Leo E. Strine, Jr. is Michael L. Wachter Distinguished Fellow at the University of Pennsylvania Carey Law School; Senior Fellow, Harvard Program on Corporate Governance; Of Counsel, Wachtell, Lipton, Rosen & Katz; and former Chief Justice and Chancellor, the State of Delaware. Laura A. McIntosh is consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on their article, forthcoming in Directors and Boards Magazine.
Virtual capabilities and electronic documents are double-edged swords.
Modern information technology can markedly improve the efficiency and quality of the deliberative processes of corporate boards of directors. Yet, if used imprudently, the same technological capabilities can reduce the quality and integrity of corporate decision-making, potentially exposing a company and its directors not only to greater litigation costs and risks, but also to serious reputational harm.
Regrettably, rather than evolving to keep pace with technological developments, corporate governance practices often involve an admixture of obsolete past approaches and ad hoc new ones, a combination that underutilizes the potential benefits of technology and increases its potential risks. In this article, we look in particular at two types of board-level practices that should evolve to take into account technological developments:
- Board information policies involving (a) the transmission to and use of information by the board of directors and (b) the documentation of action taken by the board and board committees; and
- Board meeting practices in the wake of the COVID-19 pandemic and the ubiquitous use of virtual web-conferencing platforms to conduct director meetings remotely, rather than in person.
These two topics are related. A regular diet of virtual meetings puts pressure on board information policies and requires directors and managers to be highly self-disciplined in their focus and engagement. The efficiency advantage can be undermined by director and manager inattention and unproductive online interaction. An overreliance on virtual meetings can also lead to insufficient in-person time for the board and key managers to meet and develop the chemistry and expectations for information flow that are vital to a successful company’s governance. The vulnerabilities in these less-than-ideal scenarios are eagerly exploited by activist investors and plaintiffs’ lawyers.
Yet the dangers inherent in the board’s use of digital technology should not obscure this promising reality: virtual meeting technology and other online tools are indeed improving the information flow between management and the board. They can facilitate more efficient and effective deliberations and, when used judiciously, can relieve stress, generate better decision-useful information on a more timely basis, and produce a more robust and reliable record of informed board decision-making. The challenge is for companies to capitalize on the huge advantages this technology provides while minimizing its risks. This requires bringing some old-school discipline and common sense to the new digital world.
This article is not theoretical, but practical. After situating board practice in its historical context, we make recommendations about affirmative steps—“do’s”—that companies could take to improve their board information policies, positive steps that imply actions to avoid—“don’ts.” From there, we recommend “do’s” and “don’ts” for board organizational, calendaring, and meeting practices, an understudied area. We then explain how our recommendations facilitate informed, efficient, and credibly-documented decisionmaking.
In our view, what is required is nothing new and is what business leaders are best at: using business judgment to reflect on how the most positive impact can be obtained through the effective use of available resources. That requires bringing professional analysis to 21st-century board practices and not assuming that the inertial use of late-20th-century policies with ad hoc additions is optimal or even adequate. With fresh thinking that builds the board’s information policies, committee structure, and use of time around what is most important, new technology can markedly improve the quality and efficiency of company decision-making.
Looking ahead, companies should apply today’s technology to their corporate governance practices in order to create more efficient, less stressful and thus more robust and effective means by which to transmit information and deliberate on critical issues. With discipline in execution and a focus on doing what is right for the company, board practices that encourage deep consideration of the most important issues and document the basis for decisions will not just result in lower legal, regulatory and reputational risk; they also will lead to better business decisions and a stronger company that is well-positioned to create sustainable value for its investors and to treat all its key stakeholders with respect. We recognize, of course, that each company and each industry space is different. The general suggestions in this article are simply suggestions for consideration and adaptation to the specific circumstances companies face. But the deeper principles we articulate about integrity and care in board information and deliberative practices are ones we hope can be usefully brought to bear at all companies. Fundamentally, we urge companies to think deeply about these issues in a businesslike way.
The complete publication, including footnotes, is available here.