'Where was the board?' Where was I? I had occasion to ask that when we board members put a company through chapter 11.

• Author: Salomon, Richard
• Position: ENDNOTE

FORMER DIRECTORS of Bear Stearns Companies Inc. won a rare early litigation victory in December, a summary judgment motion exonerating them from liability for their hasty decision to sell Bear Stearns to JP Morgan Chase in March 2008. Before they got to trial, class action plaintiffs were defeated in their claims that the directors violated their fiduciary duty, despite expert testimony that there were better options than a fire sale price of $10 per share (14 months earlier, Bear Stearns shares reached $171.52). In a 44-page opinion that no doubt cheered directors everywhere, the New York judge provided a lucid explanation and affirmation of the business judgment rule, writing: "The Court should not, and will not, second guess their decision."

It may be comforting in this time of financial debacles and business failures for directors to be assured they will not be personally liable if they have acted in disinterested good faith. But legal immunity is cold comfort to directors who are accustomed to winning--not just avoiding trouble. It is simply not good enough for ambitious men and women with histories of personal success to know that they will be covered if the company fails. They came to the board to build value for shareholders inside a durable company. When that doesn't happen, thoughtful directors of the distressed company will ask themselves, "Where was the board in all this--and where was I?"

I had occasion to ask that question in the previous bubble--the dot-com meltdown--about my own service as a director of a small public company. After dramatic growth through a series of acquisitions, our company suddenly could not meet its debt burden when the collapse of so many high-tech companies sharply reduced demand for our product. We put the company through Chapter 11, more or less wiping out all shareholder equity. The outside directors ran an efficient, low-cost bankruptcy event from which the operating company emerged and continues today. We were thanked for our work.

But I could not help thinking about what we might have done differently to build a more durable company for the shareholders. Obviously, the time to have prepared for emergencies was when things were going well. Our board had some very smart and seasoned members. Why didn't we take more precaution against the possibility that the marketplace would cease to reward our growth model and that we might have to weather a storm?

All external evidence had favored the course we...