Many major companies prohibit managers from engaging in personal relationships with subordinates, even if those involvements are entirely consensual.
Such strictures certainly reduce the possibilities that a company will face, and be found liable on, claims for sexual harassment and/or creating a hostile work environment. They also protect workplace morale, by preventing some perceptions of unprofessional and preferential treatment.
Should boards bar romantic relationships among their own directors?
Beyond any considerations of morality, or concerns about the destabilizing effect of a (possibly extramarital) relationship, there are at least ten problems that a company could avoid by adopting such a policy—even if the board believed that sexual harassment would be unlikely among its directors, and even if the “inside” directors, who also serve the company as officers, were already prohibited from such relationships by a policy governing employees.
First, a romantic relationship among directors could well complicate, and compromise, the board’s ability to identify, as required by the NYSE’s and NASDAQ’s listing rules, the directors that it deems independent.
Both exchanges require that a majority of the board, and all members of its audit and compensation committees, be independent. NASDAQ Listing Rule 5605 specifically disqualifies from this status anyone “having a relationship which, in the opinion of the Company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.” (Some companies’ governance guidelines instruct directors to disclose material personal relationships with “senior management,” but these documents usually don’t address specifically a director’s involvement with other directors.)
Second, even if a director (D1) qualified generally as independent, she might not be considered disinterested for purposes of voting on a transaction involving: another director (D2) with whom she is or was romantically involved; a person close to D2; and/or a company at least partially owned or managed by D2, or someone close to D2.
The traditional concern in such situations is that D1 would be inappropriately inclined to favor, to the company’s detriment, a transaction directly or indirectly benefiting D2; or, in the separate context of derivative lawsuits, that D1 would be inappropriately inclined to protect D2 by denying a well-founded shareholder demand for a company-initiated suit against, or approving a motion to dismiss a valid shareholder derivative lawsuit against, D2.
However, a romantically disappointed and/or dumped D1 might vindictively vote against a transaction that could benefit not only D2 (or a person or company linked to D2) but also the company; or D1 might vote to approve an unjustified lawsuit against D2.
Some former lovers could concur with William Faulkner’s Requiem for a Nun (1951) that “The past is never dead. It’s not even past.” So, in some circumstances, might the Delaware Court of Chancery, which has held that, “[a]lthough mere recitation of the fact of past business or personal relationships will not make the Court automatically question the independence of a challenged director, it may be possible to plead additional facts concerning the length, nature or extent of those previous relationships that would put in issue that director’s ability to objectively consider the challenged transaction.” Orman v. Cullman, 794 A.2d 5, 27 n.55 (Del. Ch. 2002).
Third, although many companies’ corporate governance guidelines require directors to disclose any business or personal relationships that could create even the appearance of a conflict of interest (and nominating committees might be well advised to ask board candidates about connections of any sort to current directors, and also to other candidates), in the absence of a strict ban on “in-boardroom” romantic relationships, directors delightedly dating each other might not perceive a potential problem.
Fourth, directors would be understandably reluctant to invite the rest of the board, and corporate counsel, to assess the relative strengths of their loyalties to each other and to the company.
They might even, to forestall speculation or rumors, decide not to recuse themselves from voting on, and possibly from participating in the board’s discussions of, transactions that could constitute conflicts for their partners in a relationship.
After such a tainted approval, to insulate the transaction from attack (or to justify not pursuing the conflicted directors) the board might have to shoulder the serious burden of demonstrating the “entire fairness” of the underlying transaction: that is, the fairness of both the process (how the deal was “initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained”) and of the substance (for a proposed merger, “the economic and financial considerations. . . including all relevant factors: assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or inherent value of a company’s stock.”). Weinberger v. UOP, Inc., 457 A.2d 701, 711 (Del. 1983).
Fifth, directors might legitimately not know (and might in good faith disagree on) the point in their blossoming relationship (the first kiss?) at which disclosure would be appropriate; and when might they be expected, or obligated, to update the board on their passions’ progress.
Sixth, having learned of such a relationship (possibly through a tip from a third director, D3—which could further complicate intraboard “conflicts”), the board would have the extremely delicate responsibility of assessing whether either or both of the dating directors still qualified as independent in general and/or with regard to particular transactions.
Seventh, those fact-sensitive determinations have not been easy even for courts.
“Allegations of mere personal friendship or a mere outside business relationship, standing alone, are insufficient to raise a reasonable doubt about a director’s independence.” Beam v. Stewart, 845 A.2d 1040, 1050 (Del. 2004).
But “[a] director can be controlled by another if in fact he is dominated by that other party, . . . through close personal. . . relationship. . . A director can also be controlled by another if the challenged director is beholden to the allegedly controlling entity [for] a benefit, financial or otherwise, upon which the challenged director is so dependent or is of such subjective material importance to him that the threatened loss of that benefit might create a reason to question whether the controlled director is able to consider the corporate merits of the challenged transaction objectively.” Orman, 794 A.2d at 25 n.50 (emphasis added).
For example, the Delaware Supreme Court found that a director “would not be able to act impartially when deciding whether to move forward with a suit implicating a very close friend [and the company’s former chair, CEO, and controlling stockholder] with whom she and her husband co-own a private plane,“ because such a connection “involves a partnership in a personal asset that is not only very expensive, but that also requires close cooperation in use, which is suggestive of detailed planning indicative of a continuing, close personal friendship.” Sandys v. Pincus, 152 A.3d 124, 130-131 (Del. 2016).
To the Delaware Court of Chancery, an allegation that the relationship between Uber director Arianna Huffington and company founder and CEO Travis Kalanick was “’so close that Huffington visited Kalanick’s family members in the hospital and made him omelettes’ . . . approach[es], if not cross[es], a line of director independence.” McElrath v. Kalanick, 2019 WL 1430210 (Del. Ch.), at *20.
But the following year, the Court of Chancery concluded that, standing alone, the allegation that a company’s chair and CEO controlled another director “because of their long-standing 15–year professional and personal relationship. . . fails to raise a reasonable doubt that [the director] could not exercise his independent business judgment in approving the transaction [at issue].” Crescent/Mach I Partners, L.P. v. Turner, 846 A.2d 963, 980-981 (Del. Ch. 2000).
Eighth, in making this inquiry, what evidence would or should the board consider, request, or (try to) compel the production of?
Should the board take at face value the directors’ denials of a disqualifying effect (D1 and D2, separately, to the board: “We simply enjoy long talks with each other.”; or, on the other end of the spectrum, “Our involvement is purely physical.”)?
Should the board review personal e-mails (and possible attachments) that had been exchanged by dating directors unwise enough to use their company-issued accounts and/or devices? Could they ask for copies of other communications? Hear from witnesses? Take into account “evidence” that a court would dismiss as hearsay? Engage a private detective to surveil suspected sweethearts?
Ninth, there might be further fallout for the relationship—and for board’s stability and efficiency— if the directors’ statements to the board diverged on their respective levels of commitment, illustrating the popular wisdom that in relationships, “one person always loves the other more.”
For instance, what if D1, regardless of the “independence”-related consequences, told the board, “D2 is the love of my life,” but D2, separately (whether to protect D1, or just to limit D2’s own potential liability), advised them that “We both consider our relationship to be just a harmless fling”? What if D1 then found out what D2 had said?
Tenth, the discovery of any violations of this policy (just as several major public corporations have, in recent years, learned that their leaders broke company rules against relationships with subordinates) might provide a useful opportunity for the board to reexamine the soundness of those directors’ previous judgments and priorities generally, and to reassess their relationship to the company itself.
Indeed, the simplicity of the restriction; its obvious benefits to the company; and the ability of (at least an outside director) simply to leave the board if he wished to pursue a promising relationship with a remaining director, would make noncompliance very difficult to defend (except, possibly, by claiming honest ambiguity about when initial interactions were considered as, or became, romantic).
Companies adopting a rule prohibiting directors from dating each other should not only make that known to candidates for the board, but also require all directors annually to indicate their own compliance, and to acknowledge their obligation to report any violations of which they become aware.
A cautionary tale:
In Danois v. I3 Archive Inc., 2013 WL 3556083 (E.D. Pa), two directors, one of whom was also the chief operating officer (and later became the CEO), and the other of whom became a vice president, were romantically involved from around the time the latter joined the board, and did not inform the board about their marriage to each other five years later.
In their respective positions, each was involved in making, and in influencing, decisions about the other’s compensation and tenure. About eighteen months after the marriage, the board discovered the relationship, and removed them both, sparking litigation and counter-litigation between the couple and the firm.
The court denied the company’s motion for summary judgment on its claim that that the couple had breached their fiduciary duty of loyalty, “[b]ecause we find that there is a genuine issue of material fact as to whether [the couple] disclosed their romantic relationship before they were married, and because we find that there is a genuine issue as to the material fact of whether the transactions governing their compensation after they were married were fair,” id. at *6, under Weinberger’s “entire fairness” standard.
But the court rejected, for two reasons, the couple’s argument that, before they were married, they had not been self-interested when voting on each other’s compensation:
“First, the definition of ‘interest’ is broader than the[y] suggest. . . . [I]nterest does not depend on a categorical analysis. Instead, a director is ‘interested’ if there are ‘factors weighing upon his exercise of judgment with respect to that decision which conflict or are inconsistent with the concept of a single, uncompromised loyalty to the corporate interest’ [treatise citation omitted]. Second, even if [each of the pair] did not each have a personal stake in the other’s compensation—a proposition we do not concede—their romantic relationship could lead each to be controlled by the other such that each would lack the requisite independence for disinterest.” Id. at *10 n.4.
Thus, although at first blush it might seem intrusive and inappropriate for a board to bar consenting adults—who had satisfied the board’s own standards for nomination, and who had then been elected by the shareholders—from engaging in romantic relationships with each other, such a blanket policy might productively preclude even more intrusive investigations and inquiries by the board.
At the least, when taking a position and casting a vote on a critical issue, each director might be able to insist, much more credibly than did The Godfather’s (1972) Michael Corleone (Al Pacino) to his skeptical brother (James Caan), who had just mockingly echoed the advice of their lawyer, Tom Hagen (Robert Duvall): “It’s not personal, Sonny. It’s strictly business.”