Finding the Balance in Board Meeting Minutes

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When boards meet, the minutes recording the discussion carries a significant burden. It’s a delicate balance, as the minutes should include proof the directors have exercised their fiduciary duty and exclude fodder for lawsuits and enforcement actions.

What a financial institution’s board records in its minutes can prove particularly valuable to investigators and attorneys if the bank finds itself in the thralls of an investigation or the subject of an investor lawsuit. Sticking to best practices can not only provide a historical record of the company, but also offer a valuable cloak of protection via proof that directors provided fiduciary duty and care.

“There’s a tension between putting too much in the minutes and putting too little,” says James McAlpin Jr., a partner at Bryan Cave Leighton Paisner LLP and an independent director at Bank Director’s parent company, DirectorCorps. “Most err on the side of putting too much in the minutes.”

Bank investors and regulators place certain expectations on bank directors regarding their fiduciary duty. A lot of the parameters focus on holding management accountable and debating key decisions during board meetings.

For the board, the only tangible proof to the outside public that a discussion took place about a key initiative comes via the meeting minutes. It’s also where boards can show that significant debate took place on important issues facing the bank.

“Any gathering that is intended to be treated as a meeting of the directors should have minutes,” says Aaron Kaslow, general counsel and chief administrative officer at $13.8 billion Sandy Spring Bancorp, based in Olney, Maryland. “Committees should also be taking meeting minutes.”

Kaslow adds that an informal discussion between a few directors wouldn’t typically rise to the level of needing the official minutes recorded.

When boards need to take minutes is relatively straightforward, but boards can interpret the how and what of the meeting minutes differently. Regulators have not set hard-and-fast rules about minutes, leaving a lot to the whim of the board. It’s up to the bank to decide the process that works for the organization to protect it from litigation. Sixty-five percent of directors responding to Bank Director’s 2021 Governance Best Practices Survey said their minutes provided a thorough summary of board proceedings, including all discussions. Twenty-seven percent said their minutes contained just a brief summary of board decisions.

When incorporating too much into the transcript, a bank may prove that discussion was provided on key aspects of the business, like whether to go forward with a merger. But it’s not always prudent to keep too much detail in the minutes, McAlpin adds. Whatever the board includes in the minutes can eventually be pulled in discovery if a shareholder suit goes forward or if regulators begin investigating the bank. If, say, a board member debates strongly against a certain provision, but then votes in favor of it, questions about what changed the vote can arise. Did the director have good reason to switch sides? Or did the director succumb to pressure? Or did another reason lead to the switch? It may raise doubt on whether the director upheld his or her fiduciary duty.

“Show the general nature of the discussion, the fact that discussion occurred and the particular topic of the discussion,” says Kaslow. “I would avoid attributing particular questions or opinions to specific directors.” If the board does show such detail in the minutes, then they’re “exposing [the directors] in some way to become a focal point of a lawsuit,” Kaslow adds.

It’s also why most boards will want to avoid using a full transcript of the meeting. If the board can see minute-by-minute detail of who thought what, why and their reasons, then so can attorneys. These will become particularly valuable points of contention in a legal setting, which could result in the bank and its directors facing liability for any action the institution took. Bank Director’s 2021 survey found 8% of banks’ minutes provide a verbatim transcript of board proceedings.

Due to this trail of legal tidbits, it’s also why boards should avoid keeping any recordings of the meeting minutes for longer than it takes to create and approve the official record. Many boards may choose to record the meeting to create the minutes after. While this has practical reasons — it can be difficult to record everything by hand as it’s happening, particularly if the board has a fast-moving agenda — it also can become fodder for a lawsuit.

“Minutes should be the exclusive record of the meeting,” says Kaslow. But if recordings exist long after the meeting occurs, then the minutes are replaced by the recordings for investigators, and the tapes become the official record.

“Whenever minutes are prepared, destroy the recording,” says McAlpin. Often the secretary of the board will develop the minutes. This might occur under the board’s direction or under the guise of the general counsel. Once the minutes are prepared, allow the directors to review. If the board approves, then that’s when the recordings should be destroyed.

The same rule exists for directors who take notes. While a meeting may last a couple hours and directors may want to review certain things mentioned during the discussion, if the notebooks are kept long afterwards, then lawyers can also use those in court.

What should you include in the minutes? Instead of tracking verbatim everything that’s said, it’s important to show that a reasonable process and debate occurred before the board approved or denied certain motions. This requires tracking when issues arise during the meeting and noting that debate occurred without detailing which director said what or which side a director took in a discussion.

“It’s very helpful of the board minutes to show the process,” says McAlpin. “It’s not the decision the court is looking at, but the process that [the board] took in reaching a decision.”

Typically, once minutes are typed up, the board members will receive the draft version. They will have a chance to review the entire document, assessing whether it captures what occurred or what they expressed, if that detail is included. If there are any quotes in the meeting minutes, then directors should eye those carefully to ensure that the quote reflects their opinion and provides the right context of what they said.

Every member should review the minutes, which will be read at the start of the next meeting. The directors will vote on whether to approve the minutes at that point.

After the vote goes through, McAlpin adds, the minutes should survive as the only “historical record,” leaving the rest of the meeting behind closed doors.

How Lead Independent Directors Drive Effective Boards

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Want to make your board more effective? Look for a lead independent director with the fortitude and skillset to constructively navigate the relationship with bank management.

While the role is still evolving, bankers have identified some attributes of successful, effective and productive lead directors. These include undisputable independence, forthrightness and an ability to facilitate productive conversations, both in and outside the board room.

As the board’s representative with management, undisputable independence is crucial to a lead director’s ability to be an effective counterweight. It can empower the lead director to act as a conduit of constructive conversations for management and have direct, and sometimes uncomfortable, conversations on behalf of fellow board members.

When speaking with management, lead directors should include an accurate and timely summary of what is discussed in any executive sessions. These sessions allow directors to express concerns and articulate expectations for management in a transparent manner — something they may not be comfortable discussing directly with the CEO. An effective lead independent director can transform these discussions into palatable and productive feedback for executives.

During board meetings, directors — not management — should guide the conversation and focus on key issues. Lead directors can help facilitate consensus and alignment between the board and management, enabling both groups to have candid conversations and ultimately share the same strategic focus.

Building consensus also includes working to making board meetings more effective. A concise, timely meeting agenda representing key board matters can lead to strategic discussions and allow directors to thoughtfully prepare for a productive meeting. Start by surveying fellow directors about matters of importance and sharing discussion points and summaries with management. This can give the board time and space to focus on critical matters during a meeting and help avoid rushing through important topics.

A board of directors is filled with a variety of personalities, so a lead independent director’s demeanor and communication style can impact its success. Effective lead independent directors must be comfortable addressing awkward or sensitive topics and have the ability to lead discussions without becoming a dominant presence in the board room. Facilitating and eliciting perspectives from other directors can coalesce key information, so all the directors feel they have been heard and management understands what is expected of them.

The specificities of the role — and the tasks the lead independent director governs — caution against frequent rotation of this role, which could be viewed as lack of strength on the board, ineffective leadership, or even a lack of commitment to governance. Rotating this role too frequently could also lead to a reduction in the board’s overall productivity.

Assess current and potential board members for candidates who could effectively serve as lead independent director, and weigh the possibility of bringing in a new board member to provide the necessary skills.

For more information on the role of lead independent director, contact Susan Sabo at [email protected] or 704-816-8452 or Todd Sprang at [email protected] or 630-954-8175.

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, investment, or tax advice or opinion provided by CliftonLarsonAllen LLP (CliftonLarsonAllen) to the reader. For more information, visit CLAconnect.com.

CLA exists to create opportunities for our clients, our people, and our communities through our industry-focused wealth advisory, outsourcing, audit, tax, and consulting services. Investment advisory services are offered through CliftonLarsonAllen Wealth Advisors, LLC, an SEC-registered investment advisor.

Five Qualities It Takes to be an Effective Director

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governance-7-20-18.pngI’ve always thought that corporate governance looks deceptively easy. While some are more hands-on than others, a bank’s board of directors does not (and should not) play a direct operating role. It is there to advise and oversee the company’s senior management team, but not run the company. I also believe that governance is critically important, and the board and its individual directors can have a material impact—either positively or negatively—on the fortunes of their companies. The attributes of an effective director are an interesting combination of knowledge, personality and social skills. Not everyone is good at it. Intelligence and experience are the minimum characteristics for any director, but they alone won’t guarantee success. While this is not an all-inclusive list, here are five attributes that I think define what it means to be an effective director.

Be independently minded. There are legal definitions that the major stock exchanges and regulators use when they refer to independence, mostly centering around conflicts of interest, but I’m referring to something different. Is a director willing to exercise their own judgment, with the courage to follow through on their convictions, even if that brings them into conflict with other board members? It can be uncomfortable to be the only director who objects to a particular course of action, or who raises a sensitive issue others are afraid to address. Effective directors are willing to engage in a level of constructive conflict when they believe there is an important principle at stake.

Actively engage in the business of the board. How thoroughly does a director prepare for every board or committee meeting? Do they ask questions? Do they participate in meetings or simply observe? Is their head in the game? Most of the really good directors I know find banking to be intellectually stimulating and believe banks are important. And they enjoy the opportunity to work with a group of smart and successful people who all want the same thing, which is to build a great bank.

Understand banks and banking. The mechanics of corporate governance are pretty straightforward, and a smart person can pick them up quickly enough. But banking is a complex business, in part because it is so heavily regulated, but also because the economics are different than most other industries. Most outside directors do not come from the banking industry, but to be effective and fulfill their fiduciary duties, a director must know enough about the business of banking to have a meaningful dialogue with management. This requires a commitment to learning and continuing education that lasts for as long as a director serves on the board. It’s also important that a director have an intimate understanding of their own bank, its strategies, its major risks and the things that drive its economic value.

Pay attention to the world around you. The business of banking is changing, and banks need to adapt. Much of this change is driven by the growth of a digital economy and evolving preferences in how consumers want to transact with their merchants and service providers, including their banks. Customer demographics is a factor in this shift. Most bank directors today are baby boomers, while the fastest growing customer segment is the millennial generation, and they want to bank differently. The digital economy isn’t the only external development that directors need to pay attention to. For example, the recent tariffs imposed by President Donald Trump’s administration on imported steel could have a negative impact on small and medium-sized manufacturers that rely on cheap steel from Mexico. How changes in the larger economy affect a bank’s corporate and business customers should always be a top concern for the board.

Know when it’s time to leave the board. Everyone has a freshness date that reflects their own unique combination of physical and mental capabilities, and life circumstances. While some boards have a mandatory retirement age policy, the argument against them is they can force a highly competent director to leave simply because they age out. Unfortunately, some directors remain on the board too long, just as some professional athletes play beyond their prime. If the board doesn’t have a mandatory retirement age, every director should have enough respect for the importance of corporate governance to acknowledge and step out gracefully if they feel they can no longer meet the demands of board service. Those who do will gain the lasting respect of their colleagues, because that’s a message no one else on the board wants to deliver—that it’s time to go.