Blue Ribbon Commission Issues Recommended Best Practices for Directors

December 20, 2005

On December 7, 2005, a blue ribbon commission of the National Association of Corporate Directors issued a report that discusses the current legal liability environment for directors and recommends best practices for directors to safeguard against personal liability. John F. Olson, a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher LLP, served on the commission.

The NACD report is particularly timely, in light of recent press reports that outside directors are being targeted by the SEC in several pending investigations, including the SEC’s investigation of Hollinger International. According to press reports, "Wells notices" have been sent to current and former members of the audit committee of Hollinger, indicating that the Enforcement Division intends to recommend that enforcement actions be brought against those directors. It is believed that the investigation focuses on, inter alia, the directors’ approval of over $200 million in management fees paid to a company allegedly controlled by former chairman Conrad Black. In related news, a Deputy Director of the Enforcement Division recently was quoted as saying that the SEC will pursue cases against outside directors when the directors have "taken no care in ensuring the accuracy" of statements made in SEC filings that they sign. "When they sign something, it has to have some basis," the SEC official said.

The threat of enforcement actions against outside directors underscores that boards of directors should take appropriate steps to strengthen their board decision-making processes. The recommendations in the NACD report include that directors:

  • Obtain a broad understanding of the company’s business, including the management’s strategy, the assumptions and risks associated with management’s strategy, the company’s system of controls and the compliance culture promoted by senior management.

  • Pay special attention to the board agenda and the flow of information to the board, including whether the board receives sufficient information, both positive and negative, to make informed decisions.

  • Attend meetings with an attitude of healthy skepticism and review minutes carefully and promptly to see that they accurately reflect the matters considered. Insist that management circle back to issues decided or discussed for updates and progress reports.

  • Hold regular executive sessions without management to discuss the quality of management.

  • Understand matters put before the board for approval. Take special care in reviewing SEC filings, including registration statements, prospectuses and the periodic reports that they incorporate. Discuss within the board and with management, outside auditors and counsel whether there are any additional steps that the directors should take to assure themselves of the accuracy of documents filed with the SEC and whether aspects of a particular disclosure are unusual or problematic.

  • Rely in good faith on well-chosen experts, but consider expert advice carefully based on a director’s own knowledge and information.

  • Strictly observe procedures for addressing unavoidable conflicts of interest and avoid self-dealing. Take special care as to any issue or transaction that involves a potential conflict for a member of management, a director or a controlling stockholder.

The appendices to the NACD report include an excerpt from a chapter on indemnification and insurance authored by Gibson Dunn attorneys that has been published as part of a larger work on corporate governance co-edited by Amy L. Goodman, a partner in the Washington, D.C. office of Gibson Dunn. The excerpt discusses the role of insurance in protecting directors and officers in circumstances where indemnification may be unavailable and reviews the structure of a typical D&O insurance policy.

The NACD report, entitled "Report of the NACD Blue Ribbon Commission on Director Liability: Myths, Realities and Prevention," is available from the NACD at

Gibson, Dunn & Crutcher’s lawyers are available to address questions regarding these issues.  For further information, please contact the attorney with whom you work or:

Jonathan C. Dickey – Bay Area Offices (650/849-5324; [email protected])
Robert F. Serio – New York (212/351-3917; [email protected])
Wayne W. Smith – Orange County (949/451-4108; [email protected])
John F. Olson – Washington DC (202/955-8522; [email protected])
Amy L. Goodman – Washington DC (202/955-8653; [email protected])

© 2005 Gibson, Dunn & Crutcher LLP