Revisiting the Importance of Documenting Board Oversight

Bank directors may want to revisit how and what corporate meeting minutes they keep, following the crucial role that meeting minutes played in a recent court case.

Corporate minutes played an important part in determining the allegations created a “reasonable inference” that a company’s directors failed to fulfill their fiduciary obligations. Bank directors may want to revisit the structure and contents of their meeting minutes, particularly as they relate to risk oversight and board-level reporting and monitoring systems.

There has always been a tension in corporate governance when it comes to the amount of detail in the minutes for a board of directors or a board committee meeting. Generally, most governance experts agree that minutes should contain details on the meeting’s date and time, who attended and whether there was a quorum, summaries of each discussed agenda item and a record of actions taken, at a minimum.

Where experts differ is around questions of how much discussion detail should be in the minutes, based in part on their discoverability under most state corporation codes. A recent Delaware Supreme Court case may shed some light on this debate.

The 2019 decision, Marchand v. Barnhill, centered around the listeria outbreak in Blue Bell Creameries’ ice cream that resulted in the illness and, in some cases, death of several consumers. Blue Bell recalled all of its products, laid off a significant number of its employees and shut down production at its plants.

In the fallout, a stockholder derivative suit was filed against Blue Bell’s key executives and directors, claiming breaches of their fiduciary duties. The Chancery Court dismissed the claims, partly on the basis that the pleadings were not sufficient to support a reasonable inference that the directors acted with bad faith. The Delaware Supreme Court reversed that decision on appeal, finding that the facts sufficiently supported a reasonable inference that the board “failed to implement any system to monitor Blue Bell’s food safety performance or compliance.”

The Supreme Court concluded that it was reasonably conceivable that the directors breached their duty of loyalty. They relied on a prior Delaware case that established the standard for claims involving the breach of the duty of loyalty, and that the failure of a board to make a good faith effort to oversee a company’s operations and have a board-level system to monitor and mitigate risks is an act of bad faith. This is commonly referred to as the Caremark duties.

In Marchand, the plaintiff used the company’s books and records to allege that the board lacked a committee that addressed food safety, had no regular process requiring management to inform the board on food safety matters and compliance, and no schedule to regularly consider food safety risks prior to the listeria incident. The plaintiff also alleged there was no evidence that management reports containing certain red flags were reported to the board and no record showing any regular discussion of food safety issues at board meetings.

In finding that the facts were sufficient to support a claim that Blue Bell’s board breached its duty of loyalty, the Supreme Court stated that bad faith is established when a board fails to implement a reporting or monitoring system, or implements one and fails to monitor or oversee its operations. A key factor was the lack of any discussion of food safety risks in board minutes or other board materials.

The court also noted that being in a highly regulated industry and compliance with applicable regulations did not “foreclose an inference that the directors’ lack of attentiveness rose to the level of bad faith indifference” – a concept that can apply to regulated industries like banking.

Marchand reminds boards of directors what is required to fulfill their duty of loyalty and their oversight responsibilities. Key takeaways from the decision include:

• Identify, in consultation with management, a company’s critical risks, and regularly consider the risk management efforts and appropriateness of board-level procedures in board and/or committee meetings.
• Implement appropriate board-level reporting systems for monitoring critical risks, including regular reports to the board or a board committee on those risks.
• Document contemporaneously, carefully and with some specificity, an accurate, precise and complete record of decision-making by the board in board minutes and other documents. This includes board-level procedures and compliance efforts for monitoring critical risks, and that the board is monitoring such risks.