#11125 - Corporate Governance In The Public Corporation - Corporations

Corporate Governance in the Public Corporation

1. Sources of Corporate Governance

   1. State Law

      1. Corporation statutes only describe directors' responsibilities in general terms.

         • MBCA 8.01(b) states that "[a]ll corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation managed by or under the direction of its board of directors . . . ."

         • DGCL 141(a) provides that "[t]he business and affairs of every corporation organized under this chapter shall be managed by or under the direction of the board of directors . . . ."

   2. Federal Law

      1. Securities Exchange Act of 1934 (1934 Act):

         • Much of the federal corporate governance lawmaking is done through disclosure and the SEC regulations under this act (e.g. SEC Proxy Rules)

      2. Sarbanes-Oxley Act:

         • Requires that a corporation's audit committee be comprised of "independent" directors

         • Requires the chief executive officer and the chief financial officer of a reporting company to certify that the company's quarterly and annual reports do not contain material misstatements or omissions and that the company's financial information fairly presents the company's financial situation in all material respects.

         • The signing officers are also responsible for establishing, maintaining and regularly evaluating the effectiveness of the internal controls

           • These controls must be evaluated within 90 days of any periodic report, and their effectiveness and any significant changes must be disclosed in the company's reports. §§ 302, 906

         • The annual report must provide an assessment of the adequacy of the company's internal controls for financial reporting. § 404

           • There are criminal penalties for false certifications.

         • Public companies must file and annual report on Form 10-K with the SEC

           • In that report, the company must disclose that it has adopted a code of ethics for the principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.

             • The code of ethics must prescribe standards "reasonably necessary to promote honest and ethical conduct," including the ethical handling of conflicts of interest between personal and professional relationships, full and fair disclosure, and compliance with applicable governmental rules and regulations.

               • The code of ethics must be made publicly available in a company's annual report, on its website with cross-reference to the annual report, or by undertaking in the annual report to send it to any person who requests it.

               • Amendments to and waivers of this code must be disclosed on the company's Form 8-K or on the company's website.

             • If the company has not adopted a code of ethics, it must explain why it has not.

             • NOTE: Both the NYSE and the NASDAQ also require that a company adopt a code of business conduct and ethics for employees

   3. Stock Exchange Listing Standards

      1. Independence of Majority of Directors

         • Majority of directors must be "independent" and not have "material relationship" with company (NYSE only)

         • Majority of directors must be "independent" (NASDAQ only)

         • Independence of directors and determination of director qualification must be disclosed in proxy statement (or annual report if company not subject to proxy rules)

      2. Independence Defined

         • Director is not "independent" if:

           • Director is company employee, or director's family member is company executive

           • Director (or family member) receives payment from company

           • Director (or family member) affiliated with current or past auditor

           • During the past three years company executives sat on compensation committee of outside director's company

           • Company has significant dealings with outside director's company (NYSE - exceeding $1,000,000 or 2 percent of outside company's revenues; NASDAQ - exceeding $200,000 or 5 percent of outside company's revenues)

      3. Executive Sessions

         • Independent directors must meet at regularly scheduled meetings without management

         • Company must have method for internal and shareholder communications to independent directors (NYSE only)

      4. Audit Committee

         • Comprised solely of three or more independent directors who are "financially literate"

         • Members must meet SEC standards on independence

         • At least one member must meet SEC "financial expert" standard

      5. Nomination Committee and Compensation Committee

         • Composed solely of three or more independent directors (with limited exception for one outside, nonindependent director)

         • Company must certify adoption of written charter on nomination process

      6. Code of Conduct

         • Company must adopt and disclose code of conduct that meets the requirements of the Sarbanes-Oxley Act

           • Both the NYSE and the NASDAQ require that a company adopt a code of business conduct and ethics for employees

             • NASDAQ requires this code to include a mechanism to ensure prompt and consistent enforcement of the code, protection for persons reporting questionable behavior, clear and objective standards for compliance, and a fair process by which to determine violations.

         • Any waivers for directors and officers must be approved by board and disclosed on Form 8-K

      7. Corporate Governance Guidelines

         • Company must adopt and disclose guidelines on director qualifications, compensation, education, responsibilities, succession, annual evaluation, access to management and, as necessary and appropriate, independent advisors, management succession, annual performance evaluation of the board (NYSE only)

      8. Audits

         • Company must have internal audit function, may choose to outsource this function to a third-party provider other than its independent auditor (NYSE only)

         • Company must disclose receipt of audit opinion with "going concern" qualification (NASDAQ only)

      9. Related Party Transactions

         • Audit committee, or group of independent directors, must approve related party transactions (NASDAQ only)

      10. Certification

          • CEO must certify annually that company is in compliance with governance listing standards (NYSE only)

          • Company must notify NYSE or NASDAQ if company executive becomes aware of material noncompliance

      11. Exceptions

          • Independent director requirement not applicable to companies controlled 50 percent or more by individual, group, or another company

          • Investment companies generally not subject to governance listing standards

          • Foreign issuers listed on the NYSE not subject to governance listing standards, except SEC standards on audit committee independence, the certification requirements and must disclose significant ways in which their company's corporate governance requirements differ from the NYSE corporate governance rules (NYSE only)

          • Foreign issuers listed on NASDAQ may apply for exemptions from governance listing standards, except SEC standards on audit committee independence

   4. Committees (Rules Under SOX, SEC Regulations, and Listing Standards): Under SOX, SEC Regulations, and the Stock Exchange Listing Standards, the boards of large public companies must assign responsibilities for three key functions to committees comprised outside directors with no significant ties to the corporation's management

      1. Audit Committee

         • The audit committee must have at least three members, and each member must be "financially literate, as such qualification is interpreted by the board in its business judgment."

           • Generally, this means that a member must be able to read and understand fundamental financial statements.

           • If an audit committee member is not financially literate, he or she "must become financially literate within a reasonable period of time after his or her appointment to the audit committee."

         • One member of the audit committee must have accounting or related financial-management experience, such that he or she understands GAAP and is knowledgable about preparing financial statements, reviewing financial controls and dealing...