This memo by director Thomas Hallagan explains several of the reasons he decided to leave the board of Amerisafe at the expiration of his term. We’ve heard similar comments from directors at other companies, although not at companies this large (approx $350m market cap). By the way, a 10% drop today is about $34m, which is one data point on the demand curve for governance.
Frankly, we’re impressed. Boards are generally assigned an oversight role in corporations, one that clearly puts them in charge of everything as proxies for the shareholders. Management’s role is to execute what the board has directed, not to exchange its judgment for that of the board. Hallagan’s letter notes specific concerns he has in this regard. What we fear many investors don’t know, or worse don’t want to know, is that this set of tensions is not unique to this company. They are collected under the “agency costs” label that economists use to add up all the stuff that counters the benefits from not trying to have stockholders manage companies directly.
The bailout pay cap proposal reflects similar discontinuities: in a discussion this week, TSC’s senior folks debated whether the cap was a viable solution, but the talk was consistently skewed in the direction of “What about the boards? Where’s the intervention at that level?” After all, if poor compensation structures created the wrong incentives for a CEO, that’s not the CEO’s fault, strictly speaking. While a CEO should participate in the discussion about proper measures of performance, it is not too much to expect the board to lead the discussion.
Hallagan’s letter references personal liability, and we think that’s not an insignificant part of what’s happening here. Not only are directors recognizing where their incentives are, they are realizing that in some cases, it’s not worth the fight. As WC Fields said, “If at first you don’t succeed, try again. Then quit. No use being a damn fool about it.” How much do we expect directors to fight, ex post facto, to solve problems? Their reward at that point is just a lawsuit.
Directors need better tools to implement good governance practices and to simplify complexity in managing the business. This fact is painfully true at companies under $10m, it’s clearly true for at least 1 at $350m, and so how can it not be true at many larger firms?
TSC will soon be relaunching this blog, and indeed the entire TSC site, in a format that focuses on how our tools, ideas, processes, and proprietary methods and algorithms can help companies simplify complexity to enhance analysis, decision-making, and guidance throughout the organization.