Minutes of Integrity

Where there’s smoke, there’s fire. It’s an old adage, but often old sayings are the most accurate. This certainly appears to be the case in some recent scandals. Options backdating has received more than its share of coverage and debate, but one issue closely tied to the scandal, and that is not garnering the attention it should, is the modification of corporate records. Here, the minutes of board meetings take center stage.

Minutes are close to the heart of most corporate secretaries and the idea that minutes could be altered after the fact – or fabricated altogether – is beyond belief for most of them. The fact remains, however, that this is exactly what has been done at a large number of companies over the last several years.

With the options scandal bubbling away, many companies under investigation are receiving requests to furnish records, including the minutes of board meetings dating back a number of years. It is becoming apparent that at a significant portion of these companies, in the process of backdating grants, the minutes were altered. This has either been proven or alleged at companies like Enron, K-mart, Rite-Aid and Tyco. As Walter Gangl, deputy general counsel and corporate secretary at Armstrong World Industries points out, ‘where there are backdated options there are also backdated minutes.’

The altering or fabricating of minutes is a very serious issue. Not only is it a red flag about the integrity and honesty of some senior management, but it is a sure sign that the policies and procedures governing the control of minutes and other legal records are seriously lacking. Not to mention the fact that it is also a criminal offense.

Section 802 of the Sarbanes-Oxley Act deals with the altering of corporate records (See textbox – penalties for altering documents) but until backdating scandals came to light not much had been said about it. That is starting to change.

Self-regulate or someone else will

Gangl is concerned that, though altering of minutes is not a widespread problem, some companies are letting the rest of the industry down by not establishing and enforcing robust records-management processes when it comes to the board minutes. ‘If these problems continue to occur and we as corporate secretaries are not able to establish best practice in the maintenance and integrity of minutes there is a real and serious risk that Congress or regulators might see fit to mandate a solution,’ he cautions. Most people agree that getting the government involved would be a far from ideal outcome.

The issue of ensuring the integrity of board minutes is coming more into the public eye. A Wall Street Journal article entitled Open Secret suggested that ‘corporate board minutes are widely altered’ and that discovery of ‘fictionalized’ board minutes is not surprising. Gangl believes this perception is unacceptable and if ‘we are to truly regain the trust of the investing public something must be done’ to ensure integrity of minutes and other records.

One of the challenges when it comes to establishing a standard for how minutes are dealt with is that almost every company has a different approach. There are almost as many theories on maintaining the minutes as there are ideas on taking them down in the first place.

Jim Brashear, corporate secretary at Sabre Holdings, says ‘Taking minutes is more art than science.’ The major issue at stake here is not so much the taking of minutes but what is done after the fact to ensure accuracy and security. One point that almost all corporate secretaries spoken to for this article acknowledge, is that timeliness of delivery is a serious issue. ‘Prompt drafting and delivery is very important,’ says Brashear. At Sabre, Brashear constructs a large part of the minutes prior to the meetings taking place. The agendas written in advance, and any presentations that are going to be seen by the board can be included. ‘Only the actual discussion part of the meeting needs to be recorded,’ Brashear explains.

Gangl also prepares a lot of material ahead of time and believes it makes the job of getting the revised minutes back to the board much easier. Brashear says that in his case ‘a draft copy of the minutes is available with hours of the meeting taking place and a revised copy ready a day or two later.’

Solid principles

It is at this point that the process varies at a lot of companies. Some corporate secretaries make extensive use of technology to manage the minutes and treat them similarly to other corporate records. Others simply keep the minutes in hardcopy under lock and key. That latter approach is still the most common, but it is starting to change as the problems inherent with hardcopy become more obvious and as demands for information increase.

Technology utilization aside, Gangl believes there are certain principles that need to be followed by everyone responsible for managing minutes:

• All materials provided to the board (or a committee) for information or consideration in oversight of management and operations, or relative to approval of resolutions or transactions, should be collected and retained by the corporate secretary. They should be stored and protected (utilizing evolving technology) in a manner that deters tampering. 

• Meeting briefing materials, meeting presentations, monthly operating updates and similar materials should be preserved as the record of who received what information and when.

• Management is responsible in the first instance for determining what information is provided. Our objective should be to ensure that the board has, on a timely basis, all material data relevant to issues that they will be acting on. If the board is not satisfied with the information being provided, it is their responsibility to instruct management on changes they desire. 

• All board and committee minutes should be prepared promptly and presented for review and approval of all board members at the board’s next regular meeting. Committee actions pursuant to authority delegated by the board (in particular, executive compensation actions) should be presented for the information of all board members. 

• Proposed resolutions should be presented in advance of meetings, allowing directors the opportunity to consider their import as well as the proper substance and wording. 

• Once board and committee minutes have been approved, their integrity should be safeguarded, and they should not be altered in any manner without the express approval of the board duly noted in its minutes.

• Final minutes should be made accessible to the board and management who are responsible for carrying out the board’s directions, without being ‘filtered’ by the corporate secretary or other managers.

The practice of getting the board to review and approve the previous month’s minutes in the current board meeting ensures ‘an ongoing record and chain of integrity,’ according to Gangl. Should a bad actor wish to alter a particular month’s minutes it would be very difficult, he says, because there is an ongoing chain and records from many months would be affected.

Turning to technology

Brashear is a big fan of using advanced records management technology to help ensure the accuracy and security of board minutes. ‘Once the draft is done it enters the document management system. Any changes made to the draft after it enters the system will be automatically noted making it easy to track version control,’ he says. As soon as the minutes are finalized Brashear makes an uneditable scan and this is also added to the records management system.

By using technology like that at Sabre, a chain of custody and complete record dates are established. It is very easy to see when the draft minutes were first submitted, what changes were made, by whom and when the final, approved version was filed. ‘It would be impossible to go into the document and change it without a complete electronic record being established,’ Brashear explains.

With so many layers of integrity Brashear feels extremely confident that changing or falsifying minutes would be next to impossible. Not that he has ever encountered a situation where this had occurred.

The ‘It would never happen here so I don’t need to worry about it’ argument is one that does not wash with some corporate secretaries. Even if you have the most honest board and management in the world it is not a reason to fall down in this area, cautions Gangl. ‘No one ever thinks it will happen to them and we are not suggesting that it will but this is a best practice that needs to be maintained.’

Taking control, the old fashioned way

Not all corporate secretaries use electronic management tools for managing minutes. Lynn Williams, who retired in May as corporate secretary of Scana Corporation, says she has always relied on hardcopy minute books. She admits her successor ‘is very technology savvy,’ and may at some stage consider using technology similar to those at other companies.

At present, Scana’s board meetings are tape recorded and transcribed so ‘there are very few errors or changes that need to be made once the minutes are written,’ she says. After the minutes are approved a scan is taken and stored on the server and then the minutes themselves are stored in a locked, fireproof room. ‘If anyone wants to see the minutes they have to come and ask me for the key,’ she explains. ‘I know where the minutes are and who has them at all times.’

David Smith, president of the Society of Corporate Secretaries and Governance Professionals thinks this a good approach: ‘If I was still an active corporate secretary I would want complete control of the minutes, and that includes from the CEO all the way down.’ He is very aware of the importance of maintaining minutes, and the Society have considerable resources for anyone looking for advice in this area.

‘One of the big challenges is recording minutes at meetings where the corporate secretary is not present. In the case of an executive session, or any other meeting where the corporate secretary is not present, the CEO or lead director must take responsibility for recording the discussion of the meeting. Once the board approves those minutes I will sign them and insert them into the relevant section of the full minutes,’ says Smith.

Though different methods yield benefits, a major advantage to using technology is the ease with which searches can be done. ‘It is not uncommon that you need to go back into the minutes and find where the board discussed certain issues,’ says Brashear. Take an M&A transaction. The lawyers will want to do due diligence and may demand: ‘we want to see all occasions when the board discussed this matter in the past five years.’ With the system in place, as at Sabre, this would be easy because the records management tool has a keyword selector. ‘The results for that request could be determined in minutes,’ says Brashear. Going back through five years of hard copy books would be much more tedious.

In spite of their different approaches, Gangl and his fellow corporate secretaries all agree that the integrity of board minutes is of utmost importance and everyone in their profession has a responsibility to ensure it is maintained. Gangl advises, ‘We should be working together towards achieving a minimum common ground to ensure problems with minutes are never the focus of a corporate scandal.’