What a GC Should Tell a Board—and When
from July/August 2007
In my view, a GC must always make a board aware of anything that materially threatens the company’s reputation. There’s the concern that some issues might enmesh directors in the day-to-day running of a company, which properly belongs to management. Still, it is prudent to make a board aware of risks a company is facing—even if only to give it the opportunity to watch how management deals with them. A GC should not be fearful of burdening the board with too much detail. If you are in doubt, you might confer with the lead director or the chair of the audit committee first, before going to the full board. It’s a good idea to schedule such meetings on a regular basis. I have a phone call with the head of our audit committee at least once a quarter, and we communicate as necessary between those calls.
Here are some events that I think should be quickly brought to the board’s attention:
Allegations of criminal misconduct
It is obvious why a board should be informed of these, whether they involve the company, top managers, or board members. Not only is the company’s reputation possibly on the line, but the financial impact can be substantial. There can also be collateral fallout, even from what at first blush looks like a relatively minor violation. What might start with a single government agency questioning something can sometimes cascade into the entire U.S. government eyeing the company with suspicion. An allegation by foreign authorities presents a different challenge. One way to measure that threat is to examine the penalties your company might face, and ultimately you should seek guidance from local attorneys to assist in making this determination. As soon as you become aware that an infraction is equivalent to a criminal charge, alert the board promptly.
Government activity
Like allegations of criminal behavior, this can very easily develop into a serious problem and put a company at significant risk. The GC should obviously consider each event on its own merits. But unless you interact with the government in the normal course of your business—which you do if you are in defense, financial services, or pharmaceuticals, for example—you should consider advising the board whenever the government contacts the company.
Legal disputes that might be expensive
This is purely a quantitative analysis. A GC needs to determine the likely financial damage of a dispute and see if it reaches the number the board has already determined to be material. If it does, the board is going to want to be in the know, period. I prepare a monthly report for the board that outlines any problems the company may be facing, and if the matter is urgent I call the audit committee chair. I assume the other side will prevail, and I provide the board with the range of damages that might be awarded. You can certainly give your opinion as to the likely outcome, but don’t let that assessment stop you from making the disclosure in the first place.
Company values called into question
A class action that accuses a company or its managers of discriminatory conduct—about age, gender, or race, typically—provokes a lot of emotion from both employees and the public at large, as do environmental problems, product recalls, and privacy breaches. In fact, it doesn’t necessarily take a lawsuit to engender a great deal of negative publicity if damaging accusations become widely known. It’s as if the company’s culture is on trial. One result: Potential candidates may opt not to join the company, a loss of talent that can be felt for years. Hopefully, by the time the problem becomes public the company has made a conscious decision to fight the allegation and has a press release ready that sets forth the message you want to get out.
Internal investigations
A company’s decision to look into possible infractions of its own policies is the one category that might be deemed proactive—and if the situation is serious, is certainly one the GC should bring to the board’s attention. It’s an opportunity for the company to step up and walk the talk, not because regulators or other third parties are pushing it to do so, but rather because it is willing to live up to its principles. If it turns out that individuals are implicated in violating the law or company policy, this is a true test of the company’s values and resolve in independently addressing such matters. The findings may well lead to public disclosure, but that is often better than the alternative of trying to explain later why the company chose to do nothing or to bury bad news—and the GC should remind the board of this.
Media coverage
No company can expect to monitor everything that runs on the Web. But if something (no matter what the source) is going to be in the mainstream press, or you think it might be, advise the board promptly.
As you can see, my bias is to overcommunicate rather than undercommunicate. But I believe open communication is one way a GC and board can build a relationship based on mutual respect and trust.
Pitney Bowes Inc., a postal-meter company in Stamford, Connecticut, had revenues of $5.7 billion in 2006; Assurant Inc., an insurer in New York City, reported 2006 revenues of $8.1 billion.
