TheCorporateCounsel.net

Governance professionals recognize that corporate governance is based on a mosaic of different inputs, which range from specific laws and rules to norms and best practices. In corporate governance land, it can sometimes feel like there is a lot of gray, rather than black and white requirements dictated by state law, the SEC and the stock exchanges.

In our “Q&A Forum” (#12,264), a member recently asked about the enforceability of provisions specified in a company’s corporate governance guidelines, which is a document familiar to many of us who practice with public companies. The member asked:

NASDAQ listed issuer (DE corporation) adopts corporate governance guidelines and includes a disclaimer regarding their purpose. If the guidelines include a section stating that directors either “shall” or “should” notify the board and receive board approval prior to taking on new directorships at outside public companies, what is the risk involved if a director doesn’t give prior notice or receive approval and accepts a directorship at another company without disclosing it to the board? Would this be a breach of duty of care of that particular director? Does the “must”, “shall” or “should” language make any difference in determining if there is a breach of the duty of care?

NASDAQ doesn’t require corporate governance guidelines, and neither does the SEC. The issuer has a code of ethics and conduct, as I understand it is required by the SEC, but the code doesn’t speak to this. The only other potential issue I see is with the state of incorporation’s corporation law. I don’t see anything regarding this in DE but would love more insight into that. The only thing I can think of would potentially be a breach of duty of care, but on the other hand, (a) accepting an outside directorship isn’t an action being taken by that director on behalf of the corporation or pursuant to the corporation’s governance and (b) it is my understanding that the corporate governance guidelines aren’t enforceable, whether or not the language is “shall” or “should”.

Am I missing something regarding Delaware law?

John responded:

The board has established a policy that it expects directors to follow. I don’t think a single incidence of noncompliance with that policy necessarily automatically results in a breach of the individual director’s fiduciary duty, but I think there are situations in which it could rise to such a level.

For example, if the director’s failure to comply with that policy resulting in the director accepting a seat on a board that would create an unlawful interlock, or if that director’s action also resulted in violation of an overboarding policy, or if the director’s failure to comply was willful, a plaintiff might have some fun with it. Remember, the director has accepted a position for which he or she will receive remuneration in violation of the policy, and I think a plaintiff who was inclined to bring a case might focus on that in an attempt to turn a care claim into a loyalty claim.

The other thing to keep in mind is that since this is a board policy, it implicates the entire board’s duty of oversight, and in an absolute worst-case scenario, might expose the other directors to a Caremark claim. This seems pretty far from rising to that level, but the takeaway is that if a board establishes a policy, it needs to be followed and violations of the policy appropriately sanctioned. The sanction doesn’t have to be draconian, but the board should address the violation in some fashion. Assuming there are no aggravating factors, perhaps requiring the director to undergo additional training on board policies and procedures might be appropriate.

I think this is a very timely question, because it seems to me that overboarding provisions of corporate governance guidelines are getting tested more and more these days, as public companies seek to refresh their board while the crop of qualified director candidates seems to remain in short supply. I increasingly find myself suggesting that companies periodically educate their boards about the corporate governance guidelines, so that directors are better attuned to the expectation that they provide timely notice of a potential new board position or executive role so that appropriate decisions can be made by the board and the individual director and embarrassment (or worse) can be avoided. I am afraid that corporate governance guidelines can drift into the category of policies that reside on the company’s website but are off the radar of those two whom the bulk of the provision apply – the members of the board of directors.

– Dave Lynn