BOARD OF DIRECTOR SELF EVALUATION: balancing honesty and risk management.
According to UCLA, the three top factors associated with competent Boards are: independent board members, a competent audit committee, and Board Self Evaluation.
As lawyers are fond of telling us, “No good deed goes unpunished.”
If a Board elects to engage in a systematic approach to Board Self Examination, what procedures can it put into place to insure that its good intentions do not backfire?
Ralph D. Ward has some good comments to make. We employ his suggestions in our Board of Directors Self Examination programs using National Association of Corporate Directors standards.
Ralph is publisher of Boardroom Insider, a monthly newsletter addressing current boardroom issues, and editor of the Corporate Board magazine, a national journal for boards of directors. He is a respected author, speaker, and boardroom consultant.
Board Evaluation: Liability Dangers?
By Ralph Ward
Having a strong evaluation process for your board is so valuable and helpful in improving board quality that I almost hesitate to mention a potential downside. Nevertheless, there is one potential drawback that you must know about. After your directors sit down and give an honest, tough-minded read of their own and each other's failings, could the results be demanded as part of lawsuit discovery? You might be surprised to learn that they can.
Though governance pros have yet to see it happen, "I don't know of any reason it wouldn't be discoverable," says Eric Orlinsky, an attorney with the firm of Saul & Ewing. In researching this story, the top legal and administrative professionals I talked to all said about the same thing: they hadn't heard of a case where a board was forced to spill its evaluation dirty laundry, "but now that I think of it...". The result of such discovery could be plaintiff attorneys tapping into a motherlode of candid comments on directors who aren't pulling their weight, board weaknesses that haven't been addressed, or second thoughts about past board actions.
This is a danger that hasn't hit yet, and it should NOT persuade your board to give up on a searching self-evaluation. It may be that this threat may never actually occur. But you should consider a few moves that may ease the risk.
1. Bring counsel into your evaluation early. While legal work products and findings are usually privileged, assuming that your evaluation is protected just by having a lawyer sit in likely won't hold up in court. "If done in communication with counsel, you might be able to claim privilege, but I think you'd be pushing it," says Orlinsky. Charles Elson, new head of the University of Delaware corporate governance center, also says that the legal claim may prove vulnerable. But it could add one firewall to discovery, and, should these cases pop up in the future, judges may be inclined to respect a legal shelter claim if they feel the value of good board evaluation warrants protection. In short, it can't hurt.
2. Keep it verbal. "A lot of the results are discussed orally, so there's nothing to produce," notes Amy Goodman, counsel with the law firm of Gibson Dunn & Crutcher. While a final report of the evaluation may be needed, raw evaluation instruments that include salty comments are simply too dangerous to keep around. "We had a policy of, after getting the initial comments, destroying the material," says Kathy Gibson, chair of the ASCS Corporate Practices Committee.
3. View potential discovery as an evaluation spur rather than a check on evaluation. In case the big "IF" should occur, and a director has to comment on evaluation shortfalls, the weaknesses uncovered probably won't be the main issue. Rather, the company will face danger if failings are identified, but then not corrected. Consider this a spur to follow through on the evaluation, and not just leave problems until next year. They could prove ticking time bombs.