Review Before Boarding: Tips For New Directors

For even the most seasoned executives, the responsibilities and duties of serving as a corporate board member may seem daunting or undefined. Keep in mind that directors are selected for their business judgment, developed through experience. The board’s role is to oversee and advise, not to manage the corporation’s day-to-day affairs.

Directors have two principle fiduciary duties: (1) the duty of loyalty; and (2) the duty of care.  The duty of loyalty requires that a director’s decision be made in good faith and mandates that the best interest of the corporation and its stockholders takes precedence over any interest possessed by a director, officer, or controlling stockholder and not shared by the stockholders generally.  The duty of care requires that a director’s business judgment be informed and reasonable.

Below is a practical list of key considerations for new directors as they join a board.  With those principles in mind, and equipped with their informed business judgment, directors can better fulfill their duties to the company and protect themselves.

Act with Undivided Loyalty

The duty of loyalty requires that the corporation’s interest comes first. Loyalty concerns often arise when directors vote on matters that affect certain shareholders, or classes of shareholders, differently from others. In that situation, a director may be conflicted if the director benefits from the board’s decision or is not independent of someone else who benefitted (an “interested party”).  Independence involves more than just the NYSE or NASDAQ requirements.  Personal, financial, or professional relationships with an interested party are relevant.  Decisions that affect other members of the board are likely to raise independence questions.  Directors appointed to a board by someone else face enhanced scrutiny given their role as “dual fiduciaries.” Consider both interestedness and independence before taking action on a matter, and get counsel where the potential for conflicts of interest is present.

Exercise Care

The duty of care requires that directors act on an informed basis when making a business decision.  This means that directors need to inform themselves of all material information reasonably available to them before making a decision.  In advance of each board meeting, directors should receive and review an agenda along with all material information relevant to the issues being discussed.  Exercising care also means raising important issues, even if they are not on the agenda.  Do not hesitate, for example, to question management about negative press or concerns expressed by securities analysts.  Failing to act in the face of potential harm to the corporation can be a breach of fiduciary duty.  It is not enough to simply confirm that management is aware of an issue.  Follow up to make sure that the issue is being properly addressed.

Seek Appropriate Advice

Directors need to be empowered to retain experts and advisors and should consult with them when appropriate.  Many boards have legal counsel attend all meetings, and the board should understand in advance the legal implications of material decisions.  In certain circumstances, it may be appropriate for the board to engage advisors directly, rather than relying on those retained by management.  This is particularly true where there is the potential for management to be conflicted, such as questions of executive compensation or allegations of mismanagement. Keep in mind, however, that although directors may rely on advisors, they cannot outsource the board’s decision-making responsibilities.

Prioritize Process

Directors must act deliberately.  Establish documented processes and ensure that they are followed.  Materials should be provided to the board in a timely manner.  Take sufficient time for discussion and deliberation at board meetings.  If the record shows that the directors received voluminous documents just hours before a thirty-minute meeting, the director’s knowledge and diligence with respect to the board decisions may be questioned.  Consider alternatives to the proposed course of action.  The board should take action only after being provided with relevant information, and the directors’ receipt of that information should be documented.  To the extent possible, directors should receive final or substantially final versions of documents for their approval.  If the version presented is not in substantially final form, the board should consider meeting again on the agreement or establishing limits on the revisions that can be made without returning to the board for further approval.

Document Your Diligence

Board and committee meeting minutes should reflect the deliberative process of the directors.  While a detailed account of the questions asked and the issues discussed is not necessary, some indication of the length and nature of the discussion is often warranted.  Even where the board ultimately resolves to take no action, the record should reflect the effort and time in reviewing the issue.  Attorney-client privilege also merits special attention here.  Counsel often advise the board on both legal and business matters.  Emphasizing which portions of the minutes and board materials are privileged helps to ensure that they are treated properly later.