Boardroom Confidentiality

Recent events surrounding the Hewlett-Packard boardroom leak scandal provoke reflection on a key element of sound corporate governance: boardroom confidentiality. The sensitive nature of board room decision making requires an environment of trust and mutual respect. Confidentiality is a keystone for frank and open discussion and a protection for the company as a whole. In this CEO Topic, we will discuss important preventative measures to help ensure the right mindset among the board. In addition, we will touch upon other ways to safeguard your company and your board of directors in case of possible problems.

The HP scandal blew up in September 2006 when the public learned that outside private investigators were hired to pose as directors and recover phone records in an effort to reveal the source of boardroom leaks. Tempers flared and resignations followed when the board discovered the extent of this pursuit, which has since spawned regulatory and criminal investigations. In the aftermath of the scandal, attention has been drawn to the fact that board of directors should proactively take precautions to establish appropriate standards to avoid boardroom leaks and to act effectively and lawfully in the event that confidentiality is not maintained.

We believe the first step to ensuring confidentiality is to establish the right culture within the board. The board must consciously and specifically commit to conducting its meetings in an environment of trust and confidence. While there may be times of dissent and debate, there has to be a commitment to the integrity of the corporate governance process. This mindset cannot be underestimated and should be clearly communicated by the Chairman of the Board and have buy-in from the CEO and all board members.

In addition, it is necessary for the board to adopt a clearly articulated set of guidelines on the topic of confidentiality. A set of guidelines or confidentiality agreements should outline the obligations and responsibilities related to board participation, designate the CEO or a company spokesperson as those who have the authority to speak to the press and detail remedies and/or consequences in case issues arise. Board members should draft a plan of action to deal with a leak before it occurs. Codifying the culture is a way to further ensure that there is commitment from the board. Counsel should always be actively involved with both the prevention of any board leaks and the task of mitigating their effects.

Confidentiality should extend to any conversations related to board matters but particularly to contact with the media. While boards should continue to engage in frank discussions among themselves, as a collective body, they must be committed to leaving outside contact and communication to the CEO or a designated company spokesperson. All media inquiries should be handled by the CEO or company spokesperson to avoid a situation where a board member misspeaks without all of the necessary information or even when a statement from one board member might give the implication of a divided board. If it is appropriate for the board to comment independently on a matter, the board should collectively choose a spokesperson and consult as a group as to what is to be disclosed.

If a leak does occur, it should be discussed openly by the entire board at one time and the board should collectively decide how to deal with the situation. If this process is not effective in reaching resolution, a decision should be made as to how to go forward including designating an individual such as counsel or hiring an outside investigator to interview each director. In either case, the board must engage in full disclosure as a group and not take any covert actions. If it is clear who is responsible for the leak, the responsible director should be confronted by the entire board and counsel or by the chairman acting on the board’s behalf. The director should be warned that such actions could lead to his or her losing the board’s re-nomination. Again, it is essential to involve counsel in all these proceedings.

The HP scandal is yet another cautionary tale on maintaining solid corporate governance practices. However, there is much we can learn from this event. To help ensure boardroom confidentiality, CEOs and their board of directors should develop appropriate guidelines, a clearly defined process for external communications and a plan of action to address any issues. But, most important is creating and maintaining a culture within the board of open but confidential discussions focused on the company’s best interests. For more information on boardroom confidentiality, please feel free to contact your GA team.