John Wilcox, one of the most dedicated and thoughtful observers of corporate governance at proxy solicitation firm Georgeson and TIAA-CREF, has written a superb new article suggesting another obligation for directors, a "duty to inform." It is not enough, he argues, that the directors do what they "reasonably believe to be in the best interests of the corporation" (the legal standard); he says that to meet that obligation directors must disclose to the shareholders how theiractions and decisions are connected to that outcome — and how they know. Wilcox says that imposing a duty to inform would have five important benefits:

1. Explain the relationship between the board’s governance decisions and the company’s business goals;
2. Enable shareholders to make an informed evaluation of
   • the company’s governance,
   • the directors’ competence and independence, and
   • the board’s exercise of business judgment;
3. Enhance directors’ credibility through the articulation of
   • the processes by which board decisions are made, and
   • the strategic rationale for their decisions;
4. Encourage customization, flexibility, and strategic focus in boards’ corporate governance practices comparable to the “comply or explain” approach used in principles-based governance systems; and
5. Promote dialogue and reduce confrontation between boards and shareholders.

He says, "The substantive information provided by directors pursuant to a duty to inform would be company-specific, qualitative, contextual, and forward-looking, thereby bringing it within the protection of the business judgment rule. The intent of the duty would not be to increase directors’ liability, but to increase their accountability to shareholders."

This is a key point. Directors and their advisors have too often relied on (exaggerated) claims of potential liability to limit their disclosures. For example, because the minutes of board meetings must be made available to shareholders on request, those minutes are minimal and opaque. This occurs even though courts have not imposed personal liability on directors without a showing of personal corruption and the broad protection of the business judgment rule insulates boards from the imposition of any penalty without a showing of gross negligence. One rare case found a director had failed to meet her duty of care — she had missed every board meeting. Wilcox argues that greater disclosure would not lead to a greater risk of liability.

More important, a duty to inform would do more than structural-based reform to ensure that "boards are not just compliant, but are implementing governance effectively." Wilcox suggests one format would be an annual "Directors’ Discussion and Analysis," but he would give boards the flexibility to consider other formats and frequencies. He is reassuring on the benefits of greater transparency and assures directors they will continue to have the privacy they need for candid boardroom discussions. The key here would be to make the disclosures meaningful, not boilerplate, as too often happened in the Compensation Discussion and Analysis. The best way to do that is through an open discussion of the procedures and criteria used for making decisions rather than details about the substance.

Wilcox's piece is particularly insightful about the impact of the "comply or explain" approach taken by the UK and other jurisdictions. In the US approach a substantive standard is imposed, sometimes with the hope that it will set a floor of minimum compliance and inspire companies to develop individual systems particular to their circumstances to exceed it. Invariably, however, it becomes the ceiling and the minimum becomes the universal practice. "Comply or explain" encourages variation, experimentation, and competition by establishing a default standard for compliance. Any company that has a better idea is free to implement it, as long as it explains why it is better. Wilcox proposes a "comply and explain" approach: whether they operate under a traditional governance structure or have adopted something specially adapted to their own circumstances, boards should always tell shareholders what their substantive — not check-list-ish — governance means. And he wisely encourages institutional shareholders to adopt the "duty to inform" as well, to be more transparent about their own governance and its connection to their own care and loyalty obligations as fiduciaries. In an era of majority shareholder votes against compensation plans and director candidates, the time for a dramatic improvement, indeed a partnership, between boards and shareholders is long overdue.

As Wilcox writes, "A board-level narrative describing the decision-making process and explaining the context and business rationale for board decisions would help defuse shareholder concerns, reduce confrontation, and ultimately strengthen shareholder support even when there is a perception of non-compliance." As he recognizes, shareholders want evidence that the board is candid, credible, and dedicated, far more than they want check-lists.

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