Board conversations should not be comfortable, routine exchanges of information concerning pre-agreed topics, facts and interpretations. They need to test the boundaries of the known to enable the organisation to profit from uncertainty whilst conceiving and avoiding risks that are emerging.
Such conversations are inherently dangerous and require a degree of trust among the participants. Challenging the status quo whilst supporting the current management and developing the next generation of managers requires boards to have a wide range of behavioural and conversational modes. As knowledge is developed through these conversations it must be recorded so that it is not lost; if records are not kept then knowledge will need to be regenerated in every meeting, wasting valuable time and undermining progress.
Recent trends and tendencies threaten this process by restricting the information contained in board minutes so that only ‘safe’ records are maintained. Legal advice to record only the issue and the decision protect boards if minutes are disclosed in legal proceedings. They also render the minutes virtually useless as a means of developing corporate memory.
This process has led many directors into the habit of making their own records, often by annotating their board papers or in a private ‘board diary’. These documents then leave to company and are stored as each individual director sees fit. Whilst these personal notes assist individual directors when they need to remember the nuances of difficult conversations about risky decisions they participated in, they can be a source of great embarrassment if they fall into the public domain.
Some companies manage this risk by requiring all board materials to be returned to the company secretary or some other person) for secure disposal. They enter into a ‘deed of access’ which gives the individual directors a right to examine the official records should a need arise. The most sophisticated companies manage this process by using ‘electronic board packs’ which allow directors to make notes on a version for use up to and during the meeting but then destroy all marked papers and retain only a clean copy for the company register.
Other companies request that directors destroy their papers after a pre-agreed period of time.
Neither of these risk mitigation strategies controls personal diary notes or compensates for the loss of qualitative data about the factors that were considered in reaching each decision. Some governance advisers have called for boards to record in the minutes which directors voted for or against each decision. This information is useless without a background of the facts presented and the interpretation given to these facts during the board’s conversation. Disclosing individual votes serves only to weaken board unity. All board members are responsible for all actions of the company taken pursuant to a decision of the board, regardless of whether they voted for or against it.
Rather than recording votes (although abstentions should be recorded where this information serves as evidence of the board properly managing a conflict of interest) it would serve the company better if the minutes recorded the key elements of the discussion so that these were available for later review. Far better to have the assumptions clearly recorded so that decisions can be revisited if key assumptions prove to have been wrong. Most boards are more likely to revisit a decision than they are to be called upon to defend it in court.
If you do end up in court it is better to be able to state that the board considered a range of issues before making its decision when, with the benefit of hindsight, unfriendly barristers are suggesting that the decision was negligently or recklessly made.
A side effect of such record keeping is that the truly negligent boards would then be easy to identify.
The downside, of course, is that dangerous and radical ideas would be recorded and, from time to time, could surface in public records, exposing the board members to ridicule or retribution. One director said that, when her company was being criticised for slow growth compared to rivals she reviewed past minutes and found that the board had considered collateralised debt instruments but had decided not to use them as they couldn’t understand them and it appeared from the board discussion that management didn’t understand them either. The original board decision was reviewed several times but never overturned; each time the opacity of the instruments deterred the board from approving their use. The board members felt no qualms about recording their inability to understand the CDOs even though the information could have been used against them if it became public. The GFC passed and the company then performed well compared to peers. Several billion positive reasons to record dangerous ideas in board minutes!
What do you think?
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Julie Garland-McLellan has been internationally acclaimed as a leading expert on board governance. See her website and LinkedIn profiles, and get her book Dilemmas, Dilemmas: Practical Case Studies for Company Directors.
Carter McNamara of Authenticity Consulting, LLC, provides organization development and consultant training services, and is developer of the Free Management Library.
Julie Garland-McLellan uses her experience and depth of knowledge in corporate governance to show boards with limited resources how to be more effective through practical governance innovation and know-how.
Nick Lindsay of Elemental CoSec, provides corporate governance, legal and company secretarial advice to a wide range of companies in the UK.
Judy, I agree that the recording of key points considered can be very helpful to corporate memory and significantly reduce board meeting time in rehashing issues. Just as you suggest that recorded votes decrease board unity, in my opinion recording who raised various points during the board meeting discussions is not appropriate. Including the pros and cons on the issue that were brought up during discussion refreshes everyone’s minds in the future, while stating who said what increases the organization’s risk as someone opposed to the direction the board took can use the recorded information to instigate division among the board members and to initiate negative public media. Including key points that influenced the discussion is a very different thing than preparing a transcript. The factors that were considered when making the decision can be briefly stated to trigger director memory without providing detail on diverse views that can be seen as conflict within the board.
Julie,
In your blog you mention that returning papers to the secretary or requiring directors to destroy their papers after a certain period of time is a risk mitigation strategy. You don’t fully describe what is the risk that is being mitigated – you mention that great embarrassment may be generated if full discussion comes into the public domain. But is embarrassment a risk that neccesitates such a active generation of lack of transparency and miscommunication? I thought we wanted directors who were able to discuss matters without fear or favour? Aren’t directors supposed to be big boys and girls? Haven’t directors left embarrassment back in high school when they worried about a date for the school formal?
Julie, do you have an example of a rationale for such an extreme measure that is in the public record?
Reducing board minutes to something completely anodyne seems to be inimical to good governance. An essential part of governance is to be able to properly assess performance, especially your own. Psychologists know enough about memory to be sure when you rely on memory to evaluate your own performance you end up with a very optimistically biased view on your own abilities. A contemporaneous recording of reasons for decisions provides the basis for a more realistic assessment of performance – for example, this recording is something that is strongly recommended for assessment of qualitative judgments in investment management.
Further, which part of a full and frank and honest discussion would directors not be willing to defend?
Hi Frank,
The most well known occasion in Australia of a board being embarrassed was part of the AWB scandal – one director had written in the margin of his board pack that a transaction propposed ‘did not pass the smell test’. The prosecution tried to use the note to infer that the board were aware of the bribery of the Sadam Husseim regime to enable greater volumes of wheat exports.
I agree with Cathie that the permanent record should be kept without any such emotive anotations; they are useful to jog a director’s memory so that he or she will not forget to raise a concern they felt when reading the papers but not for recording for use by third parties.
The practice of requiring directors to return their board papers to the company for secure disposal is quite common; I have a board that does this and others that require directors to maintain their documentation in a secure location and dispose of it safely. Board portals manage this risk better than paper based systems.
In all my experience I haven’t had a board that was required to disclose its papers (although some of my government sector boards did have Freedom of Information Requests for certain items of information. That was the point of my post – too many boards are reducing their minutes to a record that is useless when revisiting discussions to avoid a risk of disclosure that is better managed by the sort of good governance that drives good corporate performance and that they are very unlikely to face.
Julie,
It wasn’t an example of an embarrassing note that I was after, but a public rationale for the extreme policy you are discussing.
If I may paraphrase your “too many boards are reducing their minutes to a record that is useless when revisiting discussions to avoid a risk of disclosure that is better managed by the sort of good governance that drives good corporate performance and that they are very unlikely to face.”
An extreme policy of only recording decisions of a board meeting is treating the symptom, not the problem. What are Boards doing if they don’t want a reasonable summary of the main points of discussion behind a decision?