Bank Directors Seminar, Coeur d'Alene, ID, September 15-17, 2019

The Role of Board Culture in Preventing and Addressing Director Misconduct* Sidley Austin LLP

Public evidence of problems in board culture are relatively rare, but board dysfunction can pose a significant threat to a company and should be guarded against. On rare occasions, a news report will appear about a director who leaks information to the media or who without authorization enters into negotiations for a corporate transaction. While this conduct is harmful to the company and highly disruptive to the board’s efforts and its culture of trust, the board is often limited in its ability to take meaningful action against a director who disregards company and board policies and fiduciary obligations. Attending to the health of the board’s own culture by underscoring what is expected of directors and supporting valued behaviors is the best prophylactic. Defining Expectations for Director Behavior For a board to be effective as a decision-making body in which a variety of views can be raised, explored and debated, directors need to respect, trust and rely on one another, and at times directors will find it necessary to defer to one another’s judgment. From a board culture perspective, the goal is to achieve a supportive atmosphere where dissent and disagreement can be both expressed and resolved. A well-functioning board culture encourages directors to ask questions and engage in healthy skepticism. Ideally, directors will understand one another’s styles and strengths and adapt to, and accommodate for, one another’s weaknesses. While diversity in director viewpoints should be highly valued and encouraged, and a range of director styles is to be expected, the board must set expectations concerning the norms of director behavior. These norms should address behaviors that are acceptable in the boardroom and in interactions outside of the boardroom as they relate to the company. These expectations should be a periodic topic of discussion for the Governance Committee and the Board, and can be reflected in the Code of Conduct for Directors and/or the Corporate Governance Guidelines. Valued Behaviors for Directors Achieving a desirable board culture generally requires a baseline agreement regarding the conduct expected of directors, such as the behaviors that are valued by the board. For example, valued behaviors may include:

zz Respecting managements’ and fellow directors’ expertise and viewpoints. zz Using constructive skepticism in questions directed to management or fellow directors.

zz Promoting opportunities for open discussion and debate.

zz Listening to all viewpoints and agreeing to use self-control, as not every director can be heard on every issue. zz Committing to work towards a consensus on issues after an informed and deliberative process.

zz Committing to support, and not undermine, decisions reached by Board.

zz Developing and maintaining trust among the directors and between the directors and management.

* This article originally appeared as Section 5 in the Report of the NACD Blue Ribbon Commission on Culture as a Corporate Asset . It is based on an article written by Holly J. Gregory that appeared in the October 2013 issue of Practical Law: The Journal , entitled “ The Challenge of Director Misconduct. ” It has been updated and revised for a director audience. This information is for educational purposes only. It should not be construed or relied upon as legal advice. Given the complexities of law, regulation and practice in this area and the variety of compa- ny-specific factors that need to be considered, information in this article should not be applied to any particular situation without the advice of an attorney experienced in this area of law.

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