Making your minutes count
Key points
- Minutes may be scrutinised during normal regulatory inspections or legal proceedings
- Important discussions or those involving significant risks, require more detailed records
- To demonstrate they discharged their duties, directors may want to record that they raised certain issues
The James Hardie case was less about minutes than the failure of the board to review a crucial media release. Nevertheless, it did serve to remind directors that minutes need to be taken seriously.
“The recent spate of high-profile court cases and the fact that both the Commonwealth Government and the Australian Securities and Investments Commission (ASIC) have demonstrated their intention to pursue Corporate Australia are giving many directors some sleepless nights, or at the very least, second thoughts about being a company director,” says Robyn FitzRoy FAICD, principal of Ixion Board Governance. “As these cases continue, with judgements being contested, we are operating in a very uncertain environment.
“The most important protection for directors beyond skills and diligence is ensuring accurate recording in the minutes of the meeting. Although we don’t attend board meetings with the possibility of legal action at the top of our minds, it may be increasingly pertinent to consider the possibility of either close regulatory scrutiny during normal inspections or even potential legal proceedings at some point in the future.”
In the US, the growing threat of litigation is limiting what some directors are prepared to say in the course of a discussion. Others have resorted to taking their legal advisers to meetings.
“The deck does seem to be stacked against directors here in the US in terms of exposing them to liability while, at the same time, depriving them of the means to have a real effect when management has run amok,” says Micah Jacobs, an attorney with MBV Law in California.
However, legal advice does not absolve directors from their personal responsibilities under Corporations Law. And, while it is often true that Australia follows in America’s footsteps, Paul McClintock FAICD, chairman of Intoll Management and a director of Perpetual, believes there would be strong resistance to such an extreme response.
“Here, boards largely seek legal advice as a group; I have never seen a situation where a director has felt the need to seek individual legal advice relating to some point made in the meeting,” he says. “And, while I don’t think Australian directors are more inhibited in what they say, the courts’ willingness to go back into the minutes and try to draw conclusions from what’s been written down is making us more attuned to areas in a board discussion where there could be legal consequences and in those cases, take a lot more care as to what’s said and written down.
“But it is important to keep that in perspective. In most board meetings, the bulk of the material you’re covering is not legally sensitive. I think it’s false to make it look as if the board spends the whole time worrying about these issues when they really only take up a small part of what a board does.”
How much information is enough?
The business discussed and decided on at meetings must be recorded and minutes are the official written record. The Corporations Act 2001 states that a company must keep minute books in which it records within one month:
- Proceedings and resolutions of meetings of a company’s members;
- Proceedings and resolutions of directors’ meetings;
- Resolutions passed by directors without a meeting; and
- If a company is a proprietary company with only one director, the making of declarations by the director.
The minutes should contain at least the following information:
- Details of the company or other entity that is the subject of the meeting;
- Confirmation of the quorum and significant persons present at the meeting, such as company officers and auditors;
- The date, time and place of the meeting; and
- All resolutions passed.
Further information is left to the discretion of the board. Minutes are not meant to be a verbatim transcript of the meeting and there is no simple answer to the question of how much detail they should include.
“I think it’s very hard to define the right level of information,” says Dale Budd OBE FAICD, chairman of Dale Budd and Associates.
“An agenda for a board meeting may have a number of items that are different in nature. With some, a record of a straightforward board approval is all that’s needed. But if there is substantial discussion, or if the matter involves significant risk, you would obviously need a more detailed record. If a particular topic is to be revisited at the following meeting, or if a proposal is rejected or sent back for revision, it’s important to record the reasons why.”
Malcolm Burrows, an associate at Rostron Carlyle, suggests directors might want to document the amount of time spent considering a significant issue.
“This seems consistent with the recommendations of the Australian Institute of Company Directors, and also with non-binding guidance from the Court of Chancery in the Disney case [in the US],” he says.
“Shareholders had accused Disney directors of violating their fiduciary duty in hiring chief operating officer Michael Ovitz, who was fired less than a year later and, thanks to a ‘no fault’ arrangement, walked away with an estimated $140 million in severance pay. The justices said it would have been useful to know they had taken the time to give the matter all care and consideration rather than simply accepting what was put in front of them in the form of board papers.”
McClintock believes the minutes should enable someone who was not at the board meeting to get a sense of what took place.
“If you make the minutes nothing more than a list of resolutions, you don’t get any feel for the flow of the meeting,” he says.
There’s no need to detail the contribution of individual directors. However, to demonstrate they have discharged their duties, directors will sometimes want to record that they raised certain issues, asked certain questions or attempted to verify certain facts.
Directors also need to bear in mind that remaining silent may be treated as acquiescence.
“I think some are reluctant to ask what they think might be an ignorant question, or they defer to other directors because they presume they know what they’re doing,” says Michael Bruce, a partner at Lavan Legal. “This is a dangerous attitude.”
Ideally, a first draft of the minutes will be distributed within a few days of the meeting; it is vital that directors take the time to check this carefully. These days, many boards distribute the draft as a Word document, allowing directors to use the Track Changes tool to make revisions or add comment.
“This is a terrific way of doing the review but if the draft has been around two or three times, it can be hard to establish which is the final, agreed to version,” says Budd. “When minutes are distributed electronically, I think a hard copy of the final draft, or at least a PDF version, which is virtually impossible to tinker with, may be necessary for clarity.”
A personal record
If the minutes are not a verbatim record of a board meeting yet might be used as evidence in court, should directors consider taking their own notes during a board meeting?
McClintock thinks not.
“What would that achieve except that instead of one record of what the session achieved, you’d have 12?” he says.
“My practice universally is to hand back my papers at the end of the meeting then use the company’s records as the access material if I need to go back to refer to anything.
“When you are annotating board papers you largely write questions about matters which will then be resolved during the meeting, so I see no point in recording those working papers. If they do exist, a court will feel free to try to interpret them as well as the official record and I think that’s very likely to produce a confused picture of what the board finally decided.”
Burrows suggests that, when a matter is controversial, it might be prudent for directors to make their own notes as a temporary record of the steps they took to discharge their duty.
“These notes then serve as a reminder to ensure those steps are shown in the final version of the minutes,” he says.
Where there is a problem, it is often the personal conduct of the director that comes under attack.
“Directors may well be left to fend for themselves,” says Bruce. “If they do find themselves in that position, they could derive considerable benefit from having notes or the relevant board papers.”
“I’m sure every director has had an experience where he or she has wanted to keep a temporary record of the detail, but that’s very different from retaining notes of the discussion and the decision,” says Budd.
“I think that’s dangerous because, if they should ever get used and they are at variance with the minutes, or even just add to the minutes, they’re going to raise the question of whether the minutes adequately or accurately recorded the discussion. A director should press for the right amount of detail in the minutes and the right amount of recording of the discussion, but keeping notes beyond that is asking for trouble.”
From the outset, the best protection for directors is, quite simply, best practice.
“We’re all very conscious that we’re laying our reputations on the line and are generally spending more time assessing directorship offers with greater due diligence, particularly in regards to our fellow directors,” says Fitzroy. “But, at the end of the day, you are best protected by being very thorough and diligent in all aspects of your role as a director.”
An inappropriate law
By law, the minutes of a meeting must be signed and entered into the minute book within a month.
Until the James Hardie case, many directors were unaware of this requirement; most boards followed the common practice of discussing changes to minutes at the following meeting even if that meant waiting longer than a month. However, it is now clear that if minutes are to be used as prima facie evidence in court, the “one month rule” will be strictly applied.
Where board meetings are more than a month apart, over the Christmas break, for example, directors must ratify the minutes to stay within the law but this will mean missing out on the benefits of a discussion.
Some are now pressing to have the law changed.
“It’s important to get the draft out early for review while the meeting is still fresh in everyone’s mind,” says Dale Budd OBE FAICD. “But then I do think it’s appropriate to have the discussion at the next board meeting before the minutes are endorsed and become the permanent record.”
Michael Bruce agrees that directors need an opportunity to discuss the minutes of the previous meeting.
“Non-executive directors have busy other lives and need an opportunity to look at the minutes, clarify and raise questions,” he says. “I think it would be preferable to change the law to two months. Most would meet within that timeframe.”