United States: Public Company Directors – Managing Reputational Risks

Public company directors face continuous scrutiny from government regulators (especially the Securities and Exchange Commission [SEC]), activists, the media, and proxy advisory firms such as ISS. Although not comprehensive, the list below outlines steps directors can take to anticipate and manage reputational risks.

Understand risks. Request regular Board briefings on best practices for directors to fulfill their oversight functions as Board and committee members. Informed decisions can head off regulatory actions, activist challenges and negative recommendations by proxy advisory firms. Areas of recent focus include:

Internal controls. Weaknesses in internal controls may appear as failures in financial oversight.

Cybersecurity. Cyber incidents may bring shareholder lawsuits alleging breach of fiduciary duties and a failure to provide effective oversight of business and technology risks.

Auditor oversight. A 2015 concept release indicates that the SEC may require greater disclosure of the audit committee’s oversight of auditors, to help investors inform their votes for audit committee members based on committee performance.

Consider “appearance” issues when determining independence of Board members. When considering director independence, the bright-line SEC and stock exchange requirements provide only a starting point. In addition, the company proxy statement must disclose other factors, such as financial, social and charitable relationships and investments, considered by the Board in determining a director ’s independence. These factors may attract the attention of activists or appear to breach the director ’s duty of loyalty in any lawsuit against the company or the Board.

Monitor potential conflicts of interest. Company policies govern any related party transactions of a director or the director’s related entities and family members. A family wedding or change in a business relationship may present an unexpected conflict of interest or create a related party transaction subject to proxy statement disclosure (or even impair director or auditor independence). Close attention to potential conflicts and changes in family relationships can help resolve disclosure and independence questions in advance.

Don’t assume confidentiality. Regulators use data-driven market surveillance and scrutinize unusual trading patterns to bring insider trading inquiries, with a focus on directors and other insiders and their family, friends, associates and confidants. Indiscreet discussions about confidential business information may lead to “tipping” investigations and even charges (for example, Raj Gupta, who passed on boardroom information to a friend). Prolonged investigations and media coverage can cause lasting reputational harm to the director and their family, friends and associates even if no charges are brought.

Meet deadlines for required filings. The SEC recently brought multiple enforcement actions against insiders for failing to timely report holdings and transactions in company stock (Forms 3 and 4). The SEC takes the position that late or missed filings withhold timely information from the market and may affect trading prices to the detriment of the investing public.

Monitor reportable transactions. Many companies assist directors in preparing and filing stock ownership reports, but the ultimate responsibility for these reports rests with the director. Directors remain responsible for monitoring reportable transactions by related entities, immediate family members and trusts, and for reporting any late filings in the annual D&O questionnaire.

Understand risks of negative votes. Director, Board and committee actions may trigger a negative voting recommendation from proxy advisory firms. Examples include:

Attendance. Attend 75% or more of combined Board and committee meetings, and ensure that the proxy statement clearly discloses director attendance. For any director that falls short of the 75% threshold, disclose reasons for the absences (for example, illness). Informal communications before and after meetings do not substitute for actual attendance.

Overboarding. Voting policies of proxy advisory firms, exchange listing standards, and company policies may limit simultaneous service on multiple Boards and audit committees. Director biographies in proxy statements that include private company and charitable Boards may suggest that the director is unable to devote adequate time to Board service. These optional disclosures may be omitted.

Problematic pay practices. Directors on the compensation committee risk negative voting recommendations if their decisions constitute problematic pay practices or fail to link pay with stock price performance. Consultants and counsel can advise on current positions taken by proxy advisory firms.

Unilateral amendments to governing documents. Consider submitting for shareholder approval any proposed bylaw amendments that might be perceived by ISS to diminish shareholder rights, such as restricting shareholder rights to call a special meeting or act by written consent, or increasing shareholder vote requirements to amend the bylaws.

Board responsiveness. ISS may issue a negative vote recommendation if a Board fails to act on a shareholder proposal that was supported by a majority vote in the previous year. The Board may include disclosures in the proxy statement to highlight the business rationale for its decisions.

Ensure accurate responses to D&O questionnaires. Responses to D&O questionnaires drive many public disclosures and governance decisions. Any inaccuracies or omissions in the questionnaire can result in misleading public disclosures, and the questionnaire can be reviewed by the SEC in any investigation. In 2015, an audit committee member settled charges with the SEC for causing public reporting violations through failing to disclose in the questionnaire his business relationship with an affiliate of the independent auditor.

Scrub biographical information in company filings. Activists look for leverage to conduct a proxy contest, including errors in publicly disclosed biographies of incumbent directors. In 2012, a director and a CEO resigned over inaccuracies in their biographies that were identified by an activist. Biographies should be cross-checked at each company where the director serves as a director or officer to avoid inconsistencies. Optional disclosures (such as academic credentials) may be omitted if they cannot be readily verified.

Specify relevant director qualifications. Boilerplate disclosures of director qualifications do not satisfy SEC proxy disclosure requirements. Instead, highlight specific experience, qualifications, attributes or skills that qualify the individual for service on the Board. Omit irrelevant experience, which can attract unfavorable comments from activists, and avoid any overstatements or claims of specialized expertise that might subject the director to a higher standard.

Conclusion. Directors may benefit from viewing their actions through the eyes of regulators and activists. On an annual basis, the Board self-evaluation can be used to enhance performance of the overall Board and individual directors. Effective directors monitor best practices, adhere to deadlines and legal requirements, and ensure appropriate public disclosures.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions