Virtual capabilities and electronic documents are double-edged swords.
(The following is an excerpted version of a larger piece. Please find the full article here.)
Modern information technology can markedly improve the efficiency and quality of the deliberative processes of corporate boards of directors. Yet, if used imprudently, the same technological capabilities can reduce the quality and integrity of corporate decision-making, potentially exposing a company and its directors not only to greater litigation costs and risks, but also to serious reputational harm.
Regrettably, rather than evolving to keep pace with technological developments, corporate governance practices often involve an admixture of obsolete past approaches and ad hoc new ones, a combination that underutilizes the potential benefits of technology and increases its potential risks. A high volume of virtual meetings puts pressure on board information policies and requires directors and managers to be self-disciplined in their focus and engagement. The efficiency advantage can be undermined by director and manager inattention and unproductive online interaction. An overreliance on virtual meetings can also lead to insufficient in-person time for the board and key managers to meet and develop the chemistry and expectations for information flow that are vital to a successful company’s governance. The vulnerabilities in these less-than-ideal scenarios have been eagerly exploited by activist investors and plaintiffs’ lawyers.
Yet the dangers inherent in the board’s use of digital technology should not obscure this promising reality: Virtual meeting technology and other online tools have improved the information flow between management and the board. They facilitate more efficient and effective deliberations and, when used judiciously, can relieve stress, generate better decision-useful information on a more timely basis, and produce a more robust and reliable record of informed board decision-making. The challenge is for companies to capitalize on the advantages this technology provides while minimizing its risks. This requires bringing some old-school discipline and common sense to the new digital world.
Positive Practices to Improve the Board’s Use of Information
Prohibit multitasking during meetings, especially virtual meetings.1 Many businesspeople are under the impression that an electronic communication, such as an email or a text, is somehow less susceptible to discovery by a plaintiff, regulator or stockholder than a written document. That is not true as a matter of law — the law does not distinguish between the forms in which information is captured — and is actually closer to the opposite in terms of today’s reality. A printed-out document that a director possesses is difficult to send unless the director scans it in and attaches it to an email. An email or text, once sent, is beyond the director’s control and typically is backed up and stored on multiple information systems.2
A related reality is that documents intended for distribution generally are prepared with more care than emails and texts. Emails and texts, though written, have many of the qualities and dangers of immediate oral responses. Boredom, anger, frustration, enthusiasm and thoughtlessness can result in instant communications that are ambiguous, snarky or hurtful to others or the company. These create misimpressions that are difficult to dispel and that can’t be rescinded or adequately explained. Everyone has had that “Oh no!” moment after sending an email inspired by a group communication but intended only for selected recipients: “Uh oh, did I hit ‘Reply All’ by mistake?” Communications of this kind happen every day, in boardrooms and beyond.
One way to better control this risk is to have a policy that requires all participants in board and committee meetings to restrict their use of email and text while meetings are in session. Periodic breaks can be scheduled to allow directors and managers to review incoming communications and to respond to them. These activities should be strongly discouraged during the board or committee meeting itself.3
As important, any communications about and during the meeting should be made orally, so that those thoughts can be heard by all participants. Side emails and texts involving a subset of attendees can be a minefield for divisions within the board and management. All too often, they indulge in unprofessional sarcasm and create a hazard not just for those who make and receive them, but also for the others in the room who are focused on the meeting. There is no privilege for side conversations, and these communications are as discoverable as a formal memo despite lacking dignity or care in preparation.
Deliberately manage the volume, flow and security of electronically provided board materials.4 With online portals, there is a temptation for management to provide an ever-greater quantity of materials to directors. Where there formerly was a practical limit on board and committee books (the size of a FedEx box, for example), there now is none. Printing out the materials before making them available online would be one way for the corporate secretary to assess whether they are too voluminous for directors to digest and usefully absorb.
As electronic information delivery and online access expand, so does the need for up-to-date information security. Portals and mailboxes can be hacked, and having password policies that address these realities (while not burdening management and directors with unreasonable numbers of passwords) is a difficult but necessary task. Companies also must be able to remotely erase a lost device so that sensitive information does not fall into the wrong hands. In the “old days,” a director might accidentally compromise confidentiality by, say, leaving a board book in a seatback pocket on an airplane. Now technology can mitigate the damage done by loss, theft or hacking. Companies should use their IT departments or consultants to ensure that their information security for board materials remains state-of-the-art and should consider providing an official device and email address for each director. Although it may be annoying for an individual director to have three company-issued tablet computers and separate email addresses for each of her three boards, it may be courting disaster to have different companies’ sensitive information on a shared device or accessed through a single, relatively insecure personal email address.
Update information-retention policies to take into account new realities.5 Given the realities of regulation and litigation, companies often face the obligation to retain certain information. Once certain documents and other records have been created, their existence and retention have consequential legal implications.
Thus, information-retention policies now must cover the emails, texts and other information contained in the devices used for company business by directors and officers. In litigation or a regulatory proceeding, it is problematic if key documents in a board portal have been deleted or if directors and officers were not properly instructed regarding a hold on the destruction of records.
The proliferation of virtual meetings itself creates new issues. There is no requirement to record a board meeting, but, if a recording is made, it cannot lightly be destroyed. In fact, it may have to be preserved if the meeting touched on matters relevant to an ongoing or expected proceeding. Companies must inquire whether a meeting conducted on Zoom or other platforms will be recorded, understand the consequences if so and subject those recordings to the company’s retention policies. Likewise, just as with the temptation to make tape recordings, minute-takers may wish to make video recordings to help ensure the accuracy of the minutes.6 But it is quite possible that a recording of a meeting, once created, cannot legally be destroyed.
An emphasis on the need for high integrity and due care in all corporate communications, whether orally in meetings or in written or electronic communications, is the best safeguard. Policies that rely on destroying corporate records invite natural skepticism and may subject the company, directors and officers to an adverse inference that the destroyed records would have revealed wrongdoing and resulted in sanctions for evidence destruction.
Suggested Practices to Capitalize on the Potential of Modern Technology to Make the Most of the Board’s Limited Time
Increase committee and board efficiency using virtual meeting technology.7 The virtual meeting world allows for priority-setting in a new way. Although in-person committee meetings remain essential, virtual committee meetings present an opportunity for some routine functions to be done before or after in-person meetings. Mandated committees that might not need as much meeting time, such as nominating and corporate governance, can conduct their business in a compact and non-burdensome way. Committees can meet, together or with the full board, to consider overlapping issues and to use the full capacity of the board’s diverse strength to make sure that the best thinking is brought to bear on all major issues.
Even more important, in virtual meetings, committees can distill key information about important issues and create materials for the full board to use in considering an issue that the committee has vetted with management and that is ripe for input from the whole board. By this means, a board could have the benefit of committees that cover key issues regularly with input from important managers and advisors as well as greater cross-fertilization and information-sharing across committees by the board as a whole. If this approach to calendaring is combined with a thoughtful approach to allocating key risks and issues across a sound committee structure — one that does not center all key compliance and employee, environmental, social and governance (EESG) issues in the audit committee — the full board’s and management’s diverse talents can be better utilized to make sure all key business issues receive adequate consideration by the entire board. Ideally, the thoughtful use of virtual committee meetings would expand the time available for the full board to meet and focus on the company’s strategy and the major risks to the success of that strategy.
Technology can thus enable a board to concentrate its limited resources on the most mission-critical ways in which the company affects its stakeholders and the biggest challenges the company faces in creating sustainable value for its investors.
But also: Do insist that directors commit to being present at scheduled in-person meetings.8 There is no substitute for human chemistry and contact, and that is especially so in corporate governance. Directors are not on-site most of the time. To do their jobs effectively, they must cultivate relationships and foster information-sharing practices that enable them to understand what is going on at the company, but that do not overwhelm management with unreasonable demands. Thus, the connections that deepen over dinners, the ability to read the room, the space for appropriate side conversations, and the chance for key managers to provide discreet input to board members about sensitive subjects all depend on a reliable and consistent level of actual personal interaction.
Board effectiveness and regular interaction with management cannot be achieved unless the board commits to meeting in person six to eight times per year and sets the firm expectation that all board members attend those meetings. A hybrid approach of rotating the blend of directors in the room and others appearing virtually diminishes the collective capacity of a board to do its job effectively, makes meetings awkward, likely requires repetitive briefings at later meetings and provides no consistent basis for management-director communications in key areas.
Certain types of committees must prioritize in-person meetings. These include special investigation and transactional committees. A number of these committee meetings should be conducted in person at key inflection points. Virtual meeting platforms can facilitate the progress of decision-making, but at important moments where committee judgment is critical, policy should favor having all the directors present with the key members of management and the outside advisors who are relevant to helping the committee fulfill its mandate. Although it might appear to be more efficient (and thrifty) to ask board advisors to appear virtually instead of in-person at board meetings, it will be substantially more difficult to develop the confidence and trust between the board and its advisors that are so important to making the board process effective.
Respect the boundaries between the roles of board and management.9 The increased ease and frequency of virtual meetings can give rise to an awkward, but real, corporate governance problem. When a board of directors oversteps its bounds and moves from approving the company’s policies, ensuring their faithful implementation by management and holding managers accountable for their effective and ethical performance, to instead enmeshing itself in day-to-day management, overburdening management with constant information requests or conversations and expecting excessive committee meetings, the company is likely to suffer. Forcing management to tend to director “squeaky wheels” creates a situation where the board’s own priorities are not effectively pursued — not because management does not wish to accomplish them, but because management’s ability to do so has been undermined by the board’s own overreaching and interference.
Thus, board calendaring and meeting practices must recognize the burden on management imposed by board meetings and information requests and the distraction from other important functions that excessive demands create. Put simply, the board calendar must be shaped to facilitate the board doing its proper policy-level role effectively, not to allow the board to act as a shadow management team. Any committee meeting or board meeting is likely to require considerable management time, and, though scheduling a virtual meeting may be easier, the fact that a meeting is virtual does nothing to reduce the time required by management to develop materials for consideration and to properly document the record of the meeting.
Making the Most Out of New Technology Requires Equally New Thinking
We end on an optimistic note. None of us would prefer to go back to mimeographs, carbon paper, whiteout and typewriters. None of us wants to spend more time in an airport than in the meeting to which we are traveling. But a digital world where everything can be and often is recorded has risks and inconveniences of its own. So does a world where the creation of information is often too easy, and where technology can enable wasteful uses of scarce director and management time and resources.
In our view, what is required is nothing new and is what business leaders are best at: using business judgment to reflect on how the most positive impact can be obtained through the effective use of available resources. That requires bringing professional analysis to 21st-century board practices and not assuming that the inertial use of late-20th-century policies with ad hoc additions is optimal or even adequate. With fresh thinking that builds the board’s information policies, committee structure and use of time around what is most important, new technology can markedly improve the quality and efficiency of company decision-making.
Looking ahead, companies should apply today’s technology to their corporate governance practices in order to create more efficient, less stressful, and thus more robust and effective means by which to transmit information and deliberate on critical issues. With discipline in execution and a focus on doing what is right for the company, board practices that encourage deep consideration of the most important issues and document the basis for decisions will not just result in lower legal, regulatory and reputational risk; they also will lead to better business decisions and a stronger company that is positioned to create sustainable value for its investors and to treat all its key stakeholders with respect. We recognize, of course, that each company and each industry space is different. The general suggestions in this article are simply suggestions for consideration and adaptation to the specific circumstances companies face. But the deeper principles we articulate about integrity and care in board information and deliberative practices are ones we hope can be usefully brought to bear at all companies. Fundamentally, we urge companies to think deeply about these issues in a businesslike way.
We hope to have provided some useful ideas toward that important goal.
Leo E. Strine Jr. is the Michael L. Wachter Distinguished Fellow in Law and Policy at the University of Pennsylvania Carey Law School, a senior fellow of the Harvard Program on Corporate Governance, and of counsel at Wachtell, Lipton, Rosen & Katz. He was the chief justice of the Delaware Supreme Court from 2014 through 2019. Before becoming the chief justice, he served on the Delaware Court of Chancery as chancellor and as a vice chancellor.
Laura A. McIntosh is a consulting attorney for Wachtell, Lipton, Rosen & Katz. Since 2004, she has coauthored a corporate governance column for the New York Law Journal.
The authors are grateful to Janet Carrig and Kim Rucker for their thoughtful comments, Amy Zeng and Peggy Pfeiffer for their assistance and David A. Katz for his insights and support.
1 Don’t be afraid to discuss and address with the board the obvious dangers of distraction and improvident statements that devices like smartphones and tablets can create. It’s for the good of the company and the directors themselves.
2 Harkening back to the last two decades of the 20th century, the same can be said for documents that were faxed to different people and inevitably were saved in some type of filing system (by the sender, the recipient or both).
3 Consider, for example, a corporate director who frequently steps out of board and committee meetings to take phone calls and is then absent from the board meeting for extended periods. Just as that is unlikely to be well tolerated by that director’s fellow board members, it should not be tolerated of those who physically sit in a board meeting but are focusing their mental efforts elsewhere using virtual means.
4 Don’t let board and committee materials expand to fill the near-infinite online space. Don’t overload directors with one massive push of information immediately before a board meeting. And don’t neglect updating information security protocols around information made available to directors online.
5 Don’t assume you can delete emails or texts or destroy Zoom, WebEx, Teams or other virtual meeting recordings or the hard or solid-state drives of devices. They should be treated no differently than paper documents.
6 Companies should also have policies prohibiting individual directors from recording board or committee meetings. In some jurisdictions, such recordings may be illegal but, even if not, in almost all circumstances these recordings are likely to be detrimental to the board as a whole.
7 Don’t waste the opportunity to leverage directors’ newfound, pandemic-generated familiarity with virtual meeting technology into greater efficiency and flexibility.
8 Don’t allow the board to degenerate into an ad hoc combination of members present in person and on virtual meeting platforms. Research has shown that the hybrid approach is generally less effective than either the all-in-person or all-virtual approach.
9 For directors, this means: Don’t forget your proper role. Remember what it was like to have important daily managerial responsibilities and the legitimate space you needed from board micromanagement to perform your management duties with the effectiveness the board itself demands. Board oversight does not mean substituting the board’s judgment for management’s. In Europe, the equivalent to our board of directors is often called the “supervisory” board; it is important that each director understands the responsibilities and limits of their oversight role.