Too often, board minutes are regarded as a routine and even inconsequential part of the board’s proceedings. To that we say: Board members beware.
With data breaches and other reputational crises on the rise, board minutes are reaffirming their important role in the boardroom. Fundamentally, minutes provide an official record of the topics discussed and the decisions reached in a board meeting. In matters of liability, they can either be a critical stumbling block or the board’s best defense.
In a recent episode, Megan Baier, Partner with Wilson Sonsini Goodrich & Rosati, addressed several common questions surrounding best practices for documenting board minutes. What’s the biggest mistake boards make? Her answer: Going “too light” on the minutes (i.e., not including enough detail).
“One of the examples we give,” said Baier, “which has come up before in a court case, is…[when] the board says, ‘We spent five hours discussing or debating whether this was a really good idea for the company.’ and then there’s [only] two sentences in the minutes.”
On the other side of the spectrum, Baier warns that documenting too much detail in the minutes can be just as dangerous.
“It really is threading a needle around the appropriate amount of disclosure to indicate exactly what was discussed in the meeting without opening yourself up to liability in that regard,” she said.
So how exactly should board members and corporate secretaries approach the minute-taking process? In her episode, Baier gives several guidelines, which we’ve summarized below.
How much detail should the board minutes include?
The amount of detail should be guided by both length and substance of the discussion.
Routine, ordinary-course board matters (e.g., operational updates, financing update), can be relatively straightforward and high-level, explains Baier. The more sensitive board discussions (e.g., M&A, capital raising) are areas that should reflect greater detail, which can be helpful to boards down the road if, for example, an M&A transaction were to be challenged.
It doesn’t necessarily need to be ‘Board member X said this, and Board member Y said that.’ But [there] certainly [needs] to be more context around the types of things that you discussed: Is this a good strategic fit? Is this acquirer someone we’re interested in being bought by? Will there be things to think about going forward in terms of employees and incentives?
In simple terms, board minutes should reflect the length and the level of discussion that took place.
The company’s greatest areas of risk should receive the most detail.
Guidelines around board minutes are largely business dependent, explains Baier. Companies in the manufacturing or energy sectors will have a different set of sensitivities than a consumer-facing organization.
“For a company like Target or Equifax, you have to think about the things that are most important to the business—or could be massive risks to the business,” said Baier.
For companies possessing sensitive customer information, discussions around data privacy should be reflected with sufficient detail—and should be reflected as a regular agenda item across meetings.
“That’s a little bit of the tail wagging the dog,” said Baier. Yet, when you allow risk to guide the meeting agenda, it often places emphasis on the right topics.
Recording the dissent of individual directors can be a sensitive issue.
For particularly sensitive discussions (e.g., capital allocation, acquisitions) where the board lacks unanimity, directors can request to have their dissent documented so as to protect against personal liability if the decision were ever challenged. This should be approached as a special case, explained Baier.
In the case of dividends, there is a statutory protection for directors who dissent on a dividend vote. For all other matters, however, individual dissents are relegated to a facts and circumstances test to determine whether a board member would be protected from any accordant liability.
[Individual dissents] can…indicate that the board wasn’t in alignment—and can certainly show cracks where you don’t want to see cracks. From our perspective, unless you feel very strongly about the dissent and you firmly believe it’s not in the best interest of the shareholders, it’s not really appropriate to put that in the minutes.
In many ways, board minutes are as much an art as they are a science, admits Baier. Boards that focus on aligning the amount of detail in the minutes with the length and substance level of the discussion are often taking the right precautions.
For more information on this topic, watch the full episode with Megan Baier. And don’t miss our recent chat below with William Chandler (Former Chancellor, Delaware Court of Chancery), who discusses several aspects of director liability including data breaches or subject-matter expertise.