Defined Responsibility – a Key to Effective Corporate Governance

Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com

Effective corporate governance requires clearly defined responsibilities. The responsibilities of each member of the Board are in a statement of board governance. Board operations are based on this statement and any change in board operations should be clearly communicated to each member. Board members should expect to receive this statement of board governance prior to agreeing to serve as a director.

No single set of board governance guidelines could possibly fit every company, but in general, the governance guidelines should address director qualifications and responsibilities, key board committees and their responsibilities, and director compensation. Corporate governance is of such importance to the overall health of a company that these guidelines, where possible, should be posted on the company’s website. Each company’s annual report filed on Form 10-K and with the SEC must state that the forgoing information is available on its website, and that the information is available in print to any shareholder requesting a copy of the guidelines.

The company, at a minimum, should expect all directors to adhere to the core cultural values of the company. The company should also expect directors to acknowledge any change in employment status. Directors should advise the Chairman of the Board prior to accepting any other public company directorship. The decision of the board on whether accepting such a directorship represents a conflict of interest should be final.

The New York Stock Exchange has finalized standards for listing companies requiring a certain number of directors be determined to be independent directors. Independent directors allow boards to exercise independent judgment in carrying out their responsibilities. In its rules, the New York Stock Exchange requires a board to consider all relevant facts and circumstances in assessing the materiality of a director’s relationship with the company. Business affiliations and organizations with which the director has a material relationship must be considered. The main criteria should be independence from the company’s management.

Business affiliation is not the only concern. Issues will arise when a board makes large corporate donations of money or services to charitable organizations with close ties to another company director. Other questions will arise should the board agrees to enter into substantial consulting contracts with a company director. The board should critically scrutinize any of the above situations when deciding if such actions will affect the independence of a director or deciding if a candidate should be elected as a member of the board.

The board must disclose the findings of independence in the company’s annual proxy statement or in the company’s annual report on Form 10-K filed with the SEC. Independent corporate governance is important especially when evaluating the company’s performance in carrying out established strategy. Independent governance is also a key in maintaining irreproachable corporate ethics. Regular executive session – in which non-management directors do not participate – also promotes open discussion and avoids the appearance of undue influence of management over board decisions.

A board should also have an established, published method for interested parties to communicate with non-management directors. For example, disgruntled employees should have a secure opportunity to disclose practices, which they believe, are detrimental to the company as a whole. They should be able to provide information to independent directors. In addition, if non-management directors include directors considered not to be independent, meetings should be held to include only non-management and independent directors.

The Sarbanes-Oxley Act has forever changed the level of scrutiny a board of directors is subjected to. No set of rules regulations or codes will eliminate the intentional misconduct by a director, however, a board of directors, following the law and the spirit of the law, will protect itself and its company from undue liability.

© Dr. Earl R. Smith II

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Related Articles:

• Officer and Director Vetting

• The CEO’s role in board member selection

• Determining Board Compensation Structure

• Good Governance – Balancing Eight Key Factors

• Board Succession Planning – Two Tiered Candidate Criteria

• Good Governance – Strategic Positioning for Strategic Planning

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