Stress testing the board governance policy

Tips for implementing board conflict management strategies

In my last column, “Preparing for Conflict in the Boardroom,” I identified three strategies to help general counsel prepare the board and management to address board conflicts in an organized, effective manner. But how, in the real world, would general counsel implement those strategies? This and subsequent columns will attempt to give practical tips to counsel.

The first strategy is to create an annual board interactive exercise putting the board governance policy to the test using several different crisis scenarios. This “stress testing” strategy is a way to proactively change the annual process of reviewing the board governance policy into a more proactive board exercise. The reason? Actually stress testing policies rather than merely discussing revisions to policies yields very different results, including valuable collective education of the board. Asking the board to engage in exercises to “stress test” their governance policy will help better prepare directors for contingencies and conflicts.

One of the worst experiences for a general counsel is to be in the middle of a crisis and discover that the governance policy does not clearly address the issue at hand. Or, alternatively, the policy spells out what is to be accomplished but it is unclear as to who will take the lead as between management and the board, which board members should be involved and when. Equally bad is going through a major crisis at the board level and having directors react afterwards by saying they felt they were left out of the process, did not understand what was happening or were uncertain what was their role. Actual stress testing exercises empower the board to discuss what they as directors should do during a crisis, what they can expect particular directors to do and what management will do.

To address this need for collective experience and collective understanding, and to turn a yearly review into a proactive board exercise, the general counsel first will need to secure CEO, chairman or lead independent director and governance committee chair support. By using clear and effective pre-meeting materials and a 30- to 45-minute time block, the board should have sufficient time to proceed with the exercise and begin a yearly process that will yield significant results in periods of stress at the board level.

Stress testing exercises start with the development of three or four succinct but diverse scenarios: the company experiences a major information technology breach that garners overnight national media attention; an unwanted bidder contacts a board director who is not the CEO and not the board chairman/lead director; the CEO informs the board of an unexpected departure of a key executive; the company learns of allegations of inappropriate practices in a geographically remote line of business or office. The diversity of the scenarios is important as in many instances it is the crisis that you don’t anticipate that may be the one that occurs. Once the short fact pattern relevant to your company is developed for each scenario, the next step is to develop a short list of process related and substantive questions for the directors to consider. Suggested questions could include: Who would you expect to hear from regarding this incident and when? What level of content would this notice have? If for some reason the chairman cannot do so, whom would you expect to lead the board’s response to this incident? Is this a material matter that must immediately be disclosed in SEC filings?

Important to this exercise is to select a non-governance committee director or directors to lead the discussion on each of the scenarios. Directors should be encouraged to explain why they agree or disagree with responses. The chairman, CEO and general counsel can provide a summary at the end of each exercise that would include summarizing the agreement reached that the board would likely take if such an incident would occur. Finally, throughout the year the general counsel can provide short articles to the board that describe when other companies experience governance challenges, as a method to keep the board updated and engaged.

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