Tom Cole: Author of CEO Leadership & Retired Partner of Sidley Austin

Episode 386

Tom Cole, recently retired Partner and chair emeritus of Sidley’s Executive Committee from the law firm Sidley Austin, joins us today to talk about board governance and his book CEO Leadership: Navigating the New Era in Corporate Governance. Tom joined Sidley in 1975 and quickly rose through the ranks to focus on public company M&A as well as advising CEOs and boards on a broad range of issues in corporate governance. He shares his lessons building boards, corporate governance as well as fiduciary duties. This episode is a wealth of information that you don’t want to miss! On this episode of #TheKaraGoldinShow.

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Kara Goldin 0:00
I am unwilling to give up that I will start over from scratch as many times as it takes to get where I want to be I want to be, you just want to make sure you will get knocked down. But just make sure you don’t get knocked down knocked out. So your only choice should be go focus on what you can control control control. Hi, everyone and welcome to the Kara Goldin show. Join me each week for inspiring conversations with some of the world’s greatest leaders. We’ll talk with founders, entrepreneurs, CEOs, and really some of the most interesting people of our time. Can’t wait to get started. Let’s go. Let’s go. Hi, everyone. It’s Kara Goldin from the Kara Goldin show. And I am so thrilled to have my next guest. Here we have Tom Cole, who is not only the author of this incredible book, CEO leadership, but he’s also a retired partner, very, very senior partner from a firm called Sidley Austin, which you may know as Sidley. But Tom and I have gotten to know each other, actually, his daughter runs a food company as well. And we met through her and he is just a wealth of information, but also his book, or he’s got a couple of books out there another one called collaborative crisis management. But today, we’re going to get to talk about CEO leadership and all of the things around around that within the book. So again, Tom was actually at Sidley recently retired. And he joined in 1975. And quickly rose through the ranks to focus on public company m&a, as well as advising CEOs and boards on a broad range of issues, including corporate governance. And he’s truly an expert on topics of building boards, corporate governance, as well as fiduciary duties. And besides offering us the opportunity to talk to him about this book, just in general, I just think he’s, he’s seen a lot over the years with all kinds of boards. So it’s just such a pleasure to be able to have him here. So without further ado, welcome, Tom, excited to have you here.

Tom Cole 2:23
Thank you, Kara. I’m excited to be here. And thanks for that kind introduction.

Kara Goldin 2:27
Absolutely. Well, this, as you and I were discussing, I was excited to have you on also, because we have a lot of entrepreneurs on the podcast. Also a lot of CEOs and people who hopefully are thinking about maybe one day running their own company, or running someone else’s company. And the topic of boards always comes up as how do I build a board? How do I, you know, do it right? What if things don’t go right? And I’d love you know, as a starting point to really have you talked about your career, looking back? And how did you get into kind of this kind of law more than anything? What What was it that really interested you the most? Well, I

Speaker 2 3:14
think the right word is stumbled a high stumbled into it. I thought I wanted to be a corporate lawyer. I didn’t quite know what that meant back in 1975. That really made you a securities lawyer. So I spent a lot of time doing securities work I was, I was the young associate on the Federal Express IPO, oh, wow, forever ago, amazing. But then things evolved. And I actually, I was, I was taken out on a loaner basis and was as a young again, as a young partner was general counsel with one of our large clients. And from that I got bitten by the m&a bug. So I started doing a lot of public company m&a, which continues really through the bulk of my career. And if you do public company m&a, you’re constantly advising CEOs and board. And you’re advising them on making big decisions. And so that, that leads pretty quickly to, you know, thinking about corporate governance, particularly from a decision making standpoint. So, from the stumble into the, into the practice, to the evolution of the practice, that’s where I ended up and I’ve just finished 47 and a half years at the same law firm.

Kara Goldin 4:26
Amazing. Did you ever think that you would be there for your entire career?

Tom Cole 4:31
Well, I’m a child of the 60. So I was going to come out of law school, you know, pay off debts or whatever, the make a little money and then go off and do good things. But what I found was that I was really stimulated by the work stimulated by the people I was around not only my colleagues, but the clients we’ve worked with. Yeah, the C suite, pretty fancy group, right? They’re very stimulating people. And I also found that I could do it do some public good by doing civic and share airtable work. So I’ve served on the University of Chicago board since 2001. Or the belief, I was chair of the hospital in a major academic medical center for a number of years. And now I’ve done other things like that. So it’s, it’s just a nice combination. And then finally, I was able to teach, take, take some time, do some teaching both to undergraduates, I had a course on leadership. And then I taught for over 10 years, Asana to law and business students on corporate governance.

Kara Goldin 5:33
That’s amazing. Well, and I’m also going to make you blush. I was doing some research on you. So the Thurgood Marshall Legacy Award, I mean, amazing. Absolutely amazing. So what an honor. So your practice was primarily public company, m&a, and advising CEOs and boards on a broad range of issues. And as you mentioned, you taught at the University of Chicago as well. When you look at deciding to write a book about this, what was sort of the purpose of of wanting to get a book out there?

Tom Cole 6:09
I guess I there were a couple of motivations. One was, I thought it would be fun to see if I could, in effect, summarize the courses I taught so long. And secondly, I had some good friends, as I was approaching retirement, say you’re allowed to write a memoir, you, as you say, Karen, seeing a lot of stuff. Yeah, and I didn’t want to do a full memoir, but I kind of interlace some vignettes in the book, as sidebars to really to illustrate the substantive points I was trying to make. So there’s the bit of the memoir. And then that now here is going to sound totally immodest. But I really think that our economy and our society is better off if important institutions, those in corporate America, public or private and and other institutions are well run, and well read, and well governed. So, you know, hopefully, this book will help some of that happen to the extent anybody read.

Kara Goldin 7:03
Yeah, no, definitely. And what do you hope that people take away? I mean, I felt that although I’m not an attorney, as you know, I’m married to a recovering one. But it’s, but I just found that the book was really easy to read, I didn’t think that it was a, you know, a lot of you didn’t have to have gone to the University of Chicago Law School. In order to really understand this, I really felt like it was not super simple speak. But it was definitely something that was digestible, that was helpful and had me thinking more than anything from a strategic standpoint. So but more than anything, some people may not understand, because they haven’t built boards. Maybe they’re not CEOs, what is corporate governance? And how would you define that for people?

Tom Cole 7:49
Well, again, coming from my m&a background, I come at corporate governance as a decision making process. There are others who are practitioners of corporate governance, and they’re more or less on the regulatory side, you know, what’s required by the SEC by the sock exchanges, and you got to be able to do both. But so my focus is decision making what is, you know, who gets to make decisions? What are the best practices to follow and making important decisions for whose benefit or decisions to be made? That’s the shareholder stakeholder debate that has literally been going off for a century is quite prominent now in the public mind? And then what are the standards by which decision makers are held accountable if they’ve sent a fiduciary duties in the like, in that file as to how to compensate? Or how to compensate the decision makers, particularly for those for whom it’s a day job as the management team?

Kara Goldin 8:44
And so private companies versus public companies, obviously, you know, there’s the SEC oversight, but it what are the main differences? That that you’ve seen are kind of the the things that if you’re not a public company, you don’t have to worry about it, but maybe you do have to worry about it as a private company board. Right,

Tom Cole 9:05
right. Well, the biggest difference is, and this is gonna get into academic speak, but the academicians call it the agency problem, or, which is easily summarizes the separation of ownership and control. In a public company. The owners aren’t really in the boardroom, and they have very few decisions that are left to them to make. I mean, they vote on directors, and there a few decisions that shareholders ultimately have to decide on, but largely only after receiving a recommendation from the board. So the public company has a separation of ownership and control. There are WAGs who say that institutional owners themselves are not the owners either because they’re investing on behalf of beneficiaries. So one way call with separation of ownership and ownership. But besides that, in a Private Company, though, you’ve got the owners in the boardroom, as well as probably in the C suite. And so that’s a big difference. Now, where it’s not a difference is that all public company, and private company, managers and directors have fiduciary duties to all of the shareholders, all the shareholders, not just not just the shareholders who brought them into the boardroom, but all the shareholders. And so that’s a that’s a very important concept that I’m, I’m fairly confident most private company directors are aware of, but they sometimes need to be reminded.

Kara Goldin 10:40
Yeah, definitely for I think that that is definitely the case. So the subtitle navigating the new era and corporate governance, how has it changed over the years and maybe share what you believe? Are the key changes and why

Tom Cole 10:56
Sure, well, let me let me focus on the notion New Era, a good friend of mine who is a retired justice of the Delaware Supreme Court likes to say that all corporate law started in 1985. That’s, that’s a bit of a stretch. But here’s what happened in 1985, there was the seminal case of Smith versus Vanguard, and people sometimes know it by the, by the company that was involved the Trans Union case. And that was the first time a board of directors was held liable for breach of fiduciary duty under a gross negligence standard, because they essentially just totally allowed the CEO to do what he wanted to Jerry van Gorton was the CEO at the time, which was to sell the company to the Pritzker Family. And they did it without much information without much debate without much deliberation, they were summoned to a meeting on a Saturday morning without being told what it was about, and they approved the deal. Now, here’s what’s interesting, they approved the deal, it was at a very large premium to the market value, or to the market price. And the deal was approved by an overwhelming majority of the shareholders. Having said that, notwithstanding that they were held liable for breach of the duty of care, because they did such a bad job. So that represented a pivot from management, centric decision making, you know, let’s do what Jerry wants to board centric decision making on big subjects, that the big subject, obviously being the sell the company now, here’s how it’s evolved since that, in about the same time, the big decision was, do we resist a hostile tender offer, we’ve made the decision not to sell the company there, again, if if he came incumbent on the board to do a good job in reaching a reasonable conclusion on that. And then as things have gone over time, the list of what gets called a big decision has increased. There are a number of additional things that are now in the big decision category. You know, one is selecting directors. I mean, it used to be frankly, that a public company CEO, and perhaps in many instances, a private company, CEO, maybe more appropriate in a private company context, gets to pick who the directors are going to be. But in public and the public company context, it used to be the CEO said, All right, here’s here’s somebody I want to put on the board and then the board, no members would just nod their head now it’s, it’s it’s been offloaded to a totally independent nominating committee. And very often if the CEO says, I would like this person on the board, that’s the gift kiss of death for the nomination, because the independent board members feel like you know, maybe he’s trying to pack the board, he or she is trying to pack the board. So selecting directors is now one of the big decisions. CDs succession, it used to be the outgoing CEO would say, Here’s my successor. I mean, you probably though the last extreme example of that was Jack Welch, who said, I have three candidates. Here’s the one, this one’s got to be my successor, and the other two aren’t going to fire so we’re gonna get in his way. And now that was dramatic. CEO compensation is now the big decision and broader broader compensation decisions, allocation of capital, you know, do we do a stock buyback and so again, a lot of these big decisions come with a recommendation from the board and the manager or the CEO and the management team. But ultimately, the buck stops at the board, strategic direction and a big one is risk management, risk management. The the overall, the overall structure for rich bricks risk management, the overall structure for corporate compliance is planted firmly in the board and it has that responsibility. And I think this is generally a good, good direction. It’s good. It’s good for a management team to have to be very thoughtful in bringing Something to the board for decision, it makes sense. Think about it more, I’ve just observed. And you’re probably well aware, when you’re when you’re kind of bringing something to the forward, you really want to make sure you got your ducks in a row. And you want to bring it to the board in the right way with the right information, and to be able to answer all the questions, right. So that that creates a discipline around the decision making that I think is overall positive. It can get carried away, if you have boards that don’t really understand their role and step over the line of what they should be doing. It can also get in the way if if boards have become too risk averse. And one of the one of the great concepts of corporate law and applies to public companies and private companies is the business judgment rule, which is where where board where courts say they will defer to boards and their business judgment, so long as it’s been a thoughtful process. And there is any rational basis for the decision. The business judgment rule is highly protective. It also and this is getting into too much law, but I’ll do it anyway. Yeah, no, I love it, the burden of proof that a board has failed to exercise a good business judgment is on the plaintiffs. So there is a presumption in favor of the board. And you know, and the plaintiffs are someone who who want to contest the decision, can can contest it, but they’ve got to prove their case, unfortunately, going back to Smith versus Vanguard, and it was way too easy to prove the case.

Kara Goldin 16:35
Yeah, so interesting. So I often hear entrepreneurs talking about shareholder rights agreements and attorneys talking about shareholder rights agreements, how does that play into what you’re talking about? I mean, if if, for example, obviously, you’re talking a lot about public companies, but even private companies, is the shareholder rights agreement. Does that actually, Trump sort of the the ability of shareholders to really have a voice in some of these things?

Tom Cole 17:04
Well, there are two types of shareholder rights agreements. Yeah, the shareholder rights agreement that public companies think about is the poison pill, which is to take over the fence, after the shareholder rights agreement is, frankly, it’s a euphemism, boys and Phil is a little more accurate. You’re right. But then in private companies, you have agreements where the shareholders delineate beyond what is required by the corporate statutes, you know, certain rights, you know, go on tagalong rights. Now, that kind of thing. Those those rights supplement, what they’re what the corporate statute requires, and the corporate statues, generally speaking, are, are quite enabling. They say, you know, if, if, if the shareholders and boards can agree to certain thing, there are some things that shareholders really cannot take. And ultimately, again, the buck stops in the boardroom, largely. And so, there there are a number of decisions that that ultimately have to be made by the board. Hmm.

Kara Goldin 18:16
Interesting. Well, I’ve seen though, for example, I was just talking to another entrepreneur about her board. And it seemed like there was this definite, four against three kind of mentality that was going on, and it was definitely people that were picked by them. I mean, you talked about a CEO picking people to be on a board. But you know, it happens on the investor side of things as well. Sure. And I think that it’s a, it especially when people are building companies, I’m finding that that is a consistent thread that, you know, maybe I don’t know how you get around that. Exactly. But it’s, it seems like it’s a lot different when it’s a public company, but when it’s a private company, it just seems consistent. all over the places people are building their boards out.

Tom Cole 19:08
Yeah. And, you know, part of that is due to the, as I was talking about the separate of the agency problem and the separation of ownership and control. I mean, you got the owners in the boardroom. I mean, I, I Well, most of my practice was with public companies. So certainly been around private companies. And what’s interesting is to observe a private company that’s just gone public, with the same board intact, you know, not a lot of new sort of outside professional director, Pat types. Those board meetings feel more like staff meeting than public company board meeting, right? You get into the day. One of my favorite stories is about a guy who became he was a public company, CEO type. He would be became the CEO of a company that had just gone public. And he walks into the boardroom and he’s you just couldn’t believe it. People were talking over each other and whatnot. And so he said that it was just like, what the Lord of the Flies and remember the conch shell. He said, Yeah, this is the conch shell, he held up his power, he said, If you want to speak, you have to hold this pen. And we will pass it around. But we’re going to take turn, because listening is more than just just waiting for your turn to speak. And people should be able to everybody should be able to interact and give their point of view.

Kara Goldin 20:28
So board oversight of management, you talk about that in the book? Is it a good thing? Or is it? Is it a bad thing? I mean, how much should a board actually be involved in the decisions that that management is making inside of the company?

Tom Cole 20:48
There are a couple ways of looking at this. First of all, board oversight of management is generally a good time, unless it goes too far. And one exercise that I’ve done with public company boards, and I think it would work with private company boards, is to sit down and, and I’ve talked about this in the book, periodically have an understanding between the management and the board, what decisions are in the, in the exclusive purview of the management, that is they can make those decisions themselves. Sometimes it relates to $1 threshold, sometimes it relates to an issue that could be more qualitatively reputational, like a reduction in force, that sort of thing. Or bringing a lawsuit that kind of been anyway, the board and the CEO and the management team have to sit down and periodically, say, Alright, these are the decisions that the management can make without having to go to the board. And I’ve had a lot of I’ve had CEOs say, why would I ever want to engage in that? And the answer is, so that when you make decisions, and somebody on the board gets huffy, and says, By what right? Did you make that decision without coming to us, you can say you told me I could. And it has to be done periodically, because things change and accompany companies grow larger. So those dollar threshold should probably go up as a reflection of a resetting of what’s a material decision. Companies can decide to go off and take a left turn and strategy or a right turn and strategy do something very different go to China instead of you know, that kind of thing. And, and Vietnam, in those instances, when things change, the board oversight probably ought to be taken up a bit. The problem with board oversight, and if this really, this really came up in the Enron era, which was so many boards were freaked by Enron at that, they became very risk averse. But they also became over. They were over emphasizing the oversight part. And they were under emphasizing the fact that they’re there to give advice, right. And a boards at board should be a a rich source of advice for a CEO. Now they’re Odyssey he knows the frankly, don’t want it. They don’t want the advice. But then you’ve got the wrong word, or you got the wrong attitude on the part of the CEO. And one of the one of the criticisms I’ve heard from boards, and I do annual board evaluation, which is another important subject. One of the criticisms I’ve heard from boards is CEO will come in and not tell us what they really wanted to buy something at the beginning of the meeting, this is this is this is what I want the takeaway to be I need you to help me with this art issue. And sometimes CEOs don’t do that, because they lack self assurance. And they feel like they have to be, I usually said they had to be strong and masterful at all time. Well, in fact, they need to show a little bit of vulnerability. I mean, you know, you don’t want to show huge vulnerability, but a little bit of I really need your advice on this. I could really use it. And sometimes that’s best done in the board meeting or sometimes it’s best buy there and one on ones between board meeting, a really savvy CEO will invest the time in doing those those calls and even visits between board meetings, but they should be substantive not social.

Kara Goldin 24:16
Definitely. But in what about if you’ve got board members that are not just talking to the CEO, but are also talking to other members of the team? Like is that overstepping your grounds of a have a board because I’ve also heard that happening? Where maybe strategic direction is, you know, maybe they don’t like a marketing campaign? And have you ever thought about doing something like this? And I think sometimes it’s lack of experience of a board member going in and trying to influence that. But what can you do about that? You start

Tom Cole 24:53
with again, and understanding an explicit understanding between the board and the CEO about what’s the protocol Some CEOs are perfectly comfortable saying, like, aka, you can call anybody in the C suite, they’ll often say, unless you call anybody below that, because, you know, they’re, if there’s somebody in middle management or lower management gets a call from, from a director, they’ll freak. Yeah. And if it director says, you know, I would really like an analysis done of this. And the other thing, you know, they’re, they’re, they’re, they’re tying up that individual. And worse, there’s sometimes saying, and I want you to send that to me only. That’s wrong. Any information that goes to a director should go to all directors. Right. But but this is largely about just having an understanding. Yeah, and for the most part, it kind of depends, right, for example, the chair of a compensation committee should have unbridled conversations with the CHRO, the chair of the audit committee ought to be able to pick up the phone and talk to the CFO or the in the internal auditor, or the external auditors at any point in time. But but going beyond that, and sort of sharp shooting the marketing campaign by going around the CEO, that’s that’s not a good idea what what that directors should do is, is it the board meeting at the board meeting site? I really think that the full board should get a further analysis of this. Again, getting back to the decision making thing? Yeah, I’m, if if, if this is an appropriate part of our oversight, I think we would all benefit from having more information so we can help you. We can advise you better. It’s not just oversight.

Kara Goldin 26:39
Definitely. Well, and I think so I guess that boils down to is, is that a fiduciary responsibility, right? Because maybe that’s disrupting businesses as normal. And it’s upsetting people like is that is that allowed at a board level, whether it’s a private company or a public company,

Tom Cole 26:59
I mean, it, it needs to be over. Right. And there ought to be, like I said, just an understanding of what of what the ground rules are, and why they’re most important ground rules I’ve already set it is that any analysis done? For one director gets shared with everybody. I mean, there there is, there is a fiduciary duty, and we can then get into fiduciary duties more broadly. But there’s a fiduciary duty, there’s a fiduciary duty on the part of a director not to withhold pertinent information from the other directors. directors don’t have fiduciary duties to each other like partners do. But it’s a fiduciary duty to the corporation, not to withhold information that is vital to the other directors to make decisions. And interestingly enough, it’s also a fiduciary duty on the part of the executives, the management team, to provide to proactively provide information and analyses to board members that are needed for them to make decisions.

Kara Goldin 28:08
Interesting. So and that applies to private companies as well as public companies.

Tom Cole 28:13
Absolutely. The the only the only part of the corporate law is not really the corporate law. But the securities laws don’t apply to private company. But I’ll give you an example is so there’s a securities requirements for disclosure, right? There is actually a fiduciary duty of candor and disclosure of by any in any corporation. So if if in a private company, you’ve got something that is a big enough decision that the statute or the shareholders agreement says we have to go to the shareholders for their approval, the standard of information flow to the shareholders for their vote is identical to what’s required under the securities law. And then in the outside of the vote, and outside of asking shareholders for their rule or action. There’s also a fiduciary duty of candor, not to lie to them. Mm. Would you would hope, right? Yeah. But in fact, new Sherry, dude,

Kara Goldin 29:18
interesting. Have you seen any examples recently where that’s been actually brought up? Not to put you on the spot. But I’m just curious, like, has it? You know, because obviously, we all want to have these in place without actually, you know, having a lawsuit over it. You want the company to be in continuing to grow. But has there ever been a situation where you remember a case out there that maybe this ended up happening? Curious? Well,

Tom Cole 29:48
it often has happened and these are publicly reported situations or their opinions of the court often happens in the context of an m&a deal and goes way back to a case from the 80s, called the Macmillan case where the court for the first time that I’m aware of uttered the phrase fraud on the board. They said there were there were there were board members who were aware of who were actually leaking information to their favorite bitter, and they weren’t telling the board about it. A hand the court yet, you know, when somebody who comes to work wearing a robe, saying you’d have committed fraud on the board? That’s bad. No, they didn’t know that. There was more recent, recent case in the involving CBS and Viacom. Yeah, same thing where information was being in as if I’m recalling the facts of the case correctly, information was being provided to some but not all aboard. And that was not a good venture. Yeah.

Kara Goldin 30:56
So in the 80s, we all live through or many of us live through or have heard about hostile takeovers. Today, we hear more about shareholder activism, what accounts for that shift? And is this a movement towards? I guess, is this a movement towards shareholder centric decision making? Or what do you think about that topic?

Tom Cole 31:18
I have strong opinions on this. But let’s let’s go back to that history. Okay. So in the 80s, the principal source of discipline from the market was the hostile takeover, that is disciplining boards and and management uses the house to pay for and then develop very robust defenses against the hostile takeover, sensibly the poison pill, which is, if you’re not if you’re not familiar with it, that’s the magical thing that a board can put in to effectively deter someone from doing a hostile taking over the company going directly for the shareholders, and only the board can remove it. So yes, if you were if you wanted to do a hostile takeover of another company, you had announced the bid they put in the pill. And then you would at the same time announced a proxy contest to remove the board so that you could redeem the fill. All right, that’s that’s hostile takeover. 101. In a nutshell, what is what has happened more recently, is shareholder activism on the part of a variety of different shareholders and their different goals, institutional shareholders, index funds and whatnot. They like to say, Do not mistake the fact that we have a follow a passive investment strategy, namely, like an index fund does, for the fact that we are not activists on government. And we have to be activists on governance, I say, because we don’t have a choice. We can’t just sell it, we can’t sell out of that stock. Because we told our investors we would be in that stock, because it’s in the index, right? So institutional investors are activists on governance subjects, they’re things like getting rid of a staggered board and the like. The the activism that most people were thinking about, though, is hedge fund activism, which has a natural and operational goal. So a hedge fund will come in, I like to say, one of the least favorite phone calls somebody will get is Hi, I’m Carl Icahn, I own one percenters. Right. But the the, the hedge funds that are looking for financial goals are thinking about, you know, they’re trying to get people to sell a company, they’re trying to get people to not accept a bid to go for a higher bid call, it’s called bumped to trage. Right? Because they want to start at the price to be bought. They’re often asking for a company to, to change the capital allocation largely, you know, do a big stock buyback do a do a special dividend that can are ultimately sometimes they’re asking you for a change in the management. Now, what I tell when I tell companies is they don’t always have bad ideas. Some of those are good ideas. And one of the ways to prepare for a shareholder activism by hedge funds is to have hire somebody like your investment banker to do a mock attack. Say, if, if if, if an activist came into our stock, and we’re going to complain about things, what would they what would they say? What would they complain about? And how can we be prepared for that? And sometimes the best way to be prepared for it is to say, that’s not a bad idea. Maybe we should do some of that. And I know I know a couple of companies where they’ll have a mock attack and they will use the learning from the mock attack to inform their strategy discussion. Right. Oh, that by the way, another Another favorite is you got to spin off a business. Right? Or for retail companies. Say you got to do a read of all your properties, you know, all that kind of stuff. All right now is shareholder activism good or bad and you write it to some degree. It represents an attempt to go from remember, historically we had management centric decision making the board saturates decision making is a shareholder centric decision making. You bet. That is very often what they’re after. And here’s why it’s a bad idea. Shareholders I like directors and officers are generally not fiduciaries. Right. And so they can be proposing something that is in their unbridled self interest, no matter what the interests of the other shareholders are. And on top of that, especially in a public company, they can get out. So if they come in and say, you want to do a massive stock buyback, and the board succumbs to that pressure. And they do the massive stock buyback, that shareholder who proposed that is probably out of the stock. And when when things turn bad because they used up too much of their capital and their and their cushion. They’re not there to pay the price or foot in either way. They’re not eating their own cooking. Right. So that’s the second Bad Idea set. The other thing is shareholders. activist shareholders are not as not as well informed as the board. And nor should they be media companies. Companies can withhold material nonpublic information. So ours, they’re not. It’s not pertinent to a decision that they’re asking the shareholders to make. And sometimes they know they absolutely should. Right. If they’re about to do something strategic and strategically important, they may not want to broadcast out prematurely. So the shareholder activist who’s pushing for something is probably not as aware of that. Clearly not as aware of that as a board. And then finally, I like to say, just because somebody’s a good stock picker, doesn’t mean they’re a good manager. Right? Yeah,

Kara Goldin 37:07
no, definitely my

Tom Cole 37:09
favorite example of Peter Lynch, who is the Chief Investment Officer, right of fidelity was onboard call Maurice and Knutson, who probably don’t remember, but it’s gone. Because they did. They did a bunch of stupid things. I mean, he was on the board, he was the only he was only one director. But but he was not, he was not able to stand in the way of joy. He’s a great stock picker, but did not really understand that management, probably

Kara Goldin 37:35
interesting. So you have a ton of experience working with CEOs on dealing with difficulties with shareholders and boards. If you had to give one piece of advice to a brand new CEO, someone who has never been a CEO, they’re coming in a warning to those start maybe starting companies and building out their boards. What’s that one thing that you would share to someone that is such an important piece? To get right,

Tom Cole 38:02
I’m going to enter joust with your question and break it into two. In terms of building the Ford, the CEO should understand if and to the extent that they have influence on who goes on the board, and they probably will on a private company, read or understand what the relationships are between and among the various candidates, the incumbents and the newbies. Because if they have, if they have deep relationships, and other relationships, it could be that there there can be some, some compromising. And it can form a bit of a clique within the board. And with the risk of frankly, creating a varsity Junior Varsity mix on your board. So understand what the relationships are. After you’ve got the board together, you know, whether you were able to influence who’s there or not. Spend time. All right, make make the meetings as productive as interesting as possible. Start, as I said earlier, let them know what you as the CEO are really looking for in terms of advice, where you haven’t made up your mind, you know, that kind of thing. Let them let them know that they’re participating in in the bait decision in in in what you’re going to be coming back to them on for a big decision. Spend time between meetings one on one again, substantively not just socially. thought might be okay, but if I stay with all we’ve bought, don’t let a board member feel legitimately that they’re somehow in the second tier or the junior varsity, everybody. Everybody’s equal in the board and they should feel that way. If you’ve got a if there’s a lead director, either formally or informally or non executive chair, work with them as your partner, they can help run a lot of interfere. Have the board see the You’re building a deep management bench. One of the criticisms I’ve seen of CEOs public and private, is that they, you know, the beyond beyond the CEO, we don’t have anybody. Right. And that could be because the CEO is not self assured. But it doesn’t reflect well, in indicate to, you’re able to adjust your leadership style with your colleagues. according to circumstances. There are there a lot of there are a lot of CEOs who are very collaborative, and that’s good. A fact that that was my style was affirmed leader, by by at times of crisis, sometimes you have to be a little more directive. And the CEO who, who can Can, can change their style, according to the circumstances, will it’s it’s a good, it’s a good look right? And the board will have more confidence in. And then clearly, having unassailable personal integrity is important. I mean, the number of CEOs who have lost their jobs from hashtag me to is done. Right. And that’s just one example of personal integrity. But that’s a really important

Kara Goldin 41:07
when you’ve seen on boards and good governance. What about like, the size of the board? Does that matter?

Tom Cole 41:15
Yeah, there’s actually a lot of sociology on this social psychology, you want a board that’s big enough to do every check to handle all the tasks, but it should, you know, big enough to populate committees so that they can, they can operate and meet concurrently. But if you have a board that’s too big, there’s a notion of social loafing, which is that people are really pigeon. They don’t feel like they need to do something because somebody else must be doing it. Right. So you don’t want it to be too big. Right? There was a, there’s, there’s a bit of a tradition and almost call it a tradition. But the typical financial institution has a large board, you worry about whether or not you know, that leads to a bit of social loafing?

Kara Goldin 42:07
Yeah, very interesting. So AI, that’s, that seems to be artificial intelligence seems to be the hot topic out there. How does this apply to boards? Or how do you think it will in the future?

Tom Cole 42:22
I’m not the best person to talk about AI. I’m, I’m the least techie person, you know, I, I don’t even know how to turn on the top of either setting or house right? Now. I’ve seen, I don’t, I’m sure Fords are thinking about and talking about AI. But I know they’re absolutely obsessed over is cybersecurity. And there’s probably a connection between the two and AI might relate to all that the folks are really focused on cybersecurity, not only a really well, advised board is thinking about their own cybersecurity, but also if they have vendors and other important folks like investment bankers that have access and have taken appropriately, information from the company to analyze and sitting on their servers or on their cloud. They need to know what the what the cybersecurity of those vendors is like. And the other thing is they you know, everybody, there’s the old adage said, you know, there are two kinds of companies I would know that have known that know they’ve been hacked, and those that don’t know they’ve been hacked, because everybody’s been hacked. So what’s your preparation for that? Are you doing war games on it? And one of the things I’ve learned is that is really important. If you’re serious about cybersecurity and being able to respond to a hack. It’s good to have a relationship with the FBI. And somebody in the local office, otherwise, they just, you know, they take it down. Say thank you very much.

Kara Goldin 43:59
Great, great advice. So last question. You’ve had a significant career, best advice that you have ever received or that you’ve ever heard, I guess for related to the book, CEO leadership,

Tom Cole 44:15
overly personal, but the best advice I ever got was to go to law school. Yeah, there you go. I was thinking about PhD and all that stuff. And my, my college president, it was Milton Eisenhower, President, Dwight Eisenhower, his brother, amazing. He said, You know, there’s a glut of PhDs again, child and 60s. But a PhD is you you’ll do well, but you won’t be happy with the job. So go to law school that you want to teach you can teach while I was aiming. Now, I think one of the best pieces of advice I’ve ever heard, was trying to find a CEO. And he was really talking about itself, which is don’t define yourself worth solely in terms of your career or title. whichever you wish I have passed along at any number of Tosa college graduations. Because I think that I think that’s that that’s good advice. It’s pretty. It’s a work life balance notion, but it’s also your you know, keep your own ego and tech.

Kara Goldin 45:17
Well, excellent advice and a great note to end on, Tom, this. Thank you so much for joining us. We’ll have all of the info in the show notes. But CEO leadership is excellent. As I mentioned, collaborative crisis management is Tom’s other book. And it is so so great. So thank you again, Tom. Thank you, everybody. Thank you for listening. Have a great rest of the week. Take care. Thanks again for listening to the Kara Goldin show. If you would, please give us a review. And feel free to share this podcast with others who would benefit and of course, feel free to subscribe so you don’t miss a single episode of our podcast. Just a reminder that I can be found on all platforms at Kara Goldin. And if you want to hear more about my journey, I hope you will have a listen or pick up a copy of my book undaunted, which I share my journey, including founding and building hint. We are here every Monday, Wednesday and Friday. And thanks everyone for listening. Have a great rest of the week, and 2023 and goodbye for now. Before we sign off, I want to talk to you about fear. People like to talk about fearless leaders. But achieving big goals isn’t about fearlessness. Successful leaders recognize their fears and decide to deal with them head on in order to move forward. This is where my new book undaunted comes in. This book is designed for anyone who wants to succeed in the face of fear, overcome doubts and live a little undaunted. Order your copy today at undaunted, the and learn how to look your doubts and doubters in the eye and achieve your dreams. For a limited time. You’ll also receive a free case of hint water. Do you have a question for me or want to nominate an innovator to spotlight send me a tweet at Kara Goldin and let me know. And if you liked what you heard, please leave me a review on Apple podcasts. You can also follow along with me on Facebook, Instagram, Twitter and LinkedIn at Kara Goldin. Thanks for listening