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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. |
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