings, and, SOURCE: Stuart R. Levine. “Wanted: Real Communication II” in terms of logistics, providing an orderly environment in Directorship, April/May 2007. which the board can conduct its business. MODULE 1 What Should Be the Role of the Board? VOLUME 2 33 FOCUS FOCUS Ten Basic Principles of Robert’s Rules of Breaking Robert’s Rules Order In the book Breaking Robert’s Rules, authors Robert’s Rules of Order is used by parliaments, Lawrence Susskind and Jeffrey Cruikshank boards, and many other decision-making bodies explain that deciding on matters is not as to establish a procedure for discussing and simple as voting. They offer the following making decisions. five steps to improve decision-making so that agreements can be reached and implemented All members have equal rights, privileges, more effectively. These steps could usefully and obligations; rules must be administered be considered by boards developing their impartially organizational processes: The minority has rights which must be Convening: Agreeing to a particular decision- protected making process. Full and free discussion of all motions, reports, Assigning roles and responsibilities: and other items of business is a right of all Clarifying who is in charge. Specifying ground members rules. Defining the role of the facilitator/ In doing business, the simplest and most direct chairman. procedure should be used Facilitating group problem solving: Logical precedence governs introduction and Generating mutually advantageous proposals disposition of motions and confronting disagreement in a respectful way. Ensuring that a range of solutions Only one question can be considered at a time (including the ones no one thought of) are considered to address the concern of all Members may not make a motion or speak participants/members. in debate until they have risen and been recognized by the chair and thus have obtained Reaching agreement: Coming as close the floor as possible to meeting the most important interests of everyone concerned and No one may speak more than twice on the documenting how and why an agreement same question on the same day without was reached. permission of the assembly. No member may speak a second time on the same question if Holding people to their commitments: anyone who has not spoken on that question Having participants/members do what they wishes to do so are supposed to/agreed to do. Keeping participants/members in touch with each Members must not attack or question the other so that unexpected problems can be motives of other members. Customarily, all addressed together. remarks are addressed to the presiding officer In voting, members have the right to know at all times what motion is before the assembly and what affirmative and negative votes mean SOURCE: California State University, Chico. Available at: http://www.csuchico.edu/sac/studentOrganizations/ SOURCE: Lawrence Susskind and Jeffrey Cruikshank. Breaking parliamentaryProcedures.shtml. Robert’s Rules. Oxford University Press: New York, 2006. 34 VOLUME 2 What Should Be the Role of the Board? MODULE 1 The right information flow to the board provides item on the agenda before every board or committee relevant facts, identifies issues, and promotes discussion meeting. The board and management must agree on and the exchange of ideas. The lack of comprehensive what information is necessary, how the information is to information may result in disputes. be packaged, and what the timetable for receipt will be. But what does “comprehensive” information mean? Typically, boards need two kinds of information: Again, the board’s informational needs are different than those of management. Informing the board requires: Ongoing information. This type of information contributes to the board’s oversight and monitoring of Understanding the board’s role and then providing the the company and its business. It also provides proper information needed to perform that role adequately flow of information, the context for specific proposals that the board may consider. (See the Practice Box Compiling, organizing, and distributing information “Establishing the Proper Flow of Information.”) to the board in a timely fashion, particularly in sufficient time before meetings to ensure that board Each board will tailor its information packages to suit its members are well-prepared needs and communicate its needs to management. Providing information that is distilled and focused on Specific information for proposals and actions. This the most salient points and issues, and avoiding the information helps directors to understand and evaluate minutiae proposals for board action so that they can make knowledgeable decisions. Part of management’s job is to keep the board informed about both the company and the business and, second, Well-constructed information systems for boards create to provide background information for every action a healthy bond between board and management. They PRACTICE Establishing the Proper Flow of Information For information flows to work best, boards and management should: Agree on certain performance indicators that give management and the board a snapshot into how the business is doing and the outlook for the short, medium, and long terms Complete an Emergency Risk Management analysis after agreeing on which indicators should be used Determine frequency of reports with performance and risk indicators for board dissemination and their publication format Determine other informational materials (e.g., press releases or certain regulatory filings) that may be desirable for the board to receive regularly Choose a format that permits directors to have an “executive summary” of issues and significant facts, with indications in the executive summary as to where greater explanatory detail is provided Agree upon and adhere to a schedule for transmission of all information reports, with this schedule permitting sufficient time for directors to read, review, and consider information before board meetings MODULE 1 What Should Be the Role of the Board? VOLUME 2 35 establish the basic facts around which discussion and would be employed, and financial information so that debate can be formed. Relevant, credible information the board can understand the economic implications of helps the board understand and focus on key issues. It their decision. increases board efficiency and creates the basis for shared focus on the company’s long-range strategies. Facts by themselves, however, are only useful when they are incorporated into analysis. Analyses, in turn, Allowing for Discussion, Debate, and combine different perspectives and ideas to understand Deliberation and evaluate a situation. For example, when ideas are Boards often deal with complicated facts and situations. exchanged, the decision to proceed with the $10- They work by collecting information, and then debating million capital investment can involve such “ideas” as that information before making decisions in the best strategies, sustainability, and impacts on constituencies interests of the company and its shareholders. Construc- (e.g., employees). Ultimately, corporate directors’ tive inquiry, discussion, debate, and decision-making, jobs involve applying their best judgment to matters however, do not automatically happen; they require a involving the company. Ideas, coupled with facts, and conscious effort. analysis shape judgments. The duty to make informed decisions is part of each Deliberation and debate are integral processes for director’s fiduciary duty of care. Surfacing information stimulating the flow of ideas, analyzing information, typically refers to discovering facts that have a bearing and formulating judgment needed to make a decision. on the decision to be made. For example, a decision Deliberation and debate are valuable processes for a to invest $10 million in such capital assets as board; they deserve taking steps to encourage them. machinery would typically require an understanding of Mediation techniques — such as promoting discussion, management’s reasons for the capital asset, how the asset encouraging the exchange of ideas, and bringing GLOSSARY From Discovery to Dispute Discussion, debate, and disagreement are constructive activities for a board. Yet, if these disagreements harden into disputes, they will inevitably interfere with the board’s work and affect strategic decision-making. Discovery tends to emerge in conversation and discourse. Directors discover different ideas and perspectives for looking at the same problem. Discovery also involves learning about the ramifications of particular decisions or courses of action. Boards have a fiduciary duty to be informed before making decisions; the discovery process aids directors in performing that duty. Debate occurs after discovery. Debate is a healthy activity for boards, resulting from directors bringing different viewpoints to board deliberations. Debate is a defining characteristic of those boards in which directors think and act independently. Disagreement occurs when, following discussion and debate, opinions are formed, and some parties are less inclined to reach the same conclusions as others. Dispute occurs when disagreement has hardened. No consensus exists, and no resolution emerges. If not resolved, the dispute can devolve into serious rifts within the board, causing a paralysis. If the board cannot be clear in its directives to management, the company’s direction may suffer and the business may suffer. 36 VOLUME 2 What Should Be the Role of the Board? MODULE 1 appropriate information to bear on an issue — become PRACTICE very helpful in encouraging the exchange and discussion of views that nourish directors’ decision-making. Promoting Discussion, Debate, and Similarly, the free flow of ideas depends as much on Deliberation active listening to different views as it does in expressing them. Some impediments to being receptive to new The following practices can help promote discussion, debate, and deliberation in the ideas or to others spring from surprisingly mundane boardroom: circumstances. Reasons that people do not listen well, or focus on what others are saying, include: Establish director standards that require maximum possible attendance at board and committee meetings Inattention Create a board (and board committee) Failure to be prepared for meetings by ignoring calendar that establishes in advance meeting information delivered in advance dates, times, and places, and that schedules for management presentations, and board discussion of topics that all agree must be Distractions because of other concerns considered periodically Language barriers Ensure that each director can have matters put on the agenda for board and committee meetings Logistical issues, such as poor acoustics, meeting table sightlines, or uncomfortable meeting facilities Avoid defined times for discussion periods so that discussions aren’t arbitrarily cut short Health issues, such as hearing loss, effects of medica- tion, or other sensory impairments Include executive sessions with non- management directors as part of every Discomfort and crankiness resulting from hunger, board and committee meeting lack of caffeine, or other amenities that impact Use executive sessions as fora for discussion physical well-being and comfort of any matters that a director may wish to raise Many of these problems may seem basic or obvious. Some Establish clear protocols for discussion might even seem trivial. Can it be that something such sessions that ensure that all directors have as a cup of coffee or an afternoon snack — certainly not an opportunity to participate things one associates with business leaders — can make Include dissenting members’ views in board a difference in the quality of debate and discussion? The meeting minutes to show that all positions answer is yes. All of the things listed above can affect have been heard and that the board values the quality of discussion by interfering with the ability open discussions to focus, concentrate, listen, and speak clearly. When Ensure that the tone of discussion sessions the environment is comfortable and the tone encourages remains civil and collegial creative problem-solving, individuals will ask probing questions, challenge assumptions, and make suggestions Elect as board or committee chairmen that contribute to innovation and informed decision those individuals who are skilled at leading meetings and encouraging discussion making. Sometimes impediments to discussion involve structural and organizational issues. For example, when meetings MODULE 1 What Should Be the Role of the Board? VOLUME 2 37 have a defined beginning and ending time, debate board directors are subject to the same human frailties may be cut short so that the meeting can end on time. and foibles as other people. Often, the impediments to Applying “best practices” for board organization helps expressing ideas may be personal inhibitions, such as: guarantee times and venues for board discussion and deliberations. Discomfort in appearing to be the sole objector Consulting with directors in preparation for meetings Concerns about the appearance of being non-collegial, will ensure that they are more willing to engage in open or of not being a team player debate and listen to each other’s perspectives. Discomfort in challenging the CEO or another Other impediments to debate and discussion can exist dominant personality on the board even with excellent board organization. Even though they may be successful, prominent, and distinguished people, Avoiding issues that have emotional sensitivity PRACTICE Improving Communications among Directors Through Informal Settings Ensure that opportunities exist for directors to know one another in comfortable surroundings. Arrange a dinner for all directors before each board meeting. Consider assigning places for each director to sit at dinners, and change the seating arrangement to ensure that each director has an opportunity to sit next to — and therefore to talk with — each director over a year. Schedule a board retreat at a location outside the company’s offices, perhaps in a resort or other setting that encourages relaxed conversation. Make sure that the retreat includes such opportunities as lunches, dinners, and cocktail hours to permit informal conversation. The non-executive chairman, or if the chairman is a member of management, the lead director, should meet over a meal at least once annually with each director individually to hear the director’s views about the company and board and to allow issues about which there is tension or irritation to surface. The CEO should also meet over a meal at least once annually with each director to hear thoughts and ideas that the director has about the company, management, and the CEO’s performance. Through Formal Settings Directors and management should determine information flow about the company, (its businesses, performance, and risk), and materials for board action. Each board and committee meeting should include an executive session among non-management directors to raise any issues of concern or interest. The non-executive chairman or lead director should communicate privately to the CEO the results of any executive sessions or meetings at which the CEO was not present. 38 VOLUME 2 What Should Be the Role of the Board? MODULE 1 Fear of appearing ignorant or uninformed techniques adroitly into their structure, doing so in a manner that facilitates constructive operation and does Peer pressure not impede the board’s work. “Groupthink,” a phenomenon in which people focus FOR A REVIEW OF BASIC ALTERNATIVE DISPUTE more on conforming their views to what they believe RESOLUTION PROCESSES, SEE VOLUME 1 is the group’s consensus view rather than promoting MODULE 3. debate on the problems or issues that must be confronted Formal ADR processes cannot be directly applied in the boardroom. These processes would disrupt the A director, who for any reason feels inhibited about board’s ongoing work and run a significant risk of expressing himself or herself, will become frustrated and positions hardening, with potential embarrassment his or her input into the decision process may be lost. and lingering resentments as a legacy. Yet techniques Frustration easily festers and becomes anger, creating borrowed from mediation and constructive negotiation dissonance among directors. Unresolved dissonance can can provide management tools that can reduce the risk easily lead to dysfunction. that disagreements will evolve into disputes. Improving Communications One major cause of dispute is a failure to communicate FOCUS effectively. Boards should take affirmative steps to improve communications among directors and between the board and the CEO. Some of these steps are basic. Dispute Resolution Techniques for the They involve making the effort to put people in contact Boardroom with one another and provide an atmosphere that The dispute resolution techniques that best encourages open discussion. lend themselves to a board’s culture and the environment in which directors meet, deliberate, The communications process is vital. It serves the debate, and take action include the following: purposes of raising issues, promoting discussion, and Identifying interests, not positions both identifying and focusing on long-term interests. Good communications form a basis for building trust. Uncovering factual information relevant to the problem People who trust one another are more apt to work collaboratively and flexibly, both of which are also Surfacing a dispute’s emotional issues that ADR techniques. have not necessarily been brought into the open Some people communicate well in a group; others Using procedures that encourage collaboration require private settings and one-on-one conversation. and emphasize flexibility Some communications occur in formal settings, while Promoting discussion and encouraging the other communications occur in casual, social, or quasi- free flow of ideas social situations. Facilitating the parties’ construction of their own solutions to the problem, rather than TO REVIEW IMPLICATIONS OF EMAIL COMMUNICATIONS FOR NEGOTIATION, SEE having solutions imposed on them VOLUME 2 ANNEX 3. Using a third-party, either someone on the board or a neutral outsider, when appropriate, Applying Dispute Resolution Techniques to facilitate and broker the communications Recognizing that disagreement is inevitable, boards process and facilitate a resolution must understand how to incorporate dispute resolution MODULE 1 What Should Be the Role of the Board? VOLUME 2 39 PRACTICE Techniques for Defusing Disputes in Boardrooms Practical dispute resolution communications techniques — borrowed from processes such as mediation and constructive negotiation — can help boards prevent disputes and resolve disagreements. To build trust, cooperation, and consensus, directors should practice the following: Listen actively — Listen closely as people communicate, and demonstrate your genuine interest by asking questions, summarizing key points, and linking relevant ideas and experiences Use open questions — Ask questions that require more than “Yes” or “No” answers. Open-ended questions encourage speakers to reveal their concerns and interests. Such questions usually begin with words like: Who..? Why…? What…? How…? When…? Where…? Clarify reasons — Encourage cooperation by clarifying shared goals and confirming objectives. Do this early in meeting discussions Be aware of body language — Show your interest and desire to communicate through friendly, open, and attentive facial expressions and posture. Notice others’ body language Speak on behalf of yourself — Use “I” statements, so that listeners understand that you are not making universal statements but only expressing your opinions, sharing personal observations, and offering alternatives. Others may have different experiences, perceptions, and ideas. Phrases that demonstrate respect for differences include: “I noticed…”, “I suggest…”, or “From my experience…” Focus on constructive ideas — Contribute and encourage constructive alternatives. Recognize others’ positive ideas through constructive feedback, and explain why their proposals are useful. If more helpful contributions are needed, be specific in your requests. Ask for practical suggestions to improve specific situations Stay calm — Stay calm as you work professionally and diplomatically to defuse tension. At times, others will discount the value of your ideas, no matter how carefully you phrase your thoughts. People become defensive for many reasons, including circumstances beyond your control. In such cases, acknowledge and respect different views. You have offered your perspective based upon your experiences. Offer to meet at another time, when emotions have cooled, to continue the discussion Avoid misunderstanding — Paraphrase other board members’ statements to ensure proper understanding of their position. Allow them to acknowledge that your summary of their remarks is correct Allow others to “save face” — Help others “save face” by reformulating their statements in less confrontational terms to unlock disputes. “Saving face” is especially important in some cultures, but generally speaking, no one likes to be publicly embarrassed — especially in the boardroom. To “save face,” directors may take a defensive position although they actually don’t oppose a decision 40 VOLUME 2 What Should Be the Role of the Board? MODULE 1 Not all of these techniques are necessarily suited to or Certain regulatory restrictions may apply on when employed in resolving disagreements or disputes. and how executive sessions can be set up. Despite a certain awkwardness and even resistance that may Dispute resolution techniques borrowed from negotiation occur when senior executives, including the CEO, are and mediation can help create the desired collegial asked to leave the room, the following are discussions environment — to encourage discussion, debate, and that can typically be held solely among directors: the free flow of ideas — but they can also help develop an orderly process for decision-making and consensus Annual meeting with the auditor formation on specific issues with which the board has to contend. This, in turn, improves the board’s all-around Evaluation of the executive director, and establishing performance. the executive director’s salary Stepping Out of the Boardroom Conflicts between two board members or serious Even with a good board culture and effective board criticism of one board member by another processes, disagreement sometimes gives rise to disputes, and consensus remains at best elusive. When it becomes Investigation into concerns about the executive clear that disagreement will harden into a dispute, or director, or report from a management consultant when a dispute materializes, the board may decide to take steps openly to build consensus and resolve the Review remuneration policies disagreement immediately. Some organizations establish a type of “semi-executive FOR A REVIEW OF TYPICAL DISPUTES THAT MAY session” during which the executive director is present, ARISE IN THE BOARDROOM, SEE VOLUME 1 but no other corporate staff members. Such sessions MODULE 1. may include discussions related to: The processes to handle disagreement or dispute that Lawsuits, complaints, or grievances may work best for the board are board executive sessions, board assessment or evaluation meetings, and board Individual senior executives retreats. These provide excellent platforms for identifying interests, surfacing issues, promoting discussion, and Evaluation of the executive director with the facilitating collaborative decision-making. Even though executive director these processes de facto can be assimilated into ADR processes, they are palatable to directors because they are An effective way to avoid the feeling that “an executive perceived as normal, constructive board activities that session means bad news” is for board chairmen to facilitate the ongoing business of the board. In many routinely put executive sessions on every agenda, or companies, these processes have become staple practice on four agendas per year. That way, the board can and thus fit neatly into the board calendar of activities. meet privately without having to raise tension simply Although the board’s annual calendar should indeed by calling an executive session. include each of these processes, they should nevertheless provide sufficient flexibility, so that the matters to be The meeting’s minutes should indicate that the board discussed or investigated are not necessarily rigidly met in executive session, and report on the discussion controlled in advance: topic, although the specifics may be confidential and appear only in a set of confidential-to-the-board Executive Sessions. An executive session is a meeting minutes. Furthermore, a director attending the (or part of a meeting) of the board without the executive session should be designated to communicate presence of senior executives or other staff members.2 to the CEO the results of the executive session. MODULE 1 What Should Be the Role of the Board? VOLUME 2 41 Board Assessments. There is no magic formula for be assured that their responses cannot be attributed a board (and board committee) assessment, but the back to them and that they will not be personally objective is to elicit from each board member her embarrassed by what anyone else in the group may or his candid views about how the board operates say about them. Interviews should involve a protocol and its effectiveness as a group. Assessments are not for issues that should, at a minimum, be addressed. evaluation scorecards or grading sheets. Instead, they However, respondents must also have the opportunity are a means of raising underlying issues and testing to raise or expound upon any issues they choose. whether the board is in concert on key matters or whether directors have different perceptions and Whether a survey or the interview technique is used, views of these important issues. They can identify for it to be effective, it must be followed by both a areas in which the members of the board agree, and report to the full board and a forum to discuss issues those where disagreements or misunderstandings raised and resolve disputed matters that have been are prominent. Typically, the assessment involves a identified. The written report must be true to the written survey or confidential interviews of each board promise that no remark or issue can be attributed to its member. The key to a successful survey is to create an source. Similarly, a good practice is that, if something environment in which respondents will be candid. To is revealed that could be personally embarrassing, create this environment, respondents must trust that only the person who is the object of such a comment they will never be identified by name to anyone else should be shown the comment. on the board or in management. Some boards view board assessments as yet another PROBLEM SOLVING AND exercise imposed by the stock exchange or other STRATEGIC PLANNING RETREATS regulatory agency. If viewed as a necessary evil, assessments will not serve their purpose. A constructive board assessment should help the board evaluate and Envisioning a improve its effectiveness. Future State The potential pitfall in using a survey is that the questions asked may not address the issues the directors Strengths and are concerned about and the questions may be worded Evaluation Gaps Analysis in ways that suggest answers. Therefore, in addition to careful construction of the questionnaire, the survey must provide ample opportunity for directors to identify matters not included in the formal questions, and to amplify answers on questions. Operational Strategy Implementation Formulation TO REVIEW SAMPLE BOARD ASSESSMENT TOOLS AND QUESTIONNAIRES, SEE VOLUME 2 ANNEX 4-6. Dealing with individual behaviors can be difficult for Retreats provide regular venues for problem solving and strategic planning. The board’s strategic planning many board members. People are often uncomfortable process typically includes five phases. complaining about their peers. No one wants to SOURCE: Adapted from Global Corporate Governance Forum, 2008. embarrass a colleague by seeming to speak ill of Corporate Governance Board Leadership Training Resources“ Part 3 Module 1. Strategic Leadership.” IFC: Washington, D.C.. 2008. him or her in front of the rest of the group. When interviews are used, respondents must, therefore, 42 VOLUME 2 What Should Be the Role of the Board? MODULE 1 Board assessments are not self-executing. They are Skillfully handled, the facilitator can identify, with the one-half of a process seeking to build consensus and full group’s affirmation, issues in dispute and issues that resolve disputes. Once the assessment surfaces and have been resolved. This process permits a collaborative identifies issues of concern, the retreat becomes a venue resolution to matters in dispute. The debate and for group discussion of the assessment results and discussion are public. As points are resolved, the formulation of action plans by which disagreement facilitator can openly ask the group for its affirmation, and disputes can be resolved. with a written record memorializing the consensus derived. Board retreats. This session’s purpose is to focus on matters such as strategy in a setting that does not have the time pressures or other distractions involved in regular board meetings and their typically lengthy agendas. Generally, participants identify common concerns early in the process. With a clear focus on the corporate vision and mission, they analyze options, prioritize interests, and formulate strategies. The outcomes include agreements on future priorities and increased focus within the board. Some boards prefer to have the chairman, a trusted member of management, or a service provider, such as the board’s law firm, conduct the assessment. The problem with these approaches, of course, is that the facilitator’s preferences are known to members of the board, discouraging innovation and candor. To help make board assessments and retreats more effective, the board can decide to call on an external expert or facilitator. This neutral or impartial third- party provides objectivity to the process, giving all participants assurances that the proceedings are not skewed against one position or another. If one or two strong personalities, for example, are allowed to dominate on the board, a good facilitator may ensure that dissenting opinions are at least fully heard during assessments and retreats. Endnotes 1 Mannix, E. and M. A. Neale (2005). “What Differences Make a Difference?” Psychological Science in the Public Interest 6(2). 2 Definition adapted from Board Café, “Should the Board Hold Executive Sessions.” Compass Point Non Profit Services: 2009. Available at: http://www.compasspoint.org/ boardcafe/details.php?id=88. MODULE 1 What Should Be the Role of the Board? VOLUME 2 43 44 VOLUME 2 What Should Be the Role of the Board? MODULE 1 VOLUME 2 : IMPLEMENTATION MODULE 2 : How to Mainstream Corporate Governance Dispute Resolution? 2.2 Efforts to efficiently and effectively resolve corporate governance disputes outside the courtrooms must operate within complex, overlapping frameworks that are local, national and international in scope. These include ADR and corporate governance laws, regulations, and best practice codes or guidelines, company-specific rules and policies, as well as social, economic, and cultural norms. Building the appropriate framework for mainstreaming the use of ADR for corporate governance disputes requires leadership, vision, and commitment from policymakers, legislators, and business leaders. Support from both the judiciary and the legal profession is also key. THIS MODULE REVIEWS The importance of building a comprehensive corporate governance dispute resolution framework to mainstream the use of ADR processes and techniques to prevent and resolve corporate governance disputes The components of a comprehensive corporate governance ADR framework The role of policymakers in supporting the implementation of an effective corporate governance dispute resolution framework to raise awareness among companies, investors, and other stakeholders on the benefits of effective corporate governance dispute resolution MODULE 2 HOW TO MAINSTREAM CORPORATE GOVERNANCE DISPUTE RESOLUTION? REVIEWING THE CORPORATE caseloads. Given this environment, ADR approaches are GOVERNANCE DISPUTE RESOLUTION far more efficient opportunities for settling corporate ENVIRONMENT governance issues. Disputants assume greater ownership over how the dispute is considered and settled since they Corporate governance disputes can be resolved more actively drive the process; this contributes to the efficacy quickly through ADR at less cost than by using and efficiency of ADR. Arbitration and mediation traditional court litigation. It may take several years outcomes can be a “win” for both sides. Disputants before a complaint is placed on a court register, or may stand a greater chance of continuing their business “docket,” and even more time before the case is relations with one another after the ADR process is considered and resolved. Courts may lack expertise in completed because the conflict’s intensity tends to be corporate governance or be overwhelmed with their less adversarial than that in court cases. An assessment by the World Bank’s 2010 Doing Business EXAMPLE in Colombia, Mexico, and Brazil found: “Arbitration is robust in each of the three countries. Indeed, it not only provides a superior alternative to the poorly rated Corporate Governance Dispute court systems, but it may provide superior alternatives to Resolution Through Arbitration courts in general, even in the more advanced economies, Russia: Yukos for reasons of expertise and availability of the decision- Shareholders in Yukos, the bankrupt Russian maker, and privacy in private commercial matters.”1 oil company, demanded in February 2010 $100 The assessment continues to state that “strong signs billion in compensation, the largest legal claim for Colombian dispute resolution in terms of investor ever. To handle the case, the investors chose a protection, corporate governance, and bankruptcy private panel of three arbitrators at The Hague. Their use underscores the rise worldwide in using procedures should not be discounted because of the ADR approaches to resolve commercial disputes. weak local court system for enforcing contracts.”2 “Arbitration is going to get even more Courts, regulators, and stock exchanges are exploring, important,” said Philip Croall at the UK law firm Freshfields Bruckhaus Deringer. “The reasons for implementing, and refining ADR procedures and rules this are essentially practical and pragmatic: while requiring disputants to consider arbitration or mediation not being as procedurally formal and complex before initiating court proceedings. a process as court-based litigation, it offers the best — and in many cases only — means of As a result, ADR processes are becoming more common effectively and reliably resolving these cases.” and more formal, with the outcomes more predictable. COMMENT The business case is strengthening as the scope of ADR Cross-border disputants are turning to arbitration precesses extends beyond commercial disputes to include for complex cases that involve multiple jurisdictions matters involving shareholders. and national laws. SOURCE: Michael Peel and Jane Croft, “Case Closed.” Financial Times, April 15, 2010. Available at: http://www.ft.com. This TO REVIEW THE BENEFITS OF ALTERNATIVE abstract from the Financial Times was produced by the toolkit DISPUTE RESOLUTION PROCESSES AND authors. TECHNIQUES, SEE VOLUME 1 MODULE 3. MODULE 2 How to Mainstream Corporate Governance Dispute Resolution? VOLUME 2 45 As a result, corporate governance ADR expertise is growing all stakeholders with the requisite level of incentives, in tandem with the rise in demand as more organizations understanding, and comfort to both adopt corporate provide an increasingly diverse range of ADR services. governance dispute resolution policies and seek third- party ADR expertise when appropriate. TO REVIEW CORPORATE GOVERNANCE DISPUTE RESOLUTION SERVICES AND PROVIDERS, SEE Implementing a comprehensive corporate governance VOLUME 2 MODULE 3. ADR framework may be cumbersome and involve: The legislator enacting laws facilitating the use of Yet, to mainstream the use of more effective out-of- ADR processes — especially mediation court dispute resolution for corporate governance disputes, the appropriate legal, regulatory, and policy The judiciary supporting the use of ADR — especially frameworks must be adopted and operating to provide through court-annexed mediation FOCUS Success Factors in Implementing an Effective ADR Framework Existing laws and regulations: Creating a legal environment for resolving commercial disputes. Does the country comply with international standards and protocols? Practice of dispute resolution in civil cases: Functioning of (commercial) courts and other legal institutions and professional associations (e.g., bailiffs, attorneys); number of procedures needed for contract enforcement; time needed for enforcement; court fees and legal fees; access to justice; geographical access to the courts; corruption; other strengths and weaknesses; etc. Culture of dispute resolution: Litigiousness; social acceptance of the settlement; rate of settlement within and outside the courts; trust in the judiciary; perceived and real corruption; approach to legal and judicial reform; economic and social background; legal and cultural background; etc. ADR experience: Existence of traditional or modern alternative methods; successful and unsuccessful attempts at introducing ADR; public awareness of ADR and particularly mediation; former ADR trainings; the pool of trained and trainable mediators; etc. Perceived need: Broad-based support for introducing mediation and identifying the areas where this process would be particularly helpful. When do the parties give up on court proceedings and why? What disputes are perceived appropriate for mediation? Is the country obliged/pressured to modify its system (by international organizations, neighboring countries, etc.)? Key stakeholders and political support: Key groups and individuals holding stakes in ADR and their declared and potential support for the project. These may include: the judiciary, ministry of justice, small and medium enterprises (SMEs), bar associations, and business organizations. What are their strengths? Weaknesses? Successes? Key opponents? Areas requiring capacity-building? NGOs and international organizations interested or involved in ADR: Past, present, and future projects with an ADR component. Areas of common interests, possible financial contributions or projects involving economies of scale (e.g., mediation trainings). Sustainable financing: Available sources; restrictions and goals of donors; the project’s financial needs; etc. The project’s duration is not likely to be shorter than three years. SOURCE: Lukasz Rozdeiczer and Alejandro Alvarez de la Campa, Alternative Dispute Resolution Manual: Implementing Commercial Mediation. Washington, D.C.: IFC, December 2006. Available at: http://rru.worldbank.org/Documents/Toolkits/adr/adr_fulltoolkit.pdf. 46 VOLUME 2 How to Mainstream Corporate Governance Dispute Resolution? MODULE 2 Regulatory bodies fostering and implementing Some countries have taken a multi-pronged approach corporate governance dispute resolution through in developing a comprehensive corporate governance regulations and listing rules ADR framework. Brazil, for example, is working on multiple levels to use ADR to address corporate Policy-makers and corporate governance institutions governance disputes. advocating effective corporate governance dispute resolution through best practice codes, guidelines, To assess the existing corporate governance dispute and awareness-raising events and workshops resolution environment, consider the specific problems EXAMPLE Corporate Governance Dispute Resolution Frameworks Brazil: A Comprehensive Multi-Level Approach Arbitration Law. Arbitration was institutionalized in 1996 (law number 9.307 of September 23, 1996). This arbitration law is based on: The 1958 New York Convention on the Recognition and Execution of Foreign Arbitral Awards (ratified in 2001) The 1976 Inter-American Convention on International Commercial Arbitration (ratified in 1985) The 1985 UNICTRAL “standard law” on commercial arbitration Market Arbitration Panel. On July 27, 2001, the Sao Paulo Stock Exchange (BM&FBOVESPA) instituted the Market Arbitration Panel, aiming to offer an appropriate forum for the resolution of listing and corporate governance disputes that may arise in the two, upper-listing segments Novo Mercado and Level 2 of corporate governance. Mandatory Adhesion to the Market Arbitration Panel Rules. Companies listed on the Novo Mercado and Level 2 corporate governance segment, as well as their controlling shareholders and directors, are required to adhere to the Market Arbitration Panel Rules. Mediation Law. There is a Mediation Bill (PLC 4827/1998, dated 12/07/2006) pending congressional approval (as of November 2010). The bill’s intent is to unclog the Brazilian judicial system, renowned for being bureaucratic, costly, and slow. The new law would require mediation to be compulsory in most cases. There will be a 180-day period for the parties to reach an agreement. If agreement is not reached, normal legal and court processes will follow. Prior to this law, a corporate governance matter may come to trial in Brazil any time between a few months or several years. Corporate Governance Code. The Brazilian Code of Best Practices issued by the Brazilian Institute of Corporate Governance (IBGC) has introduced a provision on arbitration and mediation in its fourth updated version published in 2010. Corporate Governance Dispute Resolution Training. IBGC has introduced in 2010 a module on corporate governance dispute resolution in its standard corporate governance training curriculum for directors. COMMENT Brazil’s framework demonstrates the comprehensive approach needed to incorporate national ADR policies and statutes into international codes while developing capacity through a corporate governance institute, IBGC, to have competent professionals for third-party roles in ADR forums. MODULE 2 How to Mainstream Corporate Governance Dispute Resolution? VOLUME 2 47 with the resolution of corporate governance disputes QUOTE within the country and the ADR-enabling environment. This review should evaluate: Traditional Mediation and Arbitration in International standards and agreements Ghana Existing laws, regulations, and court proceedings “Most Ghanaians know that ‘mediation’ as a portal for dispute resolution is our creation. And Current practices for corporate governance dispute so is arbitration. resolution “These ideas of ADR are not new to our traditional judicial system. They are central, not Culture of dispute resolution alternative to our own juridical paradigm. It would seem, therefore, that the full recognition ADR experiences and precedents and acceptance of some of the finer aspects of our own home-grown principles of dispute resolution, should make attempts to expand Perceived need to introduce mediation the reach of those concepts to modern court structures an easy process.” Key stakeholders and political support DENNIS ADJEI-BRENYAH COLUMNIST, GHANA WEB NGOs and international organizations interested in ADR SOURCE: Dennis Adjei-Brenyah, “Some Reflections on Ghana’s Search for Alternative Dispute Resolution.” March 2, 2010. Available at: http://www.ghanaweb.com/GhanaHomePage/ NewsArchive/artikel.php?ID=177621. In reviewing a country’s existing corporate governance dispute resolution environment, some key questions should be considered, particularly those identifying the possible “drivers” for introducing and utilizing ADR: QUOTE Considering Dispute Resolution Traditions A country’s exposure to traditional mediation may impact the development of an effective corporate ADR Practices in Indonesia governance dispute resolution environment. In several “As it happens in other Asian countries, Indonesia developing countries, ADR has deep roots as a means by has been practicing ADR in traditional communities which societies resolved conflicts long before centralized for a long time. In the traditional community governments established formal judicial systems. Pasemah, South Sumatera for example, customary Disputes were typically settled by elders as conciliators/ dispute resolution uses Jurai Tue or Sungut Jurai as the third-party conciliator. In West Sumatera, mediators internally within the local community. In that person is known as Kerapatan Adat Nagari this environment, an informal style of mediation was or Kerapatan Ninik Mamak and functions to settle accepted. disputes based on their customary rules.” MAS ACHMAD SANTOSA In Indonesia, for example, third-party conciliators were VICE SECRETARY GENERAL AND MEMBER INDONESIA used throughout the archipelago to resolve disputes. NATIONAL STANDING COMMITTEE OF ASEAN LAW In Ghana, village chiefs used mediation to handle ASSOCIATION SENIOR LECTURER OF ADR commercial and social disputes. India embraced lok UNIVERSITY OF INDONESIA LAW FACULTY adalat, village-level people’s courts, in the 1980s. Trained SOURCE: “Development of Alternative Dispute Resolution mediators sought to resolve common problems that, in an (ADR) in Indonesia.” December 1, 2003. Available at: http:// earlier period, may have gone to the panchayat, a council www.aseanlawassociation.org/docs/w4_indo.pdf. of village or caste elders. In Latin America, there has been 48 VOLUME 2 How to Mainstream Corporate Governance Dispute Resolution? MODULE 2 a revival of interest in the juece de paz, a legal officer with Assessing the Dispute Resolution Legal the power to conciliate or mediate small claims.3 Environment Approaches in introducing or strengthening a corporate Having an embedded culture of resolving disputes governance dispute resolution framework may vary through mediation, a well-established ADR framework from country to country. In general, surveys show that or a longstanding tradition of resorting to ADR pro- utilization of ADR approaches is growing more rapidly in cesses such as Switzerland — these are without doubt common law (e.g., the United States, Australia, Canada, important assets for effectively introducing out-of-court and England) than in civil law countries (e.g., France, corporate governance dispute resolution practices. (See Germany, Austria, Denmark, Belgium, Germany, “Switzerland: Effective Mediation and Arbitration.”) Switzerland, and Yugoslavia).4 EXAMPLE ADR Traditions Switzerland: Mediation-Arbitration Practice Mediation success rates typically exceed 70 percent and may exceed 80 percent. Arbitration clauses increasingly require mediation to be conducted as a preliminary step before arbitration. “Med-arb” clauses (which provide that the mediation process will give way to arbitration should the parties fail to agree) are increasingly common and will probably become generalized. Switzerland’s tradition of med-arb cases is reflected in its statutes, court decisions, and practice. The established nature of the practice is demonstrated by the relatively large number of arbitrators and counsel who have dual skills as a result of the tradition of conciliation or mediation in court cases. One example that has influenced Swiss lawyers is the highly successful report hearing, in which the Zurich Commercial Court expresses a preliminary view after a first set of submissions so that the parties, guided by this view, can decide to settle the case out of court (if the view appears sound) or to pursue a court trial (if it appears likely that the court’s preliminary view might be changed by the submission of more information). As to statute, the draft federal Act on Civil Procedure contains provisions on mediation. This federal act will replace cantonal codes of civil procedure, which already provide mandatory conciliation proceedings before a case may be brought to court. The main Swiss chambers of commerce have issued a common set of mediation rules, which can be combined with their arbitration rules.1 COMMENT Some countries have a long-standing tradition of resorting to ADR reflected in their laws, court decisions, and practices. This environment can facilitate the use of ADR processes for corporate governance disputes. On the question of enforcing med-arb clauses, there seems to be little doubt that the court will enforce med-arb clauses strictly as agreed. Generally, when faced with agreed pre-arbitration time limits or conditions, the course has enforced them strictly according to the parties’ intent. Therefore, the onus is on those drafting arbitration clauses: if they wish to include mandatory mediation before arbitration, they should state this clearly. Providing a time limit for mediation before arbitration begins is helpful in this regard. 1 The mediation and arbitration rules can be found at: https://www.sccam.org/sm/en/index.php and http://www.swissarbitration.ch/ respectively. SOURCE: Pierre-Yves Tschanz, “Arbitration: Switzerland. A Suitable Forum for Med-Arb.” December 13, 2007. International Law Office. MODULE 2 How to Mainstream Corporate Governance Dispute Resolution? VOLUME 2 49 GLOSSARY Common Law Body of law based on custom and general principles and that, embodied in case law, serves as precedent or is applied to situations not covered by statute. Under the common law system, when a court decides and reports its decision concerning a particular case, the case becomes part of the body of law and can be used in later cases involving similar matters. This use of precedents is known as stare decisis. Civil Law Body of law developed from Roman law. The basis of law in civil law jurisdictions is statute, not custom; civil law is thus to be distinguished from common law. In civil law, judges apply principles embodied in statutes, or law codes, rather than turning to case precedent. SOURCE: Brittanica Concise Encyclopedia FOCUS International Agreements on ADR and Arbitration AGREEMENT ACTION ACTION New York Convention Enables enforcement of arbitral 142 nations (Convention on the awards in any member-state Recognition and Enforcement of Foreign Arbitral Awards) Washington Convention Enables enforcement of arbitral 155 nations (International Centre for awards in any member-state Settlement of Investment Provides a forum for conciliation Disputes) and arbitration of disputes Establishes rules of procedure United Nations Commission Establishes rules of procedure 60 nations on International Trade Law Produced a model law on international commercial arbitration for countries seeking to adopt internationally understood arbitration laws SOURCE: Modified from chart in U.S. Department of Commerce, Alternative Dispute Resolution Services in West Africa: A Guide for Investors. Washington, D.C.: Government Printing Office, 2003. Available at: http://www.fdi.net/documents/WorldBank/databases/benin/ westafricaguide7212003.pdf. Texts of agreements available at: www.uncitral.org. 50 VOLUME 2 How to Mainstream Corporate Governance Dispute Resolution? MODULE 2 In many circumstances under a common law system, up Some countries have mandatory mediation for to 90 percent of all civil litigation cases are settled before disputants. Canada, Australia, and Singapore are three they go to trial. This would indicate that settlement by examples. The rationale is that “citizens of all countries mediation is not a step too far away from the existing will accept regulations if they believe as a result of that system and, as such, is easier to establish. For example, regulation, ‘Society’ will be better off.”6 However, any Canada undertook a two-year trial to assess the value of ADR legislation must fit with the broader business compulsory ADR. That study concluded that stakeholders environment. Australia introduced ADR into the New reaped considerable benefits in using ADR and that South Wales courts systems under legislation that “courts need not fear adverse effects of compulsory had a three-year “sunset” clause, which provided an mediation, [that] it may benefit the stakeholder in the opportunity to determine ADR’s worth. litigation system.”5 I n more and more countries, explicit legal EXAMPLE policy encourages parties to negotiate or mediate their differences with considerable International comment for a senior UK effect, as this recentStandardsfromMediation lawyer illustrates: European Union: Mediation Directive 2008/52/EC QUOTE BOX STARTSare: The key components The Directive obliges Member-States Mainstreaming Mediation Practices to encourage the training of mediators and the development of, and adherence to, voluntary codes of conduct and other effective quality control mechanisms concerning “At first mediation was viewed with some skepticism — the provision of mediation services. particularly from clients who could not see how it would The Directive gives every Judge in the failed. Now succeed where traditional negotiations had Community, at any stage of the proceedings, the right to suggest that the parties attend an information meeting on mediation and, if the Judge deems it appropriate, to invite the parties to have recourse to mediation. The Directive enables parties to give an agreement concluded following mediation, a status similar to that of a Court judgment by rendering it enforceable. This can be achieved, for example, by way of judicial approval or notarial certification, thereby allowing such agreements to be enforceable in the Member-States under existing Community rules. The Directive ensures that mediation takes place in an atmosphere of confidentiality and that information given or submissions made by any party during mediation cannot be used against that party in subsequent judicial proceedings if the mediation fails. This provision is essential to give parties confidence in, and to encourage them to make use of, mediation. To this end, the Directive provides that the mediator cannot be compelled to give evidence about what took place during mediation in subsequent judicial proceedings between the parties. The provision of the Directive on periods of limitation and prescription will ensure that parties that have recourse to mediation will not be prevented from going to court as a result of the time spent on mediation. The Directive thus preserves the parties’ access to justice should mediation not succeed. COMMENT This Directive is an important step forward in mainstreaming ADR approaches — especially mediation — in the European Union. Policymakers will need to do more than just ensure the directive is properly translated into national laws and regulations; they must also raise awareness about ADR’s benefits for effective implementation. SOURCE: European Union Directive on Mediation. April 23, 2008. Available at: http://europa.eu/rapid/pressReleasesAction.do?reference=MEM O/08/263&format=HTML&aged=0&language=EN&guiLanguage=en. MODULE 2 How to Mainstream Corporate Governance Dispute Resolution? VOLUME 2 51 In either event, it can be very useful to have a clear perception of ways in which ADR may be introduced. In some jurisdictions, the introduction of ADR requires legislation; in others, a best practice code or exchange listing rules may be the introductory vehicles. Looking up International ADR Standards and Agreements The enabling environment for the use and practice of ADR and the enforcement of arbitral awards is structured, in part, by international agreements, which include both multilateral and bilateral accords focused primarily on commercial disputes. These set out rules, establish forums, and may bind signatories to modify their national laws and regulations to align with the agreement’s provisions. (See “International Agreements on ADR and Arbitration.”) In Europe, the use of ADR has been embraced in 2008 through a directive 7 designed to encourage the use of voluntary mediation as a cost-effective and more expeditious alternative to civil litigation in cross-border civil or commercial disputes. Modeled on different elements of several national legal structures, this directive applies to all EU member-states, with the intention of making it unnecessary for a corporation with a presence or a dispute in more than one EU country to try to harmonize the different procedures itself. 52 VOLUME 2 How to Mainstream Corporate Governance Dispute Resolution? MODULE 2 STRENGTHENING THE CORPORATE For effective development and implementation of ADR GOVERNANCE DISPUTE RESOLUTION in corporate governance, every element of the policy FRAMEWORK framework is needed. The corporate governance dispute resolution framework Introducing Laws and Regulations can be strengthened at various levels, including ADR In introducing a change to current practices, all parties and corporate governance laws, regulations, and best will have to be convinced of the arguments and incentives practice standards. In a well-designed framework, each for supporting ADR. This is especially difficult if ADR element supports and aligns with the others. has not been mandated by law and relies on voluntary adoption. Laws are not essential or technically required Legislation provides the underlying basis for constructive to practice ADR and mediation, but the benefits of interpretations of ADR results when courts review cases. introducing a mediation law are two-fold: Administrative rulemaking fleshes out the invariably ambiguous terms, which later may be added to a new Provides users and practitioners with a greater level of statute. Directives by supranational bodies provide some comfort in resorting to mediation impetus for national legislative action, but also help to ensure consistency in ADR implementation. Best Establishes a commonly agreed definition of mediation practice codes apply the expertise of directors, business and other ADR processes managers, lawyers, mediators, negotiators, arbitrators, and other professionals who may be less influential in ADR terms and processes suffer some ambiguity as a enacting statutes. Guidelines and policy institutions can result of the huge variety of circumstances under which provide examples and assurances to “early adopters.” they can be practiced. Specific statutory language They also may provide the essential structure and defining precisely what is meant by a term such as “home” for services to support ADR. “mediation” and its particular purpose and jurisdiction can later avoid confusion. TO REVIEW REFERENCES TO SAMPLE CORPORATE GOVERNANCE MEDIATION LAWS FROM AROUND THE WORLD, DISPUTE RESOLUTION FRAMEWORK SEE VOLUME 2 ANNEX 7. If ADR or mediation is already in a country’s laws and STANDARDS & A NAL GR is used for commercial dispute resolution, then ADR TIO EEM NA EN TER TS mechanisms for corporate governance may be introduced IN REGULATIO LAWS & NS as part of this broader legal framework. INGS & LISTING RUL RE IVE QU For example, Australia’s government mandates compul- AT IR TR sory ADR for some laws. By 1998, ADR, principally IS EM T PRACTICE GU IN BES EN ID M & EL ES mediation, was provided through 28 different acts or AD TS I D NE CO AL ADV TION regulations, including the Corporations Act (2001) S OC ITU A ST and the Financial Services Act (2001). Laws require CY IN TE POL ORA IC disclosures of internal and external dispute resolution RP IE CO S procedures. In July 2000, the courts were granted the power to refer matters to mediation, notwithstanding the lack of a party’s consent. Such compulsory provisions exist alongside mechanisms for voluntary mediation. MODULE 2 How to Mainstream Corporate Governance Dispute Resolution? VOLUME 2 53 ADR and mediation mechanisms may be slowly appropriations legislation, may be the best opportunity embedded into a legal system. For example, in Delaware, to advance ADR through statutes. in the 2008 Civil Rule 1, “every civil case …[is] subject to compulsory ADR.” The format may be agreed on Statutes addressing different aspects of corporate by the parties; if there is no agreement, then mediation governance are many and vary widely. Relatively few is the default format. In February 2010, the Delaware statutes, however, give explicit consideration to thorough Court of Chancery itself was given the power to arbitrate dispute resolution systems. in certain business disputes. Additionally, in May 2010, voluntary ADR was recognized in law and enforceable The drafting, adoption, and implementation of laws is a in court. lengthy, cumbersome process. Specific provisions related to the effective resolution of corporate governance Law can have a larger or smaller role in comparison to disputes are therefore best established through regulations other processes, and a statutory scheme can be enacted and administrative rule-making and then promoted specifically for corporate governance, or for broader through best practice codes and guidelines. regulatory purposes. Introducing Administrative Rulemaking and One advantage of specific legislation for corporate Listing Requirements governance ADR is that it is easier to obtain majority Since administrative rulemaking differs from one country support for legislation and craft the appropriate statutory to another, there are few general principles. As part of an language. Several countries have adopted, or appear near overall framework for introducing corporate governance to implementing, legislation covering a wide variety of dispute resolution, however, rulemaking and listing cases, including a greater focus on corporate disputes. requirements cannot be ignored. For example, Italy has adopted a statute on mediation of intra-company disputes, clearly an aspect of corporate After legislation governing one or another kind of governance. corporate governance issue is passed, the administrative agency provides detailed interpretations of often vague By contrast, a broader approach may exhaust legislators’ statutory language. These “directions” help to ensure attention, a rare commodity, and require too many statutory compliance. reforms that cannot be adequately accommodated by the legislature’s calendar when other issues are competing Securities regulators and stock exchanges established for attention. Achieving a “critical mass” is necessary for their own systems and services to support more effective major corporate law reform, and attaching corporate dispute resolution by: governance ADR terms to a “must pass” bill, such as Mandating that brokers and issuers use the exchange’s arbitration process to resolve their disputes GLOSSARY Requiring listed companies to adopt dispute resolution clauses in their bylaws as part of good corporate Administrative Rulemaking governance practices In administrative law, rulemaking refers to the process that executive and independent agencies This trend may be the most important development in use to create, or promulgate, regulations. In mainstreaming effective corporate governance dispute general, legislatures first set broad policy mandates resolution; already, it has spawned many variations. by passing statutes, and then agencies create more detailed regulations through rulemaking. For example, Jordan’s Amman Stock (ASE) issued in September 2004 a Dispute Resolution Directive to 54 VOLUME 2 How to Mainstream Corporate Governance Dispute Resolution? MODULE 2 EXAMPLE Sample Corporate Dispute Resolution Clause Mandated by Listing Rules Brazil: Natura Cosméticos S.A. The Novo Mercado, the specialist index of well-governed companies of the BM&FBOVESPA Stock Exchange, requires companies to include an arbitration clause in their by-laws. The arbitration by-laws of Natura Cosméticos S.A. provide: Article 40 - The Company, its shareholders, directors, and the members of the Board of Auditors are compelled to solve, by arbitration, all and any dispute or disagreement that may appear between then, related or deriving, in special, of application, validity, effectiveness, interpretation, violation, and its effects, of the dispositions at the Law No. 6.404/76, at the Company’s By-law, at the rules edited by the National Monetary Advice, by the Brazilian Central Bank and by the Securities Commission, as well at other rules applicable to the working of the capital market in general, beyond of those constant of the New Market Listing Regulations, of the New Market Participation Agreement and the rules of arbitration of the Market Chamber of Arbitration. COMMENT Companies such as Natura Cosméticos S.A. who have introduced arbitration clauses in their by-laws have actually never or rarely needed to resort to arbitration. One main reason: preparing for disputes helps prevent disputes. SOURCE: Natura Cosméticos SA, By-laws 2006, Brazil, 2006. Accessed at www.natura.et/investor. EXAMPLE Stock Exchange Arbitration Pakistan: Stock Exchange Arbitration Committees Pakistan’s Islamabad, Karachi, and Lahore stock exchanges are self-regulatory organizations (SROs) empowered to take cognizance of complaints against their respective members under the approved rules and regulations. Each exchange has its own arbitration committee, which looks into the grievances/disputes between investors and members. Arbitration committees, after perusing the documents and providing the parties an opportunity of being heard, pass an arbitration award in accordance with the exchange’s relevant rules and regulations. For further details: Karachi Stock Exchange (Guarantee) Limited: Regulation 29. Available at: www.kse.net.pk. Lahore Stock Exchange (Guarantee) Limited: Regulation 5.01. Available at: www.lahorestock.com. Islamabad Stock Exchange: Regulation 29. Available at: www.ise.com.pk. COMMENT Most stock exchanges have now introduced dispute resolution mechanisms to provide issuers and investors with and effective forum should a dispute arise. This is key to supporting investor confidence. MODULE 2 How to Mainstream Corporate Governance Dispute Resolution? VOLUME 2 55 impose ADR on its members and participants. ASE affordable, and informal alternative for resolving reported that it handled 20 cases through June 2010 disputes, with the added advantage of using arbitrators with a value exceeding JD1.3 million. In Pakistan, the specialized in the matters brought up for discussion. Karachi, Islamabad, and Lahore stock exchanges all have arbitration procedures for disputes involving their Creating an ADR system within securities regulations or members. stock exchange rules establishes “instant legitimacy” for corporate governance ADR and helps divert caseloads By having their own specific rules, stock exchange from more contentious and expensive methods of a trial arbitration panels can provide a more expeditious, through the judicial system. EXAMPLE Securities Arbitration Rules India: Securities and Exchange Board of India MUMBAI, August 10, 2010: The Securities and Exchange Board of India (SEBI) issued guidelines aimed at strengthening the arbitration process at stock exchanges and expediting the resolution of disputes. The arbitration committees help settle disputes between a client and broker, or disputes among brokers. Under the new rules, the stock exchanges have to maintain a panel of arbitrators and the number of arbitrators in that panel will have to be commensurate with the number of disputes so that each person handles a limited number of cases. This will help in speedy disposal of cases. While considering a candidate for the arbitration panel, the stock exchanges will have to take into account his/ her qualification in the area of law, finance, accounts, economics, management, or administration, and his experience in financial services, including the securities market. The person included in the panel will have to give a declaration that he has neither been involved in any act of fraud nor been found guilty of any economic offence. He will also have to disclose the names of dependants associated with the securities market as a member, or sub-broker. Besides, the bourses will also be required to appraise the performance of the arbitrators and reconstitute the panel based on the appraisal once a year. The arbitration reference will have to be concluded by way of issue of an arbitration award within four months from the date of arbitrator appointment. However, at the discretion of the managing director or executive director of an stock exchange for sufficient cause, they could extend the time for issue of the arbitration award by two months on a case-to-case basis. If the aggrieved party is unhappy with the arbitration award, he can appeal it to the stock exchange’s appellate panel of arbitrators. However, the appeal must be filed within one month from the date of receipt of the arbitration award. COMMENT In several countries, securities regulators are reviewing stock exchange dispute resolution systems and seeking to strengthen the processes. This includes ensuring timely resolution of disputes and being able to draw on a pool of expert arbitrators. SOURCE: “SEBI Issues Arbitration Guidelines for Stock Exchanges.” Economic Times, August 13, 2010. Available at: http://economictimes. indiatimes.com/markets/stocks/market-news/Sebi-issues-arbitration-guidelines-for-stock-exchanges/articleshow/6302391.cms. Securities and Exchange Board of India guidelines are available at: http://www.sebi.gov.in/circulars/2010/cirmrd24.pdf. 56 VOLUME 2 How to Mainstream Corporate Governance Dispute Resolution? MODULE 2 TO REVIEW SAMPLE STOCK EXCHANGE often not issued by a governmental entity, a code can be ARBITRATION TRENDS AND RULES, SEE VOLUME 2, supranational or local. Codes should embody the views ANNEXES 8, 9, 10, AND 11. of what constitutes good ADR practices, communicating fairness, accountability, transparency, and responsibility. Introducing ADR through Codes of Best Practice A code of best practice has significant advantages. As with laws, codes can help provide a commonly agreed First, a responsible industry group can develop such a definition of ADR processes. Yet, to ensure that codes code itself, taking full advantage of industry expertise remain relevant and adequate, they must be reviewed while remaining relatively free of political interference. and updated regularly. This will ensure that, if at a later Codes are flexible, giving disputants room to maneuver stage an ADR law is passed, there are no contradictions while allowing for amendments to reflect changing in the terms and perceptions that could lead to confusion circumstances. Moreover, codes make sense, too, since and uncertainty. Review mechanisms with deadlines for corporate governance issues may not lend themselves to periodic assessments are typically included in a code’s statutory prescriptions. provisions. A specific code can be drawn for dispute resolution, or If a code is carefully developed with the conspicuous clauses related to dispute resolution can be inserted into participation of all relevant stakeholders, the resulting existing corporate governance codes. Not mandatory, and document can become highly persuasive to government officials, legislators, regulators, and targeted users. EXAMPLE Corporate governance codes have been adopted world- wide. Policymakers “increasingly argue that codes embodying these principles not only protect investors Introducing Corporate Governance against fraud and poor stewardship but also may help Dispute Resolution reduce the corporate sector’s cost of capital.”8 Codes Brazil: Corporate Governance Code of address all types of companies, or focus on listed Best Practice companies, banks, state-owned enterprises or family The Brazilian Code of Best Practices (4th version) firms. issued by IBGC includes the following clause: “1.8 Mediation and arbitration Addressing effective dispute resolution in corporate In cases successful negotiation cannot be reached governance best practice codes can: between the parties involved, the conflicts between shareholders and administrators and between Raise awareness of the risks and negative consequences administrators and the organization should be of corporate governance disputes resolved, preferably through mediation, and, failing that, through arbitration. It is recommended Broaden awareness of the benefits of ADR techniques that such mechanisms be included in the Articles and processes to prevent and resolve corporate of Incorporation/Organization, or a commitment be made and signed between the parties.” governance disputes COMMENT Provide guidance on effective dispute resolution Corporate Governance Codes are excellent tools to help mainstream corporate governance dispute Foster corporate adoption of dispute resolution resolution practices and foster subsequent training policies for directors. SOURCE: IBGC, Code of Best Practices of Corporate Governance, Fourth Edition. Sao Paulo: IBGC, 2010. Available Encourage dispute resolution training for directors at: http://www.ibgc.org.br/CodeBestPractices.aspx. Influence legislation and rulemaking MODULE 2 How to Mainstream Corporate Governance Dispute Resolution? VOLUME 2 57 The South African and Brazilian corporate governance codes champion corporate governance dispute resolution best practices through provisions in their codes. King III, the revised South African code issued in 2009, states unequivocally that ADR is an essential component of good corporate governance and a tool to manage and preserve stakeholder relationships. TO VEW THE SOUTH AFRICAN CORPORATE GOVERNANCE CODE (KING III) PROVISIONS RELATED TO DISPUTE RESOLUTION, SEE VOLUME 2 ANNEX 12. While being based on the “apply and explain” approach, King III’s provisions have been strengthened in legal terms by the requirement that companies listed on the Johannesburg Stock Exchange must apply the code. Principle 8.6 states: “The board should ensure disputes are resolved as effectively, efficiently, and expeditiously as possible.” In paragraphs 39 and 40, the code states: “The board should adopt formal dispute resolution processes for internal and external disputes.”9 58 VOLUME 2 How to Mainstream Corporate Governance Dispute Resolution? MODULE 2 SUPPORTING THE IMPLEMENTATION In the United Kingdom, the Jackson review of litigation OF CORPORATE GOVERNANCE costs found that mediation’s benefits are neither highly DISPUTE RESOLUTION appreciated nor widely realized.10 This review stated: “The most important form of ADR is mediation. The reason ADR is a relatively new concept in many countries, and for the emphasis on mediation is twofold. First, properly its application to corporate governance disputes is even conducted mediation enables many (but certainly not more novel. Providing for a comprehensive framework all) civil disputes to be resolved at less cost and greater is essential but not sufficient to mainstream the use satisfaction to the parties than litigation. Secondly, many of effective corporate governance dispute resolution disputing parties are not aware of the full benefits to be practices. gained from mediation and may, therefore, dismiss this option too readily.”11 The Lord Justice recommended Even if a comprehensive framework is in place, several preparing an authoritative handbook and launching obstacles prevent the systematic use of ADR processes — education initiatives to maximize the use of ADR. especially mediation — to effectively resolve corporate governance disputes. These include: The support and engagement of policymakers, legislators, regulators, the judiciary, and professional institutions Knowledge. ADR and its benefits among corporate are essential in implementing and mainstreaming ADR lawyers, boards, and shareholders are not well for corporate governance dispute resolution. understood. Many strategies can be used to reach and convince Awareness. Most mediation examples that people cite corporate governance stakeholders about ADR’s value. involve either family or neighborhood small claims In the short term, these may include: cases. Corporate governance disputes are not known to be mediated. Focus groups targeted at key stakeholders Trust. Like other ADR processes, mediation is not Expert advice for interested parties considered as serious and formal as court procedures; hence, the enforceability agreements are questioned. Conferences and other events to facilitate dialogue, networking, and coalition-building Strength. Cultural issues related to “saving face,” such as using a collaborative method, are often understood Publications, surveys, and promotional material as “giving in.” Direct communications with key parties (including Data. Difficulty in providing results impairs the meetings with legislators, regulators, industry groups, ability of businesses to objectively evaluate which lawyers, board directors, and shareholder groups) method to use. Heightened media/public relations campaign, including Experience. Mediators and established mediation articles in print and broadcast media and the use of services may not have handled corporate governance relevant social media dispute. This involves the identification of key leaders, There are many alternatives to introducing ADR for stakeholders, and possible partners who see the need corporate governance disputes. In Europe, the rise and, acting as a catalyst, are prepared to support the in ADR usage followed the growth in commercial introduction of corporate governance dispute resolution. mediation, but many in the business community remain Such “change agents” are typically willing to speak out unaware of the benefits. and work towards widespread use of ADR in corporate MODULE 2 How to Mainstream Corporate Governance Dispute Resolution? VOLUME 2 59 governance disputes. The most important attributes they Well-designed communications strategies contribute can bring to achieving change are passion, conviction, and to the successful implementation of a good corporate confidence in others.12 “True change agents are willing governance dispute resolution framework. These to take bold action — and accept the consequences,” strategies should focus on: write former GE Chairman and CEO Jack Welch and management consultant Suzy Welch. “They know that Increasing knowledge of ADR and communicating leading change can be messy, with few clear-cut answers these approaches’ benefits to corporate governance about how events will play out. They understand that disputes pushback accompanies any change initiative and that they will take the brunt of it if things go wrong.... Strengthening commitment for ADR from Finally, change agents have something about them that policymakers, judges, lawyers, and business leaders galvanizes teams and turns people.”13 who have successfully addressed governance disputes through ADR approaches. Identifying individual leaders or “ADR champions” is particularly important. They are likely to have a combination of these attributes: FOCUS Political connections Supporting the Introduction of Ability to facilitate change Corporate Governance Dispute Resolution Alternatives Good understanding of the judiciary, ADR, and its The following stakeholders are key to raising benefits awareness and building support for the use of corporate governance ADR: Support and acceptance as a ccommunity and business Ministry of Justice leaders Judges and commercial courts Such leadership was evident in South Africa where the Regulators and stock exchanges use of ADR was supported and promoted by the IoDSA Directors’ associations and such prominent leaders in corporate governance as Professor Mervyn E. King through the seminal and Chambers of commerce and other business influential King reports. organizations Institutional investors and shareholder Raising Awareness associations Until ADR approaches for corporate governance dispute Bar associations and other lawyers resolution are fully embedded in local practices, there is an ongoing role for communicating the business case for NGOs and international organizations ADR. Doing so will enable boards, shareholders, and Arbitrators and mediators (or arbitration and other stakeholders to draw on the existing ADR process mediation’ association) and apply effective dispute resolution techniques. SOURCE: Adapted from Lukasz Rozdeiczer and Alejandro Alvarez de la Campa, Alternative Dispute Resolution Manual: Implementing Commercial Mediation. Washington, DC: TO REVIEW HOW PROCESSES AND TECHNIQUES IFC, 2006. Available at: http://rru.worldbank.org/Toolkits/ CAN HELP RESOLVE CORPORATE GOVERNANCE AlternativeDisputeResolution/. DISPUTES, SEE VOLUME 1 MODULE 3. 60 VOLUME 2 How to Mainstream Corporate Governance Dispute Resolution? MODULE 2 FOCUS Why Devote Attention to Alternative Methods of Corporate Governance Dispute Resolution? KEY PARTIES INTERESTED IN ADR INTEREST IN AND MESSAGES RELATING TO ADR Legislators and Regulators Legislators and regulators seek to establish and maintain well- functioning markets by providing the proper legal framework to ensure the proper application of the law, the protection of investors’ rights, and the timely resolution of issues. ADR will provide better access to justice and improve the business climate. Court Systems and Judges Court resolution of disputes is limited to the court’s jurisdiction. Court systems may be slow and cumbersome, or overwhelmed by their case workload. Courts do not always have sufficient staff and expertise to deal with complex corporate governance disputes. Judges may benefit from a reduction in workload and the courts’ improved efficiency. Lawyers and Counsel They will be concerned about ADR’s impact on their practices. Lawyers can become peacemakers with appropriate training and guide their clients towards more effective dispute resolution. This is an opportunity to create a new market niche. Directors Associations Establishing professional standards and guiding directors in the exercise of their duties. Effective dispute resolution is part of good corporate governance practices. Mediation Centers Corporate governance disputes undermine confidence in the company, potentially harming its competitive position and share price. Such disputes may threaten the company’s ability to attract capital by deterring investors, impairing the capacity to grow and prosper. Normal legal recourse is costly, slow, not easily accessible for smaller shareholders, and limited to a legal result in one particular legal jurisdiction. With appropriate training in the field of corporate governance, mediators can extend their practice to corporate governance dispute resolution. Media The media are particularly important, since they inform a broad community of government leaders, heads of businesses, stakeholders, and such opinion-makers as university professors. The media can help raise awareness on alternative ways to better resolve corporate governance disputes. SOURCE: Adapted from Lukasz Rozdeiczer and Alejandro Alvarez de la Campa, Alternative Dispute Resolution Manual: Implementing Commercial Mediation. Washington, D.C.: IFC, December 2006. Available at: http://rru.worldbank.org/Documents/Toolkits/adr/adr_ fulltoolkit.pdf. MODULE 2 How to Mainstream Corporate Governance Dispute Resolution? VOLUME 2 61 Showcasing success stories. Success stories are Changing cultural perspectives and creating reputation particularly useful in broadening awareness and incentives for the use of effective corporate governance acceptance of ADR. Typically, interest in ADR arises dispute resolution. Applying ADR processes and tech- when a particular dispute takes too long to resolve, niques rather than taking cases to court should be goes unresolved, or encounters costly, seemingly perceived as a sign of strength rather than weakness. insurmountable court-related obstacles. This creates a sense of urgency to “do something” as the costs of Advertising the availability of corporate governance the protracted dispute escalate — but what? Those dispute resolution services to provide training, advice, who have identified the need to establish a plan to and other assistance in resolving disputes. manage internal and external corporate governance conflicts, or reduce court backlogs, will invariably The success of ADR must be demonstrated while share their views. To motivate stakeholders, concise, ensuring that any systemic defects are identified well-prepared, pertinent arguments are needed to and rectified. To facilitate this monitoring process, demonstrate the business case for ADR. evaluation measures must be developed. Monitoring, QUOTE Business Reputation Acts as an Incentive for Parties to Honor ADR Outcomes “In Argentina, Colombia, and Peru, any firm that fails to arbitrate a dispute after agreeing to do so or refuses to pay an award — quickly becomes known as an unreliable business partner. Thus a firm’s concern about its reputation provides a powerful incentive to participate in alternative dispute resolution and respect the outcome.” ADR CENTER INDIA BLOG SOURCE: ADR Center India Blog, “Common Drawbacks.” August 11, 2009 post on the ADR Centre India Blog. Available at: http://cppradr. blogspot.com/search?updated-max=2009-10-20T17%3A17%3A00%2B05%3A30&max-results=7. EXAMPLE Raising Awareness Tonga: Improving Mediation Awareness In the island nation-state of Tonga, ADR and mediation were little known concepts in 2007. A program led by Chief Justice Anthony Ford — assisted by IFC and LEADR (a non-profit Australian organization that promotes ADR approaches) — helped broaden and deepen knowledge about ADR. “IFC-funded radio broadcasts and talk-back shows on mediation.… IFC [also] funded mediator training in Samoa for three Tongans.… Since June 2008, “10 civil cases have been referred to mediation, eight of which were settled successfully. Each would have taken three to five years if they had gone to a court hearing.” COMMENT A court-supported program with external support shows how creative uses of the media and other initiatives effectively build ADR awareness. SOURCE: K.Stingemore, IFC Works With Tonga, a ‘Doing Business’ Top Performer, to Improve Mediation Awareness. Washington, D.C.: IFC, 2008. Available at: http://www.ifc.org/ifcext/pacificedf.nsf/AttachmentsByTitle/PQFY08Qtr2/$FILE/Pacific+Quarterly_Second+Qrt+FY08.pdf. 62 VOLUME 2 How to Mainstream Corporate Governance Dispute Resolution? MODULE 2 evaluation, and a continuous improvement program shared values, they are subject to degradations as soon as will help to integrate ADR into the local environment the pressure for change is removed,” he warns. and determine initiatives for continual improvement in ADR usage. McKinsey management consultants Carolyn Aiken and Scott Keller caution that “ ‘influence leaders’ aren’t Ongoing data collection and dissemination of the a panacea for making change happen.” In their view, successes of ADR for corporate governance dispute “success depends less on how persuasive a few selected resolution in the local environment is important. leaders are and more on how receptive the ‘society’ is Valuable data would include records of corporate to the idea. In practice, it is often unexpected members governance dispute cases, information on the reduction of the rank and file who feel compelled to step up and in court backlogs, the time taken for dispute resolution, make a difference in driving change. That’s why we the costs, and disputants’ satisfaction levels with ADR. warn against overinvesting in influence leaders....“15 Equally important to the reform process is stakeholder In his seminal book Leading Change, Harvard ownership, a point stressed by Columbia University University Professor John Kotter outlines how success researcher Shanta Sukhu. The process must reinforce in implementing change depends on convincing up to the perception of all participants that “they are heavily three-quarters of key stakeholders.14 This takes time and involved in the process — from what to change to how effort and yields only a 30-percent success rate. Successful to go about it, to how it will be measured — change is change tends to follow an eight-step process: establish not imposed.”16 Early buy-in from stakeholders, coupled a sense of urgency; form a powerful guiding coalition; with their sense of personal ownership, as Kotter notes, create a vision; communicate that vision; empower others matters the most. to act on the vision; plan for and create short-term wins; consolidate improvements while building momentum for change; and, institutionalize the new approaches. FOCUS “Until new behaviors are rooted in social norms and Change Management QUOTE Management consultants Emily Lawson and Colin Price suggest four basic conditions that are necessary in changing behavior: Mainstreaming Mediation Practices Compelling story: there’s a point behind the “At first, mediation was viewed with some change that stakeholders agree with skepticism — particularly from clients who could not see how it would succeed where traditional Role modeling: CEO and colleagues behave negotiations had failed. Now clients appreciate in the new way the benefits that a neutral facilitator can bring, Reinforcing mechanisms: systems, processes, although some remain skeptical — but the and incentives must align with the new pressure from the English courts ensures that behavior they engage in ADR in any event.” Capability building: skill-building is required JOSEPH TIRADO to make the desired changes HEAD OF ARBITRATION AND ADR, NORTON ROSE LLP SOURCE: Emily Lawson and Colin Price, “The Psychology SOURCE: Forum 2008 survey on mediating corporate of Change Management.” McKinsey Quarterly, June 2003. governance disputes. Available at: mckinseyquarterly.com. MODULE 2 How to Mainstream Corporate Governance Dispute Resolution? VOLUME 2 63 In more and more countries, explicit legal policy Chambers of commerce may be influential, too, in encourages parties to negotiate or mediate their developing policies by creating an environment where differences with considerable effect, as the comment (in businesses can flourish. Worldwide, they have helped an adjoining box) from a senior UK lawyer illustrates. establish ADR or mediation facilitation centers. For example, in Colombia, the Chambers of Commerce Research has shown that most people learn primarily from of Bogota and Medellin have separately established examples set by others who are more innovative, but who arbitration and mediation centers. These centers have are also part of the same occupational community and proven to be successful in providing non-litigation-based otherwise very similar. Corporate governance dispute dispute resolution services. resolution service providers — directors associations, chambers of commerce, corporate law firms, and TO REVIEW THE ROLE AND SERVICES OF CORPORATE GOVERNANCE DISPUTE RESOLUTION consultants — play a central role in advocating effective PROVIDERS, SEE VOLUME 2 MODULE 3. out-of-court dispute resolution. Many corporate governance disputes involve other types The IoDSA, for example, when recommending to its of stakeholders in addition to directors. Thus, a parallel members the use of mediation to resolve disputes, clearly focus on finding and working with counterparties such believes it is a part of its members’ and directors’ duties. as institutional investors and shareholder associations is This has the effect of placing the weight of a recognized equally important. body behind a strong statement. Companies of all sizes in South Africa are accustomed to receiving policy The long-term generation of support for and trust in direction from the IoDSA. This makes the responsibility ADR requires the development of training and other to consider mediation not merely vague and up to the education programs. These efforts should address such company, but, instead, a professional responsibility for topics as: “What is mediation?” “Why mediate?” “What each director as an individual. By so doing, the IoDSA are mediation’s benefits?” “How does ADR relate to a has raised the profile of mediation and added impetus. directors’ duty to act in the company’s best interests?” The development of exemplary case studies focused on corporate governance disputes and dispute resolution QUOTE processes — their level of success and satisfaction — are particularly relevant to these discussions. Supporting Effective Corporate TO REVIEW SAMPLE CORPORATE GOVERNANCE Governance Dispute Resolution DISPUTE RESOLUTION TRAINING MATERIALS, SEE VOLUME 3 MODULES 2 AND 3. “A director has a duty to act in the best interests of the company. Mediation will avoid unnecessary Fostering Court-Annexed Mediation delays, eliminate long periods of uncertainty Courts are also encouraging ADR procedures as an integral and reduce costs substantially, which clearly part of the judicial system. Judges are concerned about would be in the company’s best interests. Should negotiation between disputing parties fail, the the backlog of cases that stretch their resources beyond IoD believes that every director owes the duty to capacity, undermining the quality of judicial deliberations his company to consider mediation as the next and leaving all the parties feeling poorly served. logical step towards dispute resolution.” INSTITUTE OF DIRECTORS SOUTHERN AFRICA In a wide range of countries, court-annexed mediation has effectively been used for the early resolution of disputes, including in the corporate governance field. SOURCE: “Director’s Duty” specification issued by the IoDSA. Available at: www.iodsa.co.za/products_services. asp?CatID=241. A court mediation program may be either based in the court or involve referral by the court to outside ADR 64 VOLUME 2 How to Mainstream Corporate Governance Dispute Resolution? MODULE 2 EXAMPLE Using ADR for Corporate Governance Disputes Uganda: Court-Annexed Mediation Based on a key study of the impact of ADR in the Horn of Africa and on Justice Geoffrey W. M. Kiryabwire’s own observations, Uganda’s introduction of ADR and, in particular, mediation for corporate governance disputes has been successful and emulated in several other African nations. “The 1995 Constitution laid the foundation stone for ADR in Uganda by promoting reconciliation in all matters handled by the judiciary,” Kiryabwire writes. “It enjoins judges to speed the trial process and settle disputes on the basis of substance and not technicalities. The 2000 Arbitration and Conciliation Act described new judicial powers of referring cases to mediation.… Shortly after they piloted a mediation scheme whereby all cases filed in the Commercial Court [including corporate governance cases] were referred compulsorily to a Centre for Arbitration and Dispute Resolution (CADER) at no cost to the parties. By the end of 2005, the Commercial Court was disposing 60% more cases than in 2001; the pilot has been deemed such a success that it has been rolled out to the other divisions of the High Court.” Case backlogs were a serious problem, particularly in the Commercial Court. In 2008, there were only four judges available at the Commercial Court. “[I]n 2007, there was an average of 1,742 cases assigned per judge, all of whom work without clerks and other support staff typically encountered in western legal systems, according to Kiryabwire. “The general tendency in Uganda over the years was to litigate disputes with the view to getting a legally binding decision. In 2003, Uganda began a pilot project at the Commercial Court to test the efficiency of sending some cases to compulsory mediation. The cases were referred to the CADER, which uses newly trained law graduates as mediators. The decisions reached were made legally binding by court orders. Uganda’s steps to court-annexed mediation (in summary) include: 1. Create a set of rules so mediation works within the court system. This was done by amending the Civil Procedure rules in 1998, adding a new rule on “Scheduling Conference and Alternative Dispute Resolution.” 2. Create awareness of the new rules and ADR’s benefits. 3. Establish a pilot project. International donors funded the two-year project in Uganda. ,. 4. Evaluate the project’s success and disseminate information about its success/failure. 5. Ensure general training in the area of mediation and the availability of competent mediators. COMMENT Uganda illustrates the many stakeholders involved in implementing ADR procedures and ensuring success, beginning with a constitutional provision. SOURCES: A. Greco, “ADR and a Smile: Neocolonialism and the West’s newest Export in Africa.” 2009. Available at: http://works.bepress.com/ cgi/viewcontentcgi?article=1000&content=anthony_greco. Justice Geoffrey W. M. Kiryabwire, “Mediation of Corporate Governance Disputes Through Court-Annexed Mediation — A Case Study from Uganda.” Available at: www.ifc.org. The article outlines the steps by which Uganda introduced court-annexed mediation as part of the legal process. B. Brainch, “Justice Sector Reform in Sub-Saharan Africa — Commercial ADR.” 2006. Available at: www.disputeresolutionkenya.org/pdf/ Commercial%20ADR.pdf. MODULE 2 How to Mainstream Corporate Governance Dispute Resolution? VOLUME 2 65 example of a country applying court-annexed mediation EXAMPLE through the introduction in 2003 of its Supreme Court Ruling No.2/2003 on Court-Annexed Mediation. Mediation of Shareholder Disputes Court-annexed mediation has also successfully been Hong Kong: Practice Direction introduced in Asian and African countries for early In 2010, the Chief Justice of Hong Kong issued a resolution of conflicts. Practice Direction for the application of the Hong Kong Companies Ordinance, which sets out the In India, arbitration and mediation have long been provision for voluntary mediation in shareholder cases. Where the petitions are purely disputes legal options but were seldom used until recently. On between shareholders, not involving the interest November 25, 2009, in a renewed effort to promote ADR of the general body of creditors of the subject centers within the country, the Chief Justice opened the company or affecting the public interest, the first court-annexed arbitration centre in New Delhi. court encourages the parties to consider the The Delhi High Court Arbitration Centre (the Centre) use of mediation as a possible additional means is autonomous with representatives of the judiciary, bar, of resolving their disputes in a cost-effective and more expeditious manner. At any stage and the government as part of its governing structure. of the petition, if a party wishes to attempt This development follows the establishment of similar mediation, this may be initiated by serving a mediation centers at the district courts in Delhi in 2005. notice (“Mediation Notice”) on the other party The mediation centers are reported to have handled or parties, inviting them to agree to mediation. close to 23,631 cases as of February 2010 with a success Under the Practice Direction, where a Mediation rate of around 72%.18 Notice has been served, an unreasonable refusal or failure to attempt mediation may expose a party to an adverse costs order. Whether a party Uganda illustrates the point that there are many ways has acted unreasonably would be determined to introduce ADR mechanisms into an existing legal having regard to all the circumstances of the environment, leading to the conclusion by Justice particular case. Kiryabwire that “the experience in Uganda will show COMMENT that court-annexed mediation can work in the settlement Hong Kong’s highest judge sees the value of of corporate governance disputes.”19 mediation for shareholder disputes. When one party serves a notice before the courts seeking Together with administrative rulemaking, court- mediation, the other parties may be penalized if they provide unreasonable reasons for their annexed mediation is maybe the most effective approach refusal. to streamlining the use of ADR processes for the resolution of external corporate governance disputes as they provide for an institutionalized framework and the level of comfort required by shareholders and other parties to such disputes. SOURCE: Practice Direction 3.3 Voluntary Mediation in Petitions Presented under Sections 168A and 177(1)(f) of the Companies Ordinance, Cap. 32. (January 2010). As cited in: Law Reform Commission (Ireland), Alternative Dispute Resolution: Mediation and Conciliation. November 2010. Available at: http://www.lawreform.ie/_fileupload/Reports/ r98ADR.pdf. MODULE 2 How to Mainstream Corporate Governance Dispute Resolution? VOLUME 2 67 Endnotes 1 World Bank, Doing Business 2010: Reforming Through Difficult Times. Washington, D.C.: World Bank Group, 2010. Available at: http://www.doingbusiness.org/features/ Highlights2010.aspx. 2 Ibid. 3 World Bank, “Topic Brief on Alternative Dispute Resolution.” Available at: http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTLAWJUSTINST/0,,contentM DK:20755904~menuPK:2035565~pagePK:210058~piPK:210062~theSitePK:1974062,00.htm. 4 See, for example: Nadja Alexander, Global Trends in Mediation. Leiden,The Netherlands: Kluwer Law International, 2006. 5 J.J. Spigelman, Chief Justice of New South Wales, “Mandatory Mediation.” Speech, November 2000. 6 Ibid. 7 A directive is a legislative act of the European Union, which requires member-states to achieve a particular result without dictating the means of achieving that result. It can be distinguished from regulations, which are self-executing. Directives normally leave member-states with some leeway as to the exact rules to be adopted. 8 Paul Coombes and Simon Chiu-Yin Wong, “Why Codes of Governance Work.” McKinsey Quarterly. May 2004. Available at: https://www.mckinseyquarterly.com/Why_ codes_of_governance_work_1416. 9 Institute of Directors of South Africa (IoDSA), King Report on Governance for South Africa and King Code of Governance Principles (King III). Copyright 2009. Used by permission. Available at: http://african.ipapercms.dk/IOD/KINGIII/kingiiireport/. 10 Lord Justice Jackson was appointed to lead a fundamental review of the rules and principles governing the costs of civil litigation. His objective was to make recommendations “in order to promote access to justice at proportionate cost.” The Review of Civil Litigation Costs was completed in December 2009. Available at: http://www. judiciary.gov.uk/about_judiciary/cost-review/jan2010/final-report-140110.pdf. 11 Ibid. 12 Rosabeth Moss Kanter, “The Enduring Skills of Change Leaders.” Leader to Leader (Summer 1999). Available at: http://www.pfdf.org/leaderbooks/l2l/summer99/kanter. html. 13 Jack and Suzy Welch, “What Change Agents Are Made Of.” Business Week, October 9, 2008. Available at: http://www.businessweek.com/magazine/content/08_42/ b4104096917161.htm. 14 John Kotter, Leading Change. Cambridge, Mass.: Harvard University Press, 1996. 15 Carolyn Aiken and Scott Keller, “The Irrational Side of Change Management,” McKinsey Quarterly, April 2009. Available at: www.mckinseyquarterly.com. 16 Ibid. 17 CPR Institute for Dispute Resolution. Available at: http://www.ilr.cornell.edu/alliance/resources/basics/court_annexed_mediation.html. 18 Alexander Oddy, Sonya Leydecker, Anthony Monaghan, Mike McClure, and Anita Phillips, “Court- Annexed Arbitration and Mediation in India.” February 25, 2010. Available at: www.lexology.com/library/detail.aspx?g+75b174e4-b97f-43e2-84f7-9919e6415129. 19 Justice Geoffrey W. M. Kiryabwire, “Mediation of Corporate Governance Disputes Through Court Annexed Mediation — A Case Study from Uganda.” Available at: www.ifc.org. The article outlines the steps by which Uganda introduced court-annexed mediation as part of the legal process. 68 VOLUME 2 How to Mainstream Corporate Governance Dispute Resolution? MODULE 2 programs run by bar associations, nonprofit groups, annexed mediation may be voluntary or mandatory and other local courts, or private ADR providers. Some courts may be initiated prior to or during court proceedings. require litigants to use mediation in what are known as mandatory mediation programs. The mediation session’s In Germany, court-annexed ADR was introduced purpose is unchanged regardless of whether litigants for civil litigation by legislation with the introduction enter the program voluntarily or by court mandate. The of Section 15a to the German Introductory Code to court mediator may be a lawyer trained in mediation the Code of Civil Procedure and Section 278 of the and compensated by the parties, or serve as a volunteer. German Code of Civil Procedure. Since 2005, Finland Judges, magistrate judges, or court ADR professionals has allowed court-annexed mediation through its “Act also serve as mediators in some court programs.17 Court- on Court-Annexed Mediation.” Indonesia is yet another PRACTICE Practical Considerations for Court-Annexed Conciliation Vichai Ariyanontaka, a judge of the Central Intellectual Property and International Trade Court in Thailand, provides some practical guidance: Conciliation is conducted in a conference room not in the court room. Formalities are dispensed with. Secrecy is enforced. The public and the press are barred from witnessing the conciliation proceedings. Non-disclosure agreement is made. Without prejudice condition is added to facilitate the invention of options for compromise. Although the law allows conciliation without attorney, in practice the conciliator never discourages the presence of an attorney. Attempting to do so is likely to have an adverse effect on the trust of the parties in dispute towards the conciliator. The decision to exclude an attorney should come from one of the parties. The conciliator should say that attorneys are welcome. Caucuses with each of the parties to the exclusion of the other are helpful, sometimes to dilute some of the less-than-reasonable claims or increase some of the more-reasonable offers. Although the law allows for the use of caucuses, it is best to obtain the parties’ consent first. An atmosphere of joint effort to solve the problem is perhaps the best environment to create in conciliation. Parties are invited to present options to settle the dispute. Each option caters for the parties’ mutual interests. The conciliator must be sensitive to each party’s needs and legitimate interests. The conciliator needs to be careful about objectivity and neutrality. Instead of making a statement in the affirmative. Asking a question is more “politically correct” and may achieve the same result. Refreshments, coffee breaks, (good) working lunch or even a few jokes of the day do help the atmosphere in a negotiation. Miracles sometimes happen during these “time-out” periods. It is arguable whether there is wisdom in forcing a litigant to appear in conciliation with the threat of contempt of court. This device is sometimes used in consumer claims where the defendant is a corporation. Under a recent amendment to the Civil Procedure Code, conciliation is compulsory in small claims disputes. SOURCE: Vichai Ariyanontaka, “Court-Annexed ADR in Thailand: A New Challenge.” This paper was presented at LEADR’s 7th International Alternative Dispute Resolution Conference, July 27-29, 2000. Available at: http://asialaw.tripod.com/articles/adr.htm. 66 VOLUME 2 How to Mainstream Corporate Governance Dispute Resolution? MODULE 2 VOLUME 2 : IMPLEMENTATION MODULE 3 : Who Can Provide Corporate Governance Dispute Resolution Services? 2.3 Although boardroom disputes are generally handled behind closed doors while shareholder disputes are battled out in the courts, companies are increasingly seeking third-party expertise to prevent and resolve disputes that may undermine their performance, reputation, and bottom line. Based on their needs and issues, boards may especially want to seek: Training on dispute resolution skills Advice on using ADR processes and implementing corporate governance dispute resolution policies Mediation of corporate governance disputes Facilitation of board retreats and stakeholder meetings Yet, who can a board turn to when it is developing effective dispute resolution policies, looking to improve its dispute resolution skills, seeking a facilitator for its strategy retreats, or needing help in resolving a dispute? Although corporate governance dispute resolution services are in their infancy, demand is on the rise. A variety of established organizations, firms, consulting practices, and academic institutions are considering or offering services that can help companies mitigate the risks and negative impact of corporate governance disputes. Each type of dispute resolution provider offers a unique range of expertise, capabilities, experiences, and authority. THIS MODULE REVIEWS Different types of corporate governance dispute resolution services Strengths and weaknesses of corporate governance dispute resolution providers Introduction and marketing of corporate governance dispute resolution services MODULE 3 WHO CAN PROVIDE CORPORATE GOVERNANCE DISPUTE RESOLUTION SERVICES? Boards should be prepared to prevent and handle both it wants to have the appropriate expertise and be internal and external corporate governance disputes in well-informed about approaches used to ensure a fair, the most effective way possible with minimum harm expeditious, and enforceable settlement. The board to the company and its stakeholders. Whether they also demonstrates that it is open-minded and flexible are reviewing their dispute resolution policies, seeking in how the dispute should be addressed. dispute resolution training for themselves and senior management, trying to prevent potential disputes before Evaluate existing policies, practices, and procedures. taking an important strategic decision, or effectively Suggest reforms where needed. An outside adviser addressing a dispute, directors may need to draw can review existing approaches to dispute resolution, on external corporate governance dispute resolution compare those against best practice, and suggest expertise. revisions. These recommendations will be based on both an independent assessment and the experiences SEEKING THIRD-PARTY DISPUTE that the ADR expert has had helping others to RESOLUTION EXPERTISE implement improvements in dispute resolution policies, practices, and procedures. Basing their Seeking corporate governance dispute resolution expertise counsel on “lessons learned,” ADR experts build can provide the following benefits: support among skeptical or ill-informed board directors. Directors may fear these “experimental” Reinforce a board’s credibility by demonstrating initiatives will waste resources and distract them commitment to fair, expeditious resolution. By hiring needlessly. They may worry that the disputants an ADR expert, the board sends a strong signal that will become more resistant to settlement as their frustrations intensify the longer that the dispute QUOTE remains unresolved. Having directors’ “buy in” for ADR approaches long before a dispute erupts helps to both expedite the ADR process when it is eventually Timing utilized and to promote a mutually fair outcome. “There is no particular time at which a case can, or should, be referred to ADR. It may occur Explain ADR approaches — the strengths and when settlement negotiations have become weaknesses. ADR is not as widely understood by deadlocked, or at any stage before or during board directors and senior management as are judicial litigation or arbitration up to and including at proceedings. Given the widespread use of somewhat trial. The benefits, particularly in terms of costs, comparable approaches in traditional societies, are obviously greater the earlier it happens.” there may be confusion in differentiating modern- HOGAN LOVELLS LLP day techniques from the long-standing practices of ALTERNATIVE DISPUTE RESOLUTION tribal elders, for example. A third party could help answer questions and expedite the learning process SOURCE: Hogan Lovells LLP. Available at: http://www. hoganlovells.com/files/Publication/dfe782b0-2cee-4480- for directors and senior managers through targeted 8ecf-548b287d0cd6/Presentation/PublicationAttachment/ training. All parties to the dispute must fully be8b2a76-54fa-48f1-86ca-581b0ba6975a/Alternative_ Dispute_Resolution.pdf. comprehend ADR terms, the processes, enforcement mechanisms, and their rights and responsibilities. MODULE 3 Who Can Provide Corporate Governance Dispute Resolution Services? VOLUME 2 69 Achieving consensus among directors. Directors may avoid litigation, contain liability, and hold costs to a disagree about the utilization of ADR approaches or minimum. the terms of a dispute resolution settlement, leaving the board frozen in inaction. A third party can help to find Establish an informal or formal process for parties consensus by guiding the directors’ discussion, clearing to negotiate a solution or comply with a third-party up misunderstandings, sharing cases illustrating how decision. The neutral third party could help calibrate other boards addressed the same issues, or actively the ADR process to the dispute(s) needing resolution. working to negotiate an agreement among opposing Based on their experiences, ADR service providers can directors. recommend specific procedures matched to a dispute’s scale and complexity. In this way, they help boards TO REVIEW THE BENEFITS OF ALTERNATIVE maximize resources and eliminate inefficiencies. DISPUTE RESOLUTION PROCESSES AND TECHNIQUES, SEE VOLUME 1 MODULE 3 QUOTE Facilitate dialogue among parties in dispute. A third- party neutral tends to have an easier time approaching the parties if he or she is perceived immediately, first, Why Seek Third-Party Dispute Resolution to have no bias towards any of the disputants’ points of Advice? view and, second, to be free of allegiances to the board, “When disagreement rises to the level of a the company, or other stakeholders. In the contract, concrete dispute, views can become hardened, the third party typically attests to being free of conflicts so much so that it can become difficult to of interest or discloses such conflicts (existing and listen fully to the other points of view being potential) so that the board can determine whether presented, even when they include concessions to one’s interests. Psychologists have come to the individual should be disqualified. The third party’s call this phenomenon ‘reactive devaluation,’ ability to retain confidence is particularly critical in meaning that in conflict situations, we tend to building trust early as a means of, first, gaining the devalue what the other side is saying, even if it parties’ commitment to the ADR process and, second, is a concession to our preferences. Whether it is finding a solution rather than continuing to be mired consciously or subconsciously, we tend in conflict in an impasse that becomes increasingly hostile. Trust to view the concessions suspiciously, and keep waiting for ‘the other shoe to drop.’ involves adherence to strict confidentiality terms; these must be carefully delineated in the contract signed by “Many dispute resolution scholars believe one the board and the ADR service provider. of the reasons mediators can be effective in facilitating conflict management is because they are able to provide a third-party presence that Define and narrow scope of the dispute. Disagreements enables disputing parties to get over problems can be resolved more quickly if extraneous concerns of reactive devaluation. Facilitators in corporate and arguments are defused or eliminated early so board disputes can provide the same function, that the parties can focus on those core issues that serving as a vehicle for the expression of ideas, fueled the dispute. This phase of discussion between opinions, and options that may be unacceptable the parties and the ADR expert facilitates settlement if brought forth directly by a disputing party.” of noisome procedural issues, eliminates common RICHARD REUBEN misunderstandings, defines expectations, and PROFESSOR, UNIVERSITY OF MISSOURI SCHOOL OF LAW establishes rapport. Trust-building emerges when SOURCE: Richard C. Reuben, Corporate Governance:A Practical Guide for Dispute Resolution Professionals. Washington, D.C.: mutual progress is achieved by eliminating early, American Bar Association, 2005. Available at: http://www.ifc.org/ for example, the “clutter” around the “real” issues ifcext/cgf.nsf/AttachmentsByTitle/Mediating_Corp_Gov_Disputes_ ADR_CG_Guide_Reuben/$FILE/Corporate+Governance+- in dispute. This initial stage is particularly critical +Reuben.pdf. because businesses are anxious to settle cases early to 70 VOLUME 2 Who Can Provide Corporate Governance Dispute Resolution Services? MODULE 3 Monitor and help ensure compliance by parties to stakeholders, among others, directors may be inclined settlement terms. After the settlement, a neutral third to engage outside advisers, despite their own proficiency party could continue to review compliance with the and experience, as an additional layer of due diligence. agreed-upon outcome and address any disputes that may arise in executing the settlement’s terms. The Before seeking third-party dispute resolution expertise, dispute may also underscore the need for revisions to and preferably before the dispute erupts, the board a company’s ADR policies and procedures, which the must determine its actual needs based on the roles ADR service provider also could help oversee. it envisages for the external facilitator, advisor or peacemaker. In defining its needs, the board should also Since the use of ADR techniques in corporate governance reflect on how its decision-making process may need to is a new endeavor for boards, senior management, and accommodate outside participants, particularly in terms PRACTICE Areas to Consider in Determining Whether and When to Seek Third-Party Expertise Expertise: How much knowledge does the board and/or senior management have about the following areas? Nature and potential impact of internal or external corporate governance disputes Settlements of similar disputes by other companies through ADR Relevant laws, regulations, and best practices Techniques used to gather all parties involved in a conflict to define the issues and agree on a resolution process outside the courts Knowledge and understanding of the potential parties involved in the dispute and other stakeholders Experience: Does the board and/or senior management have proven experience in successfully containing, if not resolving, disputes involving corporate governance issues? Workload: Does the board and/or senior management have sufficient time and staff to dedicate to the dispute resolution process? Are there other foreseeable distractions that may arise, which will reduce the time and resources that could otherwise be dedicated to proper dispute resolution prevention and resolution? Conflicts of Interest/Trust: Will the board and/or senior management be seen as sufficiently independent by the disputants to ensure that the process will be fair, objective, and thorough to inspire confidence by the parties that their interests will be respected and well-served? Can an outside adviser provide sufficiently independent and neutral case evaluation? Objectivity can be particularly difficult to maintain when preparing for a high-stakes litigation battle. Board’s Ability to Work Effectively: Boards should consider how the inclusion of outside providers of ADR services will affect their ability to make decisions effectively. Policies and procedures governing board decision- making may have to be amended to ensure that outside advisers can become part of the process without compromising their independence. Confidentiality restrictions and access to board documents are among the changes that directors must contemplate to fully integrate outside advisers so that they can work effectively. Accountability: Above all, directors must consider how to ensure that a proper, optimal balance is maintained between authority and accountability for directors and officers with the inclusion of outside advisers. MODULE 3 Who Can Provide Corporate Governance Dispute Resolution Services? VOLUME 2 71 of delegating authority, building trust, safeguarding the all these roles, and since corporate governance dispute confidentiality of information, and delineating liability resolution is in its infancy, boards may find limited and warranty terms and conditions. choices in their jurisdiction. Finding and engaging qualified individuals is not an easy task. Boards should allocate sufficient time to research potential candidates, TO REVIEW THE FACTORS THAT MAY HELP GUIDE THE SELECTION OF ADR SERVICES, SEE organize interviews, and make a decision. VOLUME 2 ANNEX 13. Corporate governance dispute resolution services may Boards must also ensure that outside advisers can be offered by: operate independently to be objective in their analysis, Corporate law firms and consultants intervention, and recommendations. In providing special access to boardroom deliberations, boards must Institutes of directors and corporate governance be careful not to compromise that independence. This centers arrangement should be clearly delineated in the contract signed with the ADR expert. The board may want to ADR providers (e.g., mediation centers, chambers of establish a special committee to oversee the selection, commerce, and firms) engagement, and negotiation of the terms of reference Universities and business schools for the third-party dispute resolution expert. Regulators and stock exchanges TO REVIEW THE BASIC TERMS TO BE DISCUSSED BEFORE ENGAGING IN MEDIATION, TO REVIEW THE ROLE OF REGULATORS AND STOCK SEE VOLUME 2 ANNEX 14. EXCHANGES IN HELPING RESOLVE CORPORATE GOVERNANCE DISPUTES, SEE VOLUME 2 MODULE 2. Once the board and senior management have inventoried their specific needs — current and anticipated — they Each type of provider offers unique strengths but is should next seek outside expertise that can satisfy those invariably limited by particular weaknesses. As the board requirements. has done in conducting its own “SWOT” (meaning strengths, weaknesses, opportunities, and threats) analysis Corporate governance dispute resolution service providers of its immediate and potential needs, the directors typically play four broad roles: advisor, educator, must do the same in evaluating and selecting potential facilitator, and/or peacemaker. Not all providers offer candidates who will guide and support them in effectively addressing and handling corporate governance disputes. QUOTE Through this analysis, the board may determine that they require a different provider for each need. Seeking Diversity Corporate governance issues touch on laws, the applica- “One way of injecting energy into the process tion of rules, and human dynamics. Understanding how is to apply diversity to the appointment of corporations work and the responsibilities that directors neutrals, arbitrators, or mediators. It forces us shoulder are crucial criteria in selecting professionals. to actively look for the right skills, talent, [and], reputation for the particular dispute.” A service provider’s expertise in corporate governance IN-HOUSE ATTORNEY matters does not alone automatically qualify it to act as INTERNATIONAL FORTUNE 500 COMPANY a mediator, facilitator, or corporate governance dispute SOURCE: Available at: http://www.negotiationlawblog. resolution expert. Conversely, even seasoned mediators are com/2010/03/articles/conflict-resolution/negotiating-gender- bias-in-adr-the-commercial-client-speaks/. not necessarily trained or equipped to handle corporate governance disputes. In seeking third-party expertise, 72 VOLUME 2 Who Can Provide Corporate Governance Dispute Resolution Services? MODULE 3 special care must be paid to the type of work that the QUOTE individual, firm, or organization has done specifically in corporate governance dispute resolution. It is crucial to determine whether the expert has the requisite knowledge, Ongoing Independent Counsel Is More experience, skills, and personality traits. Routine for Boards “Some boards now retain counsel to attend TO REVIEW THE SKILLS REQUIRED FOR EFFECTIVE all meetings and advise them on an ongoing CORPORATE GOVERNANCE DISPUTE RESOLUTION, SEE VOLUME 3 MODULE 1. basis, having concluded that the benefits of independent advice more than outweigh concerns about additional costs and potential Corporate Law Firms and Consultants inefficiencies. They believe that independent legal advice is unquestionably needed for the Boards rely increasingly on independent counsel to numerous ongoing tasks and that, when a help comply with best practices and changing legal and crisis erupts, everyone benefits from having a regulatory requirements. When internal or external second set of knowledgeable lawyers available governance disputes arise, a board’s first reflex is often to immediately to advise the board.” seek input from its law firm. SOURCE: Francis G. Coleman, “The Case for Independent Counsel.” Directorship. February 1, 2008. Available at: http:// www.directorship.com/the-case-for-independent-counsel/. Law Firms Law firms have advised boards and board committees on governance issues and represented parties in external EXAMPLE corporate governance disputes. They may have staff who perform board assessments for clients, and some boards have retained counsel on a continuing basis. As a result, Dispute Resolution Service Providers lawyers, usually senior, who counsel boards, or who sit United States: Foley Hoag LLP on boards, have acted without the formalities in the role We begin by investigating and analyzing of a mediator in internal governance disputes. what really is at stake for our clients and for their opponents, what resources are available Lawyers may also serve as mediators and arbitrators, and to address the underlying issues, and what some law firms have made ADR a specific practice area. In business resolutions can be tailored to address those interests. We also work to identify the some jurisdictions, lawyers have even an ethical obligation tangible and intangible costs of litigation and to counsel clients about the multiple ways of resolving non-litigation resolutions, the likely outcomes of problems. Lawyers and their firms need to understand each approach, and the possible results. how the purpose, key concepts, and information flows If our client elects to use ADR processes, we work of ADR differ from those of more conventional legal to position our client to make the most of such practice. If the firm is global, having offices worldwide proceedings. We assist in developing creative may help to pull in expertise from different jurisdictions negotiating strategies and draft presentations as needed. Yet, lawyers with the appropriate ADR skills to educate the neutral facilitator and the should also have a corporate governance background opposition’s business executives; then we help structure the process. Once the proceeding is and experience working with boards, either as an outside underway, we participate actively to achieve a counsel or as a director. mutually acceptable resolution. Law firms are nevertheless not always the best-suited COMMENT This example illustrates the process a law firm providers of corporate governance dispute resolution would pursue in using ADR approaches. services. They tend to be highly competitive internally, which is a source of their excellence. But the competition SOURCE: Foley Hoag LLP. http://www.foleyhoag.com. may also generate internal conflicts when, for example, MODULE 3 Who Can Provide Corporate Governance Dispute Resolution Services? VOLUME 2 73 they have a wide range of clients with opposing interests. expertise. For that reason, generalizations about Furthermore, outside counsel requires start-up time to consultants can be misleading because a firm may have mobilize their resources and advance along the learning someone with the specialized qualifications required curve. When seeking a law firm’s services, boards should for corporate governance disputes. Organizational incorporate this preparatory work into the schedule. consultants and executive coaches, some of whom may be part of firms offering a broad range of human Consultants resource services, have expertise in team-building and Boards may also want to draw on consultants whose strengthening leadership skills. Their work and expertise practices touch on aspects of corporate governance. lies principally with senior management, but not They have more flexibility and the costs of their services necessarily with the board and the issues that directors, may be comparatively less than the fees that law firms rather than management, face. Specific individuals in charge. But not all consultants will have the breadth, these firms may have experience working with boards, expertise, and inclination to mediate or arbitrate but they may not, however, have a sophisticated corporate governance disputes. understanding of corporate governance requirements or familiarity with mediation techniques or arbitration The term “consultants” covers a broad, but often vague procedures. Similarly, compensation consultants and range of services that third parties may offer, and the human resource firms basically provide advice in their scope of their services varies, often depending on the areas of expertise. Their expertise is valuable in providing individuals who work in the firms and their particular information and recommendations about executive compensation, but their focus and experience are not necessarily in negotiating and bringing parties together EXAMPLE to resolve their dispute(s). Dispute Resolution Service Providers QUOTE India: Seth Associates The firm represents its clients in dispute resolution through ADR and conducts both Law Firms and ADR domestic and international arbitration matters “We recognize that litigation and arbitration before various forums, relating to all areas of are no longer the only processes for clients general and special practice, including finance, seeking legal remedies to enforce or defend commerce, contractual, intellectual property their commercial positions We are, therefore, rights, cyber laws, building, construction, as well increasingly providing advice on pre-litigation as industry and employment related disputes. matters and working alongside our non- The lawyers and technical experts of our firm contentious teams as risk managers. ADR is an have the requisite expertise of handling high- integral part of our practice and an area where stake arbitrations, including those pertaining we have great expertise. We regularly undertake to supply contracts, building, and construction mediations, expert determinations, adjudications contracts, and turnkey projects. and bespoke processes to resolve disputes. A number of our lawyers are also accredited COMMENT mediators.” The information a law firm typically provides on its Websites provides a good starting point for HERBERT SMITH LLP evaluating a firm and developing questions for an initial meeting with the firm’s attorneys. SOURCE: http://www.sethassociates.com/firm-experience. SOURCE: http://www.herbertsmith.com/Services/ html. PracticeAreas/Disputeresolution. 74 VOLUME 2 Who Can Provide Corporate Governance Dispute Resolution Services? MODULE 3 FOCUS Corporate Governance Dispute Resolution Providers Strengths and Weaknesses of Law Firms and Consultants STRENGTHS WEAKNESSES Experience advising boards and board Inadequate expertise and experience, or committees on governance issues one-person office may not have a formal network, particularly global one, to tap Experience representing parties in external expertise corporate governance disputes Conflicts of interest with existing or potential Experience serving as negotiators for clients or a willingness to please to obtain settlement of corporate disputes follow-up business Broad knowledge of ADR processes Experience may be limited to specific Client-focused business model corporate governance compliance issues, not broad-based corporate governance Pre-established trust relationship with client practices. Senior partner may pass day-to-day engagement of ADR process to junior staff attorney, who wields less clout given perceived reputation and “power” Trained to litigate and reluctant to apply ADR processes Focused on the dispute’s legal dimension Boards could typically seek the following corporate governance dispute resolution services from law firms and consultants: Counsel on using ADR processes and policies Help in preparing for an ADR forum and client support during mediation and arbitration proceedings Facilitation of difficult discussions among board directors Facilitation of discussions between the board and external stakeholders Advice on ADR clauses in shareholder agreements Negotiation and mediation of corporate governance disputes Neutral expert evaluations (e.g., share valuation) MODULE 3 Who Can Provide Corporate Governance Dispute Resolution Services? VOLUME 2 75 EXAMPLE Dispute Resolution Service Providers Philippines: Institute of Corporate Directors The institute (ICD) provides orientation and training in all aspects of the practice of corporate directorship. ICD may also assist in the formulation and implementation of corporate governance improvement programs in specific boards where its associates serve. It is a membership organization. COMMENT Boards should assess the training needs of their directors and senior managers to ensure that key decision- makers have sufficient expertise to guide and evaluate ADR approaches. Custom-tailored programs may be more relevant, particularly if training is needed to deal with an immediate dispute. SOURCE: www.icdcenter.org. FOCUS Corporate Governance Dispute Resolution Providers Strengths and Weaknesses of Corporate Governance Institutes and Directors Associations STRENGTHS WEAKNESSES Knowledge and understanding of corporate Inability to access the right experts (e.g., governance best practices poor pay, unattractive terms of engagement, weak network of contacts) in competitive Competence in reaching and providing market member services through established networks Limited capacity to expand services (e.g., Ability to gather/train professionals to be limited funds and weak infrastructure to competent in ADR approaches support growth) Product/service development experience and skill Boards could typically seek the following corporate governance dispute resolution services from corporate governance institutes and directors associations: Corporate governance dispute resolution training Workshops on using corporate governance dispute resolution Advice on implementing ADR processes and guidance on who to contact Counsel on dispute resolution policies Facilitation of difficult discussions among board members Facilitation of discussions between the board and external stakeholders 76 VOLUME 2 Who Can Provide Corporate Governance Dispute Resolution Services? MODULE 3 Corporate Governance Institutes and Directors government. They may administer training programs Associations for board directors and promote research to demonstrate As awareness of corporate governance has broadened and the business case for adopting best practices. Some offer more businesses adopt best practices, institutes of directors consulting services for a fee; others do not, adhering to a and/or corporate governance centers are launching or strict policy of independence. expanding their services in many countries. Often, these institutions are in the vanguard of advancing corporate Given their focus, institutes of directors are well governance best practices and play an essential role in positioned to raise awareness on effective corporate building boardroom capacity. Institutes typically have governance dispute resolution and train directors on strong networks of leaders in business, academia, and preventing and resolving disputes. Institutes may offer training, facilitation, and coaching, among other services. In most cases, these institutes refer governance disputes that need formal third-party intervention to mediation EXAMPLE centers or ADR firms. In some cases, as in South Africa, the institute houses a mediation center. Dispute Resolution Service Providers South Africa: Institute of Directors Corporate governance dispute resolution is nevertheless Center for Mediation still uncharted territory in most countries. Therefore, most institutes are limited in providing advice on ADR The IoDSA established the Center for Mediation, which focuses on corporate and commercial approaches and resolving a company’s unique corporate dispute resolution. The center encourages governance disputes. contracting parties to incorporate mediation clauses in their contracts. There has been Mediation Centers and ADR Firms traditional reluctance to include mediation An important contributor to the emphasis on mediation provisions in contracts in South Africa. Yet, as the within corporate governance has been the emergence of representative body for directors and business leaders, the institute is well positioned to develop specialist professional mediation or other ADR centers a culture of mediation. and providers. Professional mediation and dispute resolution services have been triggered by demand The Institute promotes the use of mediation clauses as a precondition to arbitration. The logic and the market opportunities for resolving social and is that parties should first attempt mediation commercial disputes in more constructive ways — through the institute’s mediation center and, either to assist social harmony and productive business if that fails, arbitration at the Arbitration relationships, or to offset the cost, professional rigidity, Foundation of South Africa according to its rules. and delays inherent in civil justice systems worldwide. COMMENT IoDSA demonstrates a different approach than TO REVIEW THE LIMITS OF COURT LITIGATION IBGC. An institute’s offerings are shaped by AND THE BENEFITS OF ALTERNATIVE DISPUTE market demand, the existence of existing ADR RESOLUTION, SEE VOLUME 1 MODULE 3. services, and competing priorities for limited re- sources. There is a diverse pattern of origins and structures to such organizations. They may have been formed from government agencies, courts, community services, chambers of commerce, business associations, NGOs, or private individual efforts. What they have in common SOURCE: Ronan Feehily and John Brand, “Commercial generally is a focus on “better ways of resolving disputes” mediation in South Africa.” Available at: http:www.bowman. co.za/LawArticles/Law-Article~id~2132417326.asp. and, usually, a commitment to specialist rules and training programs for their experts delivering the service. MODULE 3 Who Can Provide Corporate Governance Dispute Resolution Services? VOLUME 2 77 Equally, a global consensus of the key attributes of Mediation is the most commonly used ADR process effective commercial mediation has emerged quickly: and, globally, has been emerging as a key focus of new professional development and recognition, assisted by A facilitative approach to helping parties negotiate the mediation providers. A forum respecting the confidentiality of conversations with negotiators/mediators Mediation has been adopted as a formal dispute resolution process and given appropriate judicial or An approach to negotiation that is without prejudice to legislative support in many countries. Mediation is also parties’ rights to seek more formal adjudication if they increasingly promoted as an effective management tool fail to reach agreement within the mediation process for non-litigious, if still difficult, business negotiations. EXAMPLE Types of Mediation Service Providers PROVIDERS EXAMPLES TRAINING CONSULTANCY FACILITATION MEDIATION ARBITRATION Court- Tamil Nadu Mediation Center X Annexed of the Madras High Court Mediation www.hcmadras.tn.nic.in/ adr.htm Chamber of International Chamber X X X Commerce of Commerce www.iccwbo.org Center of Arbitration and Conciliation of the Bogota Chamber of Commerce www.ccb.org.co/cac International Center for Effective Dispute X X X Mediation Resolution (CEDR) Centers www.cedr.com International Institute for Conflict Prevention and Resolution (CPR) www.cpradr.org ADR Firms Bickerman Dispute Resolution, X X X PLLC www.bickerman.com Online ICM-Online ADR Training X X X Services www.icmadr.com/conflict- resolution-training/online-adr- training 78 VOLUME 2 Who Can Provide Corporate Governance Dispute Resolution Services? MODULE 3 Developments have nevertheless been uneven in EXAMPLE organizational structure and focus. TO REVIEW THE ROLE OF POLICYMAKERS IN Dispute Resolution Service Providers SUPPORT OF CORPORATE GOVERNANCE DISPUTE RESOLUTION, SEE VOLUME 2 MODULE 2. United Kingdom: Centre for Effective Dispute Resolution We offer a comprehensive dispute resolution ADR and mediation centers provide training, consulting, service with a range of processes together with forums for parties to convene, and other services (e.g., bespoke solutions we can tailor to your needs. recommending mediators who can work directly with disputants). Our service is independent with neither law firms, mediators, nor special interest groups as financial stakeholders. There is one important factor to consider when reviewing mediation centers: the limited risk a board will encounter We can: in taking steps towards involving a center. The mediation Select the most appropriate process process will usually be protected by confidentiality and Helping parties decide which process will most be non-binding, unless an agreement is reached to effectively resolve their dispute. publicly disclose the final agreement and/or be bound to Approach the other parties the mediator’s decision. Because of our neutrality, we can approach all parties to gain consent to the process. EXAMPLE Select a neutral The choice of neutral rests ultimately with the parties, but we are able to provide advanced Dispute Resolution Service Providers matching due to our detailed and up-to-date Italy: ADR Center knowledge, including client feedback, on all CEDR Solve Mediators. The ADR Center combines 30 years of experience in administering efficient JAMS Administer the process mediation and arbitration in the United States Depending on the process you choose, with the expertise of some of the best Italian the experienced team will sort logistical and European mediators and arbitrators. The arrangements and provide advice and support ADR Center’s services have evolved based on where required. requests from customers to ensure its ability to resolve disputes within a prescribed timeframe Ensure quality control at predetermined costs. The ADR Center is the After each mediation, we seek feedback on the world’s only body with operations in Europe and process and the mediator’s performance. the United States. We also provide free downloadable documents COMMENT under “Model Documents” on our website, International expertise may be particularly impor- including our Model Mediation Procedure and tant for cross-border disputes. Organizations that Agreement, Model ADR Contract Clauses, and have offices or ADR professionals based in the Model Settlement Agreement. countries where the disputes occurred may be more attuned to cultural, social, and other COMMENT nuances that are key in understanding the CEDR’s online library provides guidance as to disputed issues and finding a resolution. what constitutes best practice in engaging a third-party expert. SOURCE: http://www.adrcenter.com. SOURCE: http://www.cedr.com. MODULE 3 Who Can Provide Corporate Governance Dispute Resolution Services? VOLUME 2 79 EXAMPLE EXAMPLE Dispute Resolution Service Providers Dispute Resolution Service Providers Colombia: Bogota Chamber of Commerce International Chamber of Commerce Arbitration and Conciliation Center ICC dispute resolution services exist in several The Center offers different services, intended for forms: the solution of the conflict and the formation International Court of ArbitrationTM — A in managing the problem, through the effective truly international arbitration institution with an application of ADR methods. This service is outstanding track record for resolving cross-bor- directed to the industrial, communitarian, and der disputes educational areas. Services offered include: ADR — An amicable dispute resolution procedure Arbitration based on the goodwill of the parties and the Conciliation assistance of a neutral third party covering various techniques, including mediation Friendly composition Dispute Board — Independent bodies designed Specialized areas to help resolve disagreements and disputes as and when they arise during the performance of Communitarian programs a contract Conflict resolution in the educational field Expertise — Assistance in finding the right person to make an independent assessment on Professional training programs every conceivable subject relevant to business Consultancy and Investigation operations The ACC´s function is to administer the different DOCDEX — Providing expert decisions to conflict solution mechanisms, among these, resolve disputes relating to documentary credits, arbitration, conciliation, friendly composition, and collections, and demand guarantees incorporating mediation. ACC also offers training programs, ICC banking rules. conflict resolution mechanisms in the education Publications area, communitarian programs, investigation, and consultancy. Model contracts series: Confidentiality agreement COMMENT Confidentiality clause The Bogota Chamber of Commerce illustrates Sales contract how chambers are in the vanguard of developing Commercial agency contract ADR processes and procedures as alternatives to Distributorship contract the courts. These initiatives are typically required International franchising contract law and by business leaders who have seen directly the arbitration costs of lengthy battles to entrepreneurs. Hence, the chambers are often driven by their mission ICC Arbitration and ICC Arbitral Awards to promote environments where business can ICC Institute of World Business Law Dossier thrive. COMMENT ICC’s array of ADR services are among the most extensive. Its model contracts provide templates in addressing such issues as the confidentiality of contractual obligations for ADR professional. SOURCE: ICC, Guide to ICC ADR. Available at: http://www. SOURCE: www.ccb.org.co. iccwbo.org. 80 VOLUME 2 Who Can Provide Corporate Governance Dispute Resolution Services? MODULE 3 EXAMPLE EXAMPLE Dispute Resolution Service Providers Dispute Resolution Service Providers United States: Chris Whitelaw Online ADR Services Anyone engaging my consultancy services can Internet-based proceedings to resolve commercial ask me to do any of the following things: disputes are increasing in use given the technology’s ease of access and connectivity Full analysis of the relevant facts improvements worldwide. More and more people Precise identification of the nature and scope are using the Internet for business, social, and of the dispute personal reasons; online ADR (OADR) services are a logical extension of these uses. “The Precise identification of all possible parties to internet facilitates the storage, retrieval, review, the dispute comparison, annotation, classification, and reuse of information more than other communication Precise identification of each party’s legal mediums,” write Hashemite University (Jordan) rights and obligations Professors Haitham A. Haloush and Bashar H. Malkawi. Further, governments, agencies, and Identification of any “gray areas” with respect other entities are beginning to provide online to legal rights and obligations dispute resolution services directly to consumers. Advice on the strengths and weaknesses of “OADR is essentially a change in venue rather than the legal position of any party to the dispute in approach,” write Haloush and Malkawi. “The Identification of the best pathways open to online ADR process does not differ very much each party, taking into account all relevant from the offline process, except for the fact that considerations (such as financial capacity, another form of communication, i.e., the Internet, bargaining power, health issues, personality is used rather than face-to-face procedures.” type, family issues, estate issues, etc.) to avoid, These forums use chat rooms, websites with dissipate, manage, and resolve the dispute encryption software and password protection, instant messaging, and video conferencing to Fully explaining in clear, simple language the create several online alternative dispute methods. alternative methods open to each party in dealing with the dispute and the implications “ADR has evolved with the development of of each option financially, time-wise, business- commerce, and online ADR will refine ADR rather wise, physically, and emotionally. than making any radical new departures. Online ADR would thus not represent a major shift, and If there is a clear need to engage legal services, the choice for the parties between online ADR determine the right level and quality of services and ADR would be dictated by considerations for the dispute, taking into account its level of of economics and convenience, informed by the complexity and the amount in dispute. relative importance that they ascribe to face-to- face interaction.” COMMENT This example illustrates the importance of COMMENT communications skills in articulating the issues Online ADR services are emerging as cost-effective in dispute, outlining possible solutions, and means of bringing parties together but may not helping disputants understand the ADR process be appropriate for all disputes. and the possible outcomes. In considering an SOURCE: Haitham A. Haloush and Bashar H. Malkawi, “Internet ADR professional, communications skills should Characteristics and Online Alternative Dispute Resolution.” be evaluated carefully. Harvard Negotiation Law Review. Spring 2008. Available at: http://www.hnlr.org/print/wp or-content/uploads/2009/06/ Haloush_Malkawi.pdf. See also: Haitham A. Haloush, Besem Melhem, Bashar H. Malkawi, “Equality of Arms in the Digital SOURCE: http://www.chriswhitelaw.com.au/dispute- Age.” 2008. Macquarie Journal of Business Law. Available at: resolution-services.html. http://www.austlii.edu.au/au/journals/MqJlBLaw/2008/3.html. MODULE 3 Who Can Provide Corporate Governance Dispute Resolution Services? VOLUME 2 81 Leading Mediation Centers in which companies’ officers signed a commitment Leaders with the biggest influence in advancing corporate to use ADR in appropriate cases with other pledge use of ADR approaches have typically originated from signatories. This initiative gathered significant support such non-profit organizations as the International from the U.S. General Counsels and law firms. CEDR Institute for Conflict Prevention and Resolution (CPR) adopted a “membership” system to promote the value in New York and the Centre for Effective Dispute of committing to high-quality conflict-management Resolution (CEDR) in London. Launched with practices and “accredited mediator” training. significant backing from the corporate community, both have promoted better alternatives to address Chambers of Commerce corporate and commercial disputes and the procedures/ In many jurisdictions, chambers of commerce have skills involved in mediation and other alternatives. traditionally taken a role in resolving private business CPR, for example, pioneered the “Corporate Pledge” disputes. That role has evolved into one of formulating FOCUS Corporate Governance Dispute Resolution Providers Strengths and Weaknesses: Mediation Centers and ADR Firms STRENGTHS WEAKNESSES Solid grounding in ADR methods Inadequate expertise and experience in the field of corporate governance Experience and track record in resolving disputes In-house capacity to access or attract qualified Range of experts available with different professionals (e.g., poor pay and unattractive industry expertise terms of engagement) Ability to gather/train competent ADR Limited capacity to handle demand and professionals expand services (e.g., inadequate funds, Ability to dedicate funds for developing ADR human resources, infrastructure) services Offers safe environment for exploring negotiation without breach of confidentiality or prejudicing subsequent legal action Boards could typically seek the following corporate governance dispute resolution services from mediation centers and ADR firms: Support professional development with specialized training and workshops for directors and senior executives to enhance their dispute resolution skills Advise on using different ADR processes (including model documents) Mediate or co-mediate corporate governance disputes — especially with external stakeholders Advise on implementing dispute resolution policies 82 VOLUME 2 Who Can Provide Corporate Governance Dispute Resolution Services? MODULE 3 arbitration rules, building on the chamber’s close ties (ChIA) or the American Arbitration Association with the business community. In many countries, (AAA). As the popularity and recognition of mediation chambers have a quasi-public role and legal recognition. has grown, most of these earlier centers have been encouraged to participate in this development. Over The International Chamber of Commerce (with a court time, these centers have adopted ADR or mediation of arbitration) is the leading global example. Most others rules in addition to their traditional arbitration focus. are associated with a major city. In countries where This is rapidly becoming the norm. In line with these chambers have a less formal public status, arbitration developments in commercial practice, UNCITRAL centers have tended to develop independently as promulgated a Model Law on Conciliation (read autonomous vehicles for commercial dispute resolution, “mediation”) to assist centers and international business such as the Chartered Institute of Arbitrators in London in finding a common, standard approach. EXAMPLE EXAMPLE Dispute Resolution Service Provider Dispute Resolution Service Provider United States: Program on Negotiation, Ukraine: Mediation Center Harvard Law School The Ukrainian Mediation Center (UMC) was This program is by any measure the foremost established under the auspices of the Kyiv- academic contingent in the dispute resolution Mohyla Business School to be the driving force field, with more than 50 affiliated faculty from behind ADR development by providing training prestigious institutions. For more than 20 years, and independent mediators’ services. the PON has been extremely successful at One barrier to the development of mediation in marketing “executive education” courses, which Ukraine is the lack of guarantees for securing a are taught to a wide variety of professionals mediator’s real independence. Parties to a dispute and executives. These courses can generate must trust a mediator to share the information, substantial fees, faculty members volunteering which they would otherwise not disclose to some of their time to teach these courses, without anyone else. Therefore, we separate the process any extra fee, to support the program. Hence, of organizing an independent mediation (partici- PON has its own internal financing for supporting pants: the parties and UMC) — which secures an the professors’ research when outside grant independent selection of a mediator, relieves a makers cannot do so and numerous graduate mediator from the need to discuss financial issues student assistants. This, in turn, helps recruit top with the parties to a dispute, and controls the students. The faculty’s reputation, particularly quality of procedures and their compliance with among business leaders who have participated mediation principles — from the process of con- in these courses, creates a ready market for the ducting an independent mediation (participants: professors’ services in ADR roles. This keeps their independently selected mediator and the parties). practical perceptions sharp. The end result is an integrated series of services, in which each COMMENT function serves the others well. University-based centers can wear many hats, from advocating regulatory and statutory reforms COMMENT for establishing ADR approaches to providing University-based centers and programs can draw experts who conduct mediation. on faculty research, expertise in adult-learning techniques, training facilities, and thought leader- ship initiatives. SOURCE: www.pon.harvard.edu. SOURCE: http://ukrmediation.com.ua. MODULE 3 Who Can Provide Corporate Governance Dispute Resolution Services? VOLUME 2 83 Chambers may offer consulting services, including ADR — has been attorneys who have either operated recommending individuals who can conduct ADR out of their former legal practice or, more commonly, processes, implementing rules governing the ADR have become individual mediators or partnered with processes, and establishing forums in which disputes others in a small business. The greatest number of can be conducted. The ICC offers the widest array of private practitioners can be found in the United States dispute resolution services. (the largest private panel grouping there, JAMS, handles more than 10,000 cases annually), which is the earliest Firms Specializing in ADR Services and largest market for ADR approaches. In addition to institutionalized mediation centers and non-profit organizations, there are many examples of Increasingly, as ADR becomes global, consultants private groups and individual consultants who have and private business operators can be found in most established or expanded an ADR practice. The most countries where the appropriate legal framework and common firm structure — arising from the origins of level of awareness on ADR benefits exists. FOCUS Corporate Governance Dispute Resolution Providers Strengths and Weaknesses: Universities and Business Schools STRENGTHS WEAKNESSES In-depth expertise and research activities may Performance in academic setting may not provide cutting-edge perspectives, including translate to a practical setting comparable case studies’ “lessons learned” Focus on theoretical issues may conflict Reputation may enhance perception of its with boards, business leaders, and other impartiality from all stakeholders involved in a stakeholders who have concrete, specific dispute matters needing resolution Network of experts developed from research Revenue constraints may limit availability, and other academic activities may be breadth, and quality of services particularly invaluable with highly technical Faculty’s teaching and research commitments issues may reduce availability and flexibility to Research and experience with ADR cases handling a case may help drive efforts to broaden use of ADR approaches Boards could typically seek the following corporate governance dispute resolution services from universities and business schools: Tailored training to directors, senior executives, and policymakers Facilitation and advice from practitioner faculty Assessments, studies, or evaluations of dispute resolution frameworks Mediation on a case-by-case basis 84 VOLUME 2 Who Can Provide Corporate Governance Dispute Resolution Services? MODULE 3 TO REVIEW THE LEGAL AND REGULATORY For faculty members, there are significant advantages FRAMEWORK FOR CORPORATE GOVERNANCE in having practical roles to complement their academic DISPUTE RESOLUTIONS, SEE VOLUME 2 MODULE 2. ones. The most obvious is financial. The daily fees can significantly exceed academic earnings. Equally ADR firms will frequently be known to, or linked into, important to many faculty members, however, is the the other “sources of case referral” through leading ADR exposure to real-world settings that cases bring. For centers. However, as with law firms, the individuals many, this exposure can otherwise be hard to obtain. hired to work with the board need to understand Even more significant in the long run is the improved corporate governance issues, directors’ fiduciary duties, opportunity that a practice base can bring to designing and, as a practical matter, the day-to-day challenges that and mounting research projects with managers, corporate directors and boards confront. professionals, and others. Consequently, there are advantages to having scholars integrated into an ADR Universities and Business Schools practice. Some universities and business schools have established negotiation and dispute resolution training programs On the negative side, faculty members may not be as for executives. In some cases, universities also house available as full-time private practitioners, particularly mediation centers or have faculty members who also for cases requiring travel on short notice. Also, faculty engage in consultancy or mediation services. Boards members, who are well-known as intellectually strong may consider universities and business schools to train researchers or theorists and highly regarded as teachers, their members. Some faculty members can also be hired are not necessarily as successful in practice settings. directly as advisors or facilitators. They may lack the insights, for example, of how an industry conducts business or they may fail to grasp the Typically, universities may provide executive and non- nuances in corporate politics. Over time, however, the executive directors with broad, deep backgrounds, more effective practitioner-scholars develop a reputation drawing from their research, which can make their services that distinguishes them. There is also a known risk, potentially up-to-the-minute. Also, professors are widely one not as common yet in ADR but observable in regarded as having intellectual independence, a quality pharmaceutical research and other fields, of a research that can be a comfort to parties in countries where they bias from excessively close relationships between scholars are not always sure who is working for whom. and corporate interests. This particular point is also relevant for research centers that are not affiliated with for those research universities. QUOTE Business Schools and ADR Training France: IRENE “There should be strong research and strong training, and keeping the link permanent between theory and practice.” ALAIN LEMPEREUR PROFESSOR OF LAW AND NEGOTIATION AT ESSEC BUSINESS SCHOOL AND FOUNDER OF IRENE (INSTITUTE FOR RESEARCH AND EDUCATION ON NEGOTIATION IN EUROPE) SOURCE: Program on Negotiation at Harvard Law School, Founding a Negotiation Education Center, Case Study 1: IRENE (Paris, France), January 2003. Available at: www.pon.org. MODULE 3 Who Can Provide Corporate Governance Dispute Resolution Services? VOLUME 2 85 DEVELOPING CORPORATE solution and deters complainants from raising issues and GOVERNANCE DISPUTE RESOLUTION seeking redress. It also provides an opportunity for the SERVICES introduction of mediation services. Corporate governance dispute resolution is still in Step 1: Conduct a Market Analysis its infancy, but as demand grows for such services, Market research is a systematic, objective collection and potential service providers will need to consider how analysis of data that involves primary (e.g., surveys) and best to address demand. Regardless, whether it is an secondary (e.g., “desk top” research including collation institute of directors, a law firm, or a mediation center, and synthesis of data) research. Data collection can use potential corporate governance dispute resolution statistical (quantitative research such as income levels service providers will need to complete a series of steps and economic growth) and anecdotal or attitudinal to help them determine which services to offer, how to (qualitative such as focus groups that tend to use open- market themselves, and how to build the appropriate ended, free response formats) analysis. capacity to deliver services effectively. Research and Planning Phase FOCUS Research and planning are essential in understanding the need/demand and other market factors that would determine an institution’s positioning in providing Steps in Developing Corporate corporate governance dispute resolution services. As Governance Dispute Resolution Services the Chinese general Sun Tzu wrote about 2,500 years The roadmap to successful implementation of ago about enemies, one could say about markets, “If corporate governance dispute services is likely to you know your (market) and know yourself, you need encompass the following steps: not fear the results. If you know yourself, but not the (market), for every victory gained, you will suffer a RESEARCH AND PLANNING defeat. If you know neither the (market) nor yourself, STEP 1: Conduct a market analysis that you will always succumb.” includes an assessment of internal interest/ capabilities and external demand. An organization considering whether to introduce such services to respond to emerging ADR opportunities STEP 2: Review skills and resources to be within its jurisdiction should develop an initial involved in offering new services. impression of the corporate governance problems and STEP 3: Develop a marketing strategy. issues and the dispute resolution environment. It should also analyze the business climate and priorities. IMPLEMENTATION In the research and planning phase, identify the STEP 4: Raise awareness about ADR’s value impediments to speedy, cost-effective dispute resolution and generate demand for training and other and plan solutions for these. Impediments may include services the market needs. the application of substantive law and the adversarial STEP 5: Secure financial and human resources. procedures that take time in following the normal process of discovery, interrogatories, examination, and STEP 6: Formulate the vision and strategy. cross-examination. STEP 7: Communicate the vision and available services. For example, in some countries it may take between nine to 14 years to set a trial date for considering a dispute. STEP 8: Generate short-term wins. Delaying resolution in this manner is not an adequate 86 VOLUME 2 Who Can Provide Corporate Governance Dispute Resolution Services? MODULE 3 As part of its market analysis, the potential provider It is essential for the market analysis to review: of corporate governance dispute resolution services Who the target users of corporate governance dispute should: resolution services could be? These considerations should include directors, shareholders, employees, Consider and determine the legal environment within stakeholders, companies (e.g., listed or unlisted the home country, including the responsiveness and companies), regulators, and the reasons why they may use ADR. capacity to resolve corporate governance disputes in a timely manner. What is the level of awareness of ADR mechanisms for corporate governance in the target user group? Build an understanding of the various ADR processes What steps will be necessary to raise their knowledge and techniques. and appreciation of ADR? Consider what will motivate participants to use ADR Recognize that ADR processes are based on for corporate governance disputes? collaboration, using interests and needs to leverage a solution, whereas legal avenues focus on rights and Who will provide the services? Consider the areas obligations, which are adversarial in nature and style. of expertise required and the qualifications and experiences of potential mediators in building trust in the competence of the mediation process. TO REVIEW THE BENEFITS OF ADR AND THE BASIC PROCESSES AND TECHNIQUES INVOLVED, SEE VOLUME 1 MODULE 3. What services are already provided? DEVELOPING NEW CORPORATE GOVERNANCE DISPUTE RESOLUTION SERVICES New Product Development Process (NDP) Idea Generation Evaluate Impact Idea Screening Concept Commercialization Development Implementation Business Analysis Market Testing SOURCE: http://en.wikipedia.org/wiki/New_product_development MODULE 3 Who Can Provide Corporate Governance Dispute Resolution Services? VOLUME 2 87 Step 2: Review the Skills and Resources to be The strategy should explain the services that will be Involved introduced, why the change is needed, what the services While reviewing potential new services to be introduced will involve, and what will be the desired outcomes by the organization, it is important to: of the services to be offered. It should consider the untapped opportunities and risks in introducing ADR Consider the available skills and the resources required services, distinguishing the operational issues from (e.g., financing, mediators, training, partners, and strategic concerns. The strategy should also explain what marketing) to provide the scoped services. Know the elements of the ADR services will be provided directly by organization’s strengths and weaknesses in responding the organization and which services may be outsourced to the corporate governance ADR needs and plan (if so, to whom they will be outsourced and why). accordingly. Engage (by interview, workshop or survey) stakeholders at this early stage to discuss their A line should be drawn to distinguish initiatives that views and priorities. must be included in the ADR services (the “must do”) from those that may be less essential (“nice to have”). Consider the individuals who will be involved in introducing the scoped services. The individuals may include: respected leaders that can champion PRACTICE the introduction of ADR in the field of corporate governance, organizational panels to support the development of ADR positioning and materials, and Leading the Development of Corporate legal fraternities. Governance Dispute Resolution Services Ideally, individuals who would lead the introduc- Determine the organization’s positioning, and the tion of corporate governance dispute resolution ramifications of providing corporate governance ADR services would have some or all of the following services. Consider in this process the legal interface. characteristics: Impeccable reputations in their fields of Step 3: Develop a Marketing Strategy influence and their personal lives Developing a marketing strategy is essential in Leadership skills introducing corporate governance dispute resolution services effectively. Director and board-level and mediation knowledge experience Service providers depend on awareness about both their Good connections in the corporate world, capabilities and differences, compared to competitors, to government, and civil society attract clients, skilled professionals, and training program Entrepreneurism participants. Marketing corporate governance ADR capabilities and services helps a provider to establish and Organizational acumen reinforce its “brand” and can be used to engage influential Marketing expertise business leaders while gaining wider endorsement for the use of ADR services. Social media (e.g., Facebook, Good knowledge of corporate governance and mediation issues Twitter, and LinkedIn) provide new “pipelines” for building relationships with targeted publics. Commitment to the use of mediation in corporate governance issues There must be a high level of trust in the ADR approaches, the quality of the services, and the trainers, SOURCE: Forum, Building Director Training Organizations, Toolkit 1. Washington, D.C.: IFC, 2003. Available at: http:// advisors, mediators, and facilitators who will provide www.gcgf.org. ADR services. 88 VOLUME 2 Who Can Provide Corporate Governance Dispute Resolution Services? MODULE 3 This will require identifying and planning the The organization’s development and endorsement of the appropriate risk-mitigation scenarios that address, for strategy may take some time to obtain. There will be many example, the legal and liability issues that may arise. discussions and questions that the organization’s board or Is the organization sufficiently indemnified against senior management will want answered. They will need liabilities? Are there regulations governing the provision to establish consensus among themselves of the benefits of such services? in providing services and the likelihood for success. FOCUS Marketing Strategy A marketing plan begins with a strategy that establishes, directs, and coordinates marketing efforts. Business goals drive the marketing strategy, and these goals must be solidified and supported by an organization’s management team. Marketing strategies may differ from organization to organization. Some may want to build a new business, perhaps challenging the leaders’ client base. Others may want to stabilize their position, particularly if they already dominant the market. Still others may want to grow their business, sometimes at their competitors’ expense, either by becoming a niche player or a market leader. All of these approaches will depend on the organization’s ability to innovate, manage costs, differentiate itself, and succeed. A strategy must define precisely the targeted market based on an analysis of short-, medium-, and long- term market demand for the organization’s services/products. This analysis typically includes industry trends, macro- and microeconomic conditions, competitors’ outlooks, the targeted market’s demographics, and the organization’s own potential. With that analysis and the business objectives as the foundation, the strategy defines the goals and the marketing “pitch.” What will marketing efforts achieve by what date? Goals should be measurable outcomes based on benchmarks. What will be the marketing campaign’s message? Methods to achieve those goals range from communications outreach (e.g., using Facebook and the website more aggressively) to more direct one-on-one networking with targeted peers, such as opinion leaders and board chairmen. In Marketing 3.0: From Products to Customers to the Human Spirit (New York: John Wiley and Sons, 2010), authors Philip Kotler, Hermawan Kartajaya, and Iwan Setiawan argue that communications technologies have forced marketing approaches to change significantly. Marketing engages people in ways that provide “solutions to their anxieties to make the globalized world a better place.” Practitioners must, as never before, understand and respond to the values that drive customer choice. Trust is at the core of the relationship. DATA DIFFERENTIATION LIFECYCLE MEASUREMENT PERFORMANCE Customer data pro- Offers, messaging, Effective programs Key performance Companies must vides insights and channel should communicate to the indicators should actively manage that drive segmenta- be differentiated by customer in keeping be built into programs to achieve tions, messages, and segment to create with where they are all relationship tangible economic channels meaningful, relevant, in the relationship marketing programs results and personal lifecycle interactions SOURCE: http://www.digitalcement.com MODULE 3 Who Can Provide Corporate Governance Dispute Resolution Services? VOLUME 2 89 While developing the strategy, it is important to successful dispute resolutions through ADR approaches identify the possible obstacles in both the introduction may mitigate these fears. In South Africa, 80 percent and implementation of corporate governance dispute of disputes are settled prior to the commencement of resolution services and then develop appropriate solutions trial proceedings, and of the remaining 20 percent, to surmount them. This includes understanding the 80 percent are settled at the discovery/interrogatories organization’s strengths and weaknesses in providing stage.1 ADR services and both knowing and responding to potential threats, including opposition and competitors. The novelty of the use of ADR and mediation in The main obstacles may include: commercial and/or corporate governance disputes. Leadership and advocacy within a jurisdiction for ADR Insufficient appreciation of ADR’s benefits and the may be required; this may lead to its consideration links to corporate governance best practices. for insertion in company law and/or in corporate governance codes. Inexperienced and poorly qualified individuals who cannot provide quality ADR services and command Implementation Phase the respect of directors and senior executives. Once the organization is sold on the idea of introducing corporate governance dispute resolution services a Difficulties with company directors inserting ADR number of steps need to be undertaken to introduce clauses in the company constitution or articles of those service. This begins with raising awareness. association, shareholder agreements, and statements Step 4: Raise Awareness of reserved powers. Directors may understand ADR’s benefits, but there may be issues related to changing The organization should be pro-active in promoting the business case for ADR. It should make a strong link the constitution, articles of association, or other between ADR and the directors’ fiduciary duty to act documents to include a clause that insists on mediation in the company’s best interests. It may also promote as a first step in dispute management. ADR and mediation as tools for risk management and mitigation. Resistance from the legal fraternity. The fraternity may perceive that ADR is a threat to their fee income To make the best business case, the organization needs to: from services they provide to support arbitration and litigation However, knowledge of the frequency of Consider how ADR’s benefits will be communicated. PRACTICE QUOTE Introducing Corporate Governance Addressing the Lack of Awareness on Mediation Services in Directors ADR’s Benefits Associations “We focus on actively using techniques of Option 1: Establish an in-house mediation center. mediation, negotiation, and facilitation in disputes, especially family business disputes, Option 2: Serve as a conduit to mediators and/ without explicitly referring to the ‘ADR’ label or partner with existing mediation centers. given the low awareness in Belgium.” Option 3: Focus on dispute resolution prevention JOZEF LIEVENS and related training or advisory services where a PARTNER, EUBELIUS LAW FIRM niche exists that existing centers do not address. 90 VOLUME 2 Who Can Provide Corporate Governance Dispute Resolution Services? MODULE 3 Threats and Opportunities for the Introduction of Corporate Governance Dispute Resolution Services by Provider FOCUS SERVICE PROVIDER MAIN OPPORTUNITIES MAIN THREATS Corporate Law Expand business in field in its infancy in many Other legal work may be more lucrative and Consultants countries Not easy to become widely known as a provider Develop a “boutique” practice of corporate governance ADR services and thus build an economically significant practice Provide additional services for existing and potential clients Competitors already offering ADR services, including mediation centers and ADR firms Over-extended individual or firm may compromise quality and time commitment needed to ensure an outcome that all parties accept Corporate Additional member services Lack of interest or awareness of ADR’s benefits Governance Institutes Grow membership through new services Inability to sustain quality in ADR services over and Directors the long-term and/or lack of qualified mediators Leadership in corporate governance, neutral Associations “home” for mediation, and quick, confidential dispute resolution Opportunity to develop partnerships and alliances in mediation in non-traditional areas Mediation Broaden public recognition of ADR value and Competition from legal community Centers and services ADR Firms Inadequate national legal structure to support Opportunity to develop partnerships and alliances ADR mechanisms in mediation in non-traditional areas Lack of interest in or understanding about Enhance “brand” through engagement corporate governance Development of a niche market Costly start-up may divert resources from other priorities Broaden network of clients/through increased exposure May lack expertise in the sector or be unable to shift energy and resources from more lucrative Establishing leadership in ADR training and markets services for corporate governance matters Increase client base and revenues Success in corporate governance disputes may facilitate spread of ADR to other dimensions of corporate life or culture, or attract attention of business schools to train next generation of executives Contracts and policy statements may be promoted by business associations, helping profile the center’s own credibility and expertise Universities and Attracting funding to support research and Competition from ADR centers and law firms Business Schools compensate world-class faculty Faculty may establish private consulting Build relationships with business leaders that may concerns, depriving center of new revenues lead to partnerships yielding financial support and broader acceptance of ADR MODULE 3 Who Can Provide Corporate Governance Dispute Resolution Services? VOLUME 2 91 Explain the key business drivers and the benefits for the Mediators, trainers or advisors may be available in organization itself (e.g., leadership, good reputation, house or may be sourced through partnership with member services). other groups or organizations. An institute of directors may want for example to partner with a mediation Consider approaching key leaders for support. center to offer corporate governance dispute resolution services. This is the initial approach taken by the Provide articles to relevant media and use any Brazilian corporate governance center (IBGC). opportunity through events, interviews, and blog “posts” to raise awareness of ADR’s values. TO REVIEW STANDARD CORPORATE GOVERNANCE DISPUTE RESOLUTION TRAINING RESOURCES, SEE VOLUME 3. Anticipate criticisms and prepare responses. Step 5: Secure Human and Financial Resources The organization will need to list the areas in which It is essential to assess and secure the human and financial identified, trusted mediators have the capacity to resources required for the roll-out of new services. In provide corporate governance mediation services. particular: This list may begin on a small scale and then expand as the needs for mediation grow and the availability of Evaluate the possible supply of qualified individuals quality, skilled mediators expands. who are willing and able to provide corporate governance ADR services. Ensure corporate governance dispute resolution services are provided for in the organization’s budget. TO REVIEW THE SKILLS NEEDED FOR CORPORATE In so doing, consider the amount of funds needed to GOVERNANCE DISPUTE RESOLUTION, SEE achieve the organization’s new strategy and the level VOLUME 3 MODULE 1. of funds that must be raised. PRACTICE Determining Fees for Mediation Services In the contract or letter of engagement, make sure the fee structure is clearly and thoroughly defined. The terms should answer the following questions: Is the fee hourly? One fee for the entire project? Or, based entirely or partly on contingencies, such as the dispute’s outcome? If an hourly fee, what is the estimate for the total hours the case will take? If longer, how will you be informed? Can you renegotiate the billing terms? If hourly, what are the minimum billing increments? Is there a charge for every phone call, letter, email, or photocopy? If so, how much? What is the payment schedule? 92 VOLUME 2 Who Can Provide Corporate Governance Dispute Resolution Services? MODULE 3 Financial considerations should include a three-year Step 6: Prepare for Implementation budget based on realistic estimates (including good, Once the above steps have been completed, the moderate, and worst case scenarios) for the new organization can work towards implementing and services. The budget process develops organizational rolling out the new activities. In order to do so, it is ownership and commitment to the new services and important to: should include assessment of: Develop the business plan’s details to execute the Revenues to be earned (from roundtables, training agreed-upon strategy, including defining and refining of directors, training of mediators, publications the services to be provided and the implementation or documents, mediation services, and other plan for each service. initiatives). Integrate the new strategy and services into the Underlying assumptions related to fees, likely institution’s other activities and strategies such as number of services to be provided, events and training, member communications, and networking training sessions to be offered, the pricing policy for activities. services and training, and the break-even points for the overall corporate governance dispute resolution Identify and select the team accountable for the program and related services. strategy’s implementation, and apprise them of their roles and responsibilities. Ensure they have the capacity Costs that may be incurred, including direct (e.g., to undertake their roles. training and service expenses) and indirect charges (e.g., overhead, administration, personnel, rent, Establish criteria for quality mediators, trainers, and and insurance). Also consider the tax implications advisors, and develop rules and a code of conduct for in earning revenues. their provision of services. Risks to financial sustainability should be identified, Identify, contract with, and train qualified mediators, and internal controls and performance measures particularly in corporate governance best practices and established to monitor these risks. legislative and regulatory requirements. QUOTE Introducing Corporate Governance Dispute Resolution Training Services “Just go little. Do a course, use simulation, show that it works, show how much students love it, and then it will be renewed. … Word of mouth. That’s why people should never be afraid. If they have a good product, and if they are good teachers, this works. … And there comes a moment when people need to have the reflex of saying, uh-oh, I need to develop a training of trainers.” ALAIN LEMPEREUR PROFESSOR OF LAW AND NEGOTIATION AT ESSEC BUSINESS SCHOOL FOUNDER OF IRENE (INSTITUTE FOR RESEARCH AND EDUCATION ON NEGOTIATION IN EUROPE) SOURCE: Program on Negotiation at Harvard Law School, Founding a Negotiation Education Center, Case Study 1: IRENE (Paris, France), January 2003, Available at: www.pon.org. MODULE 3 Who Can Provide Corporate Governance Dispute Resolution Services? VOLUME 2 93 Step 7: Marketing the New Services The parties to be marketed to ensure the successful Marketing is key to the successful introduction of new implementation of mediation services should include: services. The organization can for example: directors, company officers, senior management, regulators, insurers, shareowner and business Prepare position papers, presentations, information, organizations, legal practitioners, accountants, stock and brochures for a wide range of external stakeholders. brokers, the judiciary, and the media. EXAMPLE Phasing In Corporate Governance Dispute Resolution Services South Africa: IoDSA Currently available: Access to independent mediators accredited to the IoD Advice and assistance in developing specialist panels of mediators to meet the needs of the business community Facilitation of mediations Facilitating mediation forums Encouraging contracting parties to incorporate mediation clauses in their contracts Encouraging disputing parties to agree to mediation even in the absence of a mediation clause Liaising with other ADR organizations nationally and internationally To be introduced in the medium-term: Provide training in all aspects of mediation To be introduced in the long-term: Conference on mediation Research and submissions on mediation issues Designing in-house dispute resolution and complaints handling systems Mediation publications and information COMMENT Organizations wanting to offer ADR services typically start with a limited array of activities that build over time, using success as a driver in providing revenues, attracting clients, and enhancing the organization’s reputation and brand. SOURCE: Institute of Directors of Southern Africa (IoDSA) Centre for Mediation, Promotional Brochure, Johannesburg: IoDSA, 2007. Available at: www.iodsa.co.za. 94 VOLUME 2 Who Can Provide Corporate Governance Dispute Resolution Services? MODULE 3 Include in the documents a discussion of ADR’s accountable for raising awareness of ADR’s benefits benefits, a description of the ADR mechanisms, the in the field of corporate governance. This panel, for organization’s positioning, and counter-arguments for example, may engage early with relevant stakeholders potential criticisms. (e.g., company officers, regulators regarding listing rules, code of corporate governance authors) to ensure Promote corporate governance dispute resolution the inclusion of mediation clauses in dispute resolution and mediation services through the development processes. of marketing and promotional materials, providing orientation courses, training, organizing forums/ Develop and provide companies with a standard ADR roundtables for discussion and networking, providing clause for shareholder agreements, which ensures access to mediation data and tools, and making shareholders and boards use mediation as the first step presentations to associated partners and groups. in seeking resolution to disputes. Include the use of a direct mail campaign, expert Develop a short list of recognized, trusted, and speakers and presentations, brochures and publications qualified mediators, available and trained in corporate of professional quality in design and artwork, governance dispute resolution. institutional public relations campaigns, a website for easy access to further information, and social media Develop and make available a model dispute resolution tools. agreement that disputants and the mediator may use to establish an agreement and the conditions of Key messages of the marketing campaign: mediation. The company’s best interests Develop rules that specify how the organization operates in providing corporate governance dispute Directors’ duties and risk management resolution services. Consolidating forward steps and introducing more change Practical, timely dispute resolution Consider the organizational support and linkages Novel, creative solutions to gain maximum advantage for the change. The organization should consider the easy and early wins Non-confrontational, confidential nature of ADR and also have a plan for the medium- and long-term development of ADR services. Organization’s leadership role in providing ADR services The successful introduction of corporate governance dispute resolution services by local institutions will help Relationship between ADR and corporate governance mainstream the use of ADR in the field of corporate codes and company constitutions governance and help promote a legal and regulatory framework that supports the use of ADR processes when Step 8: Generating Short-Term Wins appropriate. Organizations can also take a proactive role Organizations should start with easy, achievable activities in advocating for news regulations and best practice to demonstrate success, develop enthusiasm, and standards. contribute to greater awareness of corporate governance dispute resolution services. Some examples: Establish within the organization’s membership an expert panel to advise on the development of corporate governance dispute resolution services and which is MODULE 3 Who Can Provide Corporate Governance Dispute Resolution Services? VOLUME 2 95 Endnotes 1 M. King, “Presentation in Washington, D.C. to IFC.” December 4, 2007. 96 VOLUME 2 Who Can Provide Corporate Governance Dispute Resolution Services? MODULE 3 VOLUME 2 : IMPLEMENTATION ANNEXES 2.4 1. Essentials of a Shareholder Agreement 2. Sample Mediation and Dispute Resolution Clauses from Around the World 3. Implications of E-Mail Communications for Negotiation 4. Sample Board Evaluation Tool 5. Sample Director Self-Evaluation Tool 6. Sample Self-Assessment Questionnaire for Bank Directors 7. Sample Mediation Laws from around the World 8. SECP – Dispute Settlement Mechanism 9. Amman Stock Exchange Directives for Dispute Resolution 10. BSE Arbitration Court 11. BM&FBOVESPA Market Arbitration Panel 12. King Report on Governance for South Africa – 2009 13. Factors to Guide Selecting ADR Services 14. Agreeing on the Terms of Mediation ANNEX 1 A N N EX 1 : ESSEN TIA L S OF A SHAREHOLDER AGREEM ENT ESSENTIALS OF A SHAREHOLDER stakeholders may transfer/sell their shares so as to AGREEMENT reconstitute the Board of Directors. Exit Clauses: A shareholder or stakeholder may choose More Business.com at any time or for any reason to divest his share or If your business is a corporation that issues shares, stake. The shareholder agreement should lay down the then you need to have a shareholder agreement, for conditions he needs to fulfill at this time. This will help everyone’s protection. A good shareholder agreement to ensure that the directors and management continue to should contain the following: maintain control of the company and it will also ensure that the overall shareholding pattern of the company FOR THE DIRECTORS OR STAKEHOLDERS does not change without the express agreement of the Share Distribution: It will include the rights related to directors. the issuance, sale, or subsequent distribution of shares. It will also have the pre-emptive rights and first refusal FOR SHAREHOLDERS rights of the directors and management. Structure of the Company: This will inform shareholders Duties and Rights of the Management and the Employees: of the persons who are running the organization and This is the legal foundation of the personnel aspect of managing their money. the business and will ensure that the business is not run in an autocratic manner. Rights and Duties of the Shareholders: It informs the shareholders of how much they can or cannot participate Transfer of Shares: With the passage of time, directors in the running of the company or how much they and management may want to divest their shares. The can control the management of the money they have shareholder agreement should contain guidelines and invested. options for the selling and buying of shares, so that the overall share distribution ratio is not disturbed. Distinction in the Ownership of the Shares: This section helps distinguish between the different classes Guidelines for Exigencies: This will include contingencies of shareholders. for the retirement or the death of a stakeholder or director. These guidelines will ensure that there is Vesting Rights: Conditions under which a shareholder minimum confusion as and when an emergency should can sell his shares. occur. It will ensure business continuity and safeguard the interest of the shareholders. Quorum: Lays down the number of shareholders that need to be present to hold a shareholders’ meeting and Composition of the Board of Directors: This is a legal to pass a resolution. requirement that clearly identifies members of the Board of Directors and their terms of employment or Ownership in Case of Buyouts: Lays down the number continuity. It will also describe the duties of the board. of shareholders that need to be present to hold a shareholders’ meeting and to pass a resolution. Compensation: Members of the Board of Directors are normally not employees of the company. Therefore, they Dispute Settlement Machinery: This section will spell need to be compensated for their effort in formulating out the methods of arbitration that would be used to policies and overseeing the management of the settle a shareholders’ dispute. company. Voting Rights: This section will outline the voting rights Conditions for Change in Composition: This section on management decisions of the shareholders, thereby will lay down the conditions under which the Board of indicating what control the shareholders will have over Directors may bring in a new stakeholder, or existing the management of the money they have invested. Annex 1 : Essentials of a Shareholder Agreement VOLUME 2 97 ANNEX 1 ESSENTIALS OF A SHAREHOLDER A G R EEM EN T : A N N EX 1 A well-drafted shareholders agreement will help run the company and will play an important role in the continuity of the organization, and will help avoid expensive and time-consuming legal wrangles. It will provide details of the rights and duties of the stakeholders and the shareholders. A shareholder agreement should be reviewed and revised periodically to ensure that it is in line with the current business environment, but it should not be revised so often as to cause instability. SOURCE: Article published at: http://www.morebusiness.com/running_ your_business/legal/Shareholder-Agreement.brc. 98 VOLUME 2 Annex 1 : Essentials of a Shareholder Agreement ANNEX 2 ANNEX 2 : SAMPLE MEDIATION & DISPUTE RESOLUTION CLAUSES FROM AROUND THE WORLD SAMPLE MEDIATION AND DISPUTE Belgian Center on Mediation and Arbitration RESOLUTION CLAUSES FROM AROUND DISPUTE RESOLUTION CLAUSE THE WORLD “The parties hereby undertake to apply the CEPANI Rules of Mediation to all disputes arising out of or in American Arbitration Association relation with this Agreement.” MEDIATION CLAUSE 1 The following provisions may be added to this clause: “If a dispute arises out of or relates to this contract, or “the seat of the mediation shall be (town or city)” the breach thereof, and if the dispute cannot be settled through negotiation, the parties agree first to try in good “the proceedings shall be conducted in the (…) faith to settle the dispute by mediation administered language” by the American Arbitration Association under its Commercial Mediation Procedures before resorting to should the mediation fail, the dispute shall be finally arbitration, litigation, or some other dispute resolution settled under the CEPANI Rules of Arbitration by one procedure.” or more arbitrators appointed in accordance with those Rules.” MEDIATION CLAUSE 2 SOURCE: http://www.cepani.be/EN/default.aspx?PId=411. “The parties hereby submit the following dispute to mediation administered by the American Arbitration Bulgarian Chamber of Commerce and Industry Association under its Commercial Mediation Procedures DISPUTE RESOLUTION CLAUSE [the clause may also provide for the qualifications of the mediator(s), the method for allocating fees and expenses, “All disputes in connection with this contract shall the locale of meetings, time limits, or any other item of be referred for resolution through mediation to the Mediation Center with the Court of Arbitration at the concern to the parties].” Bulgarian Chamber of Commerce and Industry, and in MED/ARB CLAUSE case parties fail to reach an agreement — to the Court of Arbitration at the Bulgarian Chamber of Commerce “If a dispute arises from or relates to this contract or and Industry in accordance with its Rules.” the breach thereof, and if the dispute cannot be settled SOURCE: http://www.mediation.bcci.bg/english/indexphp3?vheader= through direct discussions, the parties agree to endeavor RECOMMENDED%20MEDIATION%2 CLAUSES&vfile=it8.htm. first to settle the dispute by mediation administered by the American Arbitration Association under its Center For Effective Dispute Resolution (CEDR) Commercial Mediation Procedures before resorting to arbitration. Any unresolved controversy or claim MULTI-TIERED PROCESS arising from or relating to this contract or breach “If any dispute arises in connection with this agreement, thereof shall be settled by arbitration administered by directors or other senior representatives of the parties the American Arbitration Association in accordance with authority to settle the dispute will, within [ ] days with its Commercial Arbitration Rules, and judgment of a written request from one party to the other, meet in on the award rendered by the arbitrator may be entered a good faith effort to resolve the dispute. in any court having jurisdiction thereof. If all parties to “If the dispute is not resolved at that meeting, the parties the dispute agree, a mediator involved in the parties’ will attempt to settle it by mediation in accordance with mediation may be asked to serve as the arbitrator.” the CEDR Model Mediation Procedure. Unless otherwise SOURCE: http://www.adr.org/resources/Drafting+Dispute+Resolution agreed between the parties, the mediator will be nominated +Clauses-+Guide-+AAA-2007.pdf. Annex 2 : Sample Mediation and Dispute Resolution Clauses from Around the World VOLUME 2 99 ANNEX 2 SAMPLE MEDIATION & DISPUTE RESOLUTION CLAUSES FROM AROUND THE WORLD : ANNEX 2 by CEDR. To initiate the mediation a party must give UNCITRAL rules in force at the time arbitration is notice in writing (‘ADR notice’) to the other party(ies) to initiated. In any arbitration commenced pursuant to the dispute requesting a mediation. A copy of the request this clause, the number of arbitrators shall be [1 – should be sent to CEDR Solve. The mediation will start 3] and the seat or legal place of arbitration shall be not later than [ ] days after the date of the ADR notice.” [London, England].” SOURCE: http://www.cedr.com/about_us/library/internationalclauses.php. “[The draftsperson has the choice to add Version 1, referring to court proceedings in parallel, or Version 2, no court proceedings until the mediation is Danish Institute of Arbitration (Copenhagen completed.] Arbitration) MEDIATION CLAUSE Version 1: “The commencement of a mediation will not prevent the “Any dispute arising out of or in connection with this parties commencing or continuing court proceedings/ contract, including any dispute regarding the existence, an arbitration.” validity or termination, shall be settled by mediation arranged by Danish Arbitration in accordance with the Version 2: Rules on Mediation adopted by Danish Arbitration “No party may commence any court proceedings/ and in force at the time when the mediation is arbitration in relation to any dispute arising out of this commenced.” agreement until it has attempted to settle the dispute by SOURCE: http://www.voldgiftsinstituttet.dk/en/Menu/ Recommended+clauses/Mediation. mediation and either the mediation has terminated or the other party has failed to participate in the mediation, provided that the right to issue proceedings is not International Chamber of Commerce prejudiced by a delay.” DISPUTE RESOLUTION CLAUSE INTERNATIONAL CORE MEDIATION CLAUSE “The parties may at any time, without prejudice to any “If any dispute arises in connection with this agreement, other proceedings, seek to settle any dispute arising the parties will attempt to settle it by mediation out of or in connection with the present contract in in accordance with the CEDR Model Mediation accordance with the ICC ADR Rules.” Procedure. Unless otherwise agreed between the SOURCE: http://www.iccwbo.org/uploadedFiles/Court/Arbitration/other/ adr_rules.pdf. parties, the mediator will be nominated by CEDR. The mediation will take place in [city/country of neither/none of the parties] and the language of the International Institute for Conflict Prevention mediation will be [ ]. The Mediation Agreement and Resolution referred to in the Model Procedure shall be governed CPR Model Dispute Resolution Clauses by, and construed and take effect in accordance with the substantive law of [England and Wales]. The NEGOTIATION courts of [England] shall have exclusive jurisdiction to Negotiation Between Executives settle any claim, dispute or matter of difference which “(A) The parties shall attempt [in good faith] to resolve may arise out of, or in connection with, the mediation. any dispute arising out of or relating to this [Agreement] If the dispute is not settled by mediation within [ ] [Contract] promptly by negotiation between executives days of commencement of the mediation or within who have authority to settle the controversy and who are such further period as the parties may agree in writing, at a higher level of management than the persons with the dispute shall be referred to and finally resolved direct responsibility for administration of this contract. by arbitration. CEDR shall be the appointing body Any person may give the other party written notice of and administer the arbitration. CEDR shall apply the any dispute not resolved in the normal course of business. 100 VOLUME 2 Annex 2 : Sample Mediation and Dispute Resolution Clauses from Around the World ANNEX 2 : SAMPLE MEDIATION & DISPUTE RESOLUTION CLAUSES FROM AROUND THE WORLD Within [15] days after delivery of the notice, the receiving procedure provided in Rule 5.4] [three independent and party shall submit to the other a written response. The impartial arbitrators, none of whom shall be appointed notice and response shall include (a) a statement of that by either party]; [provided, however, that if one party party’s position and a summary of arguments supporting fails to participate in either the negotiation or mediation that position, and (b) the name and title of the executive as agreed herein, the other party can commence who will represent that party and of any other person arbitration prior to the expiration of the time periods who will accompany the executive. Within [30] days set forth above.] The arbitration shall be governed by after delivery of the initial notice, the executives of the Federal Arbitration Act, 9 U.S.C. §§1 et seq., and both parties shall meet at a mutually acceptable time judgment upon the award rendered by the arbitrator(s) and place, and thereafter as often as they reasonably may be entered by any court having jurisdiction thereof. deem necessary, to attempt to resolve the dispute. [All The place of arbitration shall be [city, state].” reasonable requests for information made by one party SOURCE : http://www.cpradr.org/ClausesRules/ to the other will be honored.] CPRModelDisputeResolutionClauses/tabid/157/Default.aspx. “All negotiations pursuant to this clause are confidential and shall be treated as compromise and settlement London Court of International Arbitration negotiations for purposes of applicable rules of MEDIATION CLAUSE evidence.” “In the event of a dispute arising out of or relating to this MEDIATION contract, including any question regarding its existence, “(B) If the dispute has not been resolved by negotiation validity or termination, the parties shall seek settlement as provided herein within [45] days after delivery of the of that dispute by mediation in accordance with the initial notice of negotiation, [or if the parties failed to LCIA Mediation Procedure, which Procedure is deemed meet within [30] days after delivery], the parties shall to be incorporated by reference into this clause.” endeavor to settle the dispute by mediation under the SOURCE: http://www.lcia-arbitration.com/. CPR Mediation Procedure [then currently in effect OR in effect on the date of this Agreement], [provided, however, Netherlands Mediation Institute that if one party fails to participate in the negotiation as provided herein, the other party can initiate mediation MEDIATION CLAUSE prior to the expiration of the [45] days.] Unless otherwise 1. “The Parties agree to submit all disputes that may agreed, the parties will select a mediator from the CPR arise out of this Agreement to mediation pursuant Panels of Distinguished Neutrals.” to the Rules of the Netherlands Mediation Institute (Stichting Nederlands Mediation Institute) in ARBITRATION Rotterdam, before such disputes are submitted “(C) Any dispute arising out of or relating to this for resolution by the competent judge [or arbitral [Agreement] [Contract], including the breach, panel] as provided below. termination or validity thereof, which has not been resolved by mediation as provided herein [within [45] 2. “The Mediator’s task is to analyse with the Parties days after initiation of the mediation procedure] [within the disputes which have arisen in order that the [30] days after appointment of a mediator], shall be Parties may come in good faith to a resolution finally resolved by arbitration in accordance with the and mutually confirm the resolution by written CPR Rules for Non-Administered Arbitration [then agreement. This good faith entails that the Parties currently in effect OR in effect on the date of this not commence any legal action before the mediation Agreement], by [a sole arbitrator] [three independent and procedure pursuant to the preceding clause has been impartial arbitrators, of whom each party shall designate attempted and for a period of [ ] days from one] [three arbitrators of whom each party shall appoint the date that the Mediator is appointed, unless the one in accordance with the ‘screened’ appointment Mediation procedure has been terminated earlier. Annex 2 : Sample Mediation and Dispute Resolution Clauses from Around the World VOLUME 2 101 ANNEX 2 SAMPLE MEDIATION & DISPUTE RESOLUTION CLAUSES FROM AROUND THE WORLD : ANNEX 2 3. “The Mediation procedure is strictly confidential in 6. “The period of 21 (twenty one) days aforesaid nature. Parties shall not be bound in any subsequent for negotiation or mediation may be shortened court [or arbitral] proceedings by any positions or lengthened by written agreement between the taken or statements made during the mediation parties. procedure. 7. “Each party agrees that the Arbitration will be 4. “[Normal arbitration or competent court clause.]” held as an expedited arbitration in South Africa SOURCE: http://www.nmimediation.nl/english/nmi_rules_and_models/ in accordance with the then current rules for nmi_mediation_clause.php. expedited arbitration of the Arbitration Foundation of Southern Africa (below AFSA) by 1 (one) Southern African Institute of Directors arbitrator appointed by agreement between parties. If the parties cannot agree on the arbitrator within DISPUTE RESOLUTION CLAUSE a period of 10 (ten) business days after the referral 1. “If any dispute arises out of or in connection with of the dispute to arbitration, the arbitrator shall be this Agreement, or related thereto, whether directly appointed by the secretariat of AFSA. or indirectly, the Parties must refer the dispute for 8. “The Provisions of this clause shall not preclude any resolution firstly by way of negotiation and in the event of that failing, by way of mediation and in Party to an appropriate court of law for interim relief the event of that failing, by way of arbitration. The in respect of urgent matters by way of an interdict, or reference to negotiation and mediation is a pre- mandamus pending the outcome of the arbitration condition to the parties having the dispute resolved for which purpose the Parties irrevocably submit to by arbitration. the jurisdiction of a division of the High Court of the Republic of South Africa. 2. “A dispute shall arise if the dispute and particularity thereof is communicated by one party to the other 9. “This clause is a separate, divisible agreement from in writing. the rest of this Agreement and shall Remain in effect even if the Agreement terminates, is nullified 3. “Within 21 (twenty one) days of the dispute arising, or cancelled for whatsoever reason.” the Parties shall seek an amicable resolution to such SOURCE: http://www.iodsa.co.za/centre_mediation.asp?ShowWhat=Serv dispute by referring such dispute to representatives iceBlock#dispute. of each of the Parties concerned for their negotiation and resolution of the dispute. The representatives Singapore Mediation Center Mediation shall be authorised to resolve the dispute. MEDIATION CLAUSE 1 4. “In the event of the negotiation envisaged in 2. failing for whatsoever reason or cause, the Parties “All disputes, controversies, or differences arising must, within 21 (twenty one) days of such failure out of or in connection with this agreement shall refer the dispute for resolution by way of mediation first be submitted to the Singapore Mediation Centre in accordance with the then current rules of the for resolution by mediation in accordance with the Institute of Directors in Southern Africa (below Mediation Procedure for the time being in force. The ‘IoD’). The negotiation shall, inter alia, be deemed parties agree to participate in the mediation in good faith to have failed if one of the parties declares in writing and undertake to abide by the terms of any settlement that it has failed. reached.” MEDIATION CLAUSE 2 5. “In the event of the mediation envisaged in 3. Failing in terms of the rules of the IoD, the matter must, “All disputes, controversies, or differences arising out within 21 (twenty one) days thereafter, be referred of or in connection with this agreement shall first be to arbitration as envisaged in clauses below. submitted to the Singapore Mediation Centre for 102 VOLUME 2 Annex 4 : Sample Mediation and Dispute Resolution Clauses from Around the World ANNEX 2 : SAMPLE MEDIATION & DISPUTE RESOLUTION CLAUSES FROM AROUND THE WORLD resolution. The disputes, controversies or differences shall be referred within [ ] days from the time they arose, in accordance with the Mediation Procedure for the time being in force, unless any of the parties serve a written notice on all the other parties and the Singapore Mediation Centre stating that it does not agree to submit the matter to mediation. The parties agree to participate in mediation in good faith and undertake to abide by the terms of any settlement reached.” SOURCE: http://www.mediation.com.sg/mediation_clauses.htm. Annex 2 : Sample Mediation and Dispute Resolution Clauses from Around the World VOLUME 2 103 ANNEX 3 I MP L IC ATIO N S OF E- M AIL COM M UNICATIONS FOR N EG OTIATION : A N N EX 3 IMPLICATIONS OF E-MAIL the possible adverse consequences of negative online COMMUNICATIONS FOR NEGOTIATION interactions because of physical distance, reduced social presence, reduced accountability, and a sense of The following is excerpted from the chapter, “You’ve anonymity (Griffith and Northcraft 1994; Wallace Got Agreement: Negoti@ting via Email” in Rethinking 1999; Thompson 2004). The lack of social cues in Negotiation Teaching: Innovations for Context and e-communication causes people to act more contentiously Culture (C. Honeyman, J. Coben, J. and G. De Palo, than they do in face-to-face encounters, resulting in more editors, DRI Press, Hamline University). The authors frequent occurrences of swearing, name calling, insults, are: Noam Ebner, Anita D. Bhappu, Jennifer Gerarda and hostile behavior (Kiesler and Sproull 1992). Brown, Kimberlee K. Kovach, and Andrea Kupfer Schneider.† Research shows that these findings on e-communication also hold true in e-negotiation. Early research showed that In this excerpt, the authors delineated five major negotiators are apt to act tough and choose contentious implications of the unique characteristics of e-mail tactics when negotiating with people at a distance (Raiffa communication for negotiation. Highlighting these 1982). As researchers began to focus on e-negotiation, particular media effects is particularly important for they discovered the effects of diminished media richness understanding the challenges posed by the media to in e-negotiation: the social presence of others is reduced negotiators trained to conduct face-to-face interactions. (Short, Williams, and Christie 1976; Weisband and Atwater 1999) and the perceived social distance among Implications of E-mail Communications for negotiators increases (Sproull and Kiesler 1986; Jessup Negotiation and Tansik 1991). Thus, negotiators’ social awareness There are five major implications for parties negotiating of each other may be seriously diminished (Valley and by e-mail: Croson 2004) when communicating through e-mail. This might explain why e-negotiators feel less bound 1. Increased contentiousness by normatively appropriate behavior than face-to- face negotiators apparently do. This weakening of the 2. Diminished information sharing normative fabric translates into an increased tendency 3. Diminished process cooperation to make threats and issue ultimata (Morris et al. 2002), to adopt contentious, “squeaky wheel” behavior, to lie or 4. Diminished trust deceive (Naquin, Kurtzberg and Belkin, forthcoming), to confront each other negatively, and to engage in 5. Increased effects of negative attribution flaming (Thompson and Nadler 2002). 1. Increased contentiousness Hence, e-mail negotiators are contending on a much Even before the advent of Internet-based rougher playing field than face-to-face negotiators. e-communication, research showed that communication Still, the better we understand the nature of e-mail at a distance via technological means is more susceptible as described in the previous section, the greater our to disruption than face-to-face dialogue. Aimee Drolet abilities to turn the potentially hazardous characteristics and Michael Morris, for example, have found that of e-mail to good use — i.e. reducing contentiousness. whereas face-to-face interactions foster rapport and Used properly, lean media may facilitate better processing cooperation, telephone communication was prone to of social conflict exactly because these media do not more distrust, competition, and contentious behavior transmit visual and verbal cues (Carnevale, Pruitt, and (Drolet and Morris 2000). Seilheimer 1981; Bhappu and Crews 2005). First, the visible, physical presence of an opponent can induce In Internet-based communication, these findings not arousal (Zajonc 1965), which leads to more aggressive only hold true, they are intensified. Communication behavioral responses. Therefore, the absence of visual and in cyberspace tends to be less inhibited; parties ignore verbal cues in e-mail may defuse such triggers. Second, 104 VOLUME 2 Annex 3 : Implications of E-mail Communications for Negotiation A N N EX 3 : IM PL IC ATION S OF E- M AIL COM M UNICATIONS FOR NEG O TIAT I ON e-mail may also reduce the salience of group differences. lower-status individuals to participate more (Siegel et al. By masking or deemphasizing gender, race, accent, or 1986). Rather than discounting or ignoring information national origin, to name just a few, E-mail may actually provided by lower-status individuals, as they might in reduce the impact of unconscious bias (Greenwald, face-to-face encounters, negotiators may be receptive McGhee, and Schwartz 1998) on negotiation. to this additional information when using e-mail. Deemphasizing group membership may also suppress Attention to this “new” information may subsequently coalition formation. In addition, because negotiators enable negotiators to identify optimal trades and create are physically isolated and the social presence of others more integrative agreements. is diminished, they can take time to “step out” of the discussion and thoughtfully respond rather than merely The nature of e-mail interactivity reinforces this react to the other party’s behavior, potentially limiting tendency toward increased participation and more escalation of social conflict even further (Harasim 1993; diverse information. As discussed above, the parallel Bhappu and Crews 2005). processing allowed by e-mail frees negotiators from sequential turn-taking, prevents interruptions, and allows negotiators to voice their different perspectives 2. Diminished inter-party cooperation simultaneously (Lam and Schaubroeck 2000). Parallel Experiments in e-mail negotiation have explored processing can also undermine existing power dynamics two connected concepts: the measure of inter-party and encourage direct confrontation because it stops cooperation throughout the negotiation process, and the one individual from seizing control of the discussion degree to which resulting outcomes are integrative at the and suppressing the views of another (Nunamaker et end of the negotiation. The connection between the two al. 1991). Thus, in a sense, e-mail exchange can tame is obvious: the potential for integrative outcomes grows and discipline the free-for-all form of parallel processing as parties become more aware of each other’s needs and that can occur in face-to-face encounters. By making capabilities, and areas of potential joint gain emerge. parallel processing more coherent, e-mail may further E-mail negotiations make information exchange likely support the simultaneous consideration of multiple to be constrained, analytical, and contentious. This issues during negotiation. Coupled with the greater diminishes negotiators’ ability to accurately assess diversity of information produced when social groups differential preferences and identify potential joint gains. are deemphasized and power differentials are reduced, Indeed, one comparison of face-to-face and computer- parallel processing in e-mail is likely to promote the mediated negotiations revealed that negotiators search for joint gains (Barsness and Bhappu 2004). interacting electronically were less accurate in judging the other party’s interests (Arunachalam and Dilla 3. Reduction in integrative outcomes 1995). Reduced social awareness in lean media causes As previously mentioned, reduced process cooperation parties to engage more heavily in self-interested behavior is expected to result in a lower level of integrative when negotiating by e-mail. As a result, they may simply agreements. Many experiments measuring these two ignore or fail to elicit important information about the indicators — cooperative behavior and integrative other party’s interests and priorities. The use of e-mail outcomes — have shown that in e-negotiation, as may, therefore, accentuate competitive behavior in opposed to face-to-face negotiation, one is less likely to negotiations (Barsness and Bhappu 2004). encounter cooperation in the process, and less likely to However, when used properly, e-mail could increase achieve integrative outcomes (Arunachalam and Dilla information exchange. Lean media may work to 1995; Valley et al. 1998; see also Nadler and Shestowsky promote more equal participation among negotiators. 2006). Additionally, the potential for impasse appears Diminished social context cues (Sproull and Kiesler to be greater than in face-to-face negotiation (Croson 1991) and resulting reduction in the salience of social 1999). Conversely, other researchers have found no group differences can reduce social influence bias difference in rates of impasse and frequency of integra- among individuals (Bhappu et al. 1997) and encourage tive outcomes when comparing e-mail and face-to-face Annex 3 : Implications of E-mail Communications for Negotiation VOLUME 2 105 ANNEX 3 I MP L IC ATIO N S OF E- M AIL COM M UNICATIONS FOR N EG OTIATION : A N N EX 3 negotiations (Nanquin and Paulson 2003; see also 1962), problem solving (Pruitt, Rubin and Kim Nadler and Shestowsky 2006).1 1994), achieving integrative solutions (Lewicki and Litterer 1985; Lax and Sebenius 1986), effectiveness Why, we might ask, should e-mail bargaining be less (Schneider 2002) and resolving disputes (Moore 2003). integrative than face-to-face encounters (if in fact the Negotiators are trained and advised to seek out and create trend goes in this direction)? We believe that a reduction opportunities for trust-building whenever possible, and in the likelihood and degree of integrative solutions as early as possible in the course of a negotiation process could result from lower levels of process cooperation and (Lewicki and Litterer 1985). the difficulty of building rapport in e-mail negotiation. If e-mail somehow encourages negotiators to become Communication via e-mail, however, is fraught with more contentious and confrontational in the way they threats to trust that are inherent in the medium and communicate (Kiesler and Sproull 1992), this can lead in the way parties approach and employ it (Ebner to spiraling conflict and the hardening of positions. This 2007). It has been suggested that lack of trust in online problem is made even more severe by the difficulty of opposites is the factor responsible for the low levels establishing rapport in e-mail (Drolet and Morris 2000), of process cooperation and of integrative outcomes which we will expand on below. The development of reported above (Nadler and Shestowsky 2006). Low rapport has been shown to foster more mutually beneficial levels of inter-party trust in e-mail negotiation have been settlements (Drolet and Morris 2000), especially in lean measured not only through indirect indicators, such as media contexts (Moore et al. 1999) perhaps because it low process cooperation and infrequently integrative engenders greater social awareness among negotiators outcomes, but also directly: when questioned about (Valley and Croson 2004). the degree of trust they felt in negotiation processes, e-negotiators reported lower levels of trust than face- On the other hand, the media effects of e-mail negotiation to-face negotiators did (Naquin and Paulson 2003). include one feature that might promote integrative E-mail negotiators enter the process with a lower level thinking and outcomes. As we have seen, negotiators of pre-negotiation trust in their counterparts than do tend to exchange long messages that include multiple participants in face-to-face negotiations (Naquin and points all in one “bundle” when using asynchronous Paulson 2003). This initially low expectation regarding media like e-mail (Adair et al. 2001; Friedman and interpersonal trust may exacerbate the fundamental Currall 2001; Rosette et al. 2001). Argument-bundling attribution error by reinforcing the tendency to seek out may facilitate integrative agreements by encouraging reasons to distrust rather than to recognize trustworthy negotiators to link issues together and consider them actions. This becomes a self-fulfilling prophecy: simultaneously rather than sequentially (Rosette et al. expecting to find counterparts untrustworthy, e-mail 2001). This can promote log-rolling, a classic tool for negotiators share less information; this reinforces their reaching integrative outcomes. However, negotiators counterparts’ expectations. As a result, participants in should avoid “over-bundling:” too many issues and e-mail negotiation also experience lower levels of post- too much information delivered at one time can place negotiation trust than do participants in face-to-face higher demands on the receiver’s information processing negotiations (Naquin and Paulson 2003).2 capabilities. Negotiators may, therefore, have more difficulty establishing meaning and managing feedback 5. Increased tendency towards sinister attribution in asynchronous media (DeSanctis and Monge 1999), The media effects of e-mail negotiation exacerbate the further hindering their efforts to successfully elicit and tendency toward the sinister attribution error: the bias integrate the information that is required to construct a toward seeing negative events as the outgrowth of others’ mutually beneficial agreement. negative intentions rather than unintended results or conditions beyond their control. The lack of social 4. Diminished degree of interparty trust presence and of contextual cues lends a sense of distance Trust between negotiating parties has been identified and of vagueness to the interaction. The asynchronous as playing a key role in enabling cooperation (Deutsch dynamic of e-mail negotiations adds to this challenge. 106 VOLUME 2 Annex 3 : Implications of E-mail Communications for Negotiation A N N EX 3 : IM PL IC ATION S OF EM AIL COM M UNICATIONS FOR NE GO TI ATIO N Research shows that e-negotiators ask fewer clarifying is noam@tachlit.net. Anita D. Bhappu is associate questions than face-to-face negotiators do. Instead of professor and division chair of Retailing and Consumer gathering information from their counterparts, e-mail Sciences and research fellow in the Terry J. Lundgren negotiators may be more likely to make assumptions Center for Retailing at the University of Arizona in (Thompson and Nadler 2002); if those assumptions Tucson, Arizona. Her e-mail address is abhappu@email. later prove unfounded, the negotiators may perceive arizona.edu. Jennifer Gerarda Brown is professor of the other’s inconsistent actions or preferences as a law and director of the Center on Dispute Resolution breaking of trust. The power of the sinister attribution at Quinnipiac University School of Law in Hamden, error in e-negotiation is clearly demonstrated by Connecticut and a Senior Research Scholar at Yale experiments showing that e-negotiators are more likely Law School in New Haven, Connecticut. Her e-mail to suspect their opposite of lying than are face-to-face address is Jennifer.Brown@quinnipiac.edu. Kimberlee negotiators, even when no actual deception has taken K. Kovach is the director of the Frank Evans Center place (Thompson and Nadler 2002). Analysis of failed for Dispute Resolution and distinguished lecturer in e-mail negotiations shows that they tend to include dispute resolution at South Texas College of Law. Her unclear messages, irrelevant points, and long general e-mail address is k2kovach@yahoo.com. Andrea Kupfer statements (Thompson 2004), each of which provides Schneider is a professor of law at Marquette University ample breeding ground for the sinister attribution error. Law School in Milwaukee, Wisconsin. Her e-mail address is andrea.schneider@marquette.edu. About the Authors The authors wish to thank Melissa Manwaring and Noam Ebner is co-director of Tachlit Negotiation participants in the Quinnipiac Law School Faculty and Mediation Training in Jerusalem, Israel. He also Colloquium for thoughtful comments on drafts of this teaches in the Masters Program in Negotiation and chapter. Also, our thanks to Ranse Howell and Habib Dispute Resolution offered by the Werner Institute at Chamoun-Nicolas for providing suggestions on reference Creighton University’s School of Law. His email address material. Endnotes 1 Reading through much of the literature on this topic, one might get the sense that most practitioners and researchers have adopted the assumption that e-negotiation, as a rule, involves diminished inter-party trust and results in fewer — and less integrative — agreements. The intuitive strength of this assumption notwithstanding, the best one can say about the research exploring it is that it is inconclusive. Several authors have noted experiences and experiments challenging this assumption (Nadler and Shestowsky 2006; Conley, Tyler, and Raines 2006; Chamoun-Nicholas 2007), indicating that more careful examination needs to be done, which might differentiate between different e-communication platforms (only some of the experiments were conducted via e-mail), or examine e-negotiation’s suitability to specific types of disputes (Conley, Tyler, and Raines 2006). 2 While this tendency for trust-diminishment in online communication holds true for those brought up in a predominantly face-to-face relational environment, it might not be as strong regarding people for whom the online environment has always been a primary meeting place. The more reflective experience and familiarity people have with online communication, the more they will develop new senses for receiving and assessing new types of contextual cues. This would suggest that people born and raised after the Internet Revolution may need to put less time and effort into becoming adept at trust-building and trust-assessment than might older communicators, who might be more prone to apply reception, transmission and assessment processes not suitable or not attuned to the medium. On the other hand, familiarity with the medium might lead younger users to being less careful in its use, causing them to send off-the-cuff or excessively informal messages that undermine their goals. The greater care and formality characterizing many older, less experienced users might be helpful in avoiding this. A negotiator’s generational affiliation notwithstanding, understanding the differences between face-to-face and email negotiation, and conscious practice at developing new senses and sharpening old senses to new types of nuance, will result in a degree of medium-familiarity conducive to improved decision-making and negotiation results. For more discussion of this issue see Larson (2003) and Ebner (2007). Annex 3 : Implications of Email Communications for Negotiation VOLUME 2 107 ANNEX 4 SAM PLE BOARD EVA L U ATION TOOL : A N N EX 4 SAMPLE BOARD EVALUATION TOOL NACD SAMPLE BOARD SELF-ASSESSMENT QUESTIONNAIRE Use this scale in your response: 1=Strongly Disagree; 2=Disagree; 3=Undecided; 4=Agree; 5=Strongly Agree OVERALL RATING RECOMMENDATION FOR IMPROVEMENT 1. The board is firmly committed to 1 2 3 4 5 being held accountable. 2. The board has critiqued, questioned, 1 2 3 4 5 and approved management’s corporate strategy. 3. The board can clearly articulate 1 2 3 4 5 and communicate the company’s strategic plan. 4. The board ensures superb 1 2 3 4 5 operational execution by management. 5. The board focuses on management 1 2 3 4 5 succession and aligns CEO leadership with the company’s strategic challenges. 6. The board and the compensation 1 2 3 4 5 committee foster an aggressive value-driven and performance- oriented culture that aligns officer compensation with long-term performance and innovation. 7. The board is knowledgeable about 1 2 3 4 5 competitive factors, including customer satisfaction. 8. The board ensures that the 1 2 3 4 5 management team is responsive to market forces. 9. The board is strategically involved in 1 2 3 4 5 merger and acquisition discussions, and ensures management’s execution in those areas. THE RIGHT PEOPLE RATING RECOMMENDATION FOR IMPROVEMENT 10. The board’s independent directors 1 2 3 4 5 have a wide range of talents, expertise, and occupational and personal backgrounds. 108 VOLUME 2 Annex 4 : Sample Board Evaluation Tool A N N EX 4 : SA M PL E B OA R D EVALUATION TOOL NACD SAMPLE BOARD SELF-ASSESSMENT QUESTIONNAIRE Use this scale in your response: 1=Strongly Disagree; 2=Disagree; 3=Undecided; 4=Agree; 5=Strongly Agree 11. The board’s independent directors 1 2 3 4 5 are independent-minded in dealing with company issues. 12. The board is intolerant of 1 2 3 4 5 management and board ineffectiveness. 13. Directors do what is best for the 1 2 3 4 5 corporation and shareholders regardless of countervailing pressure. THE RIGHT CULTURE RATING RECOMMENDATION FOR IMPROVEMENT 14. The board encourages a culture that 1 2 3 4 5 promotes candid communication and rigorous decision making. 15. Directors and managers work 1 2 3 4 5 together to achieve “constructive interaction” — a healthy atmosphere of give and take. THE RIGHT ISSUES RATING RECOMMENDATION FOR IMPROVEMENT 16. The board focuses on activities that 1 2 3 4 5 will help the company maximize shareholder value. 17. The board consistently focuses on 1 2 3 4 5 corporate strategy. 18. The board and management act in 1 2 3 4 5 concert, while showing fidelity to their respective roles. THE RIGHT INFORMATION RATING RECOMMENDATION FOR IMPROVEMENT 19. Directors study and understand 1 2 3 4 5 relevant information in order to spend their time effectively and make informed decisions. 20. Director requests for information 1 2 3 4 5 are reasonable in amount and time frame, enabling thorough and prompt replies. Annex 4 : Sample Board Evaluation Tool VOLUME 2 109 ANNEX 4 SAM PLE BOARD EVA L U ATION TOOL : A N N EX 4 NACD SAMPLE BOARD SELF-ASSESSMENT QUESTIONNAIRE Use this scale in your response: 1=Strongly Disagree; 2=Disagree; 3=Undecided; 4=Agree; 5=Strongly Agree THE RIGHT PROCESS RATING RECOMMENDATION FOR IMPROVEMENT 21. The board has composed a 1 2 3 4 5 description of specific duties, goals, and objectives, and measures its performance against those responsibilities. 22. The board has designated an 1 2 3 4 5 independent committee to monitor board composition and operations. THE RIGHT FOLLOW-THROUGH RATING RECOMMENDATION FOR IMPROVEMENT 23. The board effectively follows 1 2 3 4 5 through on recommendations developed during the evaluation process. 24. Evaluations lead to a clearer 1 2 3 4 5 understanding of what the board must do to become a strategic asset. 25. The full board agrees on and 1 2 3 4 5 approves actions to address areas in need of improvement. 26. The board initiates action 1 2 3 4 5 plans with specific time lines for implementation of recommendations, and monitors progress. SOURCE: NACD, Improving Director Effectiveness//it.//, 2005. Copyright 2005 NACD. All rights reserved. Used by permission. 110 VOLUME 2 Annex 4 : Sample Board Evaluation Tool ANNEX 5 A N N EX 5 : SA M PL E D IR EC TOR SELF- EVALUATION TOOL SAMPLE DIRECTOR SELF-EVALUATION TOOL Highmark Inc. Self-Assessment of Directors Name:________________________________________________________________________________________ Term Expiration Date: _______________________________ Retirement Date: _______________________________ 1. During your term in office as a Director, you have chaired or served on the following committees and Subsidiary Boards. (Please review this record of your participation, correct and update as needed.) Dates Committee __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ 2. Attendance at Annual Meetings Minutes of the annual meetings since your term began on ____________________ reflect that you have attended __________ of the __________ annual meetings. (Please review and correct this information, if needed.) 3. Attendance at Board Meetings Minutes of Board meetings reflect that you have attended ____________ of the ___________ meetings held since your term began. Participated in ____________ meetings by telephone conference. (Please review and correct this information, if needed.) 4. Attendance at Committee Meetings Minutes of Committee meetings reflect that you have attended ___________ of the ___________meetings held by the committees which you chaired or on which you served since your term began. Participated in _______________ meetings by telephone conference. (Please review and correct this information, if needed.) Annex 5 : Sample Director Self-Evaluation Tool VOLUME 2 111 ANNEX 5 SAM PLE DIRECTOR SELF- EVA L U ATION TOOL : A N N EX 5 5. Attendance at Subsidiary Board Meetings (If Applicable) Minutes of Subsidiary Board meetings reflect that you have attended ___________ of the __________ meetings held by the Subsidiary Board which you chaired or on which you served since your term began. Participated in _________ meetings by telephone conference. (Please review and correct this information, if needed.) 6. In light of time commitments, family/professional obligations, and health status, will you be able to continue to contribute to the Board and its Committees? Yes No Comments: ________________________________________________________________________________ __________________________________________________________________________________________ _________________________________________________________________________________________ __________________________________________________________________________________________ 7. Comment on the extent to which you have brought, and will bring, useful experience, information, and insights in addressing issues coming before the Board. Comments: ________________________________________________________________________________ __________________________________________________________________________________________ _________________________________________________________________________________________ __________________________________________________________________________________________ 8. What are the areas confronting the Board now and for the next three years that most interest you and to which you feel that you could make the greatest contribution? Comments: ________________________________________________________________________________ __________________________________________________________________________________________ _________________________________________________________________________________________ __________________________________________________________________________________________ 9. Are you satisfied with your performance as a Board Member? Why or why not? Comments: ________________________________________________________________________________ __________________________________________________________________________________________ _________________________________________________________________________________________ __________________________________________________________________________________________ 112 VOLUME 2 Annex 5 : Sample Director Self-Evaluation Tool A N N EX 5 : SA M PL E D IR EC TOR SELF- EVALUATION TOOL 10. What would help you to better fulfill your obligations as a Director in the future? Comments: ________________________________________________________________________________ __________________________________________________________________________________________ _________________________________________________________________________________________ __________________________________________________________________________________________ 11. Are there areas of interest or expertise in which you would like to expand your involvement with the Board? If yes, please specify. Comments: ________________________________________________________________________________ __________________________________________________________________________________________ _________________________________________________________________________________________ __________________________________________________________________________________________ SOURCE: NACD, Improving Director Effectiveness//it.//, 2005. Copyright 2005 NACD. All rights reserved. Used by permission. Annex 5 : Sample Director Self-Evaluation Tool VOLUME 2 113 ANNEX 6 SA MP L E S E LF- A SS ESSM ENT QUESTIONNAIRE FOR BANK D IR EC TOR S. : A N N EX 6 SAMPLE SELF-ASSESSMENT QUESTIONNAIRE FOR BANK DIRECTORS Federal Reserve Center for Online Learning SAMPLE BOARD OF DIRECTORS’ SELF-ASSESSMENT FOR DECEMBER 31, 20_________ 1. Determining the Bank’s Mission and Purpose The board should establish the bank’s mission statement and periodically revise it when necessary. The mission statement should be clear, concise and understood and supported by each board member. Are you satisfied that: Not Satisfied Satisfied Not Sure Not Applicable 1.1 All board members are familiar with the current mission statement? 1.2 All board members support the current mission statement? 1.3 The mission statement is appropriate for the bank’s activities for the next two to four years? 1.4 The board’s policy decisions are consistent with the bank’s mission statement? Are there any areas related to the bank’s mission statement that need to be discussed? __________________________________________________________________________________________ _________________________________________________________________________________________ __________________________________________________________________________________________ 2. Establishing the Bank’s Strategic Plan Strategic planning is an essential board responsibility. The formal planning process should take place at least every three years because changes in the environment may present new opportunities or challenges and may require the bank’s leadership to change. These changes may also affect the bank’s goals. Are you satisfied that: Not Satisfied Satisfied Not Sure Not Applicable 2.1 All board members are familiar with the current mission statement? 2.2 All board members support the current mission statement? 2.3 The mission statement is appropriate for the bank’s activities for the next two to four years? 2.4 The board’s policy decisions are consistent with the bank’s mission statement? 114 VOLUME 2 Annex 6 : Sample Self-Assessment Questionnaire for Bank Directors Are there any areas related to the bank’s strategic planning process that need to be discussed? A N N EX 6 : SA M PL E SEL F - ASSESSM ENT QUESTIONNAIRE FOR B AN K DI R EC TO RS __________________________________________________________________________________________ _________________________________________________________________________________________ __________________________________________________________________________________________ 3. Approving and Monitoring the Bank’s Products and Services The bank carries out its mission by offering specific products and services that have been approved by the board. Additionally, the board has the responsibility for monitoring and evaluating products, ensuring that their quality is consistent with the bank’s objectives. Monitoring means tracking progress toward the goals established in strategic and annual planning. Evaluating means measuring the effectiveness and quality of the bank’s products and services. Monitoring and evaluating can be accomplished by reviewing performance data, observing products and services firsthand, surveying customers, or retaining a consultant to conduct an evaluation. Are you satisfied that: Not Satisfied Satisfied Not Sure Not Applicable 3.1 The board is knowledgeable about current products and services? 3.2 The board knows the strengths and weaknesses of the bank’s current products and services? 3.3 The board periodically considers adding new products and services or discontinuing existing products and services? 3.4 The board has a process for tracking the performance of products and services? Are there any areas related to the bank’s products and services that need to be discussed? __________________________________________________________________________________________ _________________________________________________________________________________________ __________________________________________________________________________________________ 4. Selecting and Supporting the CEO and Reviewing the CEO’s Performance A primary board responsibility is the selection and retention of the chief executive officer. An effective board will have a clear job description to utilize in evaluating the CEO’s performance or to facilitate a carefully executed search process if the position is vacant. Additionally, the board will support the CEO by providing frequent and constructive feedback, and periodically conducting evaluations to strengthen the CEO’s performance. Annex 6 : Sample Self Assessment Questionnaire for Bank Directors. VOLUME 2 115 ANNEX 6 SA MP L E S E LF- A SS ESSM ENT QUESTIONNAIRE FOR BANK D IR EC TOR S. : A N N EX 6 Are you satisfied that: Not Satisfied Satisfied Not Sure Not Applicable 4.1 A written job description clearly defines the responsibilities of the CEO? 4.2 The board assesses the CEO’s performance in a systematic and fair way on a regular basis? 4.3 The mission statement is appropriate for the bank’s activities for the next two to four years? 4.4 The board’s process for determining the CEO’s compensation is objective, adequate, and ties performance to compensation? Are there any areas related to the board’s selection, support, and review of the CEO’s performance that need to be discussed? __________________________________________________________________________________________ _________________________________________________________________________________________ __________________________________________________________________________________________ 5. Providing Effective Fiscal Oversight Another important board responsibility is preservation of a bank’s resources and assets. The board should establish budget guidelines, approve an annual operating budget, and monitor adherence to the budget throughout the year. In addition, the board should consider having an annual audit by an independent accounting firm to verify to shareholders and the public that the bank is accurately reporting its sources and uses of funds. The board is also responsible for ensuring that funds are appropriately invested to safeguard the bank’s future. Are you satisfied that: Not Satisfied Satisfied Not Sure Not Applicable 5.1 The board ensures that the budget reflects priorities consistent with the strategic plan and annual plan? 5.2 The board receives financial reports on a regular basis? 5.3 Financial reports are understandable, accurate, and timely? 5.4 Management has established appropriate controls over financial reporting? 5.5 Accounting personnel have appropriate experience and on- going training to prepare financial statements in accordance with generally accepted accounting principles? 5.6 The board considers having an annual financial statement audit by an independent accounting firm and documents in its minutes any reasons why this is not done? 116 VOLUME 2 Annex 6 : Sample Self-Assessment Questionnaire for Bank Directors A N N EX 6 : SA M PL E SEL F - ASSESSM ENT QUESTIONNAIRE FOR B AN K DI R EC TO RS Are you satisfied that: Not Satisfied Satisfied Not Sure Not Applicable 5.7 The board has established appropriate investment policies? 5.8 The board has approved policies that enable the bank to manage risks and reduce them to a tolerable level? 5.9 The board has an adequate amount of liability insurance in the event of lawsuits filed against the bank as a whole or against members and staff as individuals? 5.10 The board periodically reviews analysis of the insurance carried by the bank (e.g., directors’ and officers’ general liability and workers compensation) to ensure adequate coverage and competitive pricing? Are there any areas related to the board’s fiscal oversight that need to be discussed? __________________________________________________________________________________________ _________________________________________________________________________________________ __________________________________________________________________________________________ 6. Understanding the Relationship Between the Board and the Bank’s Staff Board members must have a clear understanding of their role and that of the bank’s staff, including an awareness that the respective responsibilities may change as the bank grows and changes. Many important organizational issues require a partnership of the board and the bank’s staff if they are to be addressed effectively. The primary board-staff relationship is between the board and the CEO, and the quality of this relationship is extremely important. When other staff members are assigned to work with board committees, their role should be clearly defined and approved by the CEO. Are you satisfied that: Not Satisfied Satisfied Not Sure Not Applicable 6.1 The respective roles of the board and staff are clearly defined and understood? 6.2 The respective roles of the board and the CEO are clearly defined and understood? 6.3 A climate of mutual trust and respect exists between the board and the CEO? 6.4 The board gives the CEO enough authority and responsibility to lead the staff and manage the bank effectively? 6.5 When bank staff is assigned to assist board committees, each understands his/her role? Annex 6 : Sample Self Assessment Questionnaire for Bank Directors. VOLUME 2 117 ANNEX 6 SA MP L E S E LF- A SS ESSM ENT QUESTIONNAIRE FOR BANK D IR EC TOR S. : A N N EX 6 Are you satisfied that: Not Satisfied Satisfied Not Sure Not Applicable 6.6 Board members refrain from directing the work of the bank’s staff? 6.7 The board has adopted adequate and appropriate human resource policies? Are there any areas related to the relationship between the board and the bank’s staff that need to be discussed? __________________________________________________________________________________________ _________________________________________________________________________________________ __________________________________________________________________________________________ 7. Enhancing the Bank’s Public Image Board members can do much to develop the bank’s image. If a bank is successful, but its achievements are kept secret, it will not be able to raise additional capital, attract desirable board candidates or staff, or serve a broad cross-section of the community. Accordingly, the board should develop a marketing and public relations strategy. Such a strategy might include written and visual communications such as annual reports, newsletters, fact sheets, press releases, Web pages, and participation in community events. As part of its public relations strategy, the role of board members should be defined for communications with key businesses, government, media, and regulators. The role of the CEO should also be defined for these purposes. While encouraging individual board members to spread the word about the bank they help govern, the board should also have a policy about who should serve as the bank’s official spokesperson when, for example, a news reporter requests an interview about a possibly controversial issue. Conversely, board members also need to understand that much information they learn as board members is confidential and should not be repeated in the community at large. Are you satisfied that: Not Satisfied Satisfied Not Sure Not Applicable 7.1 The bank has an effective public relations and marketing strategy? 7.2 Board members promote a positive image of the bank in the community? 7.3 Board members understand who can serve as the official spokesperson for the bank? 7.4 Board members understand what information is confidential and is not to be repeated in the community? Are there any areas related to the bank’s public relations and marketing strategy that need to be discussed? __________________________________________________________________________________________ _________________________________________________________________________________________ __________________________________________________________________________________________ 118 VOLUME 2 Annex 6 : Sample Self-Assessment Questionnaire for Bank Directors 8. Carefully Selecting and Orienting New Board Members A N N EX 6 : SA M PL E SEL F - ASSESSM ENT QUESTIONNAIRE FOR B AN K DI R EC TO RS An effective bank board is made up of individuals who contribute needed skills, experience, perspective, wisdom, time and other resources to the bank. Because no one person can provide all of these qualities, and because the bank’s needs change over time, the board should have a plan to identify and recruit appropriate people to serve on the board. Once new members have been recruited, the board should have an orientation program to acquaint new members to their responsibilities and to the activities of the bank. Additionally, consideration might be given to having board members periodically rotated off of the board to ensure that it can benefit from new ideas and experience without creating a board so large that it becomes ineffective. Are you satisfied that: Not Satisfied Satisfied Not Sure Not Applicable 7.1 The board has an effective process to identify, select, and nominate new members? 7.2 The board ensures that prospective board members have adequate time to devote to board responsibilities? 7.3 The board’s composition reflects the diversity of background, expertise, and other resources needed by the bank? 7.4 The board provides new board members with a comprehensive orientation to the bank’s programs and finances? 7.5 The board has established policies for length of board service, mandatory retirement, and rotation of board members to ensure appropriate leadership, energy, and skills to oversee the operations of the bank? Are there any areas related to selection or orientation of new board members that need to be discussed? __________________________________________________________________________________________ _________________________________________________________________________________________ __________________________________________________________________________________________ 9. Organizing Itself So That the Board Operates Efficiently Boards carry out their work in meetings. To make board meetings productive, board members need to receive and review agendas and background materials before the board meetings. Effective boards utilize board agendas that focus on important issues, allow discussion, and culminate in action. Since boards operate in accordance with by-laws and organizational policies, board members need to be familiar with these documents. By-laws and policies need to be reviewed periodically and, if necessary, revised. Annex 6 : Sample Self-Assessment Questionnaire for Bank Directors VOLUME 2 119 ANNEX 6 SA MP L E S E LF- A SS ESSM ENT QUESTIONNAIRE FOR BANK D IR EC TOR S. : A N N EX 6 Are you satisfied that: Not Satisfied Satisfied Not Sure Not Applicable 9.1 Board members receive clear and succinct agendas and written material with sufficient time to review prior to board and committee meetings? 9.2 The board focuses much of its attention to long-term, significant policy issues rather than short-term administrative concerns? 9.3 Board members have adequate opportunities to discuss issues and ask questions? 9.4 Board members are each comfortable discussing controversial issues and asking difficult questions? 9.5 The frequency of the board meetings is appropriate for the responsible discharge of the board’s duties? 9.6 The length of board meetings is adequate to thoroughly vet all items on the board’s agendas? 9.7 The size of the board is appropriate for the effective governance of the bank? 9.8 Board members are actively involved in the work of the board? 9.9 The board periodically reviews and approves its policies, procedures, committee charters, and bylaws? 9.10 Board members are familiar with bylaws, policies, procedures, and charters? 9.11 The board has adopted and approved a Code of Ethics for itself and the bank’s staff? 9.12 The board has adopted and approved an effective conflict- of-interest policy for itself and the bank’s staff? 9.13 The board has appointed appropriate committees to improve its efficiency and effectiveness? 9.14 Committee assignments reflect the interests, experience, and skills of individual board members? 9.15 Each committee has a charter or policy that defines its responsibilities and authorities? 9.17 Policies regarding committee assignments offer adequate opportunities for leadership development? 9.18 Does the board evaluate board member independence at least annually? 120 VOLUME 2 Annex 6 : Sample Self-Assessment Questionnaire for Bank Directors A N N EX 6 : SA M PL E SEL F - ASSESSM ENT QUESTIONNAIRE FOR B AN K DI R EC TO RS Are you satisfied that: Not Satisfied Satisfied Not Sure Not Applicable 9.19 If the board does not have an audit committee, does the full board perform all of the responsibilities that would have been conducted by the audit committee? 9.20 Does the board hold line management accountable if they do not follow up satisfactorily or effectively on control weaknesses? 9.21 Does the board hold line management accountable if they do not follow up satisfactorily or effectively on control weaknesses? Are there any areas related to board organization that need to be discussed? __________________________________________________________________________________________ _________________________________________________________________________________________ __________________________________________________________________________________________ 10. General Assessment In addition to the issues covered by the questionnaire: 1. Have any board members been identified who need additional training regarding any aspect of their responsibilities? ______________________________________________________________________________________ 2. What issues should occupy the board’s time and attention during the next couple of years? ______________________________________________________________________________________ 3. How can the board’s organization or performance be improved during the next couple of years? ______________________________________________________________________________________ 4. What other comments or suggestions would you like to offer related to the board’s performance? ______________________________________________________________________________________ SOURCE: Insight for Bank Directors, a Basic Course on Evaluating Financial Performance and Portfolio Risk, Federal Reserve Bank of Kansas City and Federal Reserve Bank of St. Louis. Copyright 2004. All rights reserved. Used by permission. Annex 6 : Sample Self-Assessment Questionnaire for Bank Directors VOLUME 2 121 ANNEX 7 S AM PLE M EDIATION LAWS FROM AROUND TH E W OR L D : A N N EX 7 SAMPLE MEDIATION LAWS FROM AROUND THE WORLD COUNTRY YEAR OF THE LAW FULL NAME LINK Albania No 9090 of Albanian Mediation http://www.mediationworld.net/albania/court_rules/full/107.html June 26, 2003 Law on Dispute Resolution Through Mediation Argentina Ley 24.573 4th Law on Mediation http://www.cejamericas.org/doc/legislacion/marc_ley24573.pdf October 1995 and Conciliation Argentina Provincial Law Mediation Law of the http://www.cejamericas.org/marc/marc_legislacion.php?idioma=in Nº 6452 From Province of Santiago de gles&accion=buscar 16/12/1998 Estero Australia 1997 Mediation Act http://www.legislation.act.gov.au/a/1997-61/current/pdf/1997-61.pdf Austria 6 June 2003 Austrian Civil http://www.mediationworld.net/austria/court_rules/full/111.html Mediation Law (Zivilrechtsmediation- sgesetz) Belarus 2004 Chapter 17 of http://praunik.org/artykuly/78#sdfootnote1anc Commercial Procedure Code of the Republic of Belarus Belgium 21 February 2005 Part Seven of the http://www.cepina.be/en/default.aspx?pld=413 Belgian Judicial Code: http://staatsbladclip.zita.be/moniteur/lois/2005/03/22/loi- Mediation 2005009173.html Bosnia and 29 June 2004 Law on Mediation http://www.umbih.co.ba/eng/mediation/law_on_mediation_ Herzegovina Procedure procedure_in_bih.pdf Brazil 2006 Project of Law in http://www.mediationworld.net/brazil/court_rules/full/90.html Mediation Bulgaria 2004 Mediation Act http://www.mediationworld.net/bulgaria/court_rules/full/6.html Colombia Ley 640 De 2001 Decree Modifing http://www.cejamericas.org/doc/legislacion/ley_640_2001.pdf Certain Regulations Concerning Conciliation Procedures and Dictates Other Specifications Ecuador Ley No. 000. Ley de Arbitraje y http://www.cejamericas.org/doc/legislacion/marc_ec_arbitraje.pdf RO/145; 4 Mediación September 1997 Finland 663/2005 Act on Court-annexed http://www.finlex.fi/en/laki/kaannokset/2005/en20050663.pdf Mediation Hungary 9 November 2007 Act on Mediation http://www.mediationworld.net/hungary/court_rules/full/108.html Act LV of 2002 Mediation Act http://www.mediacio.net/e05.php?szakterulet= http://www.mediationworld.net/hungary/court_rules/full/108.html Indonesia 2003 Supreme Court Ruling http://www.pmn.or.id/files/doc/document%20-%20perma%20 No.2/2003 on Court 02%202003_pmn_official_translation.pdf Annexed Mediation 122 VOLUME 2 Annex 7 : Sample Mediation Laws from Around the World A N N EX 7 : SA M PL E M ED IATION LAWS FROM AROUND THE W OR LD COUNTRY YEAR OF THE LAW FULL NAME LINK Italy Law no. 192-1998 Special Rules on http://www.mediationworld.net/italy/court_rules/full/131.html Mediation in Law no. 192-1998 Italy Decreto 23 The text of the law http://www.mediationworld.net/italy/court_rules/full/132.html Luglio 2004, n. (decree no. 5 of 222: Ministry of 2003) establishing a Justice Decrees n. mediation scheme 222 of 2004 intended for disputes relating to either companies and partnerships and certain financial investments or transactions, together with the relevant implementing regulations by the Ministry of Justice (decrees no. 222 and 223 of 2004). Macedonia 2008 Mediation Law http://www.seemf.cssproject.org/pdf/fyrom/16.01.2005%20-%20 %20Draft%20Mediation%20Law.Macedonia.pdf Malta 2004 Mediation Act http://docs.justice.gov.mt/lom/Legislation/English/Leg/VOL_15/ Chapt474.pdf Montenegro 2005 Law on Mediation http://www.mediationworld.net/montenegro/court_rules/full/30. html Romania 2006 Mediation Act http://www.mediationworld.net/romania/court_rules/full/3.html Serbia 2005 Law on Mediation http://www.seemf.cssproject.org/pdf/serbia/Serbia%20LAW%20 ON%20MEDIATION.pdf Singapore 1998 Community Mediation http://statutes.agc.gov.sg/ Centers Act Slovakia 25 June 2004 Mediation Law http://www.mediationworld.net/slovakia/court_rules/full/56.html USA Pub. Law 104 - The Administrative http://www.justice.gov/adr/pdf/adra.pdf 320 (amending Dispute Resolution Act Pub. Law 101 - of 1996 552 and Pub. Law 102 - 354) Annex 7 : Sample Mediation Laws from Around the World VOLUME 2 123 ANNEX 8 SECP - DISPU TE SETTL EM E : A N N EX 8 SECP - DISPUTE SETTLEMENT MECHANISM such terms and conditions as the Commission deems fit SECP may be Empowered to Evolve ‘Dispute and such person shall be discharged from his liability in Settlement Mechanism’ respect of the matter or transaction in issue to the extent of such amount.” By Sohail Sarfraz The draft law said that the voluntary return of assets, ISLAMABAD: The government may empower the gains or any other amount under this section shall not Securities and Exchange Commission of Pakistan (SECP) discharge any person of his liability in relation to any to issue ‘Dispute Settlement Mechanism’ for resolution contractual arrangement with any other person. The of disputes between a company and its shareholders on powers under this section shall be exercised by the issues arising among members of board of directors of a commission in accordance with the rules prescribed by company. the Federal Government. Sources told Business Recorder here on Monday that According to the provision of “Enforceable Undertaking the draft of the Securities and Exchange Commission and Consent Orders,” where a regulated person has of Pakistan Act 2010 has introduced a new provision of committed a breach of any law, rule, regulation, ‘Dispute Settlement Mechanism’ to reduce litigation. The condition of license or registration or directions given concept is already available in the Income Tax Ordinance by the Commission, which breach does not involve 2001, Sales Tax Act, 1990; Federal Excise Act and Customs fraudulent behaviour on part of the Regulated Person, the Act 1969 to resolve tax-related disputes between taxpayers Commission may, if it deems it to be in the interest of and department. On the same pattern, draft of the the relevant stakeholders and the market generally, accept Securities and Exchange Commission of Pakistan Act 2010 a written undertaking given by such Regulated Person in has proposed ‘Dispute Settlement Mechanism’ to reduce connection with such matter. The undertaking may contain litigation between the corporate sector and the SECP. admissions of breach and contravention, affirmation of According to the provision, the Commission may prescribe abstinence and such other affirmation to the satisfaction a settlement mechanism for disputes arising between of the Commission. The undertaking may be varied at any regulated persons, an investor and a regulated person, time but only with the Commission’s consent. a company and its shareholder or board of directors of If the Regulated Person breaches any of the terms of a company. Under the proposed law, the “Regulated the undertaking, the Commission may enforce the Person” is defined as a person who carries on or engages in undertaking and take the relevant action as is permissible business in a Regulated Activity and where such person is a for the said breach under this Act or any other law for the subsidiary that includes a holding company, not a banking time being in force. Provided that in such case, in addition company or a Development Financial Institution. to any other right the Regulated Person agrees to waive Through another major amendment in the existing in the undertaking given by him, he shall not be required Securities and Exchange Commission of Pakistan Act to be given an opportunity of hearing or representation 1997, the SECP would allow persons to voluntarily before such an action is taken by the Commission. return the assets or gains acquired in contravention of The Commission may, where it is adjudicating any the proposed Securities and Exchange Commission of matter under this Act or an Administered Legislation Pakistan Act 2010. pass orders with the consent of the parties involved. According to the provision, “notwithstanding anything The powers under this section shall be exercised by the contained in any other law, where a person prior Commission in accordance with the rules prescribed by to commencement of an investigation against him the Federal Government, the draft of the Securities and voluntarily comes forward and offers to return the assets Exchange Commission of Pakistan Act 2010 added. or gains acquired in contravention of this Act or an SOURCE: Sohail Sarfraz, “SECP may be empowered to evolve ‘Dispute Settlement Mechanism’”, Business Recorder, May 11, 2010. Available at: Administered Legislation, the SECP may accept such http://www.brecorder.com/index3.php?id=1054762&currPageNo=3&quer offer after determination of the amount due from him on y=&search=&term=&supDate. 124 VOLUME 2 Annex 11 : SECP - Dispute Settlement Mechanism ANNEX 9 AMMAN STOCK EXCHANGE DIRECTIVES A N N EX 9 : D ISPU TE R ESOLUTION — AM M AN STOCK EXCHANGE 2. If the parties agree following the arising of a FOR DISPUTE RESOLUTION dispute that it shall be conclusively resolved Issued by virtue of the provisions of article in accordance with the provisions of the ASE 24/B/7 of the ASE by-laws of 2004. Instructions for Dispute Resolution if there is no arbitration clause. Article 1: B. Disputes arising between Members as regards These Instructions shall be called the “Amman Stock financial brokerage activities shall be resolved Exchange Directives for Dispute Resolution for the year according to the provisions of these Instructions, if 2004”. They shall enter into effect as of September 1st the parties agree that it shall be conclusively resolved 2004. through arbitration procedures in accordance with the provisions of these Instructions. Article 2: C. Disputes to which the ASE is party shall not be Whenever they appear in these Instructions, the subject to arbitration procedures according to the following words and expressions shall have the meanings provisions of these Instructions. assigned to them hereunder, unless otherwise indicated by context: Article 4: A. Any party wishing to resort to arbitration in ASE Amman Stock Exchange pursuance of these Instructions shall submit a request to the Secretary. Said request must include The Board Board of directors of the ASE the following information: 1. Name and full address of both the claimant and The Chairman Chairman of the board of the respondent. the ASE 2. Related agreements, particularly those related Member ASE Member to the agreement to refer the dispute to arbitration according to the provisions of these Arbitration Panel A single arbitrator or a three Instructions. arbitrator panel 3. A description of the nature and the circumstances of the dispute that gave rise to the request. The Secretary Secretary of the board of 4. Reference to the subject matter of the request, the ASE claimed amounts and evidence corroborating the claim. Article 3: 5. The party’s position vis-à-vis the number and A. Any dispute arising between Members and their the selection of arbitrators according to the clients shall be resolved through arbitration provisions of Article 6 of these Instructions. procedures at the ASE, in any of the following cases: 6. Any other information pertinent to the subject matter of the request. 1. If the agreement drafted between the parties include an arbitration clause stipulating that all B. Once the documents referred to in sub-paragraph disputes pertinent or related to the agreement (a) of this Article are completed, the Secretary shall shall be conclusively resolved in accordance serve on the respondent, on the following day to the with the provisions of the ASE Instructions for completion of documents, a copy of the request and Dispute Resolution by one or more arbitrator as its attachments to enable the latter to present his/her the parties may agree. response. Annex 9 : Dispute Resolution — Amman Stock Exchange VOLUME 2 125 ANNEX 9 DIS PUTE RESOLUTION — AM M AN STOC K EXC H A N G E : A N N EX 9 Article 5: of the date of appointing the second arbitrator. If the A. The respondent must present his/her response to the two arbitrators are unable to agree on the selection request within (5) five working days of receiving the of the third arbitrator within the prescribed period, request. He/she shall submit his/her response to the the Chairman of the Board shall appoint the said Secretary, inclusive of the following information: third arbitrator. In all cases, the third arbitrator shall be the president of the Arbitration Panel. 1. His/her opinion on the nature and circumstances of the dispute. C. If any of the parties fails to appoint his/her arbitrator 2. His/her response to the claimant’s requests, as stipulated in sub-paragraph (b) of this Article, the together with corroborative documents and Chairman of the Board shall appoint the arbitrator evidence. in his/her stead. 3. His/her response to the proposals regarding the D. The parties shall be notified of the final composition number and the selection of arbitrators. of the Arbitration Panel. 4. Any other information pertinent to the subject E. Any party can reject the appointment of an matter of the dispute. arbitrator on the grounds of impartiality or B. The respondent shall attach to the response to the connection, in any manner or form, to the subject request any counter claim to the arbitration request, matter of the dispute; the rejection petition shall inclusive of a statement of the events that gave rise to be submitted to the Secretary within three days the counter claim, together with a statement of the of his/her notification of the appointment of the amount(s) claimed in such counter claim. arbitrator. The Board shall have the discretion to rule on that petition. C. The Secretary shall send a copy of the response and the documents attached thereto to the claimant on F. An arbitrator who ceases to perform or resigns from the following day to his/her receipt of the response. his/her duty, for whatever reason, shall be replaced by another arbitrator to be appointed by the same D. If the respondent’s response contains a counter party who appointed the previous one. claim, the claimant must answer it within (5) five working days of receiving the counter claim. G. Arbitrators shall act in their personal capacity and not as representatives of any party. Article 6: Article 7: A. If the claimant and the respondent agree on a single arbitrator to hear the dispute, they shall appoint A. Once the procedures of exchange of documents and him / her in writing, and their agreement shall be selection of arbitrators are complete, the Secretary notified to the Secretary. If they do not so agree shall submit the dispute file to the Arbitration within (7) seven days of serving the respondent with Panel. the arbitration request, the Chairman of the Board B. The Arbitration Panel shall appoint a minute-taker shall appoint a single arbitrator. and shall study the case in the light of documents B. If the parties do not agree on appointing a single and statements presented by both parties. Upon the arbitrator, the dispute shall be referred to three request of any of the parties, the Panel shall hear the arbitrators. In such an event, each party to the parties in their presence. The Arbitration Panel may request and to the response shall appoint his/her also decide, of its own initiative and without any arbitrator, and the Chairman of the Board shall request from the parties to that effect, to hear them. appoint the third arbitrator, unless the two parties The Arbitration Panel shall have the right to decide had authorized the two arbitrators appointed by to hear any other person in the parties’ presence or them to select the third arbitrator within three days upon duly inviting them to attend. 126 VOLUME 2 Annex 9 : Dispute Resolution — Amman Stock Exchange such measures taken by the judicial authority must be A N N EX 9 : D ISPU TE R ESOLUTION — AM M AN STOCK EXCHANGE Article 8: immediately brought to the attention of the Secretary, A. Notices, notifications and decisions shall be served who shall notify the Arbitration Panel thereof. The on the concerned parties via fax or express mail, Panel shall request the cancellation or confirmation of unless the parties agree otherwise . said provisional and preventive measures in the light of B. If one of the parties fails to attend the arbitration its final award. sessions in spite of his/her due invitation to attend, the Arbitration Panel shall, upon verifying the Article 12: absence of any legitimate excuse, proceed with its If the parties reach a settlement to the dispute, after duties, and the procedures shall be deemed as taken referral of the arbitration file to the Arbitration Panel, vis-à-vis both parties. the settlement must be confirmed in an award issued with their mutual consent. Article 9: A. The place of arbitration shall be Amman, and the Article 13: actual venue of arbitration procedures shall be the A. Procedures before the Arbitration Panel shall be ASE, unless the parties agree otherwise. subject to the provisions of these Instructions. B. Arabic shall be the language of arbitration, unless In cases where there is no provision in these the parties agree to use another language. Instructions, relevant Jordanian legislation shall serve as authoritative reference. C. The Arbitration Panel shall be responsible for the session proceedings; and no person other than the B. The Arbitration Panel shall apply the relevant parties or their legal representatives can attend Jordanian legislation on the subject matter of the without the Panel’s approval. dispute. D. The minutes of the meetings shall be signed by the Article 14: President of the Arbitration Panel as well as by the A. The Arbitration Panel must issue its final award minute-taker. within (20) twenty days of the date of submission E. The Arbitration Panel shall be exempt from abiding of the file to it. by the litigants’ rights under procedural codes. B. On the basis of a convincing request from the Arbitration Panel, the Board may extend the Article 10: period set in sub-paragraph (a) of this Article for a It shall be within the discretion of the Arbitration maximum of (20) twenty days. Panel to rule on its competence to hear the dispute, in accordance with these Instructions, notwithstanding Article 15: any claim by a party of nullification or non-existence of A. Where three arbitrators are appointed, the arbitration a contract between the parties. award shall be taken unanimously or by majority. If these two cases fail to materialize, the President of Article 11: the Arbitration Panel shall issue the award on his/ Any of the parties may petition any judicial authority to her own. take provisional or preventive measures, according to the B. The arbitration award must be reasoned. provisions of the Law, prior to the initiation of arbitration procedures. Such a petition shall not be in contravention C. The arbitration award shall be considered as issued with the arbitration agreement, and shall not infringe on in the place of arbitration and on the date of its the Arbitration Panel’s power. Such a petition and any issuance. Annex 9 : Dispute Resolution — Amman Stock Exchange VOLUME 2 127 ANNEX 9 DIS PUTE RESOLUTION — AM M AN STOC K EXC H A N G E : A N N EX 9 D. The arbitration award shall be issued in writing, working day. Official holidays shall not be counted in and shall be signed by the Arbitration Panel. the time limits. E. The final arbitration award must contain a provision on arbitration expenses, arbitrator fees, and the Article 19: party that bears them or the percentage born by The Amman Stock Exchange/Securities Market each party. By-Laws on Dispute Resolution for the year 2000 are thus repealed. F. Arbitration Panel awards shall be conclusive and enforceable. Article 16: A. The Arbitration Panel may issue temporary awards on part of the requests, prior to issuing its final award that puts an end to the entirety of dispute. B. The Arbitration Panel that rules on the dispute shall be in charge of interpreting any ambiguity in the award or rectifying any clerical, mathematical or typographical error therein. C. The interpretation or rectification decision shall be considered an integral part of the award. Article 17: A. The arbitration award shall be issued in an original copy to be deposited by the Arbitration Panel with the Secretary. B. Upon receipt thereof, the Secretary shall call in the parties to pass on the award to them. C. The Secretary shall deliver a certified copy of the arbitration award to any party upon request, provided that one or both of the parties have paid the arbitration expenses in full. D. Any of the parties may at any time request additional certified copies of the issued award from the Secretary. Article 18: Time limits mentioned in these Instructions shall come into force on the day following that wherein notification is considered as duly served; if it is an official holiday, the time limit shall come into force on the first following 128 VOLUME 2 Annex 9 : Dispute Resolution — Amman Stock Exchange ANNEX 10 BSE ARBITRATION COURT A N N EX 10 : B SE A R B ITR ATION COURT 4. organize the continuing education of the judges and Rules and Regulations of the administrative staff; 5. distribute the tasks for the overall organization and ARTICLE 1. (1) The Arbitration Court with the management among the Deputy Chairpersons. Bulgarian Stock Exchange — Sofia AD is a special jurisdiction established in pursuance of Item 1 of Article (2) In the absence of the Chairperson, the functions 26 (1) of the Public Offering of Securities Act. thereof shall be performed by the Deputy Chairpersons, conforming to the distribution referred to in Item 5 of (2) The Arbitration Court shall examine cases, the foregoing Paragraph. conforming to the cognizance thereof by law, as well as cases related to the conclusion and execution of ARTICLE 4. (1) Upon deciding cases, Arbitrator Judges exchange transactions and the consequences thereof, shall be equal in rights, autonomous and independent voluntary arbitration and other relations arising from and shall conform only to the law and to the Exchange the Exchange Rules and Regulations. Rules and Regulations. (3) A dispute may be brought before the Arbitration (2) Arbitrator Judges shall be obligated to respect the Court, and the said dispute shall be examined and confidentiality of any information that comes to the resolved on the merits, regardless of the fact that the knowledge thereof in the course of or in connection same dispute is subject to a pending proceeding before with the performance of the functions thereof. a court of law or another special jurisdiction in Bulgaria ARTICLE 5. The Administrative Secretary shall organize, or abroad. direct and control the work at the records office of the (4) An arbitration agreement shall be enforceable against Court and, to this end, shall: other judicial acts according to the general principles of 1. direct and control the record-keeping; the applicable law. 2. see to the compliance with the orders of the (5) Should the applicability of the award and of the Chairperson, the Deputy Chairpersons and the law be contested, the consent of the party regarding arbitration panels; the examination of the dispute shall be deemed 3. keep a list of arbitrators and be in charge of the prevailing. application of the Tariff of the Court; ARTICLE 2. (1) The Arbitration Court with the 4. be in charge of the logistical support for the Bulgarian Stock Exchange — Sofia AD shall consist of operation of the Court. a Chairperson, two Deputy Chairpersons and Arbitrator ARTICLE 6. The Minute-Taker Clerk shall: Judges. 1. draw up and certify the minutes of proceedings at (2) There shall be an Administrative Secretary, a the sessions of the Chairperson’s Board and of the Minute-Taker Clerk and a Record-Keeper with the court panels; Arbitration Court. 2. ensure implementation of the orders of the Court; ARTICLE 3. (1) The Chairperson of the Arbitration 3. draw up the documents in connection with the Court shall organize the operation thereof and, to this payment of the fees, the remunerations of expert end, shall: etc.; 1. ensure the prompt deciding of cases; 4. compile the list of persons to be summoned and 2. direct the work of the Administrative Secretary and report on compliance to the Presiding Arbitrator the record-keeping; Judge; 3. ensure the interaction of the Court with the 5. certify the appearance of persons in the matter of management bodies of the Exchange; arbitration cases; Annex 10 : BSE Arbitration Court VOLUME 2 129 ANNEX 10 BSE ARBITR ATION C OU RT : A N N EX 10 6. be in charge of the keeping of the records of the Chairperson not later than three days after the receipt of Court and of the separate panels. the said records, and the Chairperson shall endorse any such records immediately. ARTICLE 7. (1) Records shall be received at the Arbitration Court in the Bulgarian language, and any (2) Outgoing correspondence shall be signed by records in foreign languages must be accompanied by a the Chairperson of the Court or by the Arbitrator certified translation into the Bulgarian language. Judge presiding the panel and by the Administrative Secretary. (2) Records received at the Court shall be constituted, conforming to the order of the Chairperson, as cases, ARTICLE 10. The cases referred to the Court shall be case files and others. proceeded with conforming to the adjective provisions of the International Commercial Arbitration Act and (2) Records originally received at the Court, with the Code of Civil Procedure. the exception of regular statements of claim, shall be constituted as file cases. ARTICLE 11. (1) Upon receipt of a statement of claim, the Chairperson of the Court shall verify the validity (3) File cases shall be transformed into cases after the thereof and, if there are no defects, shall order that parties bring the documents into conformity with the transcripts of the list of arbitrators, the tariff and the requirements of the law, pay the fees due, and appoint present Rules and Regulations be transmitted to the regular and substitute Arbitrator Judges of their choice. claimant party, and shall set a time limit wherewithin the (4) The Arbitrator Judges appointed by the parties, party must appoint a regular and a substitute arbitrator sitting in camera on a day and at a time determined by and must pay the fees due. the Chairperson, shall elect a Presiding Arbitrator Judge for the arbitration panel. (2) After appointment of arbitrators and payment of the fees due, transcripts of the records shall be transmitted (5) Substitute Arbitrators shall join the proceeding in to the respondent party, which shall be set a time limit the event of a challenge of a regular Arbitrator or should to appoint a regular and a substitute arbitrator and to an insurmountable obstacle prevent any of the regular respond to the claim. Arbitrators from proceeding with examination of the case. (3) In case the claimant party fails to cure the defects within the time limit set and to pay the fees due, ARTICLE 8. (1) The following books shall be kept at the Chairperson of the Court shall terminate the the Arbitration Court: proceeding. 1. an incoming and an outgoing register; (4) A terminated proceeding may be resumed, acting 2. an alphabetical index; on a new statement of claim and in compliance with the 3. an inventory book for cases; requirements of the law. 4. a book of executive and open sessions; ARTICLE 12. (1) After commencement of the pro- 5. a book of evidence. ceeding by the arbitration panel, the parties shall have the right to challenge, which shall be decided according (2) The books shall be strung through, numbered, to the procedure established by the Code of Civil sealed and signed by the Chairperson. Procedure. (3) Incoming records shall be accepted by the (3) In case an Arbitrator establishes the existence of Administrative Secretary, who shall assign an incoming legal impediments to participation in the panel, the said number and a date of receipt to the said records. Arbitrator shall be obligated to recuse himself or herself. ARTICLE 9. (1) The records received, once filed, shall ARTICLE 13. (1) The cases shall be examined at the be reported by the Administrative Secretary to the building of the Court. 130 VOLUME 2 Annex 10 : BSE Arbitration Court (2) By way of exception, acting on a motion by a party Chairperson of the Court or the Presiding Arbitrator of A N N EX 10 : B SE A R B ITR ATION COURT and by a unanimous decision of the panel, where the the panel. circumstances of the case so necessitate, a case may be examined elsewhere as well. (4) Original documents shall be returned solely where the need is proven and after the party presents a certified (3) The cases shall be heard and decided in the Bulgarian transcript. language. A party who does not possess command of the ARTICLE 18. (1) Pending cases shall not be made Bulgarian language shall be obligated to appear with an available to state bodies, to the parties or to third parties interpreter. and shall not be attached to other cases. ARTICLE 14. (1) Upon deciding of cases, the members (2) Any lost cases shall be restored according to the of the panel shall enjoy equal rights, and decisions shall procedure established for this by the Ministry of Justice. be rendered by a majority. (3) After the end of each year, the Administrative (2) Where a member of the panel holds a dissenting Secretary shall inventory the cases for the past period opinion, the said member shall state reasoning of the and shall report the result in writing to the Chairperson said opinion and shall enter the said opinion in the of the Court. decision of the panel within three days after the said decision is made. ARTICLE 20. (1) Cases shall be scheduled for examination in an executive session by the Presiding ARTICLE 15. All records on the cases as instituted shall Arbitrator of the panel not later than seven days after be filed conforming to the order of receipt and shall be the election of the said Arbitrator. numbered so as to ensure the unimpeded reading of the text. (2) After performance of the actions prescribed in the executive session, the Presiding Arbitrator of the panel ARTICLE 16. (1) Any undecided cases shall be kept shall schedule an examination of the case in an open separately and shall be arranged conforming to the dates session with summoning of the parties. of examination thereof. (3) The parties, the experts and the witnesses shall be (2) Any closed cases shall be filed by an endorsement of summoned according to the procedure established by the Chairperson and shall be kept separately in the order the Code of Civil Procedure. of the filing numbers thereof. ARTICLE 21. (1) If duly summoned, the non-appearance (3) Where a case is removed from the premises of the of a party or a representative thereof shall not be an Court, the Administrative Secretary shall note the impediment to examination of the case. person whereto the said case has been delivered and the time of delivery in the relevant book. (2) In the event of non-appearance of a party or a representative thereof for cogent reasons, the court panel ARTICLE 17. (1) It shall be inadmissible to make any shall adjourn the examination of the case until another date, marks, signs, underlining and other such on the court of which the appearing party shall be presumed notified. records, with the exception of the endorsements by the Chairperson of the Court and the Presiding Arbitrator (3) A party may motion that the case be examined in its of the panel. absence, but if the panel determines that the appearance of the said party is of material relevance for elucidation (2) The cases shall be made available only to the parties of the factual situation in the matter of the case, the or to the authorized representatives thereof. panel may order the appearance of the said party. (3) Transcripts, abstracts, certifications and other ARTICLE 22. (1) The proceeding before the arbitration such of the case records shall be prepared solely acting panel shall open by a proposal for a settlement by the on a written application with a permission from the Presiding Arbitrator. Annex 10 : BSE Arbitration Court VOLUME 2 131 ANNEX 10 (2) The parties may agree on a settlement before the BSE ARBITR ATION C OU RT : A N N EX 10 the decision have been performed and shall report to the decision of the Court is recorded, and the settlement, Chairperson of the Court. unless contrary to morals and to law, shall be approved by the Court and shall be entered in the minutes of (3) The books of the court after close of the cases entered proceedings. therein shall also be kept according to the procedure established by the foregoing paragraph. (3) The parties may furthermore agree regarding the applicable substantive law in case this is not contrary ARTICLE 27. Annually, the Chairperson and the to the standards of international law and to the Deputy Chairpersons shall summarize the caselaw of Constitution. the court and shall bring the said caselaw to the notice of the plenary panel of arbitrators. (4) Bulgarian law shall govern any disputes related to ownership of immovable property and rights in rem The present Rules and Regulations were adopted by the arising therefrom. Board of Directors of the Bulgarian Stock Exchange — Sofia at a meeting evidenced by Minutes of Proceedings ARTICLE 23. (1) The minutes of proceedings at the No. 28 dated 24 September 2004, and the seal of the sessions of the Court shall be prepared under dictation Exchange has been affixed thereto. of the Presiding Arbitrator during the session itself and shall be signed by the said Presiding Arbitrator and by the Minute-Taking Clerk. (2) The defences of the parties, after completion of the collection and verification of evidence, unless presented in writing, shall be included in the minutes in a summary form. ARTICLE 24. The decision of the arbitration panel shall be entered into the inventory book for cases and shall be transmitted to the parties in the order of summoning. ARTICLE 25. (1) Each party may approach the court panel with a motion to interpret the decision or to correct an apparent error of fact. (2) Upon interpretation of the decision, the panel shall pronounce on all ambiguities declared by a new decision. (3) In a proceeding for correction of an apparent error of fact, the court panel may pronounce sitting in camera, if the parties do not object in writing. Otherwise, the motion shall be examined according to the procedure established by the Code of Civil Procedure. ARTICLE 26. (1) After entry of the decision and notification of the parties, the case shall be filed by an endorsement of the Chairperson of the Court and shall be archived for a period of not less than ten years. (2) Before archiving of the cases, the Administrative Secretary shall verify whether all actions prescribed in 132 VOLUME 2 Annex 10 : BSE Arbitration Court ANNEX 11 Procedure of Adhesion to The Market Arbitration A N N EX 11 : B M & F B OVESPA M ARKET ARBITRATION PANEL BM&FBOVESPA MARKET ARBITRATION PANEL Panel Rules The signing of a “Term of Approval” is necessary to By Luiz Eduardo Martins Ferreira adhere to the Market Arbitration Panel Rules and will become the solution of the disputes by mandatory Market Arbitration Panel arbitration. Institution On July 27th 2001, the Sao Paulo Stock Exchange Proceedings of Voluntary Adhesion to The Market “BOVESPA” instituted the Market Arbitration Panel, Arbitration Panel Rules aiming to offer an appropriate forum for the solution of For those who are voluntarily interested in submitting issues relative to capital markets and issues especially of a dispute to the Market Arbitration Panel Rules, it is a corporate nature. necessary to include an Arbitration Clause or another specific document, referring expressly to the regulations Goals of the Market Arbitration Panel of the Market Arbitration Panel. In addition, the Firstly, the Market Arbitration Panel has the function participation also depends on the consent of the of acting in the composition of conflicts arising in the Chairman of the Market Arbitration Panel. special listing segments of BOVESPA, which are New Market and Level 2 of Corporate Governance. Controversies Susceptible to Solution in The However, i) increasing the arbitration institute, ii) Market Arbitration Panel the benefits provided by the panel and iii) the recent Corporate rules amendments in Brazilian legislation that made possible Rules applicable to capital markets the inclusion of solution by arbitration in company by-laws (Article 109, paragraph 32 of Law no. 10.303, Differently to other Arbitration Centres, the Market of 31st October, 2001, that amended the Corporate Arbitration Panel counts on an essential characteristic, Law)3 must all be taken into consideration. The Market that is the maintenance of expert arbitrators in the most Arbitration Panel has decided to authorise the adhesion varied corporate issues and subjects relative to the capital of any persons, companies and others than those market, whose degree of complexity and difficulty is participants referred to in the special listing segments. quite considerable. In this sense, the Market Arbitration Panel will be able to solve controversies resulting of Compulsory Adhesion to The Market Arbitration the application of the dispositions contained in the Panel Rules Corporate Law, in company by-laws, in the rules edited The companies listed in the New Market and Level by the National Monetary Council, Brazilian Central 2 of Corporate Governance segments, as well as their Bank and Security and Exchange Commission of Brazil, controlling shareholders, administrators and Fiscal as well as other applicable rules to the operation of the Council members, are obliged to adhere to the Market capital market in general. Arbitration Panel Rules. Composition of The Market Arbitration Panel Voluntary Adhesion to The Market Arbitration In accordance with the regulation of the Market Panel Rules Arbitration Panel, the panel should be composed of at Investors of companies listed in the New Market or Level least 30 arbitrators, elected by BOVESPA’s Board of 2 of Corporate Governance may voluntarily adhere to Directors, for a two year term. Each arbitrator should the Market Arbitration Panel Rules. Any other company, comply with the following requirements (cumulatively): including those companies listed in the other special listing segments, (Level 1 of Corporate Governance) to possess an unblemished reputation and good will also be eligible to adhere. knowledge of the capital market; and Annex 11 : BM&FBOVESPA Market Arbitration Panel VOLUME 2 133 ANNEX 11 BM &FBOVESPA M ARKET ARBITRATION PA N EL : A N N EX 11 to be a capable person, having a minimum of 30 years Providing that the request complies with all of the of age. demanded requirements, the requested party should present the defense to the Market Arbitration Panel Today, a board of 31 arbitrators make up the Market within five days, and the requesting party will hear Arbitration Panel, with one Chairman and two about the defense. Vice-Chairmen, among them lawyers, accountants, economists and administrators. The panel also includes The parties will be notified to attend a first hearing in a General Secretary (who does not make up part of the the attempt of a composition, and in case a settlement board of arbitrators). is reached, the respective settlement agreement will have the effect of an arbitration award. In case the To act in an arbitration procedure, the arbitrator does not composition fails, the existing preliminary subject need to necessarily integrate the board of arbitrators of will be resolved and the proceedings of an arbitrator’s the Market Arbitration Panel. The parties may appoint appointment will be initiated. other persons as arbitrators, by submitting their names for approval to the Market Arbitration Panel Chairman The appointed arbitrators should elaborate the and Vice-Chairmen. Arbitration Term that should contain the summary of the dispute and the rules of the proceedings The appointed arbitrator should not: (Arbitration Commitment). After the correct signing of the Arbitration Term, evidence and producing be, or has been a controller, administrator, audit of evidence (documental, oral, expert, testimonial) committee/fiscal council member, auditor, employee will begin. After this stage, the sentence should be or representative of some of the litigant parties, in the pronounced, observing the time delay stipulated in last three years; the Arbitration Term. be rendering services to some of the litigant parties, 2. Summary Arbitration or to have rendered it within the last three years, Summary Arbitration should be used to solve disputes except for offering opinions on issues not linked to of a simpler complexity. the dispute; and On his own request, the party that claims for have an economic or legal interest in the dispute. arbitration must indicate the proof that he intends to produce in the Settlement and Judgment Hearing. The Chairman of the Market Arbitration Panel Arbitration Proceedings promotes the draw of a single arbitrator, except if the The Market Arbitration Panel maintains in operation parties make the indication by mutual consent, when three types of arbitration proceedings: the Chairman notifies the requested party and arrange a date for the hearing. In this hearing, there will be a 1. Ordinary Arbitration composition attempt, and in case it is frustrated the Ordinary Arbitration should be used to solve disputes Arbitration Term is immediately signed. In this case, of a large complexity, if it involves very detailed and the requested party presents his defence and evidence, specific proceedings, and must have a maximum of and either at that moment, or within 48 hours, the five arbitrators (Arbitration Tribunal). arbitrator pronounces the sentence. In summary, the party that claims to solve a certain 3. Ad Hoc Arbitration dispute should direct a request to the Market In Ad Hoc Arbitration, or informal arbitration, the Arbitration Panel indicating the parties that will parties can establish private proceeding rules, as for participate, presenting the facts that originated the the number of arbitrators and the use of another controversy, formulating the request, esteeming the Centre, since they make it by mutual consent and involved values, as well as joining all the documents through an Arbitration Term that should count on pertinent to aid the judge in making a decision. the Chairman’s Market Arbitration Panel approval. 134 VOLUME 2 Annex 11 : BM&FBOVESPA Market Arbitration Panel In all of the proceedings, the principles of the that will establish the juridical-procedural outlines A N N EX 11 : B M & F B OVESPA M ARKET ARBITRATION PANEL adversary, equality of the parties, impartiality of the of the arbitration (summarising the dispute and the arbitrators and free convincing are respected, besides proceedings rules). being adopted the secrecy, the speed, the economy of For Corporate Law to suit arbitration procedures, it resources and the expertise of the arbitrators. is expressly established that companies may insert in their by-laws, any rule which submits the arbitration Arbitration Award proceedings to the controversies among shareholders The arbitration award should be issued for a majority of and their company, as well as among minority and votes, in the terms defined by the parties in the Arbitration controlling shareholders. Term or, in the absence of a term stipulation, in the time period of 180 days counted from the commencement of However, the effectiveness of the statutory Arbitration the proceedings. Clause is not completely accepted. For some jurists the simple provision of arbitration in the company’s by-law is Before the signature of the sentence, the Arbitration not enough to oblige the shareholders to submit themselves Tribunal should submit a draft of the sentence to to an arbitration proceeding, being indispensable the the appreciation of the Chairman or one of the Vice signature of a specific Arbitration Clause. For others, the Chairmen, who may prescribe modifications related to statutory clause is equivalent to an Arbitration Clause, formal aspects and point out aspects relating to the merit becoming possible with the establishment of an arbitration of the controversy (without affecting the decision). proceeding immediately, i.e., as soon as a controversy with any shareholder arises. The extension of the arbitration decision is restricted to the parties of the proceeding. However there is the Specifically in the case of the Market Arbitration Panel, possibility of the company extending its effects to other the parties are obliged to adhere to its regulations shareholders that may plead the same situation. and sign a Term of Approval that is equivalent to the Arbitration Clause, in accordance with item 7 above, From time to time, the decisions by arbitration will be in order to avoid any further discussion about the published, including the names of the arbitrators who arbitration proceeding. participated in the proceeding, but without disclosing the names of the parties or any other information that (ii) what changes in law and practice would be may be used to identify them. required to join officers and directors? Corporate Law has foreseen only the one possibility of a Quarrels public corporation’s by-law implementing arbitration to Regarding specifically to what was requested, we have to solve conflicts among the shareholders and the company add the following: or among the controlling and minority shareholders (i) in what form should the company’s submission to (article 109, § 3º). arbitration take? In the Market Arbitration Panel, in order to avoid any With the edition of Law no. 9.307/96, the Arbitration further discussion about the joining of officers and Clause (that precedes the controversy, disposing of the directors, it is necessary to sign the Term of Approval event of a future dispute) inserted a certain agreement submitting the discussion to the arbitration procedure. becoming enforceable, being enough and capable of (iii) how are damages calculated? submitting the dispute to the arbitration proceeding, avoiding the state jurisdiction. In this way, when the Established in the arbitration proceeding, the respective dispute arises the parties shall ask for the establishment sentence (or arbitration decision) should contain a of arbitration, with the signature, in good faith — or, “report” (delimitation of the request), the legal basis in having resistance, for a judicial decision — of the of the decision (reasons that convinced the Arbitration Arbitration Commitment, that it is the document Tribunal) and the “decision” itself. In the last part of Annex 11 : BM&FBOVESPA Market Arbitration Panel VOLUME 2 135 ANNEX 11 BM &FBOVESPA M ARKET ARBITRATION PA N EL : A N N EX 11 the arbitration award, the Tribunal solves the subject, It is still possible to consider the possibility of grouping resolving the conflict and refer only to the request of the different arbitration proceedings that discuss the same winning party, declaring it proceeding or not, or deciding issue and involve the same request or requested party. and specifying the sentence (example: “I impose the In this case, there should be previously appraised the losing party the payment of R$___) and the form and consequences of grouping the proceedings, especially execution terms of what remains to be resolved. the appointment of the arbitrators that would make up the respective Arbitration Tribunal. The decision by arbitration should be clear to avoid ambiguous or erroneous interpretations. Its imprecision BOVESPA Novo Mercado listing rules available at: can cause, for instance, an appeal requesting clarification http://www.bmfbovespa.com.br/en-us/bmfbovespa/ of the decision or even the request to make the download/regulamento.pdf. Rules governing the panel arbitration award not valid. There is also the possibility are available at: http://www.camaradomercado.com.br/ of a proceeding denominated “sentence revision” that InstDownload/Regulation.pdf. aims for the prescription of modifications of the formal SOURCE: Luiz Eduardo Martins Ferreira, “Arbitration in Brazil,” aspect of the decision, and even as for the merit of the OECD – UNCITRAL Experts Group meeting on Corporate Governance Dispute Resolution, June 25, 2003. Available at: www.oecd.org/ controversy, by the Chairman or Vice Chairmen of the dataoecd/2/59/3842405.pdf. institute. The respective Arbitration Tribunal should specify in the arbitration award the responsibility of the parties concerning the costs and expenses of the arbitration proceeding, as well as the fees of the arbitrators who have taken part. (iv) how should multi-party arbitration be handled? In the Arbitration Act, and also in the Market Arbitration Panel Rules, there is no difference in arbitration proceedings involving a single party on both sides of the proceeding, or that involves two or more parties on each side. Endnotes 1 The Arbitration Clause is the convention through which the parties of an agreement commit to submit to arbitration the disputes arising from such an agreement (Article 4 of Law no. 9.307/96). 2 §3 The by-law can establish that the divergences between the shareholders and the company, or between the controlling shareholders and the minority shareholders, can be solved by arbitration, in the terms that specify. 3 Art. 109. Neither the by-law nor the General Meeting can deprive the shareholder of his rights. 136 VOLUME 2 Annex 11 : BM&FBOVESPA Market Arbitration Panel ANNEX 12 A N N EX 12 : KIN G R EPORT ON GOVERNANCE FOR SOUTH AFRIC A - 2 009 KING REPORT ON GOVERNANCE FOR SOUTH many instances and so it behoves specialists to AFRICA - 2009 improve the overall rate of intake and success. Dispute Resolution Clearly the optimal outcome would be to increase the overall satisfaction with the process and outcome of successful resolution. Principle 8.6: The board should ensure disputes are resolved as effectively, efficiently and 7. Disputes may arise either within a company (internal expeditiously as possible disputes) or between the company and outside 1. Disputes (or conflict) involving companies are an entities or individuals (external disputes). The board inevitable part of doing business and provide an should adopt formal dispute resolution processes for opportunity not only to resolve the dispute at hand internal and external disputes. but also to address and solve business problems and to avoid their recurrence. 8. Internal disputes may be addressed by recourse to the provisions of the Act and by ensuring that internal 2. It is incumbent upon directors and executives, dispute resolution systems are in place and function in carrying out their duty of care to a company, effectively. to ensure that disputes are resolved effectively, expeditiously and efficiently. This means that the 9. External disputes may be referred to arbitration or a needs, interests and rights of the disputants must court. However these are not always the appropriate be taken into account. Further, dispute resolution or most effective means of resolving such disputes. should be cost effective and not be a drain on the Mediation is often more appropriate where interests finances and resources of the company. of the disputing parties need to be addressed and where commercial relationships need to be preserved 3. ADR has been a most effective and efficient and even enhanced. methodology to address the costly and time consuming features associated with more formal 10. A distinction should be drawn between processes of litigation. Statistics related to success range from a dispute resolution (litigation, arbitration, mediation low of 50%, for those situations in which the courts and others) and the institutions that provide dispute have handed down a case for ADR, to an average resolution services. of 85% — 90% where both parties are willing participants. 11. In respect of all dispute resolution institutions and regardless of the dispute resolution process 4. Mediation is often suggested as an ADR method or processes adopted by each, an indispensable with the assumption that the parties are willing to requirement is its independence and impartiality in engage fully in the process. A process of screening relation to the parties in dispute. is undertaken by many mediators, which excludes those who fall short of the criteria of will and 12. The courts, independent mediation and arbitration capacity. This is described in the field in terms of services (not attached to any disputing parties) readiness or ripeness for ADRs. Incapacity, as in and formal dispute resolution institutions created the case of mental illness and inability to grasp the by statute are empowered to resolve disputes by concepts, should naturally result in exclusion from mediation or conciliation and by adjudication. Their the process. effective use should be ensured by companies. 5. Those who are resistant to ADRs are problematic in 13. Successful resolution of disputes entails selecting terms of ubiquitous referral. a dispute resolution method that best serves the interests of the company. This would, in turn, entail 6. ADR has become the intervention of choice in giving consideration to such issues as the preservation Annex 12 : King Report on Governance for South Africa - 2009 VOLUME 2 137 ANNEX 12 K IN G RE P ORT ON GOVERNANCE FOR SOUTH AF R IC A - 2009 : A N N EX 12 of business relationships and costs, both in money within a limited period of time, sometimes and time, especially executive time. within a day. 14. It is also important to recognise that the use of 18.2. Principle and precedent. Where the issue in mediation allows the parties to create options for dispute involves a matter of principle and resolution that are generally not available to the where the company desires a resolution that parties in a court process or in arbitration. Further, will be binding in relation to similar disputes the Act makes provision for alternative dispute in the future, ADR may not be suitable. In resolution processes to be conducted in private. such cases court proceedings may be more appropriate. 15. Mediation is not defined in the Act. The concept has an accepted meaning in practice in South 18.3. Business relationships. Litigation and processes Africa. Mediation may be defined as a process involving an outcome imposed on both parties where parties in dispute involve the services of an can destroy business relationships. By contrast acceptable, impartial and neutral third party to assist mediation, where the process is designed to them in negotiating a resolution to their dispute, produce a solution most satisfactory to both by way of a settlement agreement. The mediator parties (a win-win resolution), relationships has no independent authority and does not render may be preserved. Where relationships and a decision. All decision-making powers in regard particularly continuing business relationships to the dispute remain with the parties. Mediation are concerned, therefore, mediation or is a voluntary process both in its initiation, its conciliation may be preferable. continuation and its conclusion. 18.4. Expert recommendation. Where the parties 16. Similarly conciliation is not defined in the Act. wish to negotiate a settlement to their Conciliation is, like mediation, a structured dispute but lack the technical or other negotiation process involving the services of an expertise necessary to devise a solution, a impartial third party. The conciliator will, in recommendation from an expert who has addition to playing the role of a mediator, make a assisted the parties in their negotiations may formal recommendation to the parties as to how the be appropriate. This process would be termed dispute can be resolved. conciliation. 17. Once again, adjudication is not defined in the Act 18.5. Confidentiality. Private dispute resolution but the process will not differ significantly from proceedings may be conducted in confidence. arbitration. Further, the Act makes provision for alternative dispute resolution processes to be 18. In selecting a dispute resolution process, there is conducted in private. no universal set of rules that would dictate which is the most appropriate method. Each case should be 18.6. Rights and interests. It is important in carefully considered on its merits and, at least, the selecting a dispute resolution process to following factors should be taken into account: understand a fundamental difference they have to adjudicative methods of dispute 18.1. Time available for the resolution of the dispute. resolution (court proceedings, arbitration Formal proceedings, and in particular and adjudication). The adjudicative process court proceedings, often entail procedures involves the decision maker imposing a lasting many years. By contrast, alternative resolution of the dispute on the parties after dispute resolution (ADR) methods, and having considered the past conduct of the particularly mediation, can be concluded parties in relation to the legal principles and 138 VOLUME 2 Annex 12 : King Report on Governance for South Africa - 2009 A N N EX 12 : KIN G R EPORT ON GOVERNANCE FOR SOUTH AFRIC A - 2 009 rights applicable to the dispute. This inevitably results in a narrow range of possible outcomes based on fundamental considerations of right and wrong. By contrast, mediation and conciliation allow the parties, in fashioning a settlement of their dispute, to consider their respective needs and interests, both current and future. Accordingly, where creative and forward-looking solutions are required in relation to a particular dispute and particularly where the dispute involves a continuing relationship between the parties, mediation and conciliation are to be preferred. For example, a contract can be amended or materially rewritten. 19. Mediation and conciliation require the participation and presence of persons empowered and mandated to resolve the dispute. 20. The board should select the appropriate individual(s) to represent the company in alternative dispute resolution (ADR) processes 21. The Courts will enforce an ADR clause to resolve a dispute providing all are subject to an agreed set of rules and practices such as the place and language of the process. 22. Contracting parties who are attuned to the fact that a dispute will be administered and resolved by a third party are naturally inclined to resolve it themselves. If, for example, the ADR processes are made subject to the rules of the Arbitration Foundation of Southern Africa (AFSA), it will be administered by AFSA. If the ADR processes are ad hoc, a recalcitrant party in bad faith may be able to frustrate the process. 23. An example ADR clause has been developed by the Institute of Directors and AFSA and settled by senior counsels. That clause is set out in the practice notes and is recommended to be incorporated in all contracts, especially major procurement and cross border contracts. SOURCE: Institute of Directors in Southern Africa, “King Report on Governance for South Africa 2009,” Copyright 2009 IoDSA. All rights reserved. Used by permission. Annex 12 : King Report on Governance for South Africa - 2009 VOLUME 2 139 ANNEX 13 FACTORS TO GUIDE SELECTING A D R SERVIC ES : A N N EX 13 FACTORS TO GUIDE SELECTING ADR SERVICES The grid below may be used to conduct interviews for selecting the appropriate support and determining the level of involvement. The topics and questions are not meant to be exhaustive, but, instead, to provide examples of criteria to guide decision-making. CAPABILITIES SUCCESS, QUALITY OF SERVICE What specific expertise and skills does your firm have? Did your firm’s assistance contribute to the successful Which of those are most relevant to our company/ resolution of a dispute? organization, its business/mission, the nature of the If so, in what ways and why? dispute, and the use of ADR approaches? What separates your firm from the others? ACCESSIBILITY AND CONVENIENCE TRAINING, CERTIFICATION How accessible would the individual or firm be throughout the period of engagement? Is access convenient for all Training through what institution for what goal? disputants and the board? Certification from a credible organization? Participation in continuing education programs to remain AVAILABILITY current? Would the firm be available to provide services within the timeframe needed? SKILLS, PERSONAL ATTRIBUTES Communications (oral, written) CONFLICTS OF INTEREST Confidence, assertiveness, interest in working with you Does your firm have any existing or potential conflicts of Personality interest with the board, senior management, the company, or the other parties to the dispute? Integrity If not, could potential conflicts of interest arise? Commitment If there are conflicts, what are those? Are they significant Organizational skills to prevent the firm from providing fair, impartial counsel? Inspirational Diplomatic FEES Culture How do you typically bill your clients (e.g., hourly; daily; lump fee per case; whether there is a contingency; fee plus expenses)? THINKING PROCESS Does the firm demonstrate creativity and new ways of RECOMMENDATIONS thinking about issues? Who has used your services? Is it well-versed in the latest information relevant to your case? In what specific cases was your firm involved? References that we may be permitted to contact? EXPERIENCE What dispute resolution cases have you and/or your firm handled? DIVERSITY Are those cases and the firm’s other experience relevant to Will the candidate understand cultural issues and gender- the board’s perceived needs for the dispute it is addressing? based viewpoints? 140 VOLUME 2 Annex 13 : Factors to Guide Selecting ADR Services ANNEX 14 AGREEING ON THE TERMS OF MEDIATION process because it gives the disputants greater confidence A N N EX 14 : A G R EEIN G ON THE TERM S OF M EDIATION that their points of view will be addressed without any Once the board has chosen an ADR expert, both must allegiances to the board or senior management. sign an agreement. This agreement should include the following provisions: CONDUCT OF EXPERT DETERMINATION This section should specify how the board expects the ADR PARTIES Identify the parties to the dispute. Specify if expert to pursue his/her work, noting the expectation other parties may arise as the ADR expert begins their that the ADR expert is bound to the high professional work. There is no need, here, to outline the parties’ and ethical standards, and referencing laws, regulations, positions. and codes that affect his or her work. For example, if there is an impasse among the parties, the CEDR1 DISPUTE’S SCOPE Define the nature of the dispute agreement specifies that the ADR expert’s decision shall but note if the dispute’s scope may broaden or narrow as prevail. the disputants work with the ADR expert. This focuses the ADR expert’s efforts and prevents him or her from DEADLINES Provisions may place specific time limits getting distracted by ancillary or other disputes that on various phases of the ADR process and/or an overall may arise. Be careful not to characterize the dispute in time limit for the period from the start to settlement. a way that suggests bias to one party or parties over others. CHALLENGE TO THE PROCEDURE If the ADR process derails because the disputants are unhappy, or APPOINTMENT OF EXPERT Define the specific the ADR expert finds he or she isn’t adequately qualified role(s) for the ADR expert, from exploratory research for the case, the agreement should outline a process for to enforcement of a settlement’s terms. Explain the challenging and changing the dispute. reporting relationship with the board and his/her authority in working with the disputants and, if this is OTHER DISPUTE RESOLUTION OPTIONS If the part of his/her role, to enforce the settlement. Provide ADR expert fails, the agreement should specify how a means to revisit this section if the ADR expert, the the case can move to a court-annexed mediation or the parties, and the board realize that the expert’s role must courts for resolution. be modified to meet changes as the dispute resolution REASONS IN THE DECISION The ADR expert must process evolves. Here, too, the expert should attest to provide reasons for his/her decision. his or her having no conflicts of interest, or if he or she does, those conflicts must be disclosed to the board FEES AND EXPENSES Be specific about the way the privately or publicly, as determined in the engagement ADR expert will bill for his or her time and expenses, negotiations. whether on an hourly basis or a set fee (within parameters jointly determined based on the agreement’s scope of PURPOSE OF EXPERT DETERMINATION This work). section provides an opportunity to affirm the board’s support for ADR for the dispute. IMPLEMENTATION OF THE DECISION Provide direction for how the ADR expert will implement the CONFIDENTIALITY Make clear the importance of the decision, if he or she has been engaged to perform this confidentiality conditions that the ADR expert must responsibility. abide by in his/her dealings with all parties. Trust in an ADR expert is a key source of his or her success. ENFORCEMENT These terms should reflect the Maintaining confidences is integral to building and requirements of local jurisdictions. sustaining trust. CHALLENGE TO THE DECISION If the parties, the INDEPENDENCE ADR experts are most effective when board, or senior managers oppose the decision, what they work independent from the board. Affirming their recourse, if any, is there to review and change the independence in the agreement is essential to the ADR decision? Annex 14 : Agreeing on the Terms of Mediation VOLUME 2 141 ANNEX 14 AGREEING ON THE TERM S OF M ED IATION : A N N EX 14 LIABILITY Should the ADR expert be negligent, what is his or her liability? This section should reflect laws, regulations, and best practice based on model documents. 1 Sample agreements are available at: http://www.cedr.com. 142 VOLUME 2 Annex 14 : Agreeing on the Terms of Mediation