G.M.’s Board Is Seen as Slow in Reacting to Safety Crisis – NYTimes.com.

A choice quote from the article:

But on the issue of vehicle safety, the board until recently took a mostly hands-off approach, rarely even discussing the topic beyond periodic reviews of product quality with company executives, according to interviews with current and former board members, as well as G.M. officials with knowledge of the board’s actions.

The lesson here is that boards should take an active role in making sure the company’s products do not harm consumers.

Another choice quote:

“I can’t remember the specifics,” Mr. Solso said in an interview. “It was a large recall. There were probably cost estimates.”

The lesson here is that boards should have someone take detailed minutes so that when questions are asked in the future, you can review the minutes and remember what did and did not happen. When I was a child welfare investigator prior to attending law school, we had a saying, “If you don’t write it down, it didn’t happen.” I testified in court constantly about my actions and the reasons for them. When it comes to governance and risk, many lawyers advise not to write anything down. To me, that’s a red flag for poor governance or persons otherwise not doing their jobs. Do your job well and have a good attorney, and you are unlikely to have problems. Some may call that a naive view. My response is that in my experience, people that do their jobs well and document, rarely have had trouble. And I say that as a person who had a high risk, and controversial position. My decisions were scrutinized after the fact by attorneys and judges, many who were not favorable towards me.

And my favorite quote:

“We didn’t understand the enormity of the situation at the beginning, because I don’t think management did,” said Mr. Solso, who became chairman in January after serving on the board since June 2012 and who is the retired head of the Cummins engine company. “It was an evolving problem.”

So it’s management’s fault that the board did not know what was going on? The business judgment rule requires that boards execute their fiduciary obligations to shareholders carefully.

Corporate directors are the individuals responsible under the law for corporate conduct.”

Roy Smith and Ingo Walter, Governing the Modern Corporation (New York: Oxford University Press, 2006), 76.

In 1968, an important legal case was decided in federal court in New York state that affected the duties of directors of public corporations (Escott v. BarChris Construction Corp., 283 F. Supp. 643 (S.D.N.Y. 1968)). The case involved fraud and false accounting in a company selling securities to the public, and the court found against the company’s independent directors, accounts, and investment bankers. Under the Securities Act of 1933, underwriters share liability with the company and its advisors for the accuracy of all offering documents. The defendants claimed they had been lied to by management and therefore did not know, and could not have known, of any fraud. The 1933 Act does prompt underwriters to perform independent investigations responsibly but does not establish how directors of issuers subject to the law are to do so. The court held, however, that the defendants had failed to demonstrate that the they had made significant effort to discover the facts for themselves. Therefore, they had not been “dully diligent” in making all the appropriate  efforts to inform themselves of the true facts in the case, thereby breaching their duties of care under the 1933 Act.

Roy Smith and Ingo Walter, Governing the Modern Corporation (New York: Oxford University Press, 2006), 79

Boards need to educate themselves about security and the governance that wraps around information in general- privacy, security, marketing, big data, analytics, technology etc. They need to do this now. They also need to be much more active than they traditionally have. Technology is currently a significant business disruptor. Boards need to make sure that management is thinking through all the implications of digital operational risk and the effects of competitors leveraging technology.