• Wednesday, June 19, 2024
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Confidentiality and the Board of Directors

Assessing the revolving door: Legality and best practices

The courts have held that “a director’s right to information is usually unfettered in nature” (Kalisman V. Friedman, 2013 Delaware Chancery Court). Given the extent of their statutory duties, Directors are entitled to demand for and receive all such information as required to enable them take decisions that are in the best interest of the company. Remarkably, the use or misuse of information to which a director becomes privy by virtue of her membership of a board of directors is a subject which many Boards do not pay significant attention until a breach of confidentiality or a threat thereof occurs.

The obligation of confidentiality fundamentally derives from the fiduciary duties of loyalty and care, hinged on the fact that in fulfilling their responsibilities, directors are entrusted with significant amount of material, non-public information. Confidential board information may be proprietary information of a competitive and commercial value to a company or sensitive information regarding board proceedings and deliberations. It is typical for the Board to take for granted that Directors would always treat board deliberations and other sensitive information with appropriate confidentiality. However, this is not always the case.

The concept of confidentiality may have different dynamics on the Board of a small privately owned company as it would on the Board of a publicly listed or quoted company. Whilst a Director’s fiduciary duties of loyalty and care are constant, the degree of transparency and disclosure set by regulatory reporting standards is higher in the case of publicly quoted entities and Directors sitting on the Boards of such entities are exposed to significantly more sensitive information than their peers in privately held companies. However, the basic principles of transparency, disclosure, trust and confidentiality apply to a Board, be it of a private or a publicly quoted company.

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There are generally no guidelines on directors’ obligations with respect to confidentiality and the law in this regard is not yet well articulated. There is also a dearth of case law to guide directors or boards on the subject. Consequently, when sensitive board information is deliberately or inadvertently leaked by a director, the board may struggle to respond as the remedies available to the board and the company itself are limited. A typical remedy would be to ask the erring Director to resign or to remove him. In the absence of a Confidentiality Policy by which Directors are bound, enforcing a sanction in the face of a breach could be resisted.

It is recommended that the Board should take a deliberate and conscious approach to ensuring confidentiality on the Board by adopting a comprehensive Director Confidentiality Policy. To be effective, Directors should be required on their appointment to sign off on the policy and be availed a copy of the policy document.

A confidentiality policy should at the barest minimum specify what the board considers to be “confidential information” and provide a list of examples of what type of information would be classified as confidential so that directors are clear in their minds in this regard. The policy should also contain an unambiguous statement that prohibits directors from disclosing confidential information to non-board members as well as other types of misuse and should provide a very narrow set of circumstances under which Directors are authorized to discuss confidential information, for example, when required by law or when authorized by the Board. It is recommend that the Policy should mandate the Board when required, to designate a Director to disseminate board information to third parties. It should also specify the penalty for breach.

A confidentiality policy by no means ensures that there will be no breaches of the duty of confidentiality on a Board but underscores the importance of maintaining the confidentiality of board information and ensures that all directors are well aware of their duty to protect such information. It also makes it easier for the Board to deal with a breach when it occurs – provided of course it is able to identify the erring Director. The consequences of breach may sometimes be far reaching as to threaten the very existence of the enterprise.

To enable them take qualitative and informed decisions, it is imperative that the boardroom gives Directors the assurance of an atmosphere of candor and free expression. Thus, the fabric of trust that such an atmosphere engenders, may be damaged irrevocably when sensitive deliberations are disclosed, albeit inadvertently and this would inevitably undermine the effectiveness of the Board.

Ultimately, there is no substitute for genuine trust, collegiality and respect among board members and as such a culture of confidence is the surest safeguard against breach of confidentiality. To facilitate the enthronement of such a culture, Directors should treat all Board deliberations and all information that come within their knowledge by virtue of their being Directors, as confidential. The Chairman should provide direction in setting the tone of a culture of trust and respect on the Board and proactively build trust and cohesiveness on an ongoing basis.