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Latham & Watkins' Advice on Board Confidentiality

Charles M. Nathan of Latham & Watkins LLP has posted a piece on Harvard Law School's Forum on Corporate Governance and Financial Regulation blog outlining directors' responsibilities for maintaining confidentiality about the company, and the confidentiality of board room discussions.  The blog post stresses the importance of the fabric of trust and collegiality that should exist among directors.  Not only a legal responsibility of a company's board members, the "maintenance of confidentiality of material board information is also critical to prevent the corrosive effect breaches of board confidentiality will have on a board’s deliberative process and the trust and confidence directors have in each other."  The first piece of advice Mr. Nathan gives is that boards must "review, and where appropriate amend, their existing confidentiality policies to make clear that a director’s obligation of confidentiality is not limited to material non-public company information of the sort customarily dealt with under 'insider trading' laws, but also explicitly includes material board information."

Given the greater access to the director nomination process contemplated by the SEC, as well as concerns about litigation, board confidentiality is as important as ever.  Directors should turn their attention to their funds' confidentiality policies with an eye toward what Mr. Nathan lists as common flaws in these policies:


    • Many policies use vague definitions of confidential information, such as:
        • only discussing proprietary information about the company and not expressly considering scenarios involving director misuse of confidential board information.

        • relying on the definition of “confidential information” from the New York Stock Exchange (NYSE): “[a]ll non-public information that might be of use to competitors or harmful to the company if disclosed.” This definition, in our view, is inadequate. Not only is it framed more in terms of competitive harm than in terms of the necessity for confidentiality in the board room (and throughout the company without regard to its affect on competition), but also it begs the question whether trading on non-public company information or publicizing non-public board information (as occurred in the HP situation) is “harmful” to the company and, if so, in what way; and/or

        • including material company information in definitions of confidential information, but not expressly covering material board information.




    • Many policies do not fully prohibit directors from misusing confidential information. For instance, policies may prohibit directors from disclosing confidential information to third parties, but may be silent regarding whether directors can use confidential information for their own benefit or for the benefit of others.


Mr. Nathan also provides some tips on how to "fix" their confidentiality policies should they find their policies to suffer from the flaws he lists.


    • A broad definition of “confidential information” that covers all relevant information, including material board information;


    • A list of examples regarding what types of information are confidential, which should include items such as board deliberations and board dynamics so that directors clearly understand that confidential board information is covered by the policy;


    • An unambiguous statement that directors may not disclose confidential information to any other party, including principals or employees of any business entity which employs the director or which has sponsored the director’s election to the board, or misuse it in any other fashion, including by using it for their or someone else’s benefit; and


    • A very narrow set of circumstances in which directors are authorized to discuss confidential information, i.e., when required by law or when authorized by the board.


Mr. Nathan's blog post on confidentiality policies is a great place for a board to start a discussion of their own policies.

The full text of the blog post is available at: