Meeting minutes of the board of directors, which usually are prepared by the corporate secretary, can play a crucial role in a government investigation or civil litigation relating to a decision or indecision of the board of directors or the knowledge of an individual director. In some instances, the minutes could establish an important defense for directors, while in other instances the minutes may subject directors to unnecessary criticism or worse. Directors should ensure that the corporate secretary follows these guidelines.
Unlike the meeting secretary, directors neither are obligated nor are advised to take individual notes during board and committee meetings. Individual director notes are unnecessary because the secretary’s official minutes will contain a record of the meeting. Additionally, director note-taking is risky. Directors’ notes likely would be discoverable in litigation, and notes that seemed clear in the days after a meeting may not be clear several years later after memories have faded. Absent a clear interpretation, adversaries will attempt to impose their own meanings on the notes. Furthermore, if multiple directors take notes, discrepancies may exist with other notes or the official meeting minutes.
Although individual circumstances may vary, below are some general guidelines that corporate secretaries of U.S. companies should follow when they take official notes and prepare meeting minutes for the board of directors. If a company is incorporated outside the United States, different guidance might apply.
Record the essential information. The corporate secretary should record essential information such as the date, starting and ending times, location, attendees (e.g., directors, management, experts, and legal counsel), presence and maintenance of a quorum, meeting chair, materials distributed in advance of the meeting, topics discussed, and decisions made in a formal meeting of the board. In some cases, the secretary should note the length of particular discussions and deliberations, especially if a particular discussion is an important part of the meeting. Directors also should ensure that the notes taken by the corporate secretary do not editorialize, as commentary could be misconstrued by an adversary if discovered in litigation.
Clearly identify separate meetings and tasks. Because notes and minutes are incomplete by nature, the more organization and structure they contain, the easier they will be to understand and interpret in the event that they are scrutinized. Secretaries should use the meeting’s agenda as a guide for organizing and labeling their notes and the minutes, and should indicate transitions from one topic to the next, including presentations by management, counsel, or advisory firms and executive sessions.
Identify in notes when an attorney is present during a conversation. Directors’ interactions with lawyers usually are protected by the attorney-client privilege or work-product protection, which may shield the content of those discussions from being turned over to an adversary. Boards also should consider including the general counsel in meetings that could involve a discussion of legal issues. If a lawyer is present during any portion of a meeting, the minutes should indicate the lawyer’s name and law firm, and the portions of the meeting for which the lawyer was present. Generally, the minutes for these interactions should indicate only that such discussions occurred and the general topics discussed.
Identify and describe the board’s deliberative process. Recording the general fact that the directors discussed or deliberated about an issue is critically important. However, what a particular director said about a particular issue is usually less important. For that reason, and to avoid errors in attribution, the secretary’s notes and official minutes generally should use collective or passive-voice descriptions (e.g., “the directors discussed the matter” or “a discussion ensued”) as opposed to attempting to record individual viewpoints and the directors who expressed them. Because directors may express passionate views about an issue, the secretary should exercise good judgment in determining what to record.
If notes are taken by hand, they should be clearly, legibly recorded, and should not include shorthand. Illegible meeting notes and notes taken in shorthand can be difficult to interpret when the secretary refers to them while drafting the official minutes. Provided typing is not disruptive to the directors in the meeting, directors should ask corporate secretaries to consider taking notes on a secure computer. Clarity and accuracy are crucial because a difference of opinion between directors regarding the events that occurred at a meeting ultimately may be resolved by reference to the secretary’s notes. In the litigation or regulatory enforcement context, unclear notes may result in meeting minutes that lack an obvious, objective interpretation and are susceptible to being misinterpreted by an adversary.
Encourage the secretary to maintain a standard practice of note taking. Secretaries generally should establish and maintain a standard practice for taking notes, retaining meeting materials and individual notes, and preparing meeting minutes. Deviating from a standard practice could raise negative inferences from a regulator or court.
The secretary should distribute the draft minutes for directors to review as soon as practicable. During their review, directors and secretaries should be mindful of any important events that occur between the meeting date and the finalization of the minutes. If a director believes the minutes omit important information, then the director should discuss orally the matter with the secretary. E-mails regarding the minutes between the secretary and directors, or among directors, should be strictly discouraged.
Discuss with counsel whether to retain notes and draft minutes. There may or may not be a legal or corporate requirement for the secretary to retain his or her meeting notes or draft minutes. After the official minutes are approved, the secretary should discuss with company counsel whether there is a requirement to maintain these materials and ascertain the length and nature of the requirement. If there is no requirement to maintain the materials, the secretary should discuss with counsel whether and how to discard them.
Bradley J. Bondi and Bart Friedman are partners with Cahill Gordon & Reindel LLP. They advise financial institutions and global corporations, boards of directors, audit committees, and officers and directors of publicly-held companies in significant corporate and securities matters, with particular emphasis on internal investigations and enforcement challenges. Michael D. Wheatley, a litigation associate at Cahill, assisted with this article.
The most powerful names in U.S. business have published guidance on Commonsense Principles of Corporate Governance (Commonsense Principles) to provide a framework to improve corporate governance and make it more long-term–oriented. Warren Buffett of Berkshire Hathaway, Laurence D. Fink of BlackRock, Jamie Dimon of JPMorgan Chase & Co., and others have outlined principles covering nine broad categories of governance issues that, while nonbinding, will likely spark an important dialogue in boardrooms. Eight of the categories have direct and far-reaching implications for boards, while the final group of principles relates to the role asset managers play in the governance arena. What makes this announcement unique is the unified position these leaders have taken behind one set of commonsense principles.
At the National Association of Corporate Directors (NACD), an organization that is advancing exemplary leadership among our community of 17,000 director members, our position is clear: We agree with many of the principles outlined and we can help boards implement effective governance practices. In fact, the Commonsense Principles reinforce the Key Agreed Principles to Strengthen Corporate Governance for U.S. Publicly Traded Companies that we introduced a few years ago.
While recognizing that the principles are not a one-size-fits-all solution, and that practices will likely differ based on size, industry, and specific company, we’ve included a practical list of next steps below that boards can take to implement the principles.
The Case for Improved Governance
Key drivers behind the 50+ nonbinding principles are the decline in the number of publicly traded firms, with many highly performing private companies delaying initial public offerings (IPOs), essentially reducing available investment opportunities; the current lack of trust between shareholders, boards, and management teams; concerns about the dominance of short-termism in the management of companies; and the complexity of current corporate governance rules.
The Commonsense Principles identify several areas for improvement:
Board agendas should include a focus on major strategic issues (including material mergers and acquisitions and major capital commitments) and long-term strategy, ensuring thorough consideration of operational and financial plans, quantitative and qualitative key performance indicators, and assessment of organic and inorganic growth, among other issues. A company should not feel obligated to provide earnings guidance, the business leaders suggest, and should determine whether providing earnings guidance for the company’s shareholders does more harm than good. Companies should frame their required quarterly reporting in the broader context of their articulated strategy and provide an outlook, as appropriate, for trends and metrics that reflect progress (or lack of progress) on long-term goals.
Every board needs a strong leader who is independent of management, the principles emphasize. The board’s independent directors usually are in the best position to evaluate whether the roles of chair and CEO should be separate or combined, and if the board decides on a combined role, it is essential that the board have a strong lead independent director with clearly defined authorities and responsibilities.
Diverse boards make better decisions, so every board should have members with complementary and diverse skills, backgrounds, and experiences. It’s also important to balance the wisdom and judgment that accompany experience and tenure with the need for the fresh thinking and perspectives that new board members can bring.
In financial reporting, the use of Generally Accepted Accounting Principles (GAAP) should not be obscured by the use of non-GAAP metrics.
Action Steps for Directors
You and your board/company may consider taking certain steps:
Review the principles in detail and benchmark your current governance approach against them.
Determine if identified differences are areas ripe for further discussion and possible change.
Engage your largest investors to get their take on the principles and how they plan to use them when assessing corporate governance effectiveness.
NACD Alignment With Commonsense Principles
Below I’ve highlighted just a few examples of how NACD aligns with the most significant principles. I have included links to NACD reports that can help boards make the Commonsense Principles common practice.
Focus on Long-Term Value Creation
The principles advocate for the creation of long-term shareholder value. Our guidance to members over the past several years has skewed unabashedly toward boards prioritizing long-term value creation. In fact, our 2015 Report of the NACD Blue Ribbon Commission on the Board and Long-Term Value Creation emphasizes the need for directors to align short-term goals—and executive compensation—with long-term strategy. The report provides tools and practical recommendations including, among others, the following:
Boards should consider recommending a move away from quarterly earnings guidance in favor of broader guidance parameters tied to long-term performance and strategic objectives.
The board’s CEO selection and evaluation processes should include an assessment of the extent to which he or she can be an effective advocate for the firm’s long-term strategy.
The nominating and governance committee should approach board composition and succession planning with long-term needs in mind, based on the director skills that will be most relevant to the company’s strategy in three, five, or more years.
Role of the Lead Director
The role of the lead independent director emerged as another key area where board effectiveness can improve. We at NACD believe that the lead independent director should spearhead efforts to intensify the board’s efficacy by identifying and addressing weaknesses in process and individual director performance. An effective lead independent director should be able to provide criticism that is both respectful and objective, and be able to ensure every director’s voice is heard. To put it simply, the lead independent director should bring out the very best in the board. Our NACD Blue Ribbon Commission Report on the Effective Lead Director provides practical guidance on how to do that.
Board Composition and Diversity
Public-company boards should have a diverse and complimentary mix of backgrounds, experiences, and skills, according to the Commonsense Principles. While this is an area in which we’ve not seen much movement—aside from a slight increase in gender diversity, with 79 percent of NACD survey respondents reporting they have at least one woman director on their board compared with 77 percent in 2014—our Report of the NACD Blue Ribbon Commission on the Diverse Board: Moving From Interest to Action provides very practical advice and tools, including a board-level discussion guide on diversity, that can help boards make diverse board composition a priority. Additional information can be found in NACD’s Board Diversity Resource Center.
Non-GAAP Financial Metrics
The use of non-GAAP metrics in financial reporting has been widely scrutinized by regulators. Mary Jo White, chair of the U.S. Securities and Exchange Commission, stated last December that non-GAAP metrics deserve “close attention, both to make sure that our current rules are being followed and to ask whether they are sufficiently robust in light of current market practices.” NACD’s Audit Committee Chair Advisory Council, a prestigious group of Fortune 500 committee chairs, met a few months ago to discuss the use of non-GAAP metrics. The council made an important recommendation:
From a governance perspective, audit committees should ensure that there are adequate controls in place to help mitigate the risk of management bias in measuring and reporting non-GAAP measures, and that these controls are frequently assessed.
Our resources and messaging have always been—and will continue to be—shaped by directors who actively contribute to better board-governance practice. As the largest gathering of directors in the United States, NACD’s 2016 Global Board Leaders’ Summit will convene some of the best minds in governance to continue the dialogue on how boards can adopt leading practices. We believe in and strongly support good corporate governance and will continue to provide resources to help directors effectively oversee U.S. businesses. For more information on the governance principles NACD has established, please review our Key Agreed Principles to Strengthen Corporate Governance for U.S. Publicly Traded Companies.
Emerging risks can be like smoldering embers that can be seen and smelled before erupting into flames. Unlike a fire, these risks may take months or even years to manifest themselves as business challenges. For example, aging populations, growing income disparity, and sustained underemployment are long-unfolding changes affecting the world’s population. Unabated, they eventually will alter the social and political landscape and affect consumer demand for goods and services. It’s not a matter of if, but when.
Emerging risks are triggered by unanticipated changes in the environment and include events ranging from catastrophic events that make an immediate impact (e.g., a tsunami or terror attack), the realization of existing risks accelerated by external factors (e.g., changes in customer preferences or new competitor actions), and the emergence of internal business factors that have materialized over a longer period (e.g., a breakdown in the internal control environment or risk culture).
The identification of these and other emerging risks is important to boards that value early warning. The uncertainty around their ultimate impact on the organization make it difficult for senior management and risk executives to assess their relevance and formulate an appropriate enterprise response, and may make management feel reluctant to assign ownership of the risks. Most importantly, these factors make it hard for management to decide what to communicate to directors, given the board’s crowded agenda.
The following are practical principles for boards to consider with respect to how the organizations they oversee should identify and communicate emerging risks.
Expect management to inform the board of relevant emerging risks and trends on a timely basis. Executive management and risk executives are responsible for communicating significant emerging risks and changes in critical enterprise risks to the board. The timing and frequency of these communications are dictated by the severity of the risk’s impact on the organization, the velocity (or speed of onset) at which the risk impacts the organization, and the uncertainty regarding if and when the risk will manifest itself. The board should expect management to review, monitor, and understand the most significant emerging risks and determine appropriate responses as the nature of the risks and their impact become clearer over time.
Consider the potential consequences of newly planned actions. When new strategic objectives, research and development initiatives, mergers and acquisitions, and other opportunities are undertaken, it is important that management understands their impact on the entity’s resources, business infrastructure, and culture. In addition, the potential impact of the planned actions on customers, suppliers, regulators, competitors, and other external parties should be considered.
Challenge critical assumptions using plausible and worst-case scenarios. The performance of a scenario analysis exercise will help to identify opportunities and avoids unacceptable losses and surprises. Management should assess relevant scenarios that could render invalid the critical assumptions underlying the business case and economic justification supporting proposed strategies, investments, acquisitions, and other key decisions. This assessment informs the board’s risk oversight by positioning executives and directors to challenge the key assumptions that matter. With respect to worst-case scenarios, the question is not “Can it happen?” but “What is the impact if it does happen, and how will we respond?”
Use key risk indicators (KRIs) to identify new and emerging risks or changes to existing risks. KRIs are qualitative or quantitative measures used to monitor the critical risks, responses to them, and facilitate risk reporting. While key performance indicators (KPIs) are generally retrospective in nature, KRIs are typically forward-looking lead metrics. When KRIs are focused on successful execution of the strategy, we have seen them used effectively in conjunction with board reporting, particularly when they are linked to the critical risks and assumptions underlying the strategy.
Look far enough forward to spot emerging risks and megatrends. Today, we see evidence of transformational change on a number of fronts. The digital technology revolution that’s increasing interconnectedness of people and things, the risk of cyberattacks, aging populations, income disparity (as mentioned earlier), increased urbanization and resulting new large markets, environmental decline (e.g., quality of air, soils and water), increasing nationalist sentiment, and geopolitical tensions in different regions are important dynamics of change. In the past, longer time horizons (say, 10 years) usually were needed to notice these risks. But today, many of these risks are becoming more imminent. Ignore them at the risk of an irrelevant strategy.
Monitor the threat landscape driving known critical enterprise risks closely. Regulatory, cybersecurity, economic, talent acquisition and retention, identity and privacy, financial markets, and other top-of-mind issues pertinent to executive management and the board merit close attention to ascertain whether changes in these risks are occurring for the worse, leaving the organization in a vulnerable position. Metrics reported to the board for critical enterprise risks should focus on changes in the risk profile and whether such changes warrant an updated risk response.
Applying the above principles will help executive management and boards face the future with confidence through greater awareness of the risks that matter.
Jim DeLoach is a managing director with Protiviti, a global consulting firm.