Comply-and-Explain: Should Directors Have a Duty to Inform?,
published recently in Duke Law School’s Journal of Law and
Contemporary Problems, argues that the directors of publicly held
companies in the United States should be subject to a new state law
duty requiring them to explain to shareholders how the board is
exercising business judgment and acting in the best interests of the
The duty is derived from:
(1) the Model Business Corporation Act (MBCA) Section 8.30 that
requires directors to act in the best interest of the corporation and
to share information material to the exercise of the board’s
decision-making or oversight functions; (2) Section 3.C.4 of the
American Bar Association’s Corporate Director’s Guidebook,
that sets forth a director’s “duty of disclosure”; and (3) the
Department of Labor ERISA requirements governing the fiduciary duties
of institutional investors and their exercise of proxy votes. The duty
to inform also builds on concepts from the UK’s principles-based,
comply-or-explain governance system that gives directors wide
discretion to customize governance policies provided that they explain
how their decisions are intended to achieve business goals and serve
the best interests of the company and its shareholders.
Borrowing from the text
of the MBCA, the Duty to Inform is stated in the following terms:
“In discharging board
or committee duties a director shall disclose, or cause to be
disclosed, to the shareholders information not already known by them
but known by the director to be material to the discharge of their
decision-making or oversight functions.”
The duty has five main
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
A. the company’s
B. the directors’
competence and independence,
C. the board’s
exercise of business judgment;
3. Enhance directors’
credibility through the articulation of
A. the processes by
which board decisions are made,
B. the strategic
rationale for their decisions;
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.
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 is not to increase directors’ liability,
but to increase their accountability to shareholders. Topics disclosed
under the duty would focus on board process and policies and would not
include material nonpublic information prohibited under Regulation FD.
The duty could be
discharged by means of a written “Directors’ Discussion and Analysis”
or by periodic communications from board committees or the board chair
to the shareholders.
The expected long-term
impact of a duty to inform would be to “operationalize” corporate
governance policies and accustom boards to provide greater
transparency about their deliberations and decisions on matters
relating to governance, business oversight, and strategy.
The article examines the
implications of a duty to inform in the framework of state corporate
law and federal securities law. It further argues that the duty would
help liberate directors from the constraints imposed by the U.S.
rules-based, strict-compliance system of corporate governance.
1. Should the
Securities and Exchange Commission establish a safe harbor to
encourage communication from boards to shareholders on matters not
involving material nonpublic information, such as governance policy,
board process, executive compensation and shareholder rights?
2. Could Rule 14a-8 be
used by shareholders to establish a directors’ duty to inform?
3. Would shareholder
resolutions seeking to require a Directors’ Discussion & Analysis or
a Board Compensation Committee Report be effective, or would the SEC
find them void for vagueness?
4. Would accountability
to shareholders be an effective alternative to legal liability as a
means to enforce a directors’ duty to inform under state law?
The complete article is