Legal Issues: The Biggest Mistake Boards Are Making

legal mistakes boards are making

What’s the biggest legal mistake board members are making? This was the question we posed to Wilson Sonsini’s Bill Chandler (Former Chancellor of the Delaware Court of Chancery) in a recent fireside chat.

“In my experience, boards get it right most of the time,” he said. However, Chandler worries about all the pressures placed on today’s boards when it comes to meeting compliance requirements. The golden mistake? Documenting the board’s processes.

It’s like the old adage. If a tree falls in the forest, and there’s no one there to hear it, does it make a sound? If the board follows a wonderful process, but doesn’t document it, will the judge still respect it? That’s the question you don’t really want to face as a corporate director.

When it comes to potential legal issues, Chandler advises boards to be mindful about the thought process of judges.

“[Remember] what judges are and what they do,” said Chandler. “Judges have very little or no business experience… Judges don’t have financial backgrounds. They don’t have backgrounds in strategy. What they do have a background in—and what the law is all about—is process. What is the process the board went through in reaching a decision or taking an action?”

Whether the legal issue at hand is director compensation or cyber risk, judges want to see that the board has gone through a good process. The only way to show that, said Chandler, is if the process has been documented.

What does good documentation look like?

Good documentation can take many forms. Corporate secretaries or general counsels should make sure that all presentations made from independent advisors are kept and documented. Meeting minutes should demonstrate that board members have fully considered the issues—that they’ve asked good questions and then questioned the answers. In a recent blog, we discussed two cyber security lawsuits (Target and Wyndham), which were dismissed at least in part, due to the board’s well-documented preparations.

In this episode, Chandler walks us through the preparations boards need to take regarding specific issues: shareholder activism, director compensation, and cyber security.

Earlier this year, we caught up with Wilson Sonsini’s Katherine Henderson to discuss changes in the director liability landscape. Don’t miss her episode (Are Today’s Corporate Directors More Personally Liable?) along with our other resources below.