Senior Director of Customer Success, APAC, Diligent Corporation
| Andrew Carrick - Senior Director of Customer Success, APAC, Diligent Corporation
The financial services Royal Commission is forcing companies to re-consider how detailed board minutes need to be to comply with the law.
The issue was put squarely on the agenda of company secretaries around Australia when the commission questioned why a major bank’s board minutes failed to mention a director challenging management about a regulatory breach.
While the Royal Commission clarified that it did not expect minutes to record verbatim what was discussed, it expected minutes to include a significant exchange between directors and management.
The Corporations Act (cited by the commission) is less specific, requiring that board minutes record “proceedings and resolutions”.
Where does this leave company secretaries, who face the delicate task of striking the right balance?
Not since the James Hardie case in 2012 have board minutes been placed under such a bright spotlight. That case concerned issues of timeliness and accuracy, both of which are clear-cut. Completing the minutes within a month of the meeting and ensuring they reflect the decisions the board actually made are basic elements of the company secretary’s role.
Meanwhile, the Royal Commission’s line of inquiry revolved around whether board minutes were complete. Specifically, the appropriateness – and even the legality – of minutes not referring to a question asked by a director and addressed in the meeting by management. This has been described in reports as a ‘bombshell’, a ‘sensational suggestion’, and an ‘explosive exchange’. The real bombshell may not be the adequacy of a major corporation’s board minutes, but the suggestion that the current, long-established practice is inadequate.
In the past, it has been customary to record a level of detail in the minutes that demonstrates directors are acting with care and diligence. This shows that directors have complied with their statutory obligations and can enable them to rely on the business judgment rule under the Corporations Act.
Generally, minutes are more detailed when they relate to a potential decision by the board, particularly when its decision is not to approve a proposal. This emphasis aligns with the legislative focus on the process followed in arriving at business judgments, rather than on more broad discussions.
Minutes have traditionally stopped far short of recording the detailed discussions that took place in the boardroom. Among the matters typically left out are:
Who asked what – That includes the specific question, and which director asked it. Unless a director specifically requests otherwise, questions are attributed to the board as a whole, reflecting its collective operation and authority.
Asked and answered – Directors’ questions which are addressed during the meeting without giving rise to requests for further information or action.
Specific responses – Rather than capturing the nuts and bolts of the answers provided, the minutes may state that management addressed questions. For significant matters, it is appropriate to note the issues the questions concerned.
Increased detail in board minutes could directors and management alike. Preserving confidentiality in the boardroom underpins openness and encourages robust debate. The perspectives expressed may swing and evolve as discussions progress. Some contributions may be personal observations or individual preferences that are not necessarily intended to lead to further action. Directors may play devil’s advocate as part of challenging management, posing questions to further the conversation that might not reflect their own views.
More fulsome records of discussions may inhibit this openness. It may even have the opposite effect that regulatory changes (or a change in interpretation of existing laws) aim to achieve.
Directors may become wary of asking what could be perceived as ‘obvious questions’ through concern that it reflects a lack of knowledge, particularly if they are new to the board or the matter is technical. The flip-side of this is that new directors will be assisted in their induction by more expansive board minutes.
For company secretaries, more detailed minutes could create two issues. They will be required to take expanded notes during the meeting and producing the minutes could become more time-consuming and challenging. The significance of some discussions may not be apparent until they are concluded, meaning that comprehensive notes will be required so that this can be considered in hindsight.
The Royal Commission was advised that the organisation in question has recently expanded its minute taking, with typical meeting minutes now stretching to roughly 30 pages – double their previous size.
Longer minutes may be the tip of the iceberg in the growing volumes of information directors must consume as their roles expand.
Directors may become sensitive to the exact wording of how their inquiries are phrased, as are management to their responses. This will affect the review process for draft minutes, potentially involving more time and greater complexity. There may also be additional amendments when the minutes are considered at the next meeting.
The extended preparation and review time may put pressure on organisations’ ability to comply with the one-month deadline to complete minutes as prescribed by the Corporations Act. This would be an ironic outcome given the James Hardie case.
Increased complexity in minute taking may boost the role and profile of company secretaries who will need to skilfully navigate the balance between detail and discretion. It also raises a challenge for organisations lacking an experienced governance professional.
The Royal Commission’s position signals major potential changes to the practice of minute-taking. Just how significant they are and what form they take may well be the subject of extensive analysis by organisations, lawyers, advisory bodies and regulators over the coming weeks, months and years.
Could we see directors become so conscious of the need to demonstrate their care and diligence that they actively seek to have their contributions recorded in minutes? This could change the dynamics of discussions and create additional challenges for the chair and the company secretary.
Directors may choose to take their own notes on the contributions they make at meetings and the responses they receive, whether to assist in reviewing the accuracy of the draft minutes or to protect them from subsequent scrutiny. This could threaten the minutes long-established standing as the single source of truth about the proceedings of a meeting. Additionally, it could have implications for data security and legal discovery that organisations will need to address with consistent policies and procedures.
It is already clear that the Royal Commission will leave a legacy in changing corporate governance culture and practices across the financial services industry and corporate Australia. How much this will affect board minutes is, for now, yet to be written.
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