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The Must-Have Record: Board Meeting Minutes

It is more imperative than ever that what happens behind the closed doors of board meetings be preserved to answer any claim of irregularity.

By Roscoe C. Howard Jr., Mark E. Nagle and Christopher M. Loveland

Hardly a day passes without news of allegations of corporate mismanagement leveled by a government agency, an aggressive plaintiff's lawyer, or an internal watchdog unit within a large company. Directors and officers find themselves scrutinized, questioned, challenged, and sometimes sued in their personal capacities for a multitude of alleged sins of commission and omission.

Amid this maelstrom, the question occasionally arises: What kind of record should a board of directors maintain of its proceedings?

In this litigious age, when any paper or electronic record can be a potential weapon in the hands of an adversary, are the directors -- and perhaps even the company itself -- better off with only the most abbreviated minutes of proceedings, or perhaps none at all?

Tempting as the notion may be to simply keep no record at all, or perhaps only the most cursory record needed to attain minimum compliance with state law, any board following that course of action will, in the end, create more problems than it solves.

One of the assumptions of the advice we provide below is that the discussions of the board are for the benefit of the shareholders and the company, and any actions taken or acquiesced in would withstand scrutiny. In that case, contemporaneous evidence to support such a conclusion is vital to proof of the actual intentions of the board. Although lawsuits and shareholder actions will not be prevented, the contemporaneous account of what was decided and how provides a record that may be relied on by testifying board members and investigating authorities that will focus and sharpen recollection and probes.

Preserving the ‘Witness’
We speak as those who have experienced the courtroom. Motions, directives, and statements get misinterpreted, reinterpreted, or even fabricated with the passage of time -- and sometimes without the passage of time. Preserving a "witness" whose testimony will not change over time -- whose allegiance will not vary with corporate administrations and will not bend with political agendas -- is imperative. That witness is the accurate minutes of the board meeting.

The overriding purpose of Sarbanes-Oxley is to place a greater burden on corporate officers and directors to ensure that the finances of their companies are in order and properly documented. Indeed, SOX mandates strict record-keeping. Maintaining a thorough paper trail is thus critical to demonstrate compliance with a board’s expanded fiduciary obligations to the company and its shareholders. One way to effectively document the decisions made by officers and directors is to prepare and maintain detailed minutes of board meetings.

It bears repeating: The fundamental objective of greater accountability and disclosure mandated by SOX, and backed by its strong criminal and civil sanctions, compels the conclusion that maintaining thorough minutes of board meetings is essential. An appropriately detailed record will allow officers and directors to demonstrate that they fully complied with their financial oversight obligations, and could become a critical source of contemporaneous evidence in any government investigation or private litigation.

Don’t Inspire Regulators to Dig Deeper
Moreover, the very fact that a company did not maintain minutes of board meetings would almost inevitably inspire regulators or law enforcement officers, should the company fall under their scrutiny, to redouble their efforts and dig deeper into a company's financial records.

A failure to keep and maintain minutes of board meetings could well be construed as an affirmative act by directors to cover up their failure to properly monitor the financial condition of the company -- or worse, to participate or acquiesce in some form of financial fraud. In fact, the failure to maintain these minutes is subject to almost any interpretation at all, and certainly one that is not controlled by the board.

Detailed and accurate minutes could be the only way to satisfy a judge or jury that the officers and directors of a company took appropriate action and that they were not "asleep at the switch." No officer or director wants to face an attorney in a deposition -- let alone a jury in a courtroom -- and have to admit to a complete lack of documentation of the reasons why the particular decision then under challenge was taken.

It is thus critical that officers and directors keep thorough minutes of every board meeting and to document their compliance with the requirements of Sarbanes-Oxley. Boards and directors do otherwise at a peril.

A longer version of this article appears in the First Quarter 2005 edition of Directors & Boards.

Roscoe C. Howard Jr. and Mark E. Nagle are partners and Christopher M. Loveland is an associate in the Washington, D.C., office of Sheppard Mullin Richter & Hampton LLP. Immediately prior to joining Sheppard Mullin, Mr. Howard was United States Attorney for the District of Columbia, and Mr. Nagle was chief of the Civil Division in the U.S Attorney's Office. The authors can be contacted at rhoward@sheppardmullin.com, mnagle@sheppardmullin.com, and cloveland@sheppardmullin.com.