Public company boards are accustomed to scrutiny from a variety of sources, including regulators, investors, analysts, reporters, influences, and whistleblowers. This Skadden memo says that “watchdogs” that don’t have a stake in the company but demand board action on their hot-button issues should be added to that list, and that boards should take their demands seriously:

Boards may wonder whether they are obligated to respond to watchdogs or other third parties raising concerns about critical company issues. The board must exercise judgment in each instance about whether and how to respond. As a practical matter, however, the board should at least consider a watchdog’s demands and document its response and reasoning. Doing nothing can be risky for several reasons:

– Watchdogs may identify real issues that, if addressed, could benefit the company.
– If ignored, these demands could later be cited as “red flags” in litigation or regulatory investigations, suggesting the board failed in its oversight duties.
– Plaintiffs’ lawyers and regulators often use hindsight to argue that ignored warnings were clear signs of deeper problems.

The memo provides guidance to boards on how to evaluate and respond to watchdogs, and says that in order to appropriately fulfill their oversight responsibilities, boards “should respond as they would to similar issues raised by whistleblowers, shareholders or government agencies.”

– John Jenkins