Boardroom Confidentiality

In the wake of the Hewlett-Packard "scandal," corporate boards and their advisors are scurrying about in order to try and avoid future, similar difficulties.  In principle, the advice is simple: engage in full and frank discussions, but leave outside contact to a spokesperson or the CEO. In the event of a leak by a board member, discuss (and do so in advance), and if necessary apply some pressure by reminding board members of the possibility that their "disclosures" will amount to civil or criminal violations of the securities laws, or pointing out that renomination to the board is unlikely for someone who can not kep confidences. The advice usually extends to referring the matter to the general counsel or outside counsel, with little advance work on what exactly will happen if the matter is not respolved in this manner.

But of course reasonable board members might disagree as to what things ought to be disclosed or not. And reasonable people might also disagree about how far to go in uncovering the source of leaks. Missing in the H-P coverage is discussion of these matters - and of the somewhat offsetting problem that leaks will further encourage corporate insiders to nominate close friends and allies, rather than fresh voices, to the board. The first two grounds for disagreement are related.  If a board-member honestly believes that it is in the interest of the corporation for something to become known, even though the CEO, or a majority of the board, thinks not, the dissenting board member might well be treated by the law as an investigative reporter or whistle-blower.  On the other hand, if dissenters are seen, after the fact, as destructive of value or, more interesting, as loose cannons who are regarded as socially costly even though a particular loose cannon may be in the right, then the corporation might get much more protection that the media seem to think (in the H-P case) in investigating the source of the leak. If viewed this way, the investigation would certainly justify "pretexting," although specific statutes might limit the investigators when it affected phone records or other matters that might have acquired special legal protection.

One way around some of the legal difficulties associated with investigation, would be for board members to agree in advance that in the event of leaks or other triggers, the corporation would be entitled to look into their phone records and other private matters if in the opinion of X (the general counsel, perhaps, or a special committee, or an outside lawyer employed for this purpose), such investigation was appropriate. In turn, perhaps, the CEO might waive some privacy rights in order to facilitate internal investigations in the event of some allegations.

Comments

[ToddHenderson]

As far as I know, the contracts that Dean Levmore anticipates don't exist. (Do any Board member readers know otherwise?) From this we can guess at a few things. One possibility is that the problem of boardroom leaks is handled by unwritten contracts -- every board member knows that if they go outside of certain bounds that the firm's investigative machinery will bear down on them. (In an upcoming interview with "60 Minutes", ousted HP board member Patricia Dunn says that these practices are ubiquitous.) If this is the case, then the conduct in the HP case directed at board members may be fine; the conduct directed at third parties, like reporters, might be another story, since they would not be party to the tacit agreements that bind board members. Maybe board members didn’t expect phone pretexting, but it might not be as far a field of acceptable conduct as it seems at first.

Another possibility is that the costs of writing these contracts, either explicitly or otherwise, would be too high, since they may undermine board collegiality. In other words, they would be like pre-nuptial contracts. If so, then the law may have a role to play in changing the equilibrium: we could establish a default rule one way or the other and force the parties to contract. The first-best solution might be to have a statutory rule that empowered the CEO or a special committee of the board to conduct such investigations, akin to those required under the Caremark case, in certain cases, unless the firm’s charter or by-laws provided otherwise. This way all parties would be on notice that this was possible, and shareholders and directors would have the choice to make.

[nedu]

Timothy Glynn (Seton Hall Law School), guest-blogging at _Concurring_Opinions_, discussed this last week.

http://www.concurringopinions.com/archives/2006/10/hewlettpackard.html

Specifically, he considered, "What if members of HP’s Board of Directors had agreed in advance to be spied on?"

[David]

I think Prof. Levmore is suggesting that boards, even if they have not historically done so, may want to impose confidentiality and other obligations on directors by contract and have directors pre-authorize investigators to obtain phone records, etc., in the event of leaks.

This could, of course, be in the bylaws, but I would counsel a corporation thinking of this approach to prepare a separate agreement and have each director sign it.

I don't believe a statutory solution is necessary or desirable, as I see no reason why a contractual approach would not work.

Sounds like an ingenious solution to the H-P problem to me.

[Dirk van de Broek]

so is Hewlett-Packard going to be eud or not?