Enron and WorldCom directors have been forced to contribute personal assets in settlements.
Q.) What steps can my directors take to protect themselves?
A.) According to E Norman Veasey, former chief justice of Delaware and senior partner at the law firm of Weil, Gotshal & Manges LLP: ‘Directors seeking assurances should find it in their own diligence and independence. This applies particularly to audit committee members. Thoroughly investigate the integrity and financial position of a company before agreeing to serve as a director.’
Veasey points out that while boards have reason to be concerned, they always did. He suggests several areas for review, but underscoring all of his comments is one simple thought: independence is the key. By this he means real, objective independence, intellectually and ingenuously, not just an independent pedigree. His suggestions for independent directors
are as follows:
Appoint a strong independent board leader. Beware CEOs who manage to the market, or who try unduly to manage the board. Resist a culture of complacency when things look to be running well
Ensure all directors are financially literate. All should understand the company’s business, competitive environment, financial controls and financial disclosures, and any transactions being considered. Understand what you sign
Use healthy skepticism and constructive criticism in active board discourse. Make management track progress on items before the board that resulted in decisions or directions.
Review registration statements. Get management assurances that disclosures are clear. Ask independent auditors for assurances of the integrity of the reporting
Assess the board agenda. Ask whether the board is focused appropriately and if it is involved in determining whether its own focus is appropriate. Ask whether the board has access to the kind of information it needs, and controls determinations of what information it needs. Review board and committee minutes – circulate them within a week, before seeking board approval of them
Adopt best practice in processes. Best practice, just like independence, must be realistic – do not undertake to jump over an impossibly high bar of best practice. Failure to follow your own guidelines is not a good optic in court.
The burden is obviously higher for independent board members because they are not involved in the day-to-day running of the company. Typically, when fraud has been committed, it was committed by management or insider board members, but not checked by outside directors.
Therefore, independent directors have an obligation to do their homework, be vigilant and have the right controls and compliance systems in place. They must act in good faith in the best interests of the corporation. And they must understand the business of the firm and each transaction being voted on.
