Here is Part 2 of a two-part blog series about nine aspects of the D&O questionnaire process for which in-house lawyers must use their judgment (here is Part 1 covering the first three aspects and more):
4. Frame the question properly
It’s important how you frame the question. This bears repeating: It’s important how you frame the question. For those areas where you expect there might be answers that lead to disclosures needing to be included in your SEC filings, you want to frame the question to elicit all the information you need.
A good example is in the complicated area of related-party transactions. You might have directors who have done well in life and have gotten involved in many business endeavors. Their business interests might be structured in a complex web of trusts. Family trusts can be particularly challenging.
There isn’t a lot of SEC guidance or case law in this area. You need to elicit as much detail as you can from the questionnaire, so you can make a judgment call about what is required to be included disclosure. Or so you at least know enough so you can ask the proper follow-up questions.
5. Pre-populate answers
Pre-population and personalization are two common practices used to make the process faster and more convenient. Pre-population – also referred to as pre-completion – is the practice of entering responses for a respondent prior to distribution.
Pre-population is popular. The QDiligence survey says that the vast majority of companies do it – and that makes sense for those situations where the responses are already known and unlikely to change. If you want to please your insiders, you’re pre-populating as much as you can. Most companies pre-populate a subset of responses for each questionnaire, and many pre-populate entire questionnaires using the prior year’s responses, according to the QDiligence survey.
Examples of common pre-population areas include bios, a list of family members or other directorship positions, compensation, third-party employment and board participation.
An example of a section not to pre-populate is a director’s independence. Let them tell you all the facts in their words so you can make that determination. It’s a tricky area. And even if your director’s story hasn’t changed – let them tell you that. Don’t assume it.
Be careful with pre-population. You want to reduce the risk that the process becomes too mechanical, with directors and officers failing to carefully consider each question and their response. Sometimes they need to conduct appropriate diligence of their own affairs. It’s not uncommon that they have a handle on all their affairs. For example, whether a “family member” now works for the company, whether the respondent’s spouse has donated money to the company’s foundation, etc.
Personalization is the practice of tailoring a questionnaire for an insider, eliminating questions that don’t apply to that particular person or revising the question so it better matches who they are.
Examples include removing questions discerning director independence from an officer’s questionnaire, eliminating questions about experience or qualifications for participating on a specific committee, or including copies of a respondent’s Form 4s to help them list their ownership in the company’s stock.
6. Rely on director assistants
Should questionnaires be sent to a director’s assistant? Or the director’s personal accountant or lawyer? Yes, particularly for those directors who have a full-time day job. Note that these should be copies, and the directors should receive the questionnaire forms too as it is their responsibility to complete them accurately and completely, and few assistants would have all of the information necessary to complete the forms on their own.
It’s “Corporate Secretary 101” that it’s helpful to establish relationships with director assistants, as they can be instrumental in ensuring that the questionnaires are completed – and completed on time.
These relationships are key, so you can do your diligence to verify if the assistants are doing their own homework. Are they really spending the time necessary to conduct their own diligence when filling out the questionnaire for their boss? It’s not uncommon for that answer to be “no.”
Find out whether this particular assistant is doing this task for more than one directorship. In other words, you’ll want to share intel with the corporate secretaries at the other companies where that director also serves on the board. I know it’s gossip – distasteful – but it really is important so you can properly do your job.
Always offer to review the questionnaire forms with the assistants to help ensure that the appropriate information is obtained.
And be prepared to answer questions about why their company’s form of questionnaire varies from yours. It’s best to be open-minded, as perhaps the practices at other companies might be more effective than yours – and comparing the two might help you improve your processes.
You’ll find out the degree to which your director relies on others. Some directors rely on their assistants for most everything related to their outside board seats (this chore included, but certainly more than this), whereas others are much more independent and use their assistants only for more administrative tasks – like collecting receipts, transmittals and scheduling.
For directors who are senior managers at another company, their assistants may limit their involvement in filling out these questionnaires due to company policy or protocol, because they are being paid by the company for company-related work. A company may frown upon an assistant’s time being used to provide services for other companies.
7. Analyze answers
Some companies turn the entire process of analyzing questionnaires over to outside counsel, but most review them in house. You should review each response individually to identify any significant changes to information that may require clarification.
Check all responses, even ones that you think you know the answer to – sometimes you get a real surprise. And, of course, pay even closer attention to those areas that are the hot spots – director independence, ownership of the company’s stock and related-party transactions.
Some folks get really organized and create spreadsheets of responses, which are then used to document decisions regarding individual responses for future reference. Sometimes you will need to share some information with another department – like HR – for further analysis. And often, you will need to share some information with your accounting reporting team. Frequently, the independent auditors will also want to see the questionnaires, and the list of family members and their employers is provided to accounts payable to run searches to see if the company had made any payments to them.
From its survey, QDiligence reports that responses are clarified after their initial submission 10% of the time. That might sound like a low number, but it’s actually quite a lot. That means you can’t steamroll through a questionnaire after it’s been filled out.
8. Prod non-responsive insiders
Sometimes an insider will fail to turn in a questionnaire despite repeated prodding. If you’re caught in this bind, make sure to document your requests for the questionnaire. Tell them they’re holding up an SEC filing. If they’ve ignored you thus far, you’ll probably need to enlist someone with more authority – the general counsel, CEO or chair of the governance committee – to help deliver the message.
It’s not uncommon for a questionnaire to be returned without all of the items being answered – or being answered incompletely. Sometimes they tell you in a cover note that they left something blank, but often there is no warning.
Note that Cooley D+O doesn’t allow the questionnaire to be signed until all questions are answered. In fact, our platform will take you directly to the unanswered questions – you don’t even have to hunt for them. If you want to try a demo, please reach out to me or your Cooley contact.
If this happens, you should follow up to find out why. Maybe it was simply an oversight, or perhaps the instructions relating to the item were unclear.
But sometimes a response is too complex – or sensitive – to be reduced to writing. This is precisely the type of situation that the questionnaire process is designed to capture. So you place a call. And if a response is then given over the phone, you should take written notes and add them to the returned questionnaire.
9. Use answers for other purposes
You’ll typically only need to collect information once per year. But some have to do this heinous task more than once during the year for a variety of reasons. In these off-cycle instances, you can either ask insiders to reconfirm all of their responses from the prior questionnaire or ask them to specifically confirm information about related third-parties, etc. with a much smaller questionnaire.
Authored by
Broc Romanek