What goes on in the boardroom stays in the boardroom.
You heard it, you referred to it, and who knows – maybe you even lived it. It’s the iconic Las Vegas slogan: “What happens here stays here”. It’s catchy, smart, and a creed for a particular lifestyle that depends on maintaining trust. And it’s not difficult to say that his message is as at home in a corporate boardroom as it is in a casino or locker room. Especially now.
An increasingly important, albeit sometimes marginalized, fiduciary duty of the director is to maintain the confidentiality of proprietary company information and to protect that information from unauthorized disclosure. To keep track of what’s going on in a boardroom in the boardroom. Acting in the best interests of the company is a fundamental element of the director’s overall duty of loyalty – and it must be continuously monitored by the board of directors.
But it’s a duty that sometimes falls by the wayside when directors feel compelled by competing interests to disclose confidential information to third parties. And if it’s unauthorized disclosure, it’s an escrow issue, regardless of whether the recipient is a business associate, friend, relative, customer, or some other outsider whom the director falsely believes to be related to that information is justified. The board of directors is requested to protect itself against such unauthorized disclosures and to react to them.
That’s why General Motors’ The recent decision to sue a former board member for allegedly disclosing confidential information to a competitor is a major development in corporate governance. It’s a powerful (if somewhat extreme) reminder that serious confidentiality violations can occur. It also shows the importance of directors’ confidentiality obligations and how long a company may wish to protect and enforce those obligations.
The core of the complaint alleges that the former director took bribes from a competitor to provide confidential information that he had access to during his role as GM board member. According to media reports, this particular competitor was trying to force a merger with GM and the person concerned was a GM director during the merger discussions. According to the complaint, GM caused “billions of dollars in increased labor costs” due to the former director’s “infidelity and breach of trust.”
A director’s motivation to disclose confidential information can vary. eg to share with a spouse; impress a friend; add a new line of business; Informing an organization or client who the director has a dual fiduciary interest with. Sometimes the motivation is even more inadequate; E.g. a dissident director who reveals information to influence an upcoming board decision or to undermine a recently passed decision. In other circumstances (e.g. the GM claim) the motivation may be venal; For example, the director tries to use confidential board information for personal financial or professional purposes.
Any type of unauthorized disclosure can have serious consequences for the company, its strategies, finances, work culture, competitiveness and reputation. This could also reduce the effectiveness of corporate governance if board members are reluctant to receive, review and / or discuss sensitive information. Depending on the type of information disclosed, this may also lead to a government investigation.
If unauthorized disclosure is discovered, it can also have serious implications for the disclosing director – whether he is currently a director or has already left the board (the fiduciary duty is not necessarily limited in time). The disclosure could not only constitute a breach of fiduciary duty, but could also include securities, antitrust and other laws (which could damage the company’s reputation). For these and similar reasons, it is becoming more and more important that companies and their management are aggressive when it comes to respecting and enforcing the confidentiality obligation.
Of course, litigation doesn’t have to be the board’s primary response when it comes to a breach of confidentiality – but it can be an appropriate option in extreme circumstances. To properly address a breach of confidentiality, the board should consider a four step process to mitigate and address the risks:
Step one would be based on board training. It is important that all directors understand their obligation, understand the potential harm of a breach, and appreciate the general range of materials, data, and information that can reasonably be considered protected and confidential.
The second step would be an open discussion about the motivations that directors might make external disclosures and why those motivations may not warrant disclosure. Directors may wish to consult their own attorney, as well as the Company’s general attorney, regarding specific conflicts and interests, the information requirements they create, and how best to address them. In this regard, “all the cards should be on the table” as to these types of interests and whether they can be considered under the confidentiality obligation. If not, the affected director may have to resign.
The Third step would be to actively maintain confidentiality concerns during all board activities. Directors should be reminded on a regular basis that all matters concerning the company and the activities of the board should be treated as confidential unless notified by an officer. In addition, particularly sensitive board actions, documents and conversations should be clearly labeled as confidential. Additional measures may be appropriate in connection with larger transactions and highly sensitive board meetings.
Directors with known conflict or confidentiality concerns should be protected from participating in discussions about or receiving documents containing proprietary information. Corporate management (regardless of whether it is the General Counsel or the Chief Compliance Officer) can help monitor board processes for possible violations.
The fourth step should be the board’s response to indications of intentional disclosure. This would include the possible beginning of an internal investigation and, depending on the results, a willingness to consider disciplinary options as appropriate to the circumstances. The board is at risk if it does not carefully respond to an indication of a violation. ie to “make easy” the breach of confidentiality by a board member for reasons of friendship, collegiality, financial interest or excessive concerns about board culture.
The unauthorized disclosure of confidential information is contrary to a director’s duty of loyalty and should be treated as such by the board of directors. If an individual director wishes to show the board’s cards to others seated at or near the table, he should have permission beforehand. Confidentiality is critical to maintaining the desired cultural destination – be it the Las Vegas lifestyle or effective corporate governance.