Confidentiality and the board of directors

by | September 25, 2017 12:50 am

The courts have held that “a director’s right to information is usually unfettered in nature”(Kalisman V. Friedman, 2013 Delaware Chancery Court). Given the extent of their statutory duties, Directors are entitled to demand for and receive all such information as required to enable them take decisions that are in the best interest of the company. Remarkably, the use or misuse of information to which a director becomes privy by virtue of his/her membership of a Board of Directors is a subject to which many Boards do not pay significant attention until a breach of confidentiality or a threat thereof occurs.

The obligation of confidentiality fundamentally derives from the fiduciary duties of loyalty and care, hinged on the fact that in fulfilling their responsibilities, Directors are entrusted with significant amount of material, non-public information. Confidential Board information may be proprietary information of a competitive and commercial value to a company or sensitive information regarding Board proceedings and deliberations. It is typical for the Board to take for granted that Directors would always treat Board deliberations and other sensitive information with appropriate confidentiality. However, this is not always the case.

The concept of confidentiality may have different dynamics on the Board of a small privately-owned company as it would on the Board of a publicly listed or quoted company. Whilst a Director’s fiduciary duties of loyalty and care are constant, the degree of transparency and disclosure set by regulatory reporting standards is higher in the case of publicly quoted entities and Directors sitting on the Boards of such entities are exposed to significantly more sensitive information than their peers in privately held companies. However, the basic principles of transparency, disclosure, trust and confidentiality apply to a Board, be it of a private or a publicly quoted company.

There are generally no guidelines on directors’ obligations with respect to confidentiality and the law in this regard is not yet well articulated. There is also a dearth of case law to guide Directors and Boards on the subject. Consequently, when sensitive board information is deliberately or inadvertently leaked by a Director, the Board may struggle to respond as the remedies available to the Board and the company itself are limited. A typical remedy would be to ask the erring Director to resign or to remove him. This remedy may however not be sufficient deterrent – never mind that a Director can only be removed by shareholders. The consequences of breach may sometimes be far reaching as to threaten the very existence of the enterprise.

The problem of Directors breaching the confidentiality of board deliberations is not new. In January 2006, CNET published an article revealing Hewlett-Packard’s long-term strategy on the basis of information supplied by an unnamed insider, later identified as then-director George Keyworth. His identity was only uncovered because Hewlett-Packard hired private investigators who surreptitiously gained access to e-mail inboxes of the company’s directors and certain reporters from CNET. A contentious series of disputes occurred between HP’s Board Chairman, Patricia Dunn(who wanted Keyworth to resign), and Keyworth. Months later, after the smoke cleared, Keyworth resigned as a director, another director resigned in protest about the way Keyworth was treated and Dunn also as Chairman but remained as a Director. The culture of the HP Board needed to be rebuilt (Harvard Law Forum).

In the absence of a Confidentiality Policy by which Directors are bound, enforcing a sanction in the face of a breach could be resisted. It is recommended that the Board should take a deliberate and conscious approach to ensuring confidentiality on the Board by adopting a comprehensive Director Confidentiality Policy. To be effective, Directors should be required on their appointment to sign off on the policy and be availed a copy of the policy document.

A confidentiality policy should at the barest minimum specify what the Board considers to be “confidential information” and provide a list of examples of what type of information would be classified as confidential so that Directors are clear in their minds in this regard. The policy should also contain an unambiguous statement that prohibits Directors from disclosing confidential information to non-board members as well as other types of misuse and should provide a very narrow set of circumstances under which Directors are authorized to discuss confidential information, for example, when required by law or when authorized by the Board. It is recommended that the Policy should mandate the Board when required, to designate a Director to disseminate Board information to third parties. It should also specify the penalty for breach.

A Confidentiality Policy by no means ensures that there will be no breach of the duty of confidentiality on a Board but underscores the importance of maintaining the confidentiality of board information and ensures that all Directors are well aware of their duty to protect such information. Having such a Policy also creates a standard of conduct and voluntary adherence that should have significant moral suasion. The Policy makes it easier for the Board to deal with a breach when it occurs – provided of course it is able to identify the erring Director.

To enable them take qualitative and informed decisions, it is imperative that the boardroom gives Directors the assurance of an atmosphere of candor and free expression. Thus, the fabric of trust that such an atmosphere engenders, may be damaged irrevocably when sensitive deliberations are disclosed, albeit inadvertently and this would inevitably undermine the effectiveness of the Board. Directors should not discuss Board deliberations with those who do not owe fiduciary responsibility to the entity including spouses.

Ultimately, there is no substitute for genuine trust, collegiality and respect among board members and as such a culture of confidence is the surest safeguard against breach of confidentiality. To facilitate the enthronement of such a culture, Directors should treat all Board deliberations and all information that come within their knowledge by virtue of their being Directors, as confidential. The Chairman should provide direction in setting the tone of a culture of trust and respect on the Board and proactively build trust and cohesiveness on an ongoing basis.

Practicing what you preach
President Muhammadu Buhari last week joined other world leaders in New York, United States of America for the high-level events of the 72nd Session of the United Nations General Assembly. On Tuesday, he addressed the General Assembly during the General Debate, whose theme was: ‘Focusing on People: Striving for Peace and a Decent Life for All on a Sustainable Planet’. In his speech, the Nigerian president commended the UN for its role in helping to settle thousands of innocent civilians caught in the conflicts in Syria, Iraq and Afghanistan, and thanked Germany, Greece, and Turkey in particular for assisting refugees escaping war-torn countries and praised the international community for the exemplary show of solidarity in assisting the countries and communities in the Sahel and the Lake Chad regions to contain the threats posed by Al Qaida and Boko Haram.
He also spoke on the international community’s efforts to gender equality, youth empowerment, social inclusion, education, creativity, innovation good governance, democracy and the rule of law.
He stressed the importance of international cooperation in confronting corruption and transnational crimes such as human trafficking and urged the international community to similarly embrace cooperation in combating international terrorism and preventing the Islamic State from spreading to the Lake Chad and Sahel regions, where there are insufficient resources and weak response capacity.
Crucially, he urged the UN to continue to take primary leadership of the maintenance of international peace and security “by providing, in a predictable and sustainable manner, adequate funding and other enablers to regional initiatives and peacekeeping operations authorized by the Security Council”.
He also pointed to the on-going crises in Yemen and Myanmar, likening the persecution of Rohingya Muslims in Myanmar to the crises in Bosnia and Rwanda in the 1990s, and pledged Nigeria’s support for the Secretary-General’s call on Myanmar to stop its ethnic cleansing of Rohingya.
Clearly, President Buhari gave an impressive speech with a particular focus on the world’s most pressing human rights issues – the brutal violence against the Rohingya Muslims in Myanmar, which he likens to genocides in Rwanda and Bosnia.
However, while Buhari’s speech will appeal to the Rohingyas, many Nigerians would be wondering why the president doesn’t practice similar sentiments with similar events back home.
In December 2015, the Nigerian Army needlessly massacred and tried to conceal evidence of the killings of over 350 Shiite Muslims in Zaria, Kaduna state as attested to by Amnesty International and even the Kaduna state government. Nearly two years after the massacre of the Shiite Muslims and despite a court order for his release, Ibrahim El-Zakzaky, the leader of the Shiite group, his wife and some top members of sect are still being detained by the government. Not a few see this as an attempt to suppress a religious minority group. Nigeria’s Muslim community is predominantly Sunni.
Similarly, he army again, between 29 – 30 May, went on another killing spree, mowing down dozens of members of the Indigenous people of Biafra (IPOB), supporters and bystanders at three locations in the Onitsha town and environs. In its report of the killings, Amnesty International described those killings as “extra judicial executions”, and called for urgent and independent investigation and the bringing to justice of anyone suspected of criminal responsibility.
Just a few days before leaving for New York, the president authorised another provocative clampdown on the secessionist group in the South East of the country.
Also, while the president was calling on the UN to be mindful of the widening inequalities within societies which may cause frustration and anger leading to spiralling instability, the over two million displaced persons in Nigeria’s northeast will likely be puzzled by the president’s sentiments given that inequality, frustration and anger are their daily realities.
We have written severally about the deteriorating conditions in the various Internally Displaced Person’s camps scattered across the North Eastern part of the country where hunger, deprivations, starvation, forced sexual slavery and deaths prevail. But despite the dire conditions of those affected, food and other relief materials meant for the needy in this region are constantly being diverted and sold in the open market by Nigerian officials while the government looks on as if there is nothing wrong.
The president cannot be a statesman only outside the country and remain a dictator and divisive leader at home. It is good that he believes in justice, peace, equity and fairness to all peoples. We urge him to practice what he is preaching because he is fast dividing the country he is opportune to lead.


Bisi Adeyemi