Fiduciary Duty and the Corporate Psychic
posted by Kaimipono D. Wenger
Newsweek has a fascinating article about a woman who makes her living as psychic to the corporations:
When Seagate Technology, the $11 billion-a-year maker of hard drives for the Playstation 3 and Microsoft Xbox, went searching for a consultant to run one of its management workshops in the fall of 2006, it bypassed the usual list of Silicon Valley gurus. Instead, Seagate’s executive director of software engineering, Gabriel Lawson, invited Laura Day—a stylish New Yorker with no tech experience—to train his Colorado-based team. “She was amazing,” Lawson tells NEWSWEEK, recalling Day’s quick insights into the poor coordination between the company’s research and marketing teams. “Anybody who can afford her will get 100 times their money’s worth.” What exactly is Day’s expertise? While she likes to downplay it as mere “intuition,” her clients prefer another explanation: she’s a psychic. . . .
Day is one of a small but expanding cadre of corporate psychic consultants—the professionalized face of an occupation better known for hokey headscarves and crystal balls. Rebranded as “intuitionists” or “mentalists”—terms more palatable to mainstream America—psychic advisers in recent years have been crossing over into the world of legitimate business, where they are used by decision makers in law, finance and entertainment looking for an edge in a down economy. “I specialize in nonbelievers,” says Day, referring to her roster of “red-meat-eating, Barneys-shopping, Type A personalities.”
For a flat rate of $10,000 a month, Day’s insight is available for rent. She has about five monthly clients at a time, offering them unlimited 24-hour access. . . . In a typical call early last year, a prominent Wall Street money manager asked whether he should pull out of a risky, multimillion-dollar energy deal or let his money ride. “My gut,” Day recalls saying, “is that you’re not going to get your return.” The money manager listened and yanked his investment, she says, just before the deal nose-dived.
A psychic may make sense as a pep talk for managers, but deciding whether to do a deal based on psychic readings? Yikes. Suppose a CEO makes a big deal decision based on advice from the psychic. What kinds of fiduciary duty problems might arise?
To start with, there are obvious Van Gorkom concerns.
The Van Gorkom court was not at all pleased with the ad hoc method of arriving at a price — in particular, with the price number that the company Chairman/CEO just pulled out of the air. Going to a psychic doesn’t seem to help. It’s no longer the CEO pulling a number out of the air — now he’s hiring someone else to pull it out of the air for him. (The court was not impressed with Van Gorkom’s gut instinct; is there any reason to think they’d like Ms. Day’s any better?)
Plus, the Van Gorkom court castigated the board for their failure to investigate the problematic methodology used to arrive at the price. And the same concern would apply here, too. Even if the CEO decides to base the deal on readings from a psychic, could the board possibly sign off on that? Van Gorkom indicates that the board should at least understand the basic methodology behind the decision. And if that methodology is, “I asked a psychic” — can the board really sign off on that?
(Do they have to ask the psychic for her methodology? “I based this prediction on the lotus pattern I noticed in my tea leaves, and on the place of Jupiter.” Not quite as convincing as a PowerPoint presentation by a Morgan Stanley team, is it?)
But what if the board has an exculpation clause in place, limiting their Van Gorkom liability? Is there still a potential fiduciary duty problem?
I think there might be, on a few unusual fronts.
First, this might be the rare case that triggers good faith concerns. Good faith (in Disney, via Stone) now includes instances:
Where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation, where the fiduciary acts with the intent to violate applicable positive law, or where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties. There may be other examples of bad faith yet to be proven or alleged, but these three are the most salient.
So, say that our CEO decides on a deal based on a prediction from the psychic; the board signs off on the deal either without investigating, or after investigating but deciding that a deal suggested by a psychic is okay — but they’re exculpated from any duty of care violation that might come up under Van Gorkom.
Is this potentially an instance of intentional dereliction / conscious disregard? Maybe. Of course, the good faith standard is clear as mud, but it seems like this could be a good candidate for finding a breach. If effectively turning the company’s helm over to Madame LeGipsy for a crucial deal isn’t intentional dereliction . . . what is?
(Plus, does this potentially fit into the “player to be named later” provision of Disney — the “we’re not saying all possible good faith violations, and we reserve the right to add more later” clause?)
If it’s a good faith breach, then it’s really a loyalty breach (see Stone’s clear-as-mud reclassification of Disney), and the board isn’t shielded by the anti-Van Gorkom exculpation provision.
(On the other hand, maybe our psychic knows that the Delaware court is about to change the good faith standard once again — in which case, perhaps she’s only giving advice that she knows will be okay.)
A second wrinkle — what if it’s waste? Of course, waste is not exactly the most robust claim to make, especially post-Disney. But one could reasonably argue, I think, that paying a $10,000 monthly retainer to a psychic might be waste. Not to mention doing a $50 million (or $500 million) deal based on a psychic’s advice.
No wonder nobody is going on the record as having made deal decisions based on Ms. Day’s advice.
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Bonus question, since we’re talking about paying for supernatural assistance:
Suppose Corporation makes a contribution of $100,000 to the Sisters of the Sacred Heart, and the nuns in return promise to pray not for a soul (corporations don’t have souls; see John Coffee’s article from a few decades ago) but rather for the company’s stock price to improve.
Is that a legitimate action? Is “purchase of prayers seeking divine intervention re: stock price” potentially waste, again? (Or good faith breach? No pun intended.)
(On the other hand, is it okay if the prayers themselves are peripheral and the real goal is to support a visible, popular charity and thus generate corporate goodwill? See Kahn v. Sullivan).
July 7, 2008 at 2:40 pm
Posted in: Corporate Law
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Responses (1)
Aaron Walker - July 9, 2008 at 8:51 am
Mmm, i am calling “spam alert” on alex. i think he is just a bot, sadly. Which is ironic that he is selling a get rich quick scheme on a post about a corporate psychic.
As far as the issue is concerned, I think that without empirical evidence that this actually works, you rely on it at your peril–as in, if it works out you are fine, but if it doesn’t, welcome to lawsuit hell. And i would be curious as to whether the psychic is aware of that issue.
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