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.

The Nuts and Bolts on Executive Sessions

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A board’s success can depend on the strength of the independent directors. But as boards become more centralized around the CEO’s carefully choreographed meetings, there’s greater potential for kabuki-style processes, with all decisions eventually funneling through one member of management. Executive sessions may be instrumental to the strength of independent directors and should be a part of the board’s meeting schedule.

Most boards believe they hold management accountable. Nearly three-in-four (74%) of the directors, chairs and chief executives surveyed by Bank Director in 2021 said their board had several directors willing to ask difficult, challenging questions. Another 72% felt free to exercise their own independent judgement if they disagreed with a board decision. Yet, in Bank Director’s 2022 Governance Best Practices Survey a year later, 24% believe that holding management accountable would improve the governance process.  

Executive sessions can be a powerful tool in the toolbox for independent directors to hold management accountable and allow room for directors to gain a stronger understanding of certain concepts before coming to a decision. 

“Whoever is chairman controls the agenda,” says James McAlpin Jr., a partner at the law firm Bryan Cave Leighton Paisner LLP, which has sponsored Bank Director’s annual Governance Best Practices Survey. Sometimes, the CEO retains the chair title and directs the agenda. Sometimes, an independent director retains the chair title. Boards have to decide which model works best for them, while ensuring independent directors have a voice. Executive sessions help ensure that directors can discuss scenarios when the chairs “may not raise the matters themselves,” he adds.

By addressing such topics in open forums, directors can determine if they’re viewing certain issues as other members do or if there’s a lack of cohesion on strategies. Discrepancies in opinions or doubts on a strategy may not come to the surface if the issue isn’t brought up during the normal process of a board meeting. 

Executive sessions occur when a group of directors call for time to discuss an item or topic, without the presence of specific individuals. There’s no hard-fast rule, although they generally involve independent directors without the presence of executives. This typically would exclude the CEO, if he or she sits on the board. But it could include a group of directors that do not participate in a certain committee, for instance, but who can provide broader input. Or it could include the CEO but exclude everyone else in the room who doesn’t sit on the board. 

Since executive sessions aren’t transcribed, they allow for a free flow of conversation. This gives the directors a chance to express their feelings on certain topics, bring up concerns or even ask questions of a sensitive nature. While it may seem as if such sessions would be awkward to call, since the CEO or other executives may wonder why such conversation needs to take place, there’s a tactic to counteract this potential. 

“It’s recommended to have them on regularly scheduled basis,” says Charles Elson, the founding director of the Weinberg Center for Corporate Governance at the University of Delaware. By building them into the agenda, he adds, they don’t become an unusual, uncomfortable situation since everyone knows when potential leadership issues will be discussed. Among directors and CEOs surveyed by Bank Director in 2021, 38% said the board held an executive session at the end of every board meeting, while 16% held them quarterly and 24% called one whenever independent directors wanted one.

For companies listed on the New York Stock Exchange (NYSE) or Nasdaq, it’s less of a social concern and more of a proper practice. Both exchanges require companies to incorporate executive sessions of the independent directors on a regular basis. Nasdaq defines that as at least twice a year (if not more), while the NYSE leaves the definition more open-ended. Such executive sessions provide an outlet for directors at community and private banks as well, serving as a valuable way to address concerns without worrying about hurting others’ feelings or working relationships.

Historically, executive sessions have been a tool of senates and parliaments, but they began to make their way to the boardroom at a greater rate in the mid-1990s. Directors needed a way to speak on certain topics off the record; this resulted in having small meetings with one or two directors over lunch or on the way to the parking lot. Instead, executive sessions formalize these conversations, encouraging directors to speak as a group. This can not only lead to a greater awareness of a certain type of thinking among directors but can also provide stronger conclusions, questions and coordinated insights for management or the board at large.

“It’s not so much hiding [issues] but addressing them in an appropriate way,” says Chip MacDonald, a financial services lawyer at the law firm Jones Day. “Whether it’s a committee function or whole board function, if you have full-time employees or officers on the board, you may want to exclude them.”

McAlpin, who works with boards at community and family banks, has often suggested that a board move to executive session when discussing certain topics that require more room for debate or discussion. 

“They provide particularly strong value when there’s an issue that’s difficult to discuss in front of the CEO or chair,” he says. “It’s better to have the discussion than not and if you do it on a regular basis, it provides open time for people to just share notes.”

The areas of discussion that are addressed during a session can run the gamut, from strategy, managerial issues, regulatory concerns or an investigation. The reason for the session will determine the people that may be present during the conversation.

The discussions are off the record, but this isn’t meant to imply that there’s nefarious conversations happening. In some cases, it might provide an open forum for direction on a new strategy. Or it may even allow for “due process,” says MacDonald. 

For instance, say there’s an accusation made against a certain member of the management team. While it’s important to scrutinize, a board may not want to make it publicly known until they have a chance to investigate the impropriety. Why? First, the board has to make sure that the accusation has validity before divulging it in a board meeting transcription. Second, the board must ensure it has a plan in place to address the issue. The closed-door executive session provides room for directors to plan.

But executive sessions also offer a way to address regular aspects of the oversight role. For instance, when discussing pay potential of top executives, the compensation committee will meet without any executives around to determine pay. This will be presented to the full board. If directors want to discuss the committee’s findings without offending certain individuals on the board — like the CEO — then an executive session would be prudent in such cases. 

The same tools can address potential strategies presented to the board. Or, in the case of a regulatory concern, the directors may want to discuss with fewer people so they have a clear understanding of the problem before coming to a decision. 

For an executive session to take place, there’s no specific quorum required, and there are no rules around whether executives should stay or go. In some organizations, a specific independent director runs all executive sessions; in others, any director can call one at any time. In both cases, the directors that seek an executive session or the director that handles executive sessions — often a lead independent director — can determine who stays and who goes. 

There’s also no requirement that the directors inform the CEO, or anyone else not in on the conversation, about what occurred during the session. But experts advise that it’s often good practice to have one director speak with the CEO after the conversation to provide a high-level recap of the talk. This doesn’t need to occur — and probably shouldn’t if directly addressing CEO wrongdoing. The regular communication with a CEO, however, can ease the potential of imaginations running wild. 

“It’s probably never a comfortable moment,” says McAlpin. “They may always wonder what is discussed in the room; best practice, have the lead outside director give an overview of what was discussed.”

The session cannot come to a decision that’s final or binding. Instead, it may provide a game plan in addressing an issue with the full board. Once the game plan is set, the directors can bring it to the full board for a vote. 

Executive sessions ensure that the directors’ game plan has the input of everyone involved. With that insight, then the board can operate with a full and robust voice. Failing to do so, would “be a breach of duty,” says MacDonald.

Board Packets: How Much Is Too Much?

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board-packets-5-19-16.pngThe first time I sat on a bank board was in 1984, and I remember the board packet being around 50 to 60 pages. I recently saw a board packet for a bank that was over 600 pages, and on top of that was another 300 pages for the holding company. Considering that most banks have monthly board meetings, it’s like having to read War and Peace or Moby Dick each month.

People like to say that these monstrous board packets are really for the regulators, and while it might be largely true, it’s not entirely true. The true purpose is to help the board provide proper oversight, and even if regulators never saw the monthly board packets, directors still need to know what’s going on at the bank. And as regulations keep multiplying, so must board packets keep getting bigger to show directors that the bank is, in fact, complying with all the new rules and regulations.

One issue is how much of these 500 to 1,000 pages a director should read. I’ve never conducted a survey, but I’m pretty certain that very few directors read the whole thing. The truth is that each board member picks and chooses what he or she thinks are the most important pages to read. This might not be ideal, but I think it’s realistic.

What about the beginning of the board packet, which often contains the minutes of the previous meeting? I’ve always believed that the minutes are a director’s one best defense against being accused of negligence in a possible Federal Deposit Insurance Corp. (FDIC) lawsuit. I have heard many people over the years say, “You’re never going to get in trouble if the minutes show you asking questions, challenging management, and generally being a prudent overseer of the bank and the risk it takes.” I accepted this as truth, but I’m not certain anymore. I know someone who was on the board of a $12 billion asset California thrift that failed in 2008. The thrift had done loads of option adjustable rate mortgages, teaser rates and all, and this one director kept questioning the wisdom of these loans. It got to the point that the chairman/CEO found his skepticism so irritating that he tried to get him off the board.

With this director’s questions and doubts about the lending strategy splashed all over the board minutes, I’m sure he felt immune from any problems when the thrift failed. Apparently, none of this mattered. He was named with everyone else in the FDIC lawsuit, and seven years later, when he tried to start a new bank, he was told his application wouldn’t be approved because he was on the board of a failed thrift.

Regardless of how big board packets have gotten, it’s important that directors get them as much in advance as possible. What I really don’t get are those banks where the directors get the board packet the day they show up for the board meeting. I know two such banks. The owner of one of the banks is also the chairman, and the other directors don’t own any stock, so maybe they feel as if they have no real power. What I’d wonder about, though, is what happens if things fall apart. If either bank were to fail, I suspect it would come out that directors didn’t get their packets in advance. And I suspect that would be deemed unsafe and unsound in any FDIC lawsuit.

Is there anything to be done about this monthly tidal wave of pages to read? Aside from asking to receive board packets a few days in advance, a table of contents could help. That way, a director could know exactly where to go to choose those areas he really wants to read in depth. A second idea is executive summaries for each section. Another solution is for a board to pick a different topic each month to put greater emphasis on. If the board members knew that this month there would be an emphasis on, say, mortgage lending, they could read the pages covering that topic in depth before the meeting. Over the course of a year, they might read those parts of the packet they otherwise might not read.

A third possible solution is to have one page at the front with 20-30 of the most important ratios. They could be shown for the current month as well as the previous 12 months so that directors could easily spot trends and see where things might be deteriorating. Each metric could also have a maximum or minimum, and if any of them are exceeded, they could be highlighted in red. That way, even a director who didn’t read the other 499 ages could read this one page and see where the bank had serious problems that needed to be discussed. It shouldn’t be hard to figure out what those key ratios should be. Capital ratios and levels of non-performing loans would be two of the most important, and obvious, ones. A side benefit to this key metrics page is that it would make it impossible for management to steer the board away from difficult issues. Instead of the bad news being buried in the third paragraph on page 423, it would be right there, a bright red flag on page 1.

I will say that we’ve made great progress in going electronic. The days of lugging around thick binders seems mostly a thing of the past. But electronic board packets don’t make the packet shorter. Quite the opposite. It just makes it easier to put loads of information in there because there is less paper to photocopy.

Reading a 1,000-page board packet will never be as enjoyable as, say, reading Moby Dick or War and Peace. But we all do the best we can, reading as much as we have time for, skimming some parts and probably skipping some sections entirely. And with some of the improvements suggested here, perhaps it can work even better.

A Director’s Viewpoint: What Makes a Good Bank Director?

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bank-director-12-18-15.pngI’ve been on four bank boards, and currently serve on the board of Pacific Premier Bank, a $2.7 billion asset bank based in Irvine, California. On two boards, I was chairman and CEO, and I figure I’ve served with about 40 different individual board members over the past 30 years.

Unlike many people, I don’t believe that boards are the key to a bank’s success. I think it’s the CEO, with the board playing the key role of choosing and retaining the right person as CEO. I’ve even said, half jokingly, that a board could meet once a year and have only one agenda item, which is whether or not to renew the CEO’s contract for the coming year.

But what actually makes for an effective director? First, those directors who talk the most at board meetings are not necessarily the most effective. I’ve had directors who rarely said a thing at the meetings but who proved extraordinarily helpful during one-on-one sessions prior to or after formal board meetings. I had one director when I was CEO who was a very successful subdivision developer. He was shy and uncomfortable talking in group settings, but once a month he’d come to the bank and we’d spend about an hour going over things. He asked good questions and was very helpful with his thoughts on our longer-term strategy. His name almost never appeared in our board minutes, and if you didn’t know better, you might have thought he was a non-factor. The reality was that he was one of the best directors on that board. His effectiveness was simply behind the scenes and in private.

Second, there are directors who get involved in very special situations where they make a big difference. One was a private equity investor in a bank where I was chairman and CEO. It was a turnaround situation, and once we returned the bank to profitability, we decided to sell it. This director had been involved in the sale of countless companies his firm had invested in, and he offered to help me out. While I had spent a career in banking, I had no experience in negotiating the sale of a bank. This director really ran the show when we sat down with the chairman/CEO of the bank we chose to sell to. He got us a vastly better deal than I could have. His private equity firm had never invested in a bank before, but there is an art to selling a company, regardless of the sector, and this individual was an artist.

Another director on the board when I served as the CEO ran a large fixed income operation, and he, too, rarely spoke at our board meetings. However, he probably saved us from failing almost before we got started. Our bank was active in originating and securitizing mortgages. We did one of our very first trades with Drexel Burnham, and on the day it was supposed to settle, this director called me at home around 5:30 a.m. West coast time. He remembered that we had voted to approve Drexel as a counter-party, and he remembered from our board package that we had some trades that would be settling a few weeks after our board meeting. He told me that morning that there were rumors that Drexel might fail to open for business that day and to call him the moment I got to the office.

My blood turned cold as I realized what a Drexel failure would mean. Fannie Mae would deliver our mortgage-backed securities to Drexel, and if Drexel filed a bankruptcy, as they did later that morning, we’d be one of thousands of creditors standing in line asking the courts to release our securities. I was pretty certain what our regulators would do. They’d most likely want us to write off the security and take a recovery when we finally got our hands on it. This write down could have impaired our capital, and coming off the thrift crisis, the regulators were in no mood to be forgiving. Anyway, this director told me exactly what to do. He told me to call Fannie Mae and have the security sent to Goldman instead of Drexel, and while the trade would initially fail, at least it wouldn’t be tied up in a Drexel bankruptcy. We scrambled to get approved by Goldman, and it all worked out, but none of this could have happened without the help of this one director. These two directors seemed very disengaged at the board meetings, and it would have been easy to criticize them for almost never participating in any discussions. But in both cases, if only in those single situations, both were extraordinarily effective in helping the bank.

The only bad director I can think of in the past 31 years was one who constantly meddled and tried to run the bank. It’s an old cliché that directors direct and managers manage, and this one individual would write me extraordinarily long e-emails almost every day telling me exactly what I was to do. Dealing with him was a drain on my time, and he alienated other board members. He even got in fights with our regulators, further proving how counter-productive he was. I could handle the occasional spell check director. It’s not that helpful when a director reading board reports says, “I think you misspelled a word in the third line of the second paragraph on page 47,” but it’s only a minor irritant.

What I didn’t appreciate was one director who never looked at his package until he showed up. We used to FedEx them four to five days before board meetings, and he’d show up with his FedEx envelope sealed, and he’d open it when he showed up for the board meeting. Reading a board packet is pretty much a bare minimum for being a board member, and I resented his unwillingness to do this basic homework. Finally, I have found that board members who’ve served a long time can serve a valuable purpose. Having a director with institutional memory can be helpful in many ways, and especially so, I think, when there’s a new CEO or new directors.

Do I view and judge directors differently having served both as an independent director as well as an inside one? I think I do. When I was a CEO, I’d be sometimes frustrated by directors who might not seem to understand some aspect of banking that I assumed they should know. I tried not to let my frustration show, but I don’t think I was always successful. As an independent director now, I’m a lot more tolerant. I can appreciate how difficult it is to learn certain things when you’re only exposed to them at a monthly or quarterly board meeting.

If I were to re-do my tenure as a chairman/CEO, I’d try to make it easier for board members to feel free to ask things that they were afraid to ask. The 40 or so directors I’ve known were all highly intelligent, and my appreciation of the ways directors can bring their intelligence to bear has only grown over the years.

Why Banks Should Consider Electronic Board Books

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In the past few years, the availability and usability of tablet devices has made it even easier for banks of all sizes to move to electronic board portals to distribute board and committee materials. In this short video, Jeffry Powell of Diligent Board Member Services outlines the key functionality and cost savings benefits that banks should consider when moving towards a paperless boardroom.


How Much is Too Much?

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One perplexing aspect of board minutes is the level of detail that is required. Regulators seem to want more detail in board meeting minutes that show a thorough discussion took place on important matters, and that board members are engaged and exercising good corporate governance. On the other hand, minutes can also provide fodder for shareholder lawsuits and regulatory action. So how much detail is enough? Bank Director asked a panel of attorneys that question.

How complete should board minutes be, and should they ever be audio recorded and saved?

Peter-Weinstock.jpgBoard minutes should be detailed enough to indicate the matters addressed and determinations reached. Objections by individuals to the group decision should also be noted. Meetings should never be recorded, nor should minutes be the equivalent of a transcript. Bankers who are tempted to have minutes that are so comprehensive that they imply that nothing else was covered if it were not in the minutes might go ahead and start kicking themselves rather than wait for the plaintiff lawyers to do so later.

—Peter Weinstock, Hunton & Williams LLP

Jonathan-Wegner.jpgRecent years have shown that board minutes are more than just a record in the corporate minute book; they may become evidence in lawsuits or regulatory enforcement actions. It is essential that board minutes accurately reflect the proceedings, and they should be reviewed and approved by the full board at the following meeting. However, individual notes generally should be excluded from board minutes, and drafts should be discarded. As a general rule, meetings generally should not be recorded so that board members do not feel inhibited or constrained from engaging in frank discussion about sensitive corporate governance matters. In the end, the written minutes should be the definitive record of the meeting.

—Jonathan Wegner, Baird Holm LLP

Zaunbrecher_Susan.jpgThere is no perfect formula for board minutes. They should be complete enough that they fully memorialize the actions of the board. For routine matters, they may be fairly brief, but for extraordinary matters, they should be more thorough and possibly detail discussions with experts and/or financial analyses. I would advise against audio recording board meetings. The minutes should be the only retained record to eliminate discrepancies or inconsistencies. This also goes for directors’ notes which should not be retained following a meeting. A seasoned litigator once told me that if there is a legal issue, every page of notes taken by a director and retained after a meeting equaled one hour of deposition time for that director.

—Susan Zaunbrecher, Dinsmore & Shohl LLP

Victor-Cangelosi.jpgAudio recording of board minutes is antithetical to their purpose, which is to record the business transacted and accomplished at the meeting and substantiate that proper procedure was followed (i.e., notice, quorum, etc.) and not be a transcript of conversations. Perhaps most importantly, minutes are legal documents that are generally discoverable in a lawsuit no matter in what form they are maintained. Institutions need to consider whether they would want to have their audio recorded minutes played in a court room for all to hear.

—Victor Cangelosi, Kilpatrick Townsend & Stockton LLP

Mark-Nuccio.jpgMaintaining needlessly detailed minutes is a horridly unsophisticated practice. In the context of banks and bank holding companies, board and committee minutes should be purposeful and set forth the essentials. The minutes of meetings are not intended to, nor should they, be transcripts. The proceedings at a meeting have legal significance to an organization and its directors if votes are required for action or nuanced consideration of board-required actions must be demonstrated. Recording and saving the recordings is inadvisable. On rare and sensitive occasions, recording the meeting to assist the note taker prepare the minutes might be warranted, but the recordings never should be saved. In my experience, recording meetings also discourages useful give and take. To the extent that activity in a board meeting becomes legally relevant, litigators protecting an organization would prefer a boiled down written record and prepare witnesses based upon it.

—Mark Nuccio, Ropes & Gray LLP

Williams_Marcus.pngWe generally recommend that, particularly for community bank holding companies, the board try and maintain only a very general summary of discussion points. The primary exception to this general principle is that where a board is making a significant shift in policy or taking a strategic action with a relatively high degree of risk, we recommend taking care to include information sufficient to demonstrate that the board has satisfied its fiduciary duties—but even in those cases, erring toward the side of omitting unnecessary detail. Examples of these situations commonly include the consideration and approval of M&A and capital markets transactions, but increasingly we have also included more thorough summaries of factors that support adoption of or changes in dividend policies, branch expansions and similar decisions.

—Marc Williams, Davis Wright Tremaine LLP

Five Must-Haves for the Paperless Boardroom

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wastebasket.jpgIn the past decade we have witnessed the wholesale transformation from hardcopy to digital for nearly every type of media. Entire industries, from film and music to publishing have been completely upended by digital technology.  Yet in the corporate world, many cling to manual processes and paper-based content distribution. Nowhere were the vestiges of tradition more firmly entrenched than in the boardroom.

This is not to say that these hold-outs are technology luddites. On the contrary, many corporate secretaries have sought change, but the underlying technologies were not ready for primetime. Only recently have secure hosted applications, ubiquitous network connectivity and mobility caught up to delivering on the promise of “going paperless.”

To understand why the digital board book is a transformative opportunity for general counsels and directors, we need look no further than the iPad. The iPad ushered in a new era. With its dramatic revision to the user interface, the iPad is ideally suited to the dense information boards need to review in an intuitive and accessible manner. Most importantly, the iPad’s readability and portability makes the online board book a better experience than its traditional printed predecessor.

Simply put, the iPad settled the debate about which device to use and took concerns about directors’ digital literacy off the table, and we can turn our attention to how a paperless board room fulfills the board’s needs. It’s worthwhile to keep in mind that in the pre-iPad era, tech-savvy directors had always been interested in basic online access to the boardbook, a technically uncomplicated task. A number of solutions existed to fulfill that need. But in the post-iPad world, the goal has grown more ambitious. Directors now want to do all their board work on the iPad, not just document review but also written consents, e-signatures, secure email and other tasks.  In other words they are ready to go 100 percent paperless. So with that in mind, here are five technology must-haves for a successful outcome:

1. Online-Offline Syncing: Directors carry their iPads wherever they go and rely on them for access to their board materials. Not unreasonably, they expect ready access to those materials even if they’re out of Wi-Fi range.  An essential requirement is briefcase technology that syncs content seamlessly between online and offline so any notes made while offline are immediately available when a director is back online. Also, to ensure directors have the latest information, the system lets the general counsel push new materials directly to the director’s briefcase.

2. Protect Against Discoverability: The iPad is a groundbreaking mobile device, but there is a tension between mobility and the risk of discoverability. Having the board book on a director’s iPad creates a potential legal exposure because directors may forget to purge this information. The way to eliminate this risk is with a system that centralizes control with the general counsel so that downloaded content, and directors’ notes, can be purged remotely by the general counsel, without relying on the actions of directors. This is akin to the traditional practice of the general counsel collecting and shredding paper board books following the meeting.

3. Map the Paper Process: Board communication is characterized by varying levels of access to sections of the boardbook. For example, what members of the audit committee see is often different than what members of the governance committee see, or outside counsel may be added for a single meeting and then her access rights revoked. In other words, a big part of board communication is about who sees what and when they see it. Today, that control exists with paper. It may be onerous, expensive and slow, but it works.  It is critical then that the portal has an equivalent ability to differentiate access between various users. In the portal this comes in the form of a control matrix and content segregation.

4. An Experience that is Better than Paper: When you change a long-standing process, you have to offer people an incentive. What you give them has to be better than what they have today. That means the user experience for your directors has to be more engaging and satisfying than what exists with paper. This requires an application that takes maximum advantage of the rich graphics and animation of the iPad to improve directors’ entire boardroom experience.

5. Embrace Two-Way Communication: For years, the board portal was a one-way communication tool. The general counsel distributed materials and directors retrieved it online and rarely communicated back. Now portals are shifting to two-way interactive capabilities that can improve decision-making by providing greater efficiency but also allowing directors to focus on the substantive issues rather than minutiae.

For more information on how to get started, check out this video on Going Paperless in the Boardroom.

Part 4: Best Practices for Bank Boards

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relay-baton.jpgI frequently speak to groups of bank CEOs and directors at state and national conferences.  One of my favorite topics is “best practices for bank boards.”  The audience reaction always confirms my belief that bank boards of directors all face the same fundamental challenges, regardless of the size or geographic location of the bank and the shareholder base which they serve.  Boards of directors are groups of people, and every group of people develops its own set of shared expectations and priorities.  It can be helpful for a bank board to occasionally take the time to reflect on its approach to self governance and decision making, especially when this is done by examining the experience and success of other boards of directors in the industry.

This is the fourth and final article in a series on best practices for bank boards. This series of articles describes ten of those best practices.  In this article, I will discuss the last two best practices—developing real board leadership and making use of special purpose board meetings.

Best Practice No. 9 – Develop Real Board Leadership

 Every board should periodically evaluate whether it has effective leadership.  Just as no director has a “right” to sit on a board, which gives rise to the need for director assessments and evaluations, leadership positions also are not tenured.  To be effective, a leader must be engaged, prepared for meetings, willing to take on difficult issues, and, in my view, willing to lead by example.  Burnout and growing complacency can be expected in all leadership roles.  It is in the best interest of the board, the bank and its shareholders for the board to have the ability and willingness to recognize and address these issues when they arise, and not delay action.

If the CEO is also chairman of the board, is that arrangement working for the board?  A test for whether such an arrangement is working is for the non-management independent directors to consider whether the board is truly making its own decisions.  If not, then reconsider the existing leadership structure and, at a minimum, appoint a lead director to bring more balance to the board’s decision making process and better ensure a flow of important information to the board.

Also, consider rotating committee leadership on a regular basis, particularly among the most important committees such as the audit, asset-liability and loan committees.  Fresh leadership perspective can be an effective risk management tool.

Best Practice No. 10 – Make Use of Special Purpose Board Meetings

Have at least two meetings a year dedicated to focusing on the bank’s strategy and why it works (or should work) and its strengths and challenges.  Include in one such meeting a discussion of “Buy, Sell or Hold,” since management needs to know the direction of the board on this fundamental issue in order to effectively run the bank and position it for the future.

Consider scheduling a special meeting to address any questions or concerns that directors may have but won’t express in a regular board meeting.  For example, in this time of increased regulatory burden and more aggressive regulatory enforcement, many directors are interested in knowing what their personal liability exposure is and what protections exist, whether they ask or not.  Directors also are very interested these days in hearing a more complete description of the impact of the Dodd-Frank Act and the scope of authority and impact of the Consumer Financial Protection Bureau.

Finally, consider setting aside most or all of a board meeting to have the directors hear directly from the key senior staff of the bank.  This can be helpful for the board to gain confidence in the bank’s overall management team, and it can also be a source of insight into the strength of the institution.  Good banking is fundamentally about good people, and in-person communication is the best way for the board to take the measure of the bank’s people.

I wish you and your board great success. The other articles in this series are below: