On Wednesday, it was revealed that one of the largest insider-trading cases seen in decades stemmed from a violation of boardroom policy. In the insider-trading trial of Raj Rajaratnam, Goldman Sachs CEO Lloyd Blankfein testified that former director Rajat Gupta violated the firm’s code of conduct in disclosing confidential information from 2008 board meetings. According to Blankfein’s testimony, Gupta allegedly revealed to Rajaratnam via telephone strategic discussions regarding the possibility of Goldman Sachs acquiring a commercial bank or insurance company, as well as advance notice of Berkshire Hathaway’s vitalizing five billion dollar investment in Goldman.
This is not the first instance of leaked high-profile boardroom discussions. After a thorough investigation, it was discovered in 2006 that Hewlett-Packard Director George Keyworth divulged confidential strategy points to CNET. With more potential channels of communication than ever, directors may choose to revisit and clarify boardroom confidentiality policies.
Often companies do not articulate boardroom confidentiality agreements, as confidentiality is implied in a director’s duty of loyalty. According to this fiduciary duty, a director cannot use confidential information for his or her own benefit, or to the benefit of a person or entity outside the company. However, a lack of clear policy would prove a weak defense for Gupta, as Goldman Sachs clearly defines a boardroom confidentiality policy in its corporate governance principles:
Confidentiality. The proceedings and deliberations of the board and its committees shall be confidential. Each director shall maintain the confidentiality of information received in connection with his or her service as a director.*
While confidentiality policies are not explicitly required, in 2000 the SEC enacted a policy to enhance fairness and transparency: Regulation Fair Disclosure, commonly referred to as “Reg FD.” With the intent to eliminate “selective disclosure,” Reg FD mandates that publicly traded companies must disclose material information to all investors at the same time. While this mandate does not necessarily extend to nonpublic boardroom discussions, the gray area created can be easily solved by including a code of conduct or other confidentiality agreement in the company’s corporate governance principles.
*Source: Goldman Sachs Corporate Governance Guidelines