How Taking Notes Can Help or Hurt You
from
July/August 2002
by Shaun Assael
When Enron’s Sherron Watkins wrote her now-famous memo to board chairman Kenneth Lay, warning that the company was about to “implode in a wave of accounting scandals,” she was en route to becoming a hero, even though she sent the note anonymously. Now, as Congress tries to untangle the tricks she warned Lay about, he and the 14 other directors who presided over Enron’s collapse are probably wishing they’d left as brave a paper trail. Then again, maybe they’re not.
The law doesn’t regulate a director’s responsibility to take or hold onto notes, and experts are split on the wisdom of doing so. Odds are that if you’ve been caught scribbling while your fellow directors were talking, someone has asked you to stop, out of fear of being misquoted or a general sense that private conversations should stay that way. “That’s why boards vote on the minutes,” says Charles Elson, who runs the Center for Corporate Governance at the University of Delaware. “It lets everyone agree on what has been said.”
But is that enough? Paul Rice, who teaches evidence at the American University Washington College of Law in Washington, D.C., thinks directors have an overly rosy view of who’s watching their legal backs. He recently surveyed more than 100 high-level executives at three Fortune 500 firms and found that 55% thought in-house counsel represented them personally in company matters. Wrong. Rice says that in-house counsel has the right to waive attorney-client privilege if it’s a choice between giving up a director or giving up the interests of the company as a whole.
He uses the example of an amnesty that the SEC offered in the early ’70s to companies like ITT and General Tire, which were willing to admit that they’d paid bribes to get overseas contracts and had claimed the money as a business expense on their taxes. If one of the companies had decided to let its in-house counsel implicate a director in the bribery and bookkeeping, the director couldn’t have prevented the admission on the basis of attorney-client privilege. But he could have fought the allegation on several grounds, including a lack of detail in the board minutes that might have caused a misinterpretation of his knowledge of or position on the bribery. That’s where a good set of personal notes might come in handy, if they showed, for example, that he’d grilled the in-house counsel about the ethics of the company’s actions.
Rice suggests that directors keep a detailed record of the questions they put to managers during board meetings, the documents they see, and their personal calculations of risk assessment. “Any lawyer who tells you otherwise isn’t serving your interests,” he says.
But this view is far from universal. “That’s not the best advice,” says Elson, who believes lawyers should routinely remind clients that anything they create can be used against them. And it’s a slippery slope. If you have extensive notes on one topic and just a few paragraphs on another, it can raise questions about why. Those questions get harder to answer as time goes by. Having to deal with them 10 years after you first set pen to paper might make you wish you’d left well enough alone.
A simpler solution, says another attorney, is to expand the volume of information that goes into your board’s minutes. And since Enron’s fall, shareholder advocates have called for reforms that would do just that. Berkshire Hathaway CEO Warren Buffett, for instance, wants to see audit boards record Q&A sessions with auditors and place the transcriptions in the official minutes.
When it comes to taking notes, the experts may not agree on everything. But it’s hard to disagree with Elson when he says that the simplest protection is this: “Ask the tough questions and be aggressive about getting them recorded.”
