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For the previously posted article to which the posting below refers, see


The Harvard Law School Forum on Corporate Governance and Financial Regulation, March 31, 2011 posting


The Directors’ Duty to Inform

Posted by John Wilcox, Sodali, on Thursday March 31, 2011 at 9:06 am

Editor’s Note: John Wilcox is Chairman of Sodali, a director of, and former Head of Corporate Governance at TIAA-CREF. The article discussed below is available here.


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 corporation.

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 objectives:

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 governance,

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;

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.

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 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.

Author’s Queries:

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 available here.



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