|WALL STREET REFORM|
|How can the Bush administration and Congress clean up Wall Street and restore investor confidence in the wake of corporate scandals?|
Behnke of Huntington Beach, Calif. asks:
Theoretically, what is the role of the corporate board of directors? Ideally, how should the board of directors protect shareholder interests and uphold corporate integrity?
Isn't it a conflict of interests when CEOs of Fortune 500 companies sit on the board of directors at other Fortune 500 companies? Doesn't this merely set up ideal scenarios for insider trading and ethics violations?
The board owes a fiduciary duty to shareholders.
As Felix Frankfurter asked, "to whom and for what?" It is not an easy question. Much of the answer relates to the process used in board decisions which must be informed, free of conflicts of interest and have a rational basis. A rational basis requires a legitimate corporate purpose and information to support the decision.
The "Business Judgment Rule" cuts directors considerable slack.
In a recent case, it was determined that The Walt Disney Company board of directors did not violate their fiduciary duty to Disney shareholders when the board approved $140 million dollars in severance benefits for Michael Ovitz. Ovitz had served as Disney's president for 14 months before being fired by the Board.
There is a potential for conflict of interest when Fortune 500 CEOs serve on one another's boards. However, it is no greater than the potential for independent directors to have such conflicts [as was the case in Enron] and at least it is on everyone's radar screen. It is also becoming increasingly uncommon.
Many companies severely limit the number of boards on which the CEO can serve and it is possible that some do not allow the CEO to be a director all. This limitation/prohibition is not surprising since board service is supposed to be a time consuming enterprise.
It is recognized that the board of directors has a duty to safeguard the interests of the company's shareholders. This fiduciary duty is imposed both under state law and by the courts.
The conclusions reached in a report by the Governmental Affairs Committee of the U.S. Senate on the "Role of the Board of Directors in Enron's Collapse" provides some insight on how a board of directors should protect shareholder interests and uphold corporate integrity:
.... much that was wrong with Enron was known to the board, from high risk accounting practices and inappropriate conflict of interest transactions, to extensive undisclosed off-the-book activity and excessive executive compensation.
...the subcommittee identified more than a dozen red flags that should have caused the Enron board to ask hard questions, examine Enron policies, and consider changing course. Those red flags were not heeded. In too many instances, by ongoing along with questionable practices and relying on management and auditor representations, the Enron Board failed to provide the prudent oversight and checks and balances that its fiduciary obligations required and a company like Enron needed.
In the aftermath of the corporate scandals the New York Stock Exchange recently proposed changes that would affect companies listed there. Those changes, among other things, would require that a majority of a company's board must be comprised of "independent" directors -- directors who have no material relationship with the company. Often board members are selected because of their expertise and experience as business leaders.
Generally, corporate boards of directors are on notice that they will be held accountable for fulfilling their responsibility to diligently oversee management. As we have seen with the recent indictment of ImClone's CEO and the investigation of Martha Stewart, there are existing laws and enforcement mechanisms that deal with the problem of insider trading.
The members of the board of directors oversee corporate affairs on behalf of shareholders. They act as advisors to management in setting strategy and vision in enhancing shareholder value and as overseers of management and their actions and decisions, which includes monitoring financial reporting and compliance in protection of shareholders.
In protecting shareholder interest, a board needs to have access to appropriate information on critical business issues and decisions in advance of meetings with adequate time for preparation, near perfect meeting attendance, and ongoing education regarding the company's business environment and issues. They need to have attention to detail, the ability to grasp the critical issues, and should ask probing questions of management, auditors and advisors, as well as possess the ability to assess the adequacy of the responses.
They should ascertain that policies, procedures and controls are in place and followed with regard to business practices and behavior. As the demands on and the oversight responsibilities of board members continue to increase and become ever more challenging, it is more important than ever to have board members who are qualified, objective, committed and inquisitive. This also includes having members with the right mix of qualifications and background to effectively serve on the various committees of the board, including audit, compensation and governance.
As to the conflict of interest issue, a CEO of an unrelated company can bring a wealth of knowledge and experience that will greatly benefit the effectiveness of the board and protect shareholder interest. Assuming there is no material business connection between the two companies, there is no incentive for anything other than being a wise adviser and overseer on behalf of the shareholders. In addition, every board member has the fiduciary responsibility to act in the best interest of the company and its shareholders.